Which one of the following investment transactions by an employer pension scheme would cause an immediate taxable withdrawal from the scheme of the funds and assets involved in the transaction?

• A. The scheme buys quoted shares direct from an unconnected third party
• B. The scheme buys shares in a close company in which a member's spouse is already a shareholder
• C. The scheme invests in a life company geared property unit fund
• D. The scheme invests in bonds denominated in US currency

Answer: (B)

The fundamental idea here is that pension schemes must avoid investments that involve close connections with members or their families. When a scheme buys shares in a close company in which a member’s spouse already holds shares, the transaction has a related-party element and isn’t at arm’s length. In this situation, the tax rules treat the investment as an immediate withdrawal of the funds involved from the scheme, effectively creating a taxable benefit or unauthorised payment for the member. That “withdrawal” is taxed as if the scheme has paid out the value to the connected party right away.

The other options don’t create that same immediate, non-arm’s-length effect. Buying quoted shares from an unrelated seller is a standard, arm’s-length investment. Investing in a life company geared property unit fund and purchasing bonds denominated in US currency are not, by themselves, prohibited withdrawals driven by related-party connections. The key factor is the close-company/connected-party nature of the investment, which is why the second option is the correct one.