Personal Finance Society news update from 25 May to 7 June 2016
on taxation, retirement planning and investments.
Taxation and Trusts
TAXATION AND TRUSTS
Gains on life assurance policies and the personal
(AF1, AF2, JO3, RO3)
The personal savings allowance covers savings
income. Although mostly thought of in terms of interest, savings
income also includes chargeable event gains on life assurance
policies. The focus here has been on offshore investment bonds and
some press coverage has highlighted this. However, the legislation
covering life assurance policyholder taxation (Chapter 9 ITTOIA 2005) makes little
differentiation between onshore and offshore bonds, other than
adding in a basic rate tax charge for certain offshore life
assurance contracts (section 531 ITTOIA 2005).
All of which raised an interesting question
recently. If an individual has UK interest and a chargeable event
gain on a UK life policy, which benefits first from the personal
savings allowance? Clearly, the preference would be for the
interest to take priority as the basic rate tax deemed paid on a UK
life policy chargeable event gain is not recoverable.
The answer is to be found in section 465A ITTOIA
2005, which states that if the taxable amount received is treated
as having irrecoverable basic rate income tax paid - section 530
ITTOIA 2005 - then this amount is treated as 'the highest part of
the individual's total income'. As a consequence, interest will
take priority for the personal savings allowance. This proviso does
not apply for gains on offshore policies as there is no deemed tax
The legislation works in the most favourable way, but it remains
a fact that some investors will effectively pay tax on interest via
a life assurance policy which they could otherwise avoid by
choosing a different tax wrapper.
Annual payments do not count towards the personal
(AF1, AF2, JO3, RO3)
Rewards paid by banks are deemed by HMRC to be annual payments
which means that the payment is fully taxable and will not benefit
from the personal savings allowance.
The new personal savings allowance, introduced in the 2015
Budget and applicable from April 2016, enables basic rate taxpayers
to earn up to £1,000 a year tax free on their savings income.
Higher rate taxpayers will be able to earn up to £500 a year tax
free on their savings income. However, additional rate
taxpayers will not benefit from this allowance.
Savings income for these purposes includes
- interest on bank and building society accounts
- interest on accounts with providers like credit unions or
National Savings and Investments
- interest distributions (but not dividend distributions) from
authorised unit trusts, open-ended investment companies and
- income from government or company bonds
- the interest element of purchased life annuity payments
- gains from certain contracts of life assurance
However, in the context of a bank or building society account,
it has emerged that the income is only tax free under the personal
savings allowance if it is classified as an interest payment. A
fixed monthly income paid by way of a reward is classed as an
annual payment rather than interest, which makes the payment fully
taxable and not capable of benefiting from the personal savings
These annual payments are effectively fixed rewards for putting
the money on deposit in the first place and are commonly offered by
Halifax, Barclays and Co-op Banks.
HMRC stated: 'Annual payments are not covered by the personal
savings allowance, so banks and building societies will continue to
pay them after basic-rate tax has been deducted.'
It will, however, be possible for non-taxpayers to reclaim the
20% tax deducted at source on these payments by completing form
Note these changes do not affect those who receive interest for
maintaining a certain balance in their account. For example,
Santander pays between 1% and 3% interest on account balances up to
£20,000. In this case the amount is paid out without deduction of
tax at source and the individual will owe income tax if the amount
exceeds their personal savings allowance.
Interestingly, these changes may provide an opportunity to
discuss the position with clients as some may wish to consider
transferring their bank account to another provider where only
interest is paid on the amount deposited to ensure that such
payments are covered by their personal savings allowance.
Beneficiaries' right to information
(AF1, RO3, JO2)
The recent case of Blades v (1)Isaac & (2)Alexander (2016)
provides a good summary of when a beneficiary has a right to
information but also confirms that, even if the beneficiary is
right, costs may be awarded to be paid out of the trust fund so
that any victory in the Court may prove to be expensive for the
The trustees in this case were partners in the firm of
solicitors which drew up the deceased's Will. Under the Will
the deceased left her entire estate on discretionary trust. The
claimant in the case was the daughter of the deceased and one of
the beneficiaries. The trustees had power to add further
beneficiaries and the deceased left the trustees a letter of wishes
suggesting the trustees should consider giving 5% of the estate to
another daughter of the deceased, sister of the claimant. The
trustees duly exercised their power and added the sister to the
class of beneficiaries and distributed some assets to both
The claimant asked the trustees for the breakdown of the estate
and the trustees refused on the grounds that they had concerns
about the relationship between the sisters. The refusal was
supported by a barrister's opinion although the trustees had
refused to disclose a copy of the opinion as well. A
different barrister subsequently advised the trustees that the
information should be provided and in the end they provided it.
This litigation therefore related only to the liability for
costs. The claimant argued that the trustees should pay all
the costs, i.e. her costs and theirs, from their personal
funds. The trustees argued that all the costs should be paid
out of the trust.
The judge decided that the barristers' opinions were obtained
for the benefit of the trust and not for the trustees personally.
Therefore, the opinions were trust documents and potentially
available to the beneficiaries and so the costs of obtaining the
opinions should be charged to the trust fund. The judge also
confirmed that the trustees had breached a duty to account to a
beneficiary by refusing to disclose the documents to begin with,
but that no loss had been caused by this and that, in due course,
the trustees did act properly. As such the Court decided it
was not appropriate to charge the trustees personally with the
Generally speaking, an indemnity clause would be included in a
trust deed so that the trustees would be able to recover their own
costs from the trust fund in similar circumstances provided there
was no misconduct and the trustees had always intended to act in
the best interests of the beneficiaries. The position in this
case could also have been different if the trustees did not seek
expert advice and act upon it.
The case also illustrates the potentially very serious financial
implications of any kind of litigation. Advisers should bear
such potential problems in mind when advising their clients on the
choice of trustees. Ideally, the settlor or the testator will
leave the trustees with a comprehensive letter of wishes, also
explaining the reasons behind their decisions. Subsequent
disclosure and frank discussion between the trustees and
beneficiaries should help to avoid disagreements and
Tax evasion, money laundering and confiscation measures
announced as part of the Queen's Speech
The new corporate criminal offence of failing to prevent the
facilitation of tax evasion will be introduced in the current
Parliamentary session as part of the Criminal Finances Bill.
The Bill, which was announced in the Queen's Speech, will also include tighter
money laundering controls and civil powers to recover the alleged
proceeds of crime.
The facilitation of tax evasion offence is currently the subject
of a second consultation by HMRC and is open until 10 July.
The money laundering and confiscation measures to be included in
the Bill are expected to be based on the Home Office's new anti-money laundering strategy which will
require those who file suspicious activity reports to supply
further customer information to law enforcement agencies.
A new confiscation measure may also allow the issue of
'unexplained wealth orders' requiring individuals to declare the
source of their wealth or forfeit their assets where their answers
are unsatisfactory, with an associated seizure power for law
While there are no details of the Bill's measures available as
yet, the government's view is that these changes will 'cement the
UK's leading role in the fight against international corruption,
crack down on money laundering and people profiting from crime, so
that we root out corruption.'
Property valuation bases start to change
(RO2, AF4, CF2, FA7)
Several large commercial property funds have changed their
The February Investment Association (IA) statistics revealed a net retail outflow for
the property sector of £119m, the biggest loss since the doom-laden
days of November 2008. The March figures recorded a further net
retail of £20m, although it is worth noting that this is the
difference between two much larger numbers: an inflow of £662m and
an outflow of £682m.
The recent pattern of outflows has prompted several of the
big-name direct property funds to switch from an offer valuation
basis to a bid valuation basis. The net effect is to wipe 5% or
thereabouts off the fund price instantly, a move which shows up
very clearly in the performance graphs. The bulk of the drop is
explained by SDLT: an offer valuation takes account of buying
costs, which include nearly 5% SDLT following the hike in the last
Budget, but a bid valuation does not.
There is no suggestion that any funds will start to impose
moratoria on redemptions. The latest data points to the valuation
changers having adequate liquidity to cope with the current rate of
The picture could alter after the Brexit vote, which has been
having a chilling effect on the property market. The latest
quarterly figures from MSCI show values dropping by 0.1% in the
first three "wait-and-see" months of 2016, although some of this
would have been due to the SDLT increase. The overall return across
the quarter was still +1.1%, a reminder of the relatively high
level of rental yields compared with the returns on offer from
The move to a bid valuation is a one-off event: if confidence
returns and funds start to experience inflows again, then the
process could be reversed as quickly as it happened. On the other
hand, if the sector continues to be out of favour, more funds are
likely to switch to a bid valuation basis.
(RO2, AF4, CF2, FA7)
Recently Land Securities (LAND) and British Land (BLND), the UK's two largest real estate
investment trusts (REITs), reported their annual results to 31
March 2016. Both REITs suffered in the wake of the financial crisis
and were forced to raise around £750m each to bolster their balance
sheets in early 2009. They are in much better health now:
- Both companies increased their annual dividend and promised
higher dividends in the coming year. LAND raised its dividend by
9.9%, while BLND's increase was a more modest 2.5%. Prospective
yields are 2.9% for LAND and 3.9% for BLND.
- Net Asset Value (NAV), a key measure for REITs, rose by 10.4%
at LAND and 10.9% at BLND, using a common European Public Real
Estate Association (EPRA) basis.
- Both companies reduced their loan to value ratio, an indication
of a less aggressive investment approach. LAND's fell from 28.5% to
22% while BLND's dropped by 3% to 32%.
- LAND made £1,493m of disposals in the year, but spent only
£497m on acquisitions, development and refurbishment. The figures
for BLND were just about in balance, with an overall net investment
of just £21m.
- On future developments both companies sounded a note of
caution. LAND said it was happy with the suggestion from some
commentators that its "current market positioning is more prudent
than exciting". Similarly, BLND wheeled out some fine jargon in
noting its "modest committed development, but a significant
pipeline with optionality". Both REITs expressed concerns about the
potential impact of a Brexit vote on their business.
After the trauma of the financial crisis, both LAND and BLND are
taking a relatively cautious stance following the past few years'
run of solid commercial property market returns. It is an indicator
of investors' caution that LAND is trading at a 20% discount to NAV
and BLND at 19%. At such levels of discount there have been
suggestions that either company could be taken over as a cheap way
of acquiring top quality property assets.
Get ready, June is here
(RO2, AF4, CF2, FA7)
It may not have felt like it over the Bank Holiday, but the
meteorological start of summer has taken place. The chill winds (if
not turbulence) some of the country has just experienced could well
be replicated in the investment markets. The June calendar says it
2 June The European Central Bank (ECB) had its
official rate setting meeting. It came as the ECB starts the next
stage of the €80bn a month quantitative easing programme with its
first purchases of corporate bonds. Although May Eurozone inflation
was -0.1%, Mario Draghi, the Bank's chief, is not expected to
announce any further easing of monetary policy. Instead, the market
will be looking more for hints of what the next moves might be.
3 June US non-farm payroll figures were
issued. These volatile numbers, often subject to significant
revisions, received even greater scrutiny than usual because of the
next event on this list.
14-15 June The US Federal Reserve Open Markets
Committee (FOMC) will meet to set rates. Several members of the
FOMC, including its chair Janet Yellen, have been dropping strong
hints that they believe June will be an appropriate time to
increase interest rates again. The stance of officials in recent
weeks has caught the markets by surprise as earlier in May futures
prices had implied very little likelihood of a rate hike: the odds
are now 28%. One major question mark over whether the FOMC will
jump in June or wait for the following meeting on 26-27 July is the
next event on this list.
23 June The Brexit vote has placed many
investment decisions on hold. The latest odds from the bookies are 4:1 on for Remain
and 4:1 against for Leave. The opinion polls resemble a random walk between
the two, with the gap generally smaller than the 12%-ish
'undecided' figure. The potential market impact of the vote has
been underlined by the news that hedge funds and banks are
commissioning exit polls in the hope of gaining an edge.
By the time July arrives, we may all be in need of a holiday…if
we can afford one.
Scheme pays: The money purchase and/or the tapered
(AF3, FA2, RO4, RO8, JO5, CF4)
This article considers how "scheme pays" works in respect of an
individual who is subject to either the money purchase annual
allowance (MPAA) or the tapered annual allowance.
Requirements for Scheme Pays
For an individual to be able to require their scheme
administrator they must meet the following two conditions are
- their annual allowance charge liability for the tax year has
exceeded £2,000 and
- their pension input amount (PIA) for the pension scheme for the
same tax year has exceeded the annual allowance amount in section
228 Finance Act 2004; £40,000 for 2016/17.
However, it is important to understand how these conditions
interact with the MPAA and the tapered annual allowance.
Where an individual's annual allowance charge liability is by
reference to the money purchase annual allowance, the individual
cannot elect to notify the scheme administrator unless the
individual's annual allowance charge liability by reference to the
annual allowance would have exceeded £2,000.
Where an individual's PIA to a scheme has to be more than
£40,000 in the year, this is still the case even where an
individual is subject to the tapered annual allowance or the
Earmarking orders and pensions flexibility
On occasion we get asked to comment about the impact of pension
flexibility on an Earmarking or Attachment order in relation to a
Earmarking or Attachment orders were the forerunner to pension
sharing and was the only option (other than offsetting) prior to
the Welfare Reform and Pensions Act 1999.
Earmarking orders were typically drafted to make a lump sum
payment or pay a percentage of income to the ex-spouse when the
pension is in payment. The flaw in the system was that the decision
when to draw benefits was at the discretion of the member (unless
it was specified in the Order, which was rare) so if the divorce
was acrimonious, the member could delay drawing the pension or not
draw it at all. Earmarking orders ceased on the members death or
remarriage of the ex-spouse.
Earmarking Orders were drafted at a time when pension freedoms
and flexibility was never envisaged and these new freedoms, such as
drawling a UFPLS or nil income from flexi access drawdown fund, can
have the unintended consequences of circumventing the requirements
set out in the order, unless the details in the order are very
For example, the member with the pension may be able to avoid
the payment of the income as set out in the earmarking order. This
could be done by choosing to take all benefits as an UFPLS. If the
earmarking order doesn't specify exactly when and how benefits must
be taken, and/or doesn't specify "tax-free lump" or "PCLS", the
order can be circumvented by taking the UFPLS (which doesn't pay a
PCLS). Then, if there are no pension funds left to crystallise,
there's no income left to be covered by an income earmarking
In Consultation Paper 15/30, Pension Reforms;
proposed changes to rules and guidance (October 2015), the FCA are
consulting on the issues around pension attaching/earmarking
orders, further information on the outcome of this consultation
will follow in due course.
It is worth revisiting clients who have Earmarking Orders and if
necessary return to the Court to get the Orders' intention
clarified. There are no time restrictions on returning to Court
although it will incur some expenses but that could be very
worthwhile in the long run for the ex-spouse.
Australian Government imposes cap on pension
(AF3, FA2, RO4, RO8, JO5, CF4)
The Australian Government announced on 3rd May 2016 that they
were introducing a new lifetime cap of $500,000 on non-concessional
contributions and the cap commenced on at 7.30pm on 3 May 2016. The
cap will be indexed to average weekly ordinary time earnings.
Non concessional contributions are contributions which are made
after tax has been paid on the income so for example making a
pension contribution from the proceeds of a house sale or
investment. A pension transfer is classed as a non-concessional
What makes matters more interesting is that all non-concessional
contributions made from 1 July 2007 are taken into account for the
purposes of this cap. So if clients had transferred funds to a
QROPS, of a value greater than the cap, then they will have already
used up their cap. Transfers/non concessional contributions made
before the announcement on 3rd May will not attract a
penalty. Those that breach the cap going forward will be liable to
penalty taxes of 45% on the excess or are being asked to remove the
excess and returned to the source. That could prove interesting for
UK pension schemes that have transferred funds to an Australian
The major attraction of transferring a pension to Australia is
that you can withdraw your Australian superannuation tax-free when
you reach age 60. This includes any UK pension monies that you have
transferred into your Australian superannuation scheme - however,
this advantage has been seriously diminished with the new cap.
Queens speech: A new pensions bill
(AF3, FA2, RO4, RO8, JO5, CF4)
Although the Queens speech did not specifically refer to the
pensions bill, it was announced in the accompanying notes to the speech.
The purpose of the Bill is to:
- Providing essential protections for people in Master Trusts -
multi-employer pension schemes often provided by external
- Removing barriers for consumers who want to access their
pension savings flexibly.
- Restructuring the delivery of financial guidance to
The main benefits of the Bill would be:
- Providing better protections for members in Master Trust
pension schemes - including millions of automatically enrolled
- Capping early exit charges to ensure that excessive charges do
not prevent occupational scheme members from taking advantage of
- Providing more targeted support for consumers by restructuring
the delivery of public financial guidance through the creation of
two new bodies and directing more funding to the front line.
- This helps deliver the manifesto pledge to give you the freedom
to invest and spend your pension however you like.
The main elements of the Bill are:
- Master Trusts would have to demonstrate that schemes meet
strict new criteria before entering the market and taking money
from employers or members.
- Creating greater powers for the Pensions Regulator to authorise
and supervise these schemes and take action when necessary.
Cap on early exit charges
- Capping early exit fees charged by trust-based occupational
- Creating a system that enables consumers to access pension
freedoms without unreasonable barriers.
Restructuring financial guidance
- A new pensions guidance body would be created, bring together
the Pensions Advisory Service, Pension Wise and the pensions
services offered by the Money Advice Service, providing access to a
straightforward private pensions guidance service for
- A new money guidance body would replace the Money Advice
Service and be charged with identifying gaps in the financial
guidance market to make sure consumers can access high quality debt
and money guidance.
The Bill deals with the restructuring of financial guidance as
announced in Budget 2016 and should deal with the concerns raised
by the Work & Pensions Committee on the lack of regulation on