PFS news update from 11 February 2015 - 24 February 2015,
covering taxation, investments, and retirement planning.
Taxation and Trusts
Taxation and trusts
Tax has recently again been front page news. Undisclosed Swiss
bank accounts have attracted attention.
Let's make no mistake. The concern here is in relation to tax
evasion (not avoidance) that could be associated with offshore
accounts. Quite simply, not declaring income or gains to the UK
HMRC that should be declared.
Advisers may need to make clear to their clients that merely
owning an offshore account is not in any way criminal or offensive
to HMRC. Having an offshore account may be perfectly justifiable on
commercial or practical grounds. Say if a UK resident has foreign
possessions (eg a property) to manage, or a business. As long as
any income and gains associated with the account are declared - no
Advisers may also need to reassure clients that offshore single
premium bonds and offshore collective funds are also perfectly
permissible; and the more "offshore" nature of them does not mean
that legitimate and permissible tax planning with them cannot be
The UK tax legislation has specifically provided for how they
are to be taxed.
Deeds of variation and tax avoidance
(RO3, AF1, JO2)
The Daily Mail recently carried the headline "RED ED THE TAX AVOIDER" (Daily Mail's caps not
The story (one of many on the continuing hot topic of tax
avoidance) focused on a deed of variation executed following the
death of the Labour leader's father in 1994.
It seems from the sketchy reporting that Ed's father left most
of his estate to his widow. The deed of variation, it seems,
transferred 40% of the value of a £300,000 property to Ed and
David equally. The value transferred of £120,000 will have used the
deceased's nil rate band - at the time £150,000. The transferrable
nil rate band wasn't introduced until 2007.
All perfectly legitimate and specifically permitted by the
The story will have been seen and read by many and so it may pay
advisers to inform and reassure clients that should the use of a
deed of variation be necessary it will be perfectly acceptable (as
the law stands) to use one.
Perhaps more relevant, though, is to encourage clients to
regularly review their Wills to ensure that they reflect their
One will then normally not need to rely on a deed of variation.
Soon after the deceased's death is rarely a good time to discuss
planning among beneficiaries and if it's not done then the two year
deadline may just slip by.
Diverted Profits Tax
In the Autumn Statement, which was delivered on 3 December 2014,
it was announced that a new tax to counter the use of aggressive
tax planning techniques by multinational enterprises to divert
profits from the UK will be introduced. From 1 April 2015 this new
tax, the diverted profits tax (DPT), will be applied using a rate
of 25%, and draft legislation and guidance was published on 10
However, the England and Wales Law Society has said that the
introduction of the DPT should be delayed due to concerns that
it is likely to apply much more widely than was intended:
'potentially to arrangements which are not contrived and do not
constitute abusive or aggressive tax avoidance'.
The Law Society also stated that the DPT needs to be
appropriately and narrowly framed so that it affects only its
intended targets - essentially this includes multinational
businesses that seek to divert profits away from the UK.
In addition, the OECD's Base Erosion and Profit Sharing (BEPS)
project is still ongoing, so delaying the introduction of the DPT
until after the outcomes of the BEPS project are known would enable
the DPT to be aligned with those outcomes. This period could also
be used to ensure that there is clear and targeted legislation,
compliant with EU and international law - which would be in line
with a more global approach. It is anticipated that final reporting
on the action points of the BEPS project will take place by the end
Whether the Government does in fact delay the introduction of
this legislation and whether the draft legislation is, in fact,
amended to be clearer and more narrowly framed only time will
BPRA Schemes - Continued target by HMRC
Business Premises Renovation Allowance (BPRA) schemes are
amongst HMRC's latest targets in the fight against tax
It has been reported in the press that this fight continues and
HMRC has now issued accelerated payment notices (APNs) to at least
three partnerships that took advantage of the scheme demanding the
repayment of the tax relief claimed on their investments.
Although the relief itself has been extended until 2017, last
year HMRC added arrangements exploiting BPRA to its public
"Spotlights" list of arrangements - so, in other words, warning UK
taxpayers that they should be wary of using this type of
On a separate point, the press article also reported that a
group of film scheme investors has challenged the issue of APNs by
HMRC and the High Court has given permission for a judicial review
to test the legality of some of the demands which were issued last
year - it will be interesting to see the outcome of this
The Government publishes consultation on the
implementation of the care costs cap
On 4 February 2015, the Department of Health published a consultation
on draft regulations and guidance on the cap on care costs
contained in the Care Act 2014.
The draft Care and Support (Cap on Care Costs, etc.) Regulations
2015 provide for a cap of £72,000 in respect of the costs that each
individual is obliged to pay to meet their eligible support needs.
When a resident reaches the £72,000 cap, the local authority
becomes responsible for meeting the costs of the resident's
eligible care and support needs. The resident will remain
responsible for meeting their daily living costs (which will be set
at a national, notional amount of £230 a week) and any additional
amount they wish to spend on superior accommodation. Where the
resident benefits from means-tested support, the contributions made
by the local authority will also count towards the cap (meaning
that people who benefit from means-tested support will pay less
than £72,000 of their own money).
Those who develop eligible care and support needs under the age
of 25 will have a zero cap for life.
Local authorities will set up care accounts to monitor
residents' progress towards the cap. Before the cap comes into
effect, local authorities will begin work to identify people who
currently meet their own eligible needs to ensure they can begin
progressing towards the cap when it comes into effect on 1 April
2016. Costs accrued before 1 April 2016 will not count towards the
For each person with eligible needs, the local authority will
provide either a personal budget (where the local authority is
going to meet the person's needs) or an independent personal budget
(where the person is meeting their own eligible needs), both of
which will set out the costs of meeting the person's eligible needs
that will count towards the cap. The local authority will also
provide annual care account statements setting out progress towards
the cap and other relevant information.
Only the cost, or in the case of self-funders what the cost
would be, to the local authority to meet a person's eligible care
and support needs will count towards the cap. This will be the cost
specified in their personal budget (or independent personal
The consultation seeks views on how local authorities should
determine what the costs of self-funders' care would be to the
local authority. It suggests that the fairest approach is for local
authorities to set independent personal budgets by taking an
average of the personal budgets the local authority has given
people in that area with similar levels or types of need.
The consultation, which also seeks views on a new system for
appeals against councils' decisions on funding a person's care,
will be open for comment until 30 March 2015.
The cap on care costs is due to come into effect in April 2016
in conjunction with an extension to means-tested support (which
will see the upper capital limit rise from £23,250 to £118,000) and
a lifting of the restrictions that currently apply to self-funded
top-ups. The draft guidance and regulations published alongside the
consultation document set out how the reforms are intended to work
New accounting standard and historic cost
(AF4, RO2, CF2)
It seems historic cost accounting for most single premium
investment bonds is likely to end from 1 January 2016.
There have been important developments in corporate accounting
standards that are likely to have an impact on the way gains made
under UK and offshore single premium investment bonds are accounted
for and taxed.
For many years the Financial Reporting Standard for Smaller
Entities (FRSSE) has provided "small companies" with a simple,
single code for all their accounting requirements.
As a result of changes in European law, in September 2014, the
Financial Reporting Council (FRC) consulted on the future of the
FRSSE. It proposed that the FRSSE be withdrawn and replaced with a
small companies regime within FRS 102. In effect, small companies
would adopt FRS 102 with certain reduced disclosures.
The UK is expected to implement the new EU Accounting Directive
by July 2015, with the changes being effective by January 2016. The
government has chosen to limit the disclosures that are permitted
to be required for small entities, so the FRC has concluded that
the FRSSE in its current form is unsuitable.As a consequence of
these proposals, the FRSSE will cease to be available from 1
January 2016.Small entities will then follow FRS 102 for
recognition and measurement purposes. Thus, the new FRSSE 2015 will
shortly cease to be relevant and will only be adopted for a short
period by companies.
Given the now "transient" nature of accounting under the FRSSE
2015, there is no real purpose in looking to the FRSSE 2015 for the
on-going treatment of insurance investment bonds ( even those in
force ahead of 1 January 2016) - essentially medium to long term
investments. We therefore need to look at the treatment prescribed by FRS 102.
Section 11 of FRS 102 deals with BASIC financial instruments -
which include bank loans, trade debtors and creditors, cash at
bank, bank loans and other instruments - including bonds.
Note that debt instruments are only regarded as BASIC if they
comply with the complex wording of para 11.9 (see "basic financial
A basic financial instrument is recorded on an amortised cost
basis (ie carried at historic cost less repayment or impairment
provisions) - thus there is no annual revaluation to fair
A debt instrument is only regarded as BASIC if it meets ALL the
Condition 1 - Returns to the holder
The holder's return must be:
- A fixed amount; OR
- A fixed rate of return over the life of the instrument; OR
- A variable rate of return - that, throughout the life of the
instrument, is equal to a single referenced quoted or observable
interest rate; OR
- Some combination of fixed and variable rates (as above),
provided they are both positive.
Condition 2 - Absence of potentially detrimental
There must be no contractual provision that could result in the
holder losing their principal or any interest relating to the
current or a previous period.
Condition 3 - Contractual provisions
Any contractual terms that enable the borrower (ie the issuer)
to repay a debt instrument or enable the holder (the lender) to put
it back to the issuer before maturity must not be contingent on
future events (other than to protect the holder against future tax
changes or a downgrade in the issuer's credit status).
Condition 4 - Extension of debt instrument
If the contract permits the term of the debt instrument to be
extended, any return to the lender and any other contractual
provisions which apply during the extended term must satisfy the
conditions 1 to 3 above.
"Complex" financial instruments
If the debt instrument does not satisfy ALL the above conditions
for a BASIC financial instrument, then it must be dealt with as a
complex financial instrument and would be accounted for at fair
value (with any annual revaluation being taxed under the loan
So is an insurance investment bond, which may be founded on
collective investments invested in equities, stocks and shares, a
"debt instrument" for the purposes of accessing the amortised cost
(historic cost) basis of accounting?
It would seem that, as a pre-condition, all the four tests set
out above would need to be satisfied. Of course, many bonds have
different underlying investment characteristics and each would need
to be judged based on its own facts. However, it is thought that
the majority would probably fail to qualify as a BASIC financial
Condition 1 - any variable nature in the return needs to be tied
to an observable interest rate. If the bond is supported by
underlying debt securities this may be achievable, but not if the
return also consists of equities. For example, an equity index is
unlikely to be regarded as an interest rate.
We can largely ignore the FRSSE since it will cease to apply
Companies can expect to account for single premium investment
bonds under FRS 102 - and (based on the above) we believe that the
majority of such investment bonds will be treated as "complex".
This would mean that they would need to be accounted for yearly on
a fair-value basis (and hence bring in unrealised losses and
Of course, if a single premium investment bond can be structured
to fit within the four conditions, this can be accounted for on an
amortised cost basis (ie no annual revaluation).
The marriage allowance
The ability to transfer part of the income tax personal
allowance to a spouse/civil partner was announced in the 2013
Budget. Full details followed in the 2014 Budget. HMRC has now issued a briefing note which outlines
more details of this measure, including how couples can
register their interest and make a formal online application.
The marriage allowance (not to be confused with the married
couple's allowance which only applies if at least one of the couple
was born before 6 April 1935) applies from the 2015/16 tax year and
will allow a spouse/civil partner born after 5 April 1935, who is
not a higher or additional rate taxpayer, to transfer up to 10%
(i.e. £1,060) of their personal allowance to their spouse/civil
partner provided the recipient is not a higher or additional rate
taxpayer. The tax saving could therefore be up to £212 where £1,060
is transferred - as the recipient would pay 20% less tax on the
HMRC has stated that around 4 million couples will be eligible
for the marriage allowance and those
that are eligible can register their interest in a matter of a few
minutes by simply answering a few questions online.
Those who choose not to register their interest will still be
able to make an application during the 2015/16 tax year and still
receive the full allowance.
This measure is only likely to benefit a handful of people and
will only be relevant where one partner has very low or little
income and does not make full use of their personal allowance.
(AF4, RO2, CF2)
George Osborne has recently revealed that the
Pensioner Bonds are expected to remain on offer until 15 May, with
the total investment ceiling raised from £10bn to £15bn.
The Chancellor was immediately criticised for
what looks like a blatantly political manoeuvre, including:
- For all his comments about wanting to support savers, the Bonds
remain only available to those aged 65 and over, not savers
- The new cut-off date is eight days after the general election,
thereby ensuring no unwelcome headlines about pensioners being
robbed of investment opportunities in the run up to polling day.
Pensioners are the demographic most likely to vote.
- The cost of government borrowing by this route is substantially
higher than using the gilt-edged market:
- 2% Treasury 2016 - a match for the one-year Bond - yields 0.43%
to redemption against the 2.8% of the Pensioner Bond; and
- 5% Treasury 2018 - a match for the three-year Bond - yields
0.81% to redemption against the 4.0% of the Pensioner Bond.
A rough calculation on a 50/50 split of sales by
term is that, before the NS&I administration costs are added,
the Treasury could have saved about £420m by using the gilts market
to raise £15bn. In practice, the cost will be higher because the
longer term Bond should be more popular given its higher rate.
The January inflation numbers
(AF4, RO2, CF2)
Inflation on the CPI measure dropped again between December and
January, bringing the rate down to 0.3%, its lowest since the CPI
was launched as an inflation measure in 1989. The January inflation numbers from the Office for
National Statistics (ONS) were in line with market
expectations. They also match the expectations of the Bank of
England, as set out in Mark Carney's letter to the
Chancellor issued on 12 February, explaining why inflation had
fallen below target.
The CPI showed prices falling 0.9% over the month, whereas
between December 2013 and January 2014 they dropped by 0.6%. Prices
normally drop at the turn of the year as a result of the January
The CPI/RPI gap narrowed this month, with the
RPI dropping 0.5% on an annual basis to 1.1%. Over the month, the
RPI fell by 0.8%.
The CPI annual rate fall from December to
January was driven by a mix of factors according to the ONS:
- Transport: Overall prices fell by 2.0% between
December 2014 and January 2015 compared with a smaller fall of 0.6%
between the same two months a year earlier. Predictably, the
downward contribution came mainly from fuel prices falling at a
quicker rate than a year ago. The ONS says that petrol is now at
its lowest price since November 2009 and diesel since February
2010. Transport alone shaved 0.21% off the annual inflation
- Food & non-alcoholic beverages: Overall prices
fell by 0.7% between December 2014 and January 2015, compared with
a rise of 0.2% between the same two months a year earlier.
- Alcoholic beverages & tobacco: Overall prices
increased by 1.4% between December 2014 and January 2015, compared
with a larger rise of 3.1% between the same two months a year
earlier. Most of the downward contribution came from price
movements for alcohol - most notably beer, where prices usually
rise in the New Year but fell this year.
- Recreation & culture: Overall prices fell by 0.9%
between December 2014 and January 2015 compared with a smaller fall
of 0.5% between the same two months a year earlier.
Despite the low rate of inflation, there are
still areas pushing up the CPI;
- Clothing & footwear: Overall prices fell by 3.7%
between December 2014 and January 2015, compared with a larger fall
of 5.4% between the same two months a year ago. The ONS says the
fall in clothing prices this winter was smaller than in recent
years, with reports of better than expected sales.
- Furniture, household equipment & routine
maintenance: Overall prices fell by 2.5% between December 2014
and January 2015, compared with a larger fall of 3.1% between the
same two months a year ago.
Although inflation is now almost zero, nine of
the twelve components of the CPI index remain in positive
territory. The low overall CPI number is down to Transport, (about
15% of the index) which shows a year-on-year fall of 2.8% and Food
and Non-alcoholic drink (11% of the index) which shows an annual
decline of 2.5%.
In his letter to the Chancellor, the Governor of the Bank of
England said "…the MPC now judges it more likely than not that
headline CPI inflation will turn negative at some point in the
spring and will remain subdued for much of the rest of the year."
He went on to say "In the absence of continuing falls in commodity
prices, negative inflation rates are unlikely to endure for very
long, however. On the assumption that energy and food prices
stabilise, CPI inflation should pick up notably once earlier
declines start to drop out of the annual comparison, towards the
end of this year." As ever, it pays to remember that inflation
numbers are a yearly comparison.
Tax revenue: The crunch January figures
(AF4, RO2, CF2)
The latest HMRC data on tax receipts for the current fiscal year
to date have just been published, showing the impact of the
all-important month of January. It looks as if the Chancellor will
miss his Budget 2014/15 target for deficit reduction, despite the
The Treasury's hope was that tax receipts would
be boosted by balance payments stemming from income deferred to
2013/14 to benefit from the reduction in the additional rate of tax
There was an indication very recently that
things might not work out quite right when HMRC published revised
statistics for the numbers of higher and
additional rate taxpayers. These showed a drop from last April's
2014/15 projections of 2.9% increase in higher rate taxpayer
numbers (to 4.48m) and 8.7% (to 313,000) in additional rate
taxpayers. Significantly, there were similar drops for the 2013/14
In the event, the numbers released by the Treasury show a £1.7bn
increase in self-assessment income tax receipts compared with
January 2014 (£12.3bn against £10.6bn). For January the Treasury
recorded its usual surplus. At £8.8bn, this was the biggest for
seven years and £2.3bn better than 2014.
With ten months of the fiscal year over, net
borrowing is down £5.0bn on the corresponding period for 2013/14.
That suggests that the figure for the 2014/15 fiscal year will come
in close to the OBR's Autumn Statement projection of £91.3bn. As
the OBR commented at the time "That would be the second smallest
year-on-year reduction since its peak in 2009/10, despite this
being the strongest year for GDP growth,"
After five years of "austerity" the deficit is still likely to
come in at over £90bn - about 5% of GDP. That statistic is a
reminder that for all the political promises we will hear over the
next 10 weeks or so, the next government will have no leeway to
increase spending without further tax increases. Indeed,
post-election tax increases are likely just to keep bringing down
State pensions forecasts to be revised
(AF3, RO4, CF4, JO5, FA2)
The state pension forecasts sent out to those who will retire
under the new flat-rate system are to be replaced following a
number of complaints. Those due to retire after 6 April 2016 have
said that the forecasts are confusing due to the fact that they
show figures for what they would receive under both the current and
the new system.
Many recipients have telephoned the Department for Work and
Pensions (DWP) to question the amounts and the DWP now says that it
will revise the format of the letters with the new ones being
available within weeks.
Pensions Minister Steve Webb is quoted in thisismoney.co.uk as
saying: 'I have listened to the people who have received the first
new state pension statements and, as a result, I am planning to
introduce some changes that make the information in them clearer
and easier to understand.'
Short service refunds
(AF3, RO4, CF4, JO5, FA2)
In October 2014 the Department for Work and Pensions announced
that short service refunds would be abolished from October 2015.
This change has now come into force.
The Pensions Act 2014 (Commencement No.4) Order
(SI 2015/134) was made on Wednesday 4 February. This brings in
to force various provisions of the Pensions Act 2014 and confirms
that the Department for Work and Pensions (DWP) will be withdrawing
the option for members to take Short Service Refunds after 30 days
in the scheme, from 1st October 2015.
This will only affect new members of occupational Defined
Contribution (DC) schemes.
TPR published DB to DC transfer guidance for
(AF3, RO4, CF4, JO5, FA2)
The Pensions Regulator (TPR) has published a
consultation around its draft guidance for trustees on managing
member requests for transfers from defined benefit to defined
TPR's intervention arises from an expectation that from 6 April
more members of DB schemes may wish to transfer to DC arrangements
in order to take advantage of the new freedom for DC members to
take pension savings as cash lump sums or via drawdown. The
guidance is also designed to reflect the fact that the Pension
Schemes Act 2015, when enacted, will provide that where a member's
cash equivalent transfer value is over £30,000, the member must
take independent financial advice before transferring.
The aim of the guidance
TPR says that the guidance is intended to:
- help trustees ensure they have appropriate processes in place
to manage transfer requests;
- prompt trustees to consider the impact of transfer values as
part of an integrated approach to risk management of their scheme;
- require trustees to provide clear information for members so
that they can get independent advice on the best option for
Scope of the guidance
The proposed guidance emphasises that for most members, it is
highly likely in current conditions to be in their best financial
interests to remain in their DB arrangement. However, there will be
exceptions to this.
Much of the guidance focuses on the transfer process and the
need for trustees to ensure that members have received appropriate
financial advice before they make a transfer. However, the guidance
says that the trustees are not 'responsible for checking what
advice was given, what recommendation was made or to confirm
whether the member is following that recommendation'.
The guidance also confirms that it 'is not the trustee's
role to second-guess the member's individual circumstances… Nor is
it their role to prevent a member from making decisions which the
trustees might consider to be inappropriate to the member's
Trustees are reminded that the financial advice requirement is
not a substitute for continuing to investigate the status of the
proposed receiving scheme: 'We expect trustees to conduct
proper due diligence on the receiving scheme to ensure that it is a
The guidance emphasises that trustees' powers and duties in
relation to DB to DC transfers remain substantially as they were
before the Budget announcements last year. However, trustees must
monitor demand from members for transfers. In relation to funding,
trustees might consider whether to commission a fresh actuarial
assessment of their scheme in light of the number of transfers, and
whether any reduction in transfer values is needed. The guidance
does note that more members choosing to transfer closer to
retirement could increase the scheme's liquidity requirements and
hence have an impact on its investment strategy.
The draft guidance should be treated with some caution, not
least because the detail of the legislation which it describes has
not been finalised. However, it does look like the guidance will
provide a useful summary of the numerous hoops that trustees and
members will need to jump through in respect of the new financial
advice requirement on DB to DC transfers.
For its part, TPR says that the consultation, which closes on 17
March, is just the first part of a package of communications to
help trustees prepare for 6 April. In particular, it will publish
further guidance for occupational scheme trustees in early March,
following publication of the relevant DWP regulations, on the new
requirements for trustees to direct DC members approaching
retirement to Pension Wise (the 'guidance guarantee' service). All
of this means that a busy time for trustees is likely to get even
busier over the coming weeks!
It is interesting the difference in approach as to the
expectations TPR has over the requirements it places occupational
pension scheme trustees and those of the FCA over the 'policing'
liability it seems to want to impose of SIPPs when they receive a
transfer in, or a members wishes to make an investment