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My PFS - Technical news - 07/11/16

Personal Finance Society news update from 25 October to 07 November 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

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TAXATION AND TRUSTS

Court of appeal victory for civil partner after partner was dishonest about her wealth

(AF1, R03)

The Court of Appeal has confirmed that the asset disclosure rules can continue to apply after the death of one of the parties in a divorce or civil partnership dissolution.

A woman who discovered that her civil partner, who died intestate in 2013, had hidden business assets worth millions of pounds during the dissolution of their relationship has succeeded in the Court of Appeal as she seeks to set aside the original settlement.

In the case in question, (Roocroft V Ball[2016] EWCA Civ 1009), the couple dissolved their civil partnership in 2009 having been together for 18 years. One of the partners (A) was a successful property developer and provided by far the largest part of the couple's income during their partnership. A consent order was made giving the other partner (B) £162,000 based on the Court's assessment of the matrimonial assets as disclosed at the time. The order was to include provision that, upon termination of the periodical payments order, the appellant agreed not to make any claims against the deceased's estate upon her death.

Three years later A died. It then emerged that she had misled the Family Court about the extent of her assets by claiming she had lost large sums in the 2008 property crash. B accordingly sought to overturn the original consent order so that a more generous order could be negotiated with A's estate.

A had died without leaving a Will, so her estate was defended by her personal representative who had obtained letters of administration. The lower courts refused to vary the consent order, citing administrative issues. However, B instructed her solicitors to prepare an appeal anyway.

The appeal was heard in July this year and judgment has been given in her favour.

The case is the first to consider the discovery of non-disclosure of assets after the death of one of the parties, says lawyers Irwin Mitchell.

Last year there were two cases (Gohil v Gohil [2014] EWCA Civ 274and Sharland v Sharland [2015] UKSC 60) raising similar issues of non-disclosure, both of which were decided in favour of the deceived spouses.

This judgment, however, confirms that same-sex couples can also have the same rights as heterosexual partners under family law and reiterates the message that dishonesty will not be tolerated by the Courts.

Step seeking comments on LPA discretionary investment management clauses

(AF1, R03, J02)

The Society of Trust and Estate Practitioners (STEP) is looking for practical examples of the difficulties faced by attorneys affected by the Office of the Public Guardian's (OPG's) latest guidance on the delegation of investment management decisions to a discretionary investment manager.  The guidance provides that delegation will only be possible if specific authority is contained in the power.

In September 2015, the OPG published guidance on the circumstances in which attorneys acting under a Lasting Power of Attorney (LPA) can delegate investment management decisions to a discretionary investment manager.

The guidance states that an attorney may appoint a bank or an IFA to act on their behalf to make investment decisions but only where specific wording, along the following lines, has been incorporated into the LPA:

'My attorney(s) may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees'.

This, of course, creates an issue for attorneys acting under a power that pre-dates the guidance who are already using discretionary managers without explicit permission in the LPA.

If the donor still has capacity, it will be possible to re-do the LPA.  However, in many cases the LPA will have already been registered, in which case the attorney will need to apply to the Court of Protection (CoP) for the retrospective authority to appoint an investment manager. Both scenarios present cost issues and are likely to be time consuming - especially given that different fund managers appear to be taking different stances and attorneys/donors may therefore need to take the extra step of confirming the firm's particular policy before deciding what action to take.  

STEP is hoping to present a test case to the OPG that will highlight the practical difficulties faced as a result of the guidance and to this end is asking members to provide examples. The hope is that the test case will allow the OPG to determine that the delegation of investment management by an attorney to a discretionary investment manager is already legally permissible without the need to retrospectively apply for it through the Court; and amend its guidance accordingly.

Attorneys already using a discretionary manager without an express power could avoid a CoP application by changing to an advisory manager (so that they are still ultimately making the investment decisions). However, this may give rise to potential liability issues and it may therefore be prudent to do nothing until a further update becomes available.

Capital gains tax is now raising more revenue than inheritance tax

(AF1, R03)

The latest figures published by HMRC show that £6.9 billion of capital gains tax (CGT) was paid by more than 220,000 individuals in 2014/15. Here we look at some simple planning strategies that might help to reduce the burden.

While CGT has historically earned comparatively little for the exchequer, over the last few years CGT receipts have been increasing steadily, with recent figures from HMRC reporting a 22% increase to £6.9 billion in 2014/15. With inheritance tax producing a yield of just £3.8 billion in the same period, CGT is clearly no longer the poor relation and the haul for subsequent years is likely to be even greater as investors continue to take advantage of a buoyant stock market and landlords (who continue to pay CGT at the higher rates of 18/28% on residential property disposals) sell to cash in on rising house prices.

Fortunately, there are a number of simple things that taxpayers can do to reduce their chances of being one of the 220,000 or so individuals lining the government's coffers. These include:

  • Minimise tax on realised gains - there is an appreciable difference in the rate of CGT paid by basic and higher rate taxpayers. For married clients, it can therefore be beneficial to ensure that taxable gains are made by the lower-taxed spouse where this is possible (remember that transfers between spouses or civil partners living together are made on a 'no gain/no loss' basis). With an annual exemption of £11,100 in 2016/17, even if both spouses are taxed at the same rate, there may still be the opportunity to use two annual exemptions rather than one.
  • Make additional pension contributions - as the rate of CGT paid is determined by the level of combined taxable income and capital gains, those who are not married or in a civil partnership can still reduce the rate at which they pay CGT on non-exempt gains by reducing their level of taxable income. One way that this can be achieved is by making additional pension contributions. As higher rate tax relief on a pension contribution continues to be given by the extension of the basic rate band payment of an allowable pension contribution could result in an equivalent amount of a capital gain that would otherwise be subject to CGT at the higher rate of 20% now being taxed at 10% - reducing the rate of CGT paid by up to 50%.
  • Make full use of the annual exemption - the annual exemption is given on a 'use it or lose it' basis. So if individuals are relying on certain investments for additional income, re-balancing asset allocation within their investment portfolio could provide the opportunity to use their annual exemption. In some cases considering a phased sale of shares over two tax years can prove to be beneficial as it is possible to benefit from the use of two annual exemptions.
  • Make the most of reliefs - entrepreneurs' relief, for example,can be very valuable, potentially reducing the capital gains tax on the sale of a business from a rate of 20% to 10% for the first £10 million of cumulative lifetime gains. However, the relief is only available as long as the qualifying conditions are met. Timing and advice will both be essential in order to maximise the relief available.
  • Retain investments showing substantial gains - selling or gifting assets during lifetime could result in a CGT liability that would otherwise be wiped out altogether if the investments had been held until death. Where the taxpayer is elderly or in ill-health, a lifetime gift of chargeable assets may be particularly detrimental given the enhanced possibility that the donor may fail to survive the seven year 'PET' period and so make no IHT saving either.

With the average CGT bill now at £28,500, and possible changes to existing reliefs being mooted as the Autumn Statement approaches, the importance of planning ahead with the benefit of informed advice should not be underestimated.

National Audit Office report on collecting tax from high net worth individuals

(AF1, AF2, R03, J03)

The National Audit Office (NAO) has examined HMRC's approach to high net worth individuals (HINWIs). 

In 2009 HMRC set up a HINWIs Unit to focus on the tax and financial position of individuals with a net worth of more than £20 million. At the start of 2015/16 HMRC reckoned there were around 6,500 such individuals, roughly 0.02% of the taxpayer population. Unsurprisingly, they pay a considerable amount of tax: over £4.3bn in 2014/15 of which £3.5bn was income tax and National Insurance (1.3% of the total revenue for those taxes) and £880m was capital gains tax (15% of all CGT).

The NAO has examined how the HINWI unit is working and reported the following:

  • HMRC is currently running a formal enquiry on around a third of high net worth taxpayers, with an average of four issues being examined per taxpayer. Total tax at risk is £1.9bn of which £1.1bn relates to marketed avoidance schemes.
  • 15% of HINWIs have used at least one avoidance scheme.
  • The HINWI enquiries can be slow to reach a resolution, with 6,000 issues under enquiry open for more than 18 months, 4,000 of which have been open for more than three years.
  • HMRC recorded yield of £416m in 2015/16 from the work of the HINWI unit, £166m more than its own internal target.
  • HMRC prioritises the recovery of tax in cases of fraud rather than criminal prosecution, a point some journalists seem to have ignored. In the last five years, HMRC has investigated and closed 72 cases relating to high net worth individuals. 70 of these were investigated with civil powers, raising £80m in compliance yield and penalties. Two cases were criminally investigated but only one was taken forward and successfully convicted. At October 2016 HMRC was criminally investigating a further 10 high net worth individuals.
  • Identifying HINWIs is not straightforward for HMRC, as most of the information about their wealth, such as sources of income or assets owned, does not need to be reported. In 2015/16, HMRC undertook a review and identified an extra 1,000 HINWIs.
  • Since 2009 the HINWI unit has moved from information gathering to become 'increasingly focused on the riskiest taxpayers'.
  • HMRC has not evaluated its approach to HINWIs, according to the NAO. While HMRC has gained more insight into HINWIs since 2009, it has not looked at what works and why in its current approach. The NAO believes HMRC could use such analysis to increase the impact of its work.

It's encouraging to note the success of this Unit in exceeding its 2015/16 target.  As a well-known advert puts it 'Every little helps'.

Current tax consultations - where are we now?

(AF1, AF2, R03, J02, J03)

What follows is a brief summary of some of the recent consultations which we feel may be of relevance to financial planners and their clients - we provide an overview of each of the consultations which have recently closed and are currently being reviewed by HMRC - it may be the case that we will have further details in the up-coming weeks or even on the eve of, or shortly after, this year's Autumn Statement on 23 November.

 

Part surrenders and part assignments of life insurance policies

Following the case of Joost Lobler, where the taxpayer suffered a chargeable event gain on taking a large part withdrawal from an investment bond, HMRC decided to consult on the tax treatment of part surrenders and part assignments from a single premium life insurance policy (commonly referred to as a "bond").  This consultation was to look at three alternative ways of taxing life policies: 

  • Taxing the economic gain
  • The 100% allowance (from the date of investment as opposed to accruing it at the rate of 5% pa for 20 years)
  • Deferral of excessive gains 

While legislation is not expected until the 2017 Finance Act, the closing date for comments was 13 July although the government said it hoped to provide responses in 12 weeks this has not yet happened. It could be that some more information will be divulged in the upcoming Autumn Statement, if not before. It's fair to say that most in the sector favour the attraction and simplicity of the 100% allowance.

 

Salary sacrifice for the provision of benefits in kind

The purpose of this consultation is to explore potential impacts on employers and employees if the government decides to change the way the benefits code applies when a benefit in kind is provided in conjunction with a salary sacrifice or flexible benefit scheme. Importantly, pension saving, employer supported childcare and cycle to work schemes are excluded.

The closing date for comments was 19 October so HMRC is currently reviewing the responses.

 

Tackling offshore tax evasion: a requirement to correct

This consultation is about introducing new legislation which will require taxpayers with outstanding tax liabilities relating to offshore interests to come forward and correct those liabilities by September 2018. The consequence of not meeting the requirement and carrying out the necessary correction within the defined window would see the taxpayer subjected to a new set of legal sanctions for ''failing to correct''.

This consultation closed on 19 October so HMRC is currently reviewing the responses.

 

Tackling disguised remuneration: technical consultation

At Budget 2016 the government announced a package of changes to tackle disguised remuneration avoidance schemes to ensure users of these arrangements pay their fair share of income tax and National Insurance contributions.

This technical consultation includes more detail on the changes the government will introduce in Finance Bill 2017 as well as details of proposals to tackle similar schemes used by the self-employed, and proposals to restrict the tax relief available to employers in connection with the use of these schemes.

This consultation closed on 5 October so HMRC is currently reviewing the responses.

 

Reforms to the taxation of non-domiciles: further consultation

At the Summer Budget 2015, the government announced a series of reforms to the way that individuals with a foreign domicile ('non-doms') are taxed in the UK. These changes will bring an end to permanent non-dom status for tax purposes and mean that non-doms can no longer escape a UK inheritance tax (IHT) charge on UK residential property through use of an offshore structure like a company or a trust. In particular, we are looking at the likelihood of a 15/20 year residence test to imply deemed domicile status for all tax purposes.

At the Autumn Statement 2015, the government made a further announcement that it would consult on how to change the Business Investment Relief rules to encourage greater investment into UK businesses.

Further consultation and draft legislation was published in August 2016 setting out the detail of the proposals to deem certain non-doms to be UK-domiciled for tax purposes.

This consultation closed on 21 October so HMRC is currently reviewing the responses.

 

Personal portfolio bonds - reviewing the property categories

At the 2016 Budget, it was announced that the government would review the categories of permitted investments which could be held in a life assurance bond without it becoming taxable as a personal portfolio bond.

Broadly, there are three types of investment vehicles which are being considered to be included within the permitted category list. These are:

  • real estate investment trusts (both UK and foreign equivalents)
  • overseas equivalents of UK approved investment trusts; and
  • UK authorised contractual schemes.

The consultation closed on 3 October 2016 and draft legislation is expected in advance of Finance Bill 2017.

 

Simplification of the tax and National Insurance treatment of termination payments

The government announced at Budget 2016 that it would make changes to the taxation of termination payments.

The changes include:

  • clarifying the scope of the exemption for termination payments to prevent manipulation by making the tax and National Insurance contributions (NICs) consequences of all post-employment payments consistent
  • aligning the rules for income tax and employer NICs so that employer NICs will be payable on payments above £30,000 (which are currently only subject to income tax)
  • removing foreign service relief
  • clarifying that the exemption for injury does not apply in cases of injured feelings

The government published an initial consultation looking at these changes and has also published a follow-up consultation on draft legislation, which explains the policy underpinning the changes in greater depth. The draft legislation is intended to give effect to the changes, and the government invites views on whether this objective is achieved.

This consultation closed on 5 October so HMRC is currently reviewing the responses.

INVESTMENT PLANNING

The old lady has second thoughts

(R02, AF4, FA7, LP2)

The Bank of England's latest quarterly Inflation Report has backtracked on much of the gloom in the August report.

November 3 was a "Super Thursday", the day when the Bank of England revealed its interest rate decision and published its quarterly inflation report (QIR). The August QIR, coming six weeks after the Brexit vote, was a gloomy affair. Indeed, the forecasts were so dire that the Bank announced a range of measures to boost the economy, including £70bn more quantitative easing (QE) and a cut in base rate to 0.25%. At the time the Bank thought:

  • The UK "was likely to see little growth in GDP during the second half of the year".
  • For 2017 growth would be just 0.8%, 1.5% lower than the May QIR forecast (which did not consider Brexit). This was the biggest cut ever seen from one Inflation Report to the next, even exceeding that of the financial crisis. For 2018, the Bank estimated growth would recover to 1.8%, still 0.5% below the May projection.
  • Inflation would pick up because of the weakness of sterling. For the final quarters of 2016, 2017 and 2018, the Bank's CPI projections were 1.2%, 2.0% and 2.4%.

Three months further on the Bank is taking a rather different view, coincidentally issuing its QIR on the same day the High Court ruled that Parliament should have a vote on invoking Article 50. In the latest Report, the Bank expressed the following views:

  • The 0.5% growth recorded by National Statistics in its first estimate is unlikely to be altered as further data emerge: this is 0.4% above the Bank's August forecast. The final quarter of 2016 is projected to provide another 0.4% growth, meaning that the Bank's overall projection for growth in the second half of 2016 has risen by 0.7% between Reports;
  • For 2017, growth is now expected to be 1.4%, 0.6% up on August's estimate. However, the forecast for 2018 growth has fallen by 0.3% to 1.5%;
  • CPI inflation in the final quarters of 2106, 2017 and 2018 is now projected to be 1.3%, 2.7% and 2.7%. The Bank expects this largely currency-induced inflation will start to drop in 2019. It is only in 2020 that the Bank sees inflation "likely to return to close to the target".

The Bank explains its changed views in terms of household reactions. To quote Mark Carney in his opening remarks at the QIR press conference, "...consumption has been even stronger [than expected], with households appearing to entirely look through Brexit-related uncertainties. For households, the signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at around the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid."

Nevertheless, the Bank sees much Brexit-related uncertainty ahead, with Mr Carney giving the High Court judgement as a good example. The Bank's stance at present is to keep interest rates down, choosing "a period of somewhat higher consumer price inflation in exchange for a more modest increase in unemployment".

A further cut in base rate, as was mooted at the last QIR press conference, now seems unlikely. However, the latest QIR's graph of market-implied interest rates suggests that a return to a 0.5% base is three years away.

PENSIONS

The triple lock

(R04, AF3, J05, FA2, R08)

Over the weekend, the House of Commons Work & Pensions Select Committee, chaired by Frank Field, published its 3rd report on intergenerational fairness. Unsurprisingly, it sees "an economy skewed towards baby boomers [born 1945-1965] and against millennials [born 1980-2000]." The report quotes the frequently cited statistic that "pensioner household incomes now exceed those of non-pensioners after housing costs", creating a risk of the millennial generation "being the first in modern times to be financially worse off than its predecessors."

The crux of problem is that:

The birth rate during the baby boomer generation was between 800,000 and 1,000,000 a year, whereas subsequent generations have seen typically 700,000-800,000. There is thus a greater strain on the post-baby boomer generations to the support the retiring baby boomers.

The swollen baby boomer generation is also hanging around longer thanks to improved life expectancy. The report notes that "a boy born in 1955, in the middle of the baby boom, had an 83% chance of living to at least 65, compared with 45% of those born in 1895." The net result of these two factors is that "The share of the population aged 65 and over is projected to grow from 18% in 2014 to 24% in 2039, while the proportion 80 and over is expected to grow from 5% to 8% over the same period."

The baby boomer generation was a winner in the housing lottery: "The opportunities that were open to baby boomers to buy a home with a relatively small deposit are closed to today's young." Getting onto the housing ladder early helped the baby boomers to build up wealth.

The report's main proposal is that triple lock increases to the basic and single tier state pension should be abandoned when the current commitment to maintain it expires in 2020. Retaining the lock "would… tend to lead to state pension expenditure accounting for an ever greater share of national income. At a time when public finances are still fragile, this is unsustainable." The option of accelerating state pension age increases as an alternative to removing the lock is dismissed because it "would disproportionately affect the young and those socio-economic groups with lower life expectancies in retirement," a point which echoes concerns raised John Cridland's SPA review for the DWP.

The report suggest that the triple lock should be replaced by a "smoothed earnings link". Under this mechanism the 2020 state pension would set the base and increases would normally be linked to earnings. In periods when earnings increases lagged behind price inflation, an above-earnings increase would be applied. Then, when real earnings growth resumed, (CPI) price indexation would continue until the state pension reverts to its 2020 benchmark as a proportion of average earnings.

Based on the estimate in the most recent Fiscal Sustainability Report from the Office for Budget Responsibility (OBR), the long term effect of reverting to an earnings link would be that state pensions rose by about 0.4% a year less than they would under the triple lock. That may not sound a great deal, but its cumulative effect is significant:  the OBR estimated that the annual cost of the triple lock relative to earnings uprating will be an additional 1.3% of GDP by 2064/65.

The report is also critical of universal pensioner benefits, such as the Winter Fuel Payment (cost about £2bn a year) and free TV licenses for the over-75s. The report says such benefits "have been deployed by successive governments for reasons of short term expediency. Such measures, which do not tend to be subject to indexation, lead to ill-targeted support, further complicate the benefits system and are politically and administratively far harder to put right than to introduce in the first place… They should …not be off limits when spending priorities are set in future Parliaments."

There is growing pressure to remove the triple lock when it reaches its currently scheduled expiry date in 2020. However, as that year will see the next general election - assuming no Article 50 snap election - politicians must be prepared to anger the (baby boomer) grey vote and face the inevitable pension-snatcher headlines.

The Pensions Regulator issues its compliance and enforcement bulletin for the quarter to 30 September 2016

(R04, AF3, J05, FA2, R08)

The Pension Regulator (TPR) has recently issued it latest Compliance and Enforcement Bulletin for the quarter ending 30 September 2016.  This once again highlights continuing rise in the number of penalties issued, including Escalating Penalty Notices, as the whole AE process spreads out to encompass more SMEs. 

The rise is in line with the sharp increase in employers reaching their deadline to comply with AE duties. Although the vast majority of employers are successful in meeting their duties, the minority of employers who fail to listen to warnings from TPR are subject to fines. 

The report also highlights that explanations given for non-compliance such as illness, being short staffed or confusion between employers and their advisers are not a 'reasonable excuse'.

The Bulletin includes three case studies (starting on page 4 of the PDF) where an employer appealed against a TPR fine for not completing their declaration in time and explains why the basis for the appeal was not upheld by the tribunal.  They go on to give examples of when "is a reasonable excuse not a reasonable excuse?

In this quarter, TPR issued 3,728 Fixed Penalty Notices to employers for failing to meet their automatic enrolment duties. After asking TPR to review their decision, a number of them contested their fines at a tribunal, claiming that their non-compliance was unintentional and that they had a "reasonable excuse".

The circumstances that employers are citing in their defence include confusion between the employer and the payroll administrator as to who is supposed to be doing what, illness, and being short-staffed. However, as the case studies illustrate, in the eyes of the law, these reasons are not sufficient to avoid a fine.

The idea of a reasonable excuse is also used by HMRC for appeals against tax penalties, but the tribunal has made it clear that the two regimes are separate. The same basic principle applies, in that a reasonable excuse is something unexpected or outside your control that stopped you meeting your statutory duties. But because the automatic enrolment and tax duties are different, something that amounts to a reasonable excuse for HMRC's purposes may not be enough to avoid an automatic enrolment fine.

For example, HMRC guidance says that a problem with their online service is a reasonable excuse for failing to file a tax return on time. However, the tribunal has rejected it as an excuse for failing to complete a declaration of compliance, because we offer an alternative telephone service, and because of the number of reminders that we give employers to complete their declaration in good time.

The following do not amount to a reasonable excuse for a failure to complete the declaration of compliance:

  • You relied on someone else and they let you down
  • You found the online system too difficult to use
  • You didn't get a reminder
  • You made a mistake
  • You or a member of staff were ill

For planners that are helping employers along the automatic enrolment journey, it's important that TPR do not take kindly to noncompliance, 3700 fixed penalty notices in one quarter is testament to how seriously these duties are taken. 

State Pension top up - Six months left to apply

(R04, AF3, J05, FA2, R08)

The Department of Work and Pensions (DWP) has recently issued a reminder to all those who have expressed an interest in topping up their Additional State pension by up to £25 per week. The option to make Class 3A Voluntary Contributions applies to individuals who attained their SPA on or before 5 April 2016, i.e. individuals who receive, or will receive, their State Pension under the old rules.

Why is this important to planners to revisit this with clients?

It has been possible to make the Class 3A Voluntary NIC payment since October last year. When the Government announced the details of these earlier, they stated that the rate offered would be in line with the market. However, even when they became available it was not possible for a healthy individual to secure a pension annuity paying the same level of income as achieved from paying Class 3A NICs. However, since then, annuity rates have been falling and then, post BREXIT, nose-dived.

So, for an individual aged 66, to secure an income of £1,300 p.a. with a 50% spouse's pension that is index-linked would cost over £46,900, according to the MAS site on 28 October.

To obtain the same level of income a Class 3 would cost £21,775 based upon the DWP calculator run on the same date.

In simple terms, the Government offer which was generous when it was launched has, due to the changes in the annuity market, become very attractive.

It may be worth advisers who have clients who attained their SPA on or before 5 April 2016, who have spare capital and are bemoaning the low level of cash deposit interest rates, making them aware of the options from paying Class 3A NICs which the offer is still on the table. It may well be, depending upon the terms of your engagement with your client, it may head-off a potential complaint in the future.

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