Last May, I drew attention to the case of Thorpe v HMRC, SpC 683, in which the taxpayer was seriously disadvantaged as a result of payments made from the pension scheme on the basis of a misunderstanding.

Mr Thorpe was the sole remaining member of the scheme and thought (or was advised) that because he was the only beneficiary, he could bring the scheme to an end under the rule in Saunders v Vautier and extract the whole of the fund.

Unfortunately, the rule in Saunders v Vautier did not apply because although Mr Thorpe was the only beneficiary at the time, it was possible that other beneficiaries could arise – he might marry or have dependents within the meaning of the scheme rules. He was therefore not entitled to the whole beneficial interest and could not call for a transfer of all the property to him. The payment to him was an unauthorised payment to which the 40 percent standing charge applied. The High Court have upheld this decision.

However, salvation is at hand. The High Court explained that when acting as a trustee, and sanctioning an unauthorised payment, Mr Thorpe committed a breach of trust. The money had been wrongly removed from the trust and he had held the sum as constructive trustee for the fund. Because he was accountable to the trust and was able and prepared to return the payment (with interest), there had been no taxable payment for the purposes of section 596A TA 1988. He should be taxed only on unauthorised payments that he was not able to return.