Personal Finance Society news update from 2 December 2015 to 8
January 2016 on taxation, retirement planning, and investments.
Taxation and Trusts
TAXATION AND TRUSTS
Updated diverted profits tax guidance
HMRC has updated its guidance on diverted profits tax. As part of
another anti-avoidance measure the government announced the
introduction of the diverted profits tax (DPT) in the 2014 Autumn
Statement The legislation was included in the Finance Act 2015, and
applies from 1 April 2015.
The DPT, which has initially been set at a rate of 25%, applies
where a foreign company 'exploits' the permanent establishment
rules or where a UK company or a foreign company with a UK-taxable
presence uses artificial transactions or entities that 'lack
economic substance' to obtain a tax advantage.
HMRC's guidance note provides details on the DPT and should be
read alongside the legislation, Explanatory Notes and the Tax Information and Impact Note which were
published on 24 March 2015. It explains how the tax works by
reference to practical examples which should prove to helpful.
Corporate tax avoidance
Ladbrokes have been blocked from reclaiming £54m of tax through
a Tax Tribunal ruling in favour of HMRC and against an avoidance
scheme promoted by Deloitte and used in 2008. There are
apparently three similar cases with a total of over £100m of tax at
stake. Seven other users of the same scheme have already
The scheme centred on (what was ruled to be) an artificial loss
creation ie a loss for tax purposes that had no foundation in
Legislation in 2009 closed the loophole but the point of this
decision was that even in a time before the new legislation was
enacted the essence of the scheme failed on a "substance over form"
basis. HMRC stated "Avoidance just doesn't pay: we win about
80 per cent of cases taxpayers choose to litigate and many more
concede before litigation."
The "take away" from this case and others like it is not related
to the facts of the case or the particular scheme, but to the fact
- HMRC is prepared to litigate and defend to secure rulings where
the desired tax advantage has no economic foundation - and/or
defeats the intention of Parliament
- HMRC appears to be building an impressive success record.
The combination of:
- success in the Tribunals and Courts
- telling the public about this success
- anything to introduce and publicise anti-avoidance legislation
- strengthening the GAAR
all build a very convincing case for warning off individuals and
companies from aggressive tax avoidance contrary to the intention
The strong recommendation underpinning financial planning
strategy must be "stick to the tried and tested" or be prepared for
HMRC launches Personal Tax Accounts
(AF1, AF2, RO3, JO3)
At March Budget 2015, HMRC published a paper '
Making tax easer: the end of the tax return'
outlining proposals for a new system of digital accounts that would
ultimately replace the current system of self-assessment for
millions of individuals and businesses.
A second paper - Making tax digital - published recently in
conjunction with the official launch of Personal Tax Accounts,
provides further detail on these plans and includes a timeline
setting out how the Government plans to achieve its aim, which is
to be interacting digitally with all taxpayers by 2020.
The main features of the proposed new system
- Taxpayers will be able to see a complete financial picture of
their tax affairs in one place, with all individuals and small
businesses having access to a digital tax account by April
- Taxpayers will not have to give HMRC information that it
already has access to. From 2016, information on bank and building
society interest will start to be included in tax codes and, in
spring 2016, HMRC will publish a consultation document to gather
views on how information might be obtained directly from more third
- Most businesses, including the self-employed and landlords,
will be required to keep digital records and update HMRC at least
quarterly where it is either their main source of income or a
secondary source of income above £10,000 and their main income is
from employment or a pension. These changes will be introduced for
some businesses from April 2018, and will be phased-in fully by
- Taxpayers will able to see the information that HMRC holds at
any given time and will report changes or submit other information
through their digital tax account.
- Outstanding tax which can't be collected through PAYE will be
collected through a new system of online billing and taxpayers who
need to meet more than one liability will be able to make a single
payment - off-setting any tax owed on one liability against an
overpayment on another. HMRC will work with stakeholders to
establish precisely how this will work.
Alongside the main document, HMRC has also published a
discussion paper which explores moving towards a simpler and more
aligned payment system for tax that operates closer to real time;
as well as a series of case studies to illustrate howMaking tax
digitalwill affect customers. HMRC will be holding a series of
consultation events in January and February 2016 to discuss these
payment issues with stakeholders.
While HMRC states that the new measures will 'transform the tax
system, making it more effective, more efficient and easier for
taxpayers'; others may be sceptical. Not only will a requirement
for quarterly tax returns place a greater administrative burden on
small businesses, there is a significant risk that HMRC could
misinterpret data received from third parties - particularly banks
where deposits do not necessarily represent the receipt of sales
income - leading to demands for additional tax where none is owing.
The government will consult widely on the details of these measures
in spring 2016, including on whether they should apply to
charities, sports clubs and their trading subsidiaries.
Dividends - Finance Bill 2016 draft clauses
(AF1, AF2, AF4, JO3, RO2, RO3, CF2, FA7)
The July 2015 Budget announced the reform of
dividend tax. At the time we commented that detailed information
was lacking, leaving a number of questions unanswered.
While a dividend allowance factsheet, issued in August, did give a little
more insight - the allowance isnotan allowance - we were still left
waiting for the full facts. The Autumn Statement said nothing, so
our hopes then turned to the Finance Bill 2016 draft clauses and
accompanying material, which emerged on 10 December. Alas, we are
still scratching our heads.
The Tax Information and Impact Notes (TIIN) on
dividend taxation set out the new tax rates for individuals beyond
their £5,000 dividend allowance (7.5% basic rate, 32.5% higher rate
and 38.1% additional). However, the relevant draft clause only spells out that "The dividend nil
rate is 0%" (surprise, surprise!) in a new subsection A1 to section
8 ITA 2007. Section 8 contains the dividend tax rates, but there
are no changes to the existing rates made by the draft clause.
Similarly, the draft clause does not reach section 9 ITA 2007,
which defines the dividend trust rate. Thus we can still only
assume that will be 38.1%, in line with the additional rate stated
in the TIIN.
At one level it is certainly odd that the new dividend tax rates
have been omitted from the draft clauses. However, if one
considers that the purpose of issuing draft clauses is to secure
feedback and comment then maybe it was thought that it was
unnecessary to secure comment on the rates themselves (pure numbers
that they have made clear in the tax impact notes and policy
statements as opposed to legislative form and structure) and they
will go straight into the Bill without being put out for
We wrote to HMRC for clarification on these points and it
confirmed to us that the dividend rates would be 7.5%, 32.5% and
38.1% and be included in the final legislation.
The other draft clause (12 pages long) deals with consequences
flowing from the abolition of tax credits. These include the repeal
of the concept of "franked investment income", which was defined in
terms of tax credit entitlement. In its place we have "exempt ABGH
distributions", so named because they are distributions falling
within paragraphs A, B, G or H of s1000(1) of CTA 2010.
The position with regard to the taxation of dividends for life
companies remains unclear. The fact that the government has made no
changes to the taxation of interest for life companies despite the
creation of the personal savings allowance makes a 7.5% (basic
rate) charge look more of a possibility. We have asked HMRC to
clarify the position.
The Personal Savings Allowance - Finance Bill 2016 Draft
(AF1, AF2, AF4, JO3, RO2, RO3, CF2, FA7)
When the Chancellor announced the personal
savings allowance (PSA) in the March 2015 Budget, we were all left
guessing how it would work in practice. Very little in the way of
background information appeared beyond a consultation issued in July on the
implications for savings not covered by the tax deduction scheme
for interest (TDSI).
The publication of the Finance Bill 2016 draft
clauses, supporting papers and a response to the TDSI consultation now give us
a clearer - but not yet definitive - picture of the PSA:
- First off - and most irritating - the PSA proves not to be an
allowance. Once an explanation of the dividend allowance emerged,
here was always a suspicion that the PSA would be another 0% tax
band and this proves to be the case. To quote the TIIN on the PSA, 'Income that is within an
individual's savings allowance will still count towards their basic
or higher rate limits'. The result is that there will be two 0%
bands for savings income, as the £5,000 starting rate band will
continue, subject to its own different set of rules.
- the PSA will have two cliff edges. The basic PSA is £1,000,
- if any of an individual's income attracts higher rate tax, then
the PSA is £500; and
- if any of an individual's income attracts additional rate tax,
then the PSA is nil.
In other words, there is no tapering.
- From 6 April 2016, banks, building societies and NS&I will
no longer be required to deduct tax from interest. However,
despite the summer consultation, "The government has not yet
reached a decision on this question [of gross payments] in respect
of authorised investment funds, investment trusts and P2P lending.
The government is continuing to analyse information provided to
understand fully the impact of potential changes, and an
announcement will be made as soon as possible." Given that the
start of the new tax year is less than three months away, this
means no change and a boost for offshore fixed interest funds
(which pay interest gross) over their onshore (net-paying)
competitors. In the case of life insurance, the rumours that the
tax treatment of policyholders' interest would be changed have
proved incorrect: 'the government has not identified a compelling
case for specific changes, and does not intend to amend the
- The government estimates that the PSA will give 18m people a
tax reduction on their savings income averaging £25 a year. "Around
95% of taxpayers" will not have any tax to pay on their savings
income. However, 1.4m people will still have tax to pay on savings
income and, as HMRC notes "Most will be additional rate taxpayers
or individuals with higher than average savings".
HMRC says that it "will introduce automated coding out of savings
income that remains taxable through the Pay As You Earn (PAYE)
system, on the basis of information supplied by
accountproviders[our italics]". HMRC promises that "further details
for customers will be provided in good time before any tax becomes
due," and in the longer term is relying upon the planned digital
tax accounts to deal with the issue.
groups will potentially face more tax compliance: trustees and
executors. Neither will benefit from the PSA, but both will have to
deal with gross interest payments and accounting for the tax due on
We have used the words of former US Treasury Secretary William
Simon before and it is worth repeating them now: we should have a
tax system which looks "like someone designed it on purpose". It
would be very hard to say that about the starting rate band for
savings and the new personal savings allowance.
The net closes in on offshore tax evaders
As announced in the March 2015 Budget, the deadline for using
the existing offshore disclosure facilities (Jersey, Guernsey, the Isle of Man and Liechtenstein) is fast approaching.
From 2016, the existing disclosure facilities will be replaced
by a new tougher, last-chance facility. Those who continue to evade
will face new tougher financial and criminal sanctions.
David Gauke, the Financial Secretary to the Treasury, said:
"Hiding money in another country at the expense of honest UK
taxpayers is not acceptable and we have made it clear we will put a
stop to it.
"Under our new regime the small minority who evade tax offshore,
facilitate or turn a blind eye to offshore tax evasion will face
"With over 90 jurisdictions now agreeing to automatic exchanges
of information, the net is closing in on offshore tax evaders."
The message is clear - those affected should use this
opportunity (if they haven't already done so!) to get their
offshore tax affairs in order and pay the tax they owe plus any
interest due to avoid facing the tougher sanctions going
Changes to the tax treatment of non-domiciles
(AF1, AF2, RO3, JO3)
Anticipated announcements on the reform of the tax treatment of
non-domiciles have not been included in the draft Finance Bill
2016. Further details are now expected in early 2016.
Changes to the UK tax rules concerning individuals who are not
domiciled in the UK but are either resident in the UK or own
property here were announced in the July 2015 Budget. This was
followed by the publication of the consultation paper 'Reforms to
the Taxation of Non-Domiciles' on 30 September 2015 and further
details had been expected in the December Finance Bill 2015.
However, no further details were included in the draft Finance Bill
2016 published on 10 December. Instead it was announced that
the government will publish its response to the consultation (which
closed on 11 November 2015) in early 2016 together with drafts of
any necessary amendments to legislation (including transitional
Here is what we already know about the proposed changes.
Broadly, these changes consist of:
- amending the deemed domicile rule for long-term residents to 15
out of 20 (from 17 out of 20) tax years for all tax purposes from 6
April 2017, i.e. extending it to CGT and income tax;
- amending the "returning to the UK domicile rule" so that anyone
who returns to the UK will reacquire their UK domicile from the
date of return; and
- bringing UK residential property owned by a non-UK domiciled
individual into the IHT net.
The new rules, which are intended to take effect from April
2017, will mean that the remittance basis charge of £90,000 (that
currently applies to those who have been UK resident for at least
17 of the past 20 tax years) would no longer be applicable from the
tax year 2017/18; and an individual will become deemed domiciled
for IHT at the start of their 16th consecutive tax year of UK
residence, rather than at the start of their 17th tax year of UK
residence as is the case under the current rules.
In order to allow non-domiciles, who are internationally mobile,
to continue to benefit from "non-dom" status in a way that is not
appropriate for those who are firmly based in the UK, the
legislation will allow someone who has lived in the UK for 15
consecutive tax years and who then leaves the UK for 6 or more
consecutive tax years, to return here and claim non-dom status
again for another 15 years (assuming they still had a foreign
domicile status under general law).
However, this would mean that, while an individual who has
become deemed-UK domiciled and ceases to be resident in the UK will
continue to be deemed-UK domiciled for up to 6 tax years following
their departure, an individual who is domiciled in the UK who
leaves and acquires a domicile of choice in another country could
potentially become non-domiciled for IHT purposes more quickly.
This is because the current IHT rules provide that an individual
who ceases to be domiciled in the UK will only continue to be
treated as domiciled in the UK if they have been domiciled in the 3
tax years immediately preceding the chargeable event.
To address this disparity, the government is proposing to
introduce a rule which treats a UK domiciliary as non-domiciled on
the later of the date that they acquire a domicile of choice in
another country, and the point when they have not been resident in
the UK for 6 tax years. A similar situation arises in respect of
non-domiciled spouses ofUKdomiciles who elect to be treated
asUKdomiciled for IHT purposes. Under the current rules, such an
election will cease to have effect if the electing spouse is
resident outside theUKfor more than four full consecutive tax
years. It is proposed that this period is also aligned to 6 tax
years under the new rules.
Clearly, we need to wait and see what the final shape of the
proposed legislation will be but, any advisers with clients falling
into the "non-dom" category need to be aware of the proposals and
discuss them with their clients. As always professional advice will
be necessary in all such cases.
Consultation on higher rates of SDLT for second homes
(AF1, AF2, RO3, JO3)
At the Autumn Statement, the Government announced that it would
be introducing higher rates of Stamp Duty Land Tax (SDLT) as part
of a Five Point Plan for housing which aims to re-focus support for
housing towards low-cost home ownership for first-time buyers.
The higher rates will apply to transactions completed on or
after 1 April 2016 in England, Wales and Northern Ireland where, at
the end of the day of the transaction, an individual purchaser owns
two or more residential properties (or, in the case of joint
purchasers, either one of the joint purchasers owns two or more
residential properties) and they are not replacing their main
residence. So, a person who already owns both a main residence and
a buy-to-let and who sells their main residence and buys a new one,
will not pay the higher rates (despite owning two properties at the
end of the day of the transaction) because they are replacing their
main residence. Contrast the person who first purchases a
buy-to-let (which is not to be used as a main residence - perhaps
because the purchaser is living in rented or job-related
accommodation or with parents) and later buys a main residence. In
this situation, the higher rates will be payable because the person
owns two properties at the end of the day of the transaction and
has not replaced their main residence.
Note that if the purchaser has sold a previous main residence
within 18 months before the day of the transaction and the
transaction is a purchase of a new main residence, the purchaser
will be considered to be replacing a main residence. Whether or not
a property constitutes a 'main residence' will be determined
according to the facts.
Where it is intended that the second property will replace the
main residence but the main residence has not yet been sold, the
transaction will be subject to SDLT at the higher rates but a
refund will be given if the original residence is sold within 18
months of the transaction.
Both inherited property as well as property owned overseas will
be relevant in determining the number of properties owned at the
end of the day of the transaction where the new property is
situated in England, Wales or Northern Ireland. Where the new
property is located overseas, SDLT will not of course be payable on
the purchase (although instead it may be liable for any property
transactions tax in that jurisdiction).
The new rates
The higher rates will be 3 percentage points above the current
SDLT residential rates and will be charged on the portion of the
value of the property that falls into each band as follows:
Existing residential SDLT rates
New additional property SDLT rates
£0 - £125k
£125k - £250k
£250k - £925k
£925k - £1.5m
An additional residential property is purchased for £200,000.
SDLT is calculated as follows:
- 3% on the first £125,000 = £3,750
- 5% on the remaining £75,000 (the portion between £125,000 and
£200,000) = £3,750
The total SDLT due is therefore: £3,750 + £3,750 = £7,500
Note that the higher rates will not apply to transactions
completed after 31 March 2016 if contracts were exchanged before 25
November 2015 or to purchases of commercial properties.
Married couples, trusts, companies and other specific
It is important to note that married couples and civil partners
are to be treated as one 'unit' for the purposes of the new rules.
This means that properties owned by either partner (or their minor
children) will be relevant when determining the number of
properties owned at the end of the day of the transaction. This
means that an individual buying their first or only property could
in some cases be charged the higher rates of SDLT on the purchase
(i.e. if their spouse owns a property already). This will be the
case unless the parties have formally separated (although the
consultation specifically seeks views on this aspect of the
It is also proposed that the 'one unit' approach will apply to
joint purchasers generally, regardless of their relationship but,
again, the consultation document acknowledges that this could
result in an inequitable situation in some cases (for example,
where one party owns no other property and is buying jointly with
someone else as a way of getting onto the property ladder) and
seeks views on how joint purchasers might alternatively be treated
to ensure a fair result.
Note that where parents help their adult children purchase a
property, the new higher rates will only apply if the parents
become owners of the new property (sole or joint) and they also
have a residence of their own. The higher rates will not apply
where a parent simply lends or gifts money to assist the purchase
in the name of the (adult) child or acts as a guarantor on the
The higher rates will also generally apply to purchases of
residential property by companies (even if it is the first
residential property purchased by the company) and to purchases of
residential property made by trustees of discretionary trusts.
Where the trust is a bare trust or an interest in possession trust,
the question of whether or not the higher rates will apply to the
transaction will be determined by reference to the number of
properties owned by the absolutely entitled or interest in
possession beneficiary. Likewise, where a beneficiary with an
interest in possession in a trust holding residential property
makes a purchase of an additional property outside the trust, the
new higher rates of SDLT will apply unless the beneficiary is
replacing his or her main residence.
Specific rules will also apply to purchases of multiple
dwellings (i.e. purchases of 6 or more residential properties in
the same transaction) and it is proposed that an exemption will
apply to bulk purchases (of at least 15 residential properties)
which significantly contribute to new housing supply and the
government's wider housing objectives, regardless of whether the
purchaser is an individual or non-natural person (such as a
corporate or fund).
This consultation will run from 15 December 2015 to 1 February
2016 and confirmation of the final design will be announced at the
Budget on 16 March 2016.
The proposed wording of the new rule ensures that any person who
either becomes an owner of a second home for the first time on or
after 1 April 2016 or replaces an existing buy-to-let on or after
that date will pay SDLT at the higher rate.
However, administration and compliance may present challenges.
The existing SDLT return will need to be adapted to include
questions such as whether any newly purchased residential property
will be a main residence and will be replacing a previous main
residence; and HMRC recognises that it may be necessary for it to
ask for information in support of an individual's claim that a
property was or was intended to be their only or main residence to
ensure that the correct amount of tax is collected. HMRC will also
need to design a system for the filing of claims and payment of
refunds (the incidence of which is likely to increase significantly
after 31 March 2016).
While SDLT will almost certainly
not be a main area of advice for financial advisers, a number of
their clients may well be interested in purchasing an additional
- as an investment to let
- as a holiday home
- for their children or parents
In all of these cases the
additional initial cost imposed by the new higher stamp duty must
be taken into account.
An overview of the new downsizing provisions for the IHT
residence nil rate band
The draft Finance Bill 2016 clauses published on 9 December
include further details on the 'downsizing' provisions announced at
Summer Budget 2015. Broadly, the measure ensures that an estate
will not be prevented from benefiting from a 'residence nil-rate
band' linked to a former property with a higher value where an
individual either downsizes to a lower value home or sells (or
otherwise disposes of) a qualifying residence on or after 8 July
2015, provided that other assets of an equivalent value to the
'lost' residence nil rate band are left to direct descendants
A technical note on the proposals was published for consultation
in September 2015 and the issues raised have, according to HMRC,
been taken into account in the draft legislation which has now been
published in a Schedule to clause 44 of Finance Bill 2016. The
Schedule amends new sections 8D-8F IHT Act 1984 (introduced by
Finance (No. 2) Act 2015) and introduces new sections 8FA-8FE which
provide that a person's estate will benefit from a downsizing
addition where prior to death (but on or after 8 July 2015) the
- Either downsized to a less valuable residence or sold or
otherwise disposed of a qualifying residence - so that the full
residence nil rate band (RNRB) can no longer be claimed; and
- Left either the lower value residence (or an interest in it) or
some other assets to direct descendants on their death.
Note that in cases where the RNRB has been lost as a result of a
downsizing move, it is not necessary for the new residence to be
closely inherited in order for the estate to qualify for the
downsizing addition - the addition will be available even where the
new residence is left to someone else provided that some other
assets are closely inherited. However, in such cases, the amount of
the downsizing addition will be limited to the lower of the amount
of RNRB lost as a result of the downsizing or other disposal, and
the value of the property or other assets being closely
The downsizing addition must be calculated in
percentage terms with the percentage of the RNRB lost by reason of
the downsizing or other disposal being applied to the person's
default allowance at death to determine the lost relievable amount.
The precise formula for calculating the residence nil rate amount
is complicated but in simple terms the lost (additional) RNRB is
calculated via a four-step process:
- Calculate the percentage of the then available RNRB that the
individual could have claimed had they died at the time of disposal
of the former residence.
- Calculate the percentage of the currently available RNRB
that the individual is actually able to claim on death.
- Calculate the difference between these two
- The lost RNRB is the resulting percentage multiplied by
the RNRB that the individual is otherwise able to claim on
This amount (or, if lower, the value of the closely inherited
assets) is added to the RNRB that would otherwise have been
available (taking account of any amount carried forward under the
transferable nil rate band rules) to determine the total amount of
RNRB available to the estate.
While HMRC is yet to update their technical note to include
detailed examples of what this will look like in practice, we would
envisage the new rules operating as follows:
Example 1 - downsizing
Shirley's husband, Tom, died in January 2014 leaving his entire
estate to Shirley. In September 2015, Shirley sold the property in
which she and Tom had lived together prior to his death for
£400,000 and purchased a smaller property for £199,950. Shirley
dies in May 2020, leaving her estate worth £415,000 to her
children. At the date of her death, the property that Shirley owns
is valued at £210,000. As Shirley's situation meets the conditions
outlined in new s8FA - 8FE IHT Act 1984, her estate will qualify
for the downsizing addition which is calculated as follows:
- Step 1: Percentage of RNRB that would have been used if Shirley
had died at the point that the more valuable property was sold =
400,000/200,000* = 200%. Note that the rules provide that where
this figure is greater than 100%, the percentage should be taken as
- Step 2: Percentage of RNRB used at date of death =
210,000/350,000 = 60%
- Step 3: Percentage of RNRB lost by reason of downsizing =
- Step 4: Lost relievable amount = 40% x 350,000** = 140,000
The downsizing addition is therefore £140,000 (as this figure is
lower than the amount that is being closely inherited). This
downsizing addition must then be added into the calculation
required by s8E IHTA to determine the residence nil rate amount.
This has the effect of increasing Shirley's residence nil rate
amount to £350,000 (which is what it would have been under the
transferable nil rate band rules had she still owned the original,
higher value residence at the date of her death).
* the new clause provides that where the
property was sold before 6 April 2017, the residential enhancement
should be taken to be £100,000.
** the percentage lost by reason of downsizing is
applied to the deceased's default allowance as defined in the
primary legislation. This is essentially their residence nil rate
amount taking account of the transferable nil rate band rules. Note
that where the first death occurred before 6 April 2017, a 100%
uplift is always given.
Example 2 - disposal
Barry sells his home worth £275,000 in May 2020 following a move
into residential accommodation. At the time of the sale the
available RNRB is £175,000. Barry dies two years later leaving his
estate of £450,000 to his children in equal shares. For simplicity
we will assume the RNRB is still £175,000 at the date of death.
Barry's lost relievable amount is calculated in accordance with
a two-step process as follows:
- Step 1: Percentage of RNRB that would have been used if Barry
had died immediately before disposing of the property =
275,000/175,000 = 157%. As before this figure is restricted to
- Step 2: Apply this percentage to Barry's default allowance, so
100% x £175,000 = £175,000
The downsizing addition is the lower of the lost relievable
amount and the amount of the estate being closely inherited i.e.
the lower of £175,000 and £450,000. This is Barry's residence nil
rate amount. Barry also has a standard nil rate band of £325,000 to
offset against his estate and consequently no IHT is payable.
Other points worthy of note are that:
- the additional RNRB will be tapered away in the same way as the
RNRB if the value of the estate at death is above £2m
- the additional RNRB will be applied together with the available
RNRB but the total for the two will still be capped so that they do
not exceed the limit of the total available RNRB for a particular
- a claim must be made for the additional RNRB in a similar way
that a claim is made to transfer any unused RNRB to the estate of a
surviving spouse or civil partner
While the broad result of the measure is clear: an estate will
remain eligible for such proportion of the RNRB as is foregone as a
result of downsizing or disposal of a property prior to death - the
reality is that the downsizing clauses run to some 8 pages which
are difficult to negotiate and contain some anomalies on which
clarification will be required before the Finance Bill becomes
FTSE 100 gets a makeover
(AF4, RO2, CF2, FA7)
The latest review of the FTSE 100 constituents has taken
place. These constituents are reviewed quarterly by the FTSE
Group, although changes can take place between times, eg in the
event of a takeover. The system involves two stages:
- Any stock having a market capitalisation ranked below 110 is
placed on the ejection list and replacement candidates with
rankings of 110 and higher are placed to the entry list, with the
largest companies at the head of the queue.
- An FTSE Index committee then reviews the results and the new
Index structure is confirmed.
The results of the latest review were announced on 2 December based on market
capitalisations at the close on the previous day and will take
effect from 21 December. This time three constituents dropped from
the FTSE 100 to the FTSE 250:
Suffering from 'reputational damage' and emerging market
Morrison (Wm) Supermarkets
Victim of food deflation and hard discounters
Defence & Aeronautics
Profit warning in late October
Dublin-based support services company
Global payments processor floated in October
Doorstep lender helped by FCA's measures against payday
This is more of a tidy up than a radical change, although that
is not to say that weightings in the Index have been little moved
over 2015. The routs in the mining sector (down 47% over the last
12 months) and oil & gas sector (down 17.5%) have made holes in
the ground a less significant part of the Footsie (itself down 4.4%
over the last year). One miner and two oil & gas companies have
been demoted from the FTSE 100 this year, but the sector will not
disappear from the Index because some of the surviving companies
are so large (Shell, BP, BHP Billiton and Rio Tinto are all in the
As at 30 November, the FTSE 100 breakdown was:
No of Companies
Oil & Gas
Personal & Household Goods
Food & Beverage
Industrial Goods & Services
Travel & Leisure
Construction & Materials
Automobiles & Parts
There is a certain irony that as the 2007/08 financial crash
fades into history, the largest FTSE 100 sector is banks...
November inflation numbers
(AF4, RO2, CF2, FA7)
Annual inflation on the Consumer Prices Index (CPI) measure
turned positive in November, with the rate rising to +0.1%. The
November inflation numbers from the Office for National Statistics
(ONS) were slightly above market expectations but still mean that
the CPI has been in a band between +0.1% and -0.1% since
The CPI showed prices flat over the month, whereas between
October and November 2014 they fell by 0.3%. The CPI/RPI gap
widened by 0.2% this month to 1%, with the RPI jumping by 0.4% to
1.1% on an annual basis. Over the month, the RPI rose 0.1%,
marginally less than the CPI.
The rise in the CPI annual rate was due to three
main upward and one main offsetting downward contributions,
according to the ONS:
Transport:Overall prices fell by 0.7% between October
and November this year compared with a larger fall of 1.2% between
the same two months a year ago. The upward effects came principally
from motor fuels and second-hand cars. Petrol prices fell by 1.5p a
litre this year compared with a fall of 3.0p a year ago while
diesel fell by 0.6p this year compared with 2.9p a year ago.
Second-hand car prices rose by 1.6% this year compared with a fall
of 1.0% a year ago.
Alcoholic beverages and tobacco:Overall
prices fell by 0.1% between October and November this year compared
with a fall of 1.2% between the same two months a year ago. The
upward contributions came from spirits and wine.
Miscellaneous goods and services:
Overall prices rose by 0.3% between October and November this year
compared with a fall of 0.1% between the same two months a year
ago. Some of the upward effect came from car insurance premiums
thanks to the July Budget Insurance Premium Tax (IPT) hike from 6%
to 9.5%, which took effect at the start of November. There was also
an upward contribution from other personal effects, where prices of
items such as luggage rose by more than a year ago.
Clothing and footwear: Overall
prices fell by 0.1% between October and November this year compared
with a rise of 0.7% between the same two months a year ago. This is
the first fall in prices between October and November since
official records began in 1996 and follows the largest September to
October price increase on record. It continues the trend seen since
the summer of atypical monthly price movements in the clothing and
footwear sector. The contribution to change this month came
primarily from price movements for a broad range of outerwear with
more products on sale this November than a year ago.
Core CPI inflation (CPI excluding energy, food,
alcohol and tobacco) was an annual 1.2%, up 0.1% from the previous
month. Three of the twelve components of the CPI index are now in
negative annual territory, the same as last month.
The unwinding of fuel price falls in the annual figures was
expected and, with recent drops in crude oil prices, may now be
back on hold. Inflation could be returning below zero soon as pump
prices drop under £1 a litre. The benign inflation figures will
reinforce the view that changes in US interest rates will not
prompt the Bank of England into immediate action.
A mixed year for UK shares
(AF4, RO2, CF2, FA7)
The FTSE 100 ended the year down 4.9%, marking a second
consecutive year of decline and its worst performance since 2011.
However, more than ever the FTSE 100 is not the whole story.
The FTSE 100 ended 2015 almost 5% down from where it started as
this year's late Christmas rally stuttered in the approach to 2016.
Add back in dividends (the FTSE 100 now has a historic yield of
about 4%) and the total Index return was a loss of about 1.3% over
However, in 2015 more than ever the Footsie's bias towards
energy and other commodity companies had a marked impact on its
performance. This shows up when other UK market indices are
examined, as the table below shows.
Index's global commodity bias takes its toll
UK-focused cos outperform Footsie yet again
FTSE Small Cap
Small caps outperform big cap, not mid-cap
FTSE 350 Higher Yield
Value-investing lagged - commodities again
FTSE 350 Lower Yield
More UK, non-commodity focus helps
Outperformed Footsie due to mid/small caps
FTSE Household Goods & Construction
Top sector: housebuilders rose on the back of Help to Buy and
increasing house prices
FTSE Industrials Metals & Mining
Bottom sector: the commodity effect again
Over the year the dividend yield on the FTSE All-Share rose from
3.37% to 3.70%, implying dividend growth of 7.0%. However, this
figure needs to be treated with caution. Part of the dividend rise
(in sterling terms) is down to the strength of the dollar, the
accounting currency for many multinationals, which rose over 5%
against sterling in 2015. Dividend cover (the ratio of profits to
dividends) has fallen sharply from 1.88 to just 1.52 and there are
2016 dividend cuts due, both announced and expected, from the
commodity behemoths, such as Glencore.
The rise in the equity dividend yield parallels a smaller upward
movement in yields on gilts - 10 year gilts reversed their 2014
yield drop and ended the year offering 1.96% (from a 1.76% starting
point). Two-year gilt yields, more sensitive to that ever-deferred
base rate rise than their longer brethren, moved from 0.50% to
The performance of the UK equity market was similar to most
other major stock markets. For example, the Euro Stoxx 50 rose by
3.9%, but for UK investors there was a 5.2% decline in the euro
against sterling, turning a euro profit into a sterling loss of
1.5%. Currency worked the opposite way for Japan: the Nikkei 225
rose by 9.1% and the yen added 4.5% against sterling. As mentioned
above, sterling fell against the all-conquering US dollar, which
more than countered a small drop in the S&P 500 of
In the emerging markets, which had their own commodity and
political excitement during the year, investors were given a lesson
in divergence between countries. For all the frights in August, the
Shanghai Composite ended up 9.4% over the year (mostly wiped off in
the first trading day of 2016). Brazil's main index, the Bovespa,
dropped 13.3%, but to that must be added a near 30% decline in the
Brazilian real against sterling. The MSCI Emerging Markets index,
combining all the ups and downs of the different markets, fell
12.2% in sterling terms.
The Footsie reached 7,103.98 in late April 2015, having finally
passed through its previous (end 1999) peak in February. Look at a
long-term chart and, with the exceptions of a few brief flurries
either side of the round 000's, the Index has been bouncing about
in a range of 500 points either side of 6,500 since January
A good year for bonds
(AF4, RO2, CF2, FA7)
While UK shares ended up roughly where they started over 2014,
bonds enjoyed an unexpectedly good year.
In 2014 UK bond funds produced some reasonable returns, with UK
Index-linked Gilts the top-performing sector and the UK Gilt sector
coming in third out of 37 according to Trustnet. 2015 was not
such a pretty picture.
If it was not the oft-predicted end of the 30-year bull market
in bonds, then at least it was a pause for reflection. Despite
nearly a complete year of zero inflation and another deferral of
the first base rate increase, most sterling bond yields moved
marginally upwards across 2015, as the table below shows.
5 year benchmark gilt
10 year benchmark gilt
30 year benchmark gilt
1.875% Treas index-link 2022*
1.25% Treas index-link 2055*
Markit gilts 10 year +
Markit AA 10 year +
Markit BBB 10 year +
Markit Corporates 10 year +
* Real yields
Long-dated index-linked stock was the exception, as demand for
this asset class from pension funds remained strong. The general
drift upwards in other bond yields was enough to counteract
interest income in 2015, leaving overall returns flat. This is
echoed in the performance of the various IA sterling fixed interest
sectors over 2015:
2015 Total Return
Sterling High Yield
Sterling Strategic Bond
Sterling Corporate Bond
UK Index-linked Gilts
The UK was not alone in experiencing a year of gently rising
yields. US yields rose across the board, with the 10-year Treasury
benchmark rising from 2.17% to 2.27%. Eurozone yields were kept in
check by the European Central Bank's bond-buying activities, which
saw Germany end 2015 with negative yields for five year bunds.
2016 could be a significant year for bond funds. Across the
Atlantic, the end of 2015 saw several high yield funds put into
wind up because of the combination of heavy redemptions and limited
liquidity for the underlying bonds. In the UK some major fund
managers have expressed concerns that similar issues might arise
here if retail investors' appetite for bonds waned further.
FCA further clarifies capital requirements for SIPP
(AF3, RO4, RO8, JO5, FA2, CF4)
The Financial Conduct Authority (FCA) has provided further
details of how to distinguish between 'standard' and 'non-standard'
assets, after operators of self-invested personal pensions (SIPPs)
called for more clarity over new capital requirements.
From September 2016, SIPP operators will be required to increase
their minimum capital holding from £5,000 to £20,000, which is
intended to cover the cost of winding down an operator in the event
of financial difficulty. Additional requirements will apply to
firms that offer non-standard assets.
Back in August 2014, the FCA reclassified commercial property
investments as 'standard' assets providing that certain conditions
were met in response to feedback from SIPP operators. The FCA had
originally proposed classifying all commercial property as
'non-standard'. Commercial property should be classed as 'standard'
if it could "be transferred between pension providers at relative
ease", which would not be the case where "it would take more than
30 days" to do so, according to a paper published at the time.
The FCA's latest update covers how firms should decide "whether
an asset is capable of being readily realised within 30 days". The
FCA go on to say that firms should "consider whether the
transaction can be concluded within that time limit in the ordinary
course of business"; for example, "such a date can be the date of
exchange of contract, or any other date when both parties have
unconditionally agreed to undertake their contractual obligations
to realise the asset".
The FCA has said that for the purposes of this 30-day test:
- the period runs from the date when the transaction is initiated
until the date it is concluded, and
- an asset can still be considered standard if the transaction
takes longer than 30 days to complete due to delays in receiving
information from third parties, or delayed third-party
The FCA has now updated its handbook for SIPP operators to
include delays caused by waiting for the consent of mortgage
lenders, joint owners or lease holders as examples of delays due to
outstanding third-party permissions. It does not intend to clarify
its stance on commercial property any further, because "the right
policy principle has been set, and it should be for the firms to
consider this within common practices for the specific asset
market", it said in its policy update.
Michael Lewis of Pinsent Masons is reported as saying that
although the update was "not particularly helpful, it did not
contain any major surprises. A firm needs to determine whether an
asset is standard or non-standard based on its knowledge of the
asset and its experience of realising that asset. The concern is
that the FCA will use this rule against SIPP operators after the
The FCA said that it did not intend to include crowdfunding and
peer-to-peer assets in the standard asset list at this stage,
despite proposals from the industry. However, it may review its
position when it conducts a full market review of the industry in
2016, it said.
Dependant scheme pension changes
(AF3, RO4, RO8, JO5, FA2, CF4)
An anti-avoidance measure was introduced with effect from 6
April 2006 to limit the amount set aside to pay dependants' scheme
pensions from a registered pension scheme. This is so that it
cannot be excessive in comparison with the amount used to provide
the member's scheme pension, in that way avoiding the lifetime
This anti-avoidance measure applies to members who die on or
after 6 April 2006, have reached age 75 before their death and are
actually or prospectively entitled to receive a scheme pension at
The calculation (as set out in Part 2, Sched 28 FA2004 - see PTM072120) is carried out if the scheme
pensioner had reached age 75 at the time of their death. The total
amount of any dependantsʹ scheme pensions have to be tested against
the amount of the memberʹs scheme pension so that excessive amounts
from the memberʹs pension savings cannot be set aside to pay
benefits for dependants so that the member can avoid paying a
lifetime allowance charge. These tests are to be carried out
annually for all dependantsʹ scheme pensions regardless of the size
of the memberʹs pension savings.
Legislation will be introduced in Finance Bill 2016 to reduce
significantly the number of calculations that need to take place to
determine whether a dependants' scheme pension exceeds the
If the total value under a pension scheme is not more than 25%
of the standard lifetime allowance at the earlier of member's death
(if the member did not have an actual right to a scheme pension at
death) or the date the member became entitled to the pension
(rounded up to the nearest £100), then the scheme administrator is
authorised to pay the dependants' scheme pensions without the test
If the total value exceeds the threshold then the calculations
will need to be carried out to determine how much of the payment to
the dependant is an authorised payment. The calculation as set out
in Schedule 28 FA2004 will need to be carried out every year.
The threshold test is:
With SP being Scheme Pension
DSP = Dependants scheme pension
LS = lump sum
CBV = Cash balance valuation
MPV = Money purchase valuation
If the threshold test results do not exceed 25% of the standard
lifetime allowance there is no requirement for the scheme
administrator to carry out the calculations.
The other 2 new exceptions from the test in the Draft Finance
Bill 2016 are:
- There is no requirement to carry out the calculation if the
individual had valid enhanced protection in place immediately
before the individual members death.
- The calculation requirement is also disapplied if every BCE in
relation to the individual member under a particular pension scheme
relates to having unused funds in a money purchase arrangement at
Clause 14 of the Finance Bill 2016 contains the new exemptions
from the calculations.
Draft clause 14
Draft legislation published to permit bridging pensions
continue with state pension changes
(AF3, RO4, RO8, JO5, FA2, CF4)
Draft Clause 13 of the Finance Bill 2016
contains provision to allow the payment of bridging pensions up to
a memberʹs state pension age following the introduction of the
single tier state pension.
A bridging pension is a higher level of scheme pension that may
be paid between the dates the member retires until the date the
member reaches state pension age. The changes to the State Pension
from April 2016 mean that legislation needs to amend do that DB
schemes can continue to pay bridging pension.
The current legislation (Paragraph 2 of Schedule 28 FA 2004)
sets out when a pension payable to a member is a scheme pension.
One of the conditions to be a scheme pension is that the pension
must not decrease except in prescribed circumstances.
Paragraph (2)(4)(c) allows the pension to reduce not earlier
than when the member reaches state pension age, by an amount that
does not exceed the relevant state pension rate. This allows the
scheme to pay a higher scheme pension at the outset and reduce it
when the member starts to receive the state pension. This is known
as a bridging pension.
Legislation will be introduced in Finance Bill 2016 to remove
Paragraph 2(4)(c), along with the provisions which relate or refer
to it. New regulations will be introduced under paragraph 2(4)(h)
for 2016 to 2017 and subsequent tax years to align pensions tax
legislation with the Pensions Act 2014. This will allow the payment
of bridging pensions to continue as at present.