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My PFS - Technical news - 12/04/16

Personal Finance Society news update from 30 March to 12 April 2016 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning



Finance (No.2) Bill 2016 published

(AF1, AF2, AF3, RO3, RO4, JO2, JO3, JO5, CF4, FA2)

The Treasury has published the Finance (No. 2) Bill 2016. 

The clauses and explanatory notes are available here.

No tax returns in 2016/17 for trustees or Personal Representatives with low levels of savings income

(AF1, RO3, JO2)

HMRC has announced that trustees and personal representatives will not need to notify it of savings interest income for the 2016/17 tax year, if the tax liability is under £100 and the trust or estate has no other income.

As of 6 April 2016 in conjunction with the introduction of a new £1,000 personal savings allowance for savings income, banks and building societies will no longer be required to deduct basic rate tax at source under the tax deduction scheme for interest.

This means that individuals, trusts and estates will, like companies, receive gross savings interest for tax years 2016/17 onwards.

While this will reduce the administrative burden for non-taxpaying individuals, who will no longer either need to register with their account provider to have this interest paid without deduction of tax or reclaim the tax deducted at source, the measure could potentially complicate the administration of some trusts and smaller estates which do not currently need to complete a tax return but will now need to report the untaxed interest.

HMRC has therefore announced that, as an interim measure, trustees and personal representatives will not need to notify it of savings interest income, for the 2016/17 tax year, if the trust or estate has no other income and the tax liability on the savings interest income is under £100. The relief applies to trustee returns, returns for estates in administration and payments made under informal arrangements.

The reporting arrangements for subsequent tax years will be decided and published in due course.

Interest in possession trusts, discretionary trusts with income within the standard rate band, and estates in administration currently pay income tax on savings income at the basic rate of 20% and the tax historically deducted by banks and building societies at source under the tax deduction scheme for interest has therefore satisfied their liability. These trusts may face new reporting burdens from tax year 2017/18 onwards. The measure will not affect trustees of discretionary trusts with income in excess of the standard rate band, who pay income tax on their savings income at the higher trust rate of 45%.

The disclosure of lifetime gifts made by a deceased - Penalties for failure to disclose

(AF1, RO3, JO2)

In a recent case law a beneficiary received an £87,000 penalty from HMRC for failing to tell his father's executors about a cash gift he had received the year before his father's death.  

This case concerns the reporting of relevant information to HMRC for IHT purposes following the death of a taxpayer.   Occasionally, when discussing tax liabilities, the question may be raised as to how HMRC will find out about the transaction in question. The point is, of course, that HMRC relies on the taxpayer or their personal representatives to make full disclosure. When there is a failure to disclose and pay appropriate tax, penalties can be severe.

It is the responsibility of executors to make enquiries of the deceased's family of any lifetime gifts made in the preceding seven years.  If gifts are made and executors have not been thorough in their research, penalties may be imposed of up to one hundred percent of the tax that is due.

In the case mentioned above it was found that the executors made proper enquiries by speaking to the family beneficiaries. A meeting was held at which the beneficiaries were asked if they had received any gifts from their late father in the preceding seven years.    No disclosures were made and the executors duly submitted the Form IHT400 on this basis.

Two years later HMRC received an anonymous tip-off that one of the beneficiaries had an undisclosed offshore account and it became clear that he had received a gift of £450,000 from the deceased.  The beneficiary was charged inheritance tax on the gift itself and sixty five percent of the potential loss of inheritance tax revenue linked to the gift.  The total fine came to over £113,000.

The beneficiary appealed but his appeal was rejected, finding that he had deliberately withheld the information.  However, the fine was reduced to just over £87,000.

There isn't much that can be added to the above by way of comment except that the case should serve as a warning not only to executors but also to beneficiaries that they must take care to respond honestly and openly to executors' enquiries. It should also go without saying that executors should make and properly document thorough enquiries to establish a full picture of the deceased's estate and history of any gifts before completing the relevant forms. There are specific questions on Form IHT400 about lifetime gifts and if there is a history of any then Schedule IHT403 must be completed giving full details.

A form has been published to enable the reclaim of additional SDLT on second home

(RO2, AF4, CF2, FA7)

HMRC has published an online form for reclaiming additional stamp duty land tax (SDLT) paid on the purchase of a second home where the taxpayer sells their previous main residence within three years of the purchase.

As announced at Autumn Statement 2015, new higher rates of stamp duty land tax (SDLT) will apply to purchases of second homes with effect from 1 April 2016.

The new rates - which will be 3 percentage points above the standard rates - will broadly apply where the taxpayer owns two or more residential properties at the end of the day of completion and has not replaced their main residence.  The measures will therefore affect buyers who buy a residence with a view to it replacing their main residence but for whatever reason (perhaps improvements are required to the new property before it can be inhabited) do not sell their main residence immediately. In such cases, a refund of the difference between the higher and the standard rates will be given if the original residence is sold within 36 months of the transaction (extended from 18 months at Budget 2016).

Refunds must be claimed using the new form, which has to be completed on-screen and then printed and posted to HMRC's Birmingham stamp office. The form must be received by HMRC within 3 months of the sale of the previous main residence or within 12 months of the filing date of the return, whichever is the later.


NS&I have announced cuts to their variable interest rates.

(RO2, AF4, CF2, FA7)

In this year's Budget it was quietly announced that the target for net fundraising by National Savings & Investments (NS&I) in 2016/17 would be £6bn (±£2bn), down from an estimated £11.5bn raised in 2015/16 (thanks largely to the final rush for 65+ Bonds). 

NS&I have used the lowered target to justify cuts in interest rates on five of its variable interest rate products. With some justification NS&I point out that because their rates have been unmoved for some while, their offerings have become relatively more competitive. For example, the last cut to rates for the Direct Saver account and Income Bonds was in September 2013.

The changes are:


Current rate

New rate


Direct ISA

1.25% tax-free/AER

1.00% tax-free/AER

6 June 2016

Direct Saver

1.10% gross/AER

0.80% gross/AER

6 June 2016

Income Bonds

1.25% gross1.26% AER

1.00% gross/AER

6 June 2016

Investment Account

0.75% gross/AER

0.45% gross/AER

1 July 2016

Premium Bonds


26,000:1 monthly odds


30,000:1 monthly odds

1 June 2016

The best instant access rate at present is 1.45%, according to Moneyfacts, with other near top rates very close to thecurrent NS&I Income Bond rate. For premium bonds, the reduction in rates and worsening of odds will mean that 90% of the prize fund (representing 99.75% of all winning draws) will be for prizes of £100 or less.

NS&I are also tweaking their reinvestment rate for index-linked certificates (no longer on general sale). The new rate, which takes immediate effect, is RPI+0.01%, down 0.04%. This still compares favourably with index-linked gilts, where short-terms yields are around RPI-1.3%.

NS&I's new Income Bond rates are a reminder of why the Chancellor could afford to offer the new Personal Savings Allowance. At 1%, a basic rate taxpayer would need to have more than £100,000 invested before their allowance was exhausted.

UK investment bond taxation

(RO2, AF4, CF2, FA7)

The publication of the Finance (No.2) Bill 2016 has given us something else to think about in relation to wrapped and unwrapped investments. In other words, it has prompted a reconsideration of the "Bonds v Collectives" debate.

The 8% reduction in the main rates of CGT to 10% (basic and non-taxpayers) and 20% (higher and additional rate taxpayers) has once again prompted a reconsideration of the "Bonds v Collectives" debate.

Prior to the CGT cut, the dividend changes meant that in terms of reinvested income UK investment bonds had become more attractive relative to collectives where the dividend allowance was exhausted because the bond offered a lower effective tax rate on dividends. This remains the case in dividend income terms, but the "holistic" comparison between bonds and mutual funds has now been given a counterbalance by the new CGT rates:

  • For onshore and offshore reporting mutual funds, the maximum personal CGT rate will be 20% in 2016/17 after an annual exemption of £11,100.
  • For onshore investment bonds, the internal rate of tax on gains remains at 20% after the RPI-based indexation allowance - there has been no change made by the Finance (No.2) Bill 2016, published on 24 March. Unless indexation fully covers gains, this will mean higher rate taxpayers will always pay more tax on capital gains via an investment bond as they will be subject to 20% (40% - 20%) personal income tax on chargeable event gains. For gains above the indexation allowance there will also be some reserve made at life fund level too.

For additional rate taxpayers who face 25% (45% - 20%) tax on chargeable event gains, even full indexation will not stop a greater overall tax charge via a bond. Basic rate taxpayers might be better off, but it will be only in unusual circumstances where they pay CGT and 10% of the gain on the mutual fund is greater than 20% of the indexed gain borne in the life fund.

  • For offshore investment bonds, full income tax on chargeable event gains now compares even more unfavourably with personal CGT rates.

Just to twist the tax kaleidoscope a little more, the Budget Red Book confirmed that "The government will consult later this year on alternatives to the current [part surrender tax] rules with a view to legislating in Finance Bill 2017".  While these changes are meant to 'right the wrongs' of large part surrender chargeable event calculations, there is always the risk that a tax-hungry government will take the opportunity to make other less welcome "simplifications".

The "Bonds v Collectives" debate has taken another turn. It is unlikely to be the last. 


Work & Pensions Committee to review AE and LISA

(RO4, AF3, CF4, JO5, FA2, RO8)

The Work and Pensions Committee has re-opened its inquiry into automatic enrolment after concerns raised over Lifetime ISAs (Individual Savings Account), their level of compatibility with auto-enrolment and the impact they could have on opt-out rates.

Concerns have been raised about the apparent contradiction savers may face when having to choose to save for a home and also their retirement. It may be that an employer matching pension contribution is foregone to save for a first home which could be a higher priority.

The Committee therefore invites written submissions addressing the following points:

  • To what extent is the Lifetime ISA compatible with auto enrolment and the Government's wider pension strategy? What impact could the introduction of the LISA have on opt-out rates?
  • To what extent will the LISA fill gaps in retirement saving among the self-employed? Are there more appropriate alternatives?
  • Which groups would be better/worse-off saving into the Lifetime ISA than they would be under auto enrolment?
  • What kind of guidance should be made available to help young people choose where to save their money?
  • What impact will the option of using LISA savings to purchase a home (or potentially "other specific life events") have on pension savings?

The inquiry closes on 17th April.

Information requirements for payment of pension death benefits to a trust

(RO4, AF3, CF4, JO5, FA2, RO8)

HMRC newsletter 77 confirms the information that scheme administrators must provide to Trustees and information the Trustees must then provide to the trust beneficiaries so that they may in turn compete their Self-Assessment return.

Information scheme administrators provide for trustees

If, from 6 April 2016, one of the lump sum death benefits listed above is taxable and the scheme administrator pays it to a trust, the scheme administrator must provide the following information to the trustees:

  • the amount of the lump sum death benefit before you deducted tax
  • the amount of the tax you deducted

Scheme administrators have to provide this information within 30 days of paying the lump sum death benefit to the trustees. The trustees will need to pass on the information to the individual beneficiaries receiving a trust payment funded by the lump sum death benefit the trust received from the pension scheme.

Information trustees must provide to individual trust beneficiaries

When the trustees receive a taxable lump sum death benefit from a scheme administrator, and make a trust payment which is funded by all or part of that lump sum to one or more beneficiaries of the trust, they have to pass on the information the scheme administrator provided about the amount of the lump sum death benefit before tax and the amount of tax the scheme administrator deducted. If there is more than one beneficiary or the amount paid to the beneficiary is less than the amount of the taxable lump sum death benefit the trust received from the registered pension scheme, they must tell the beneficiary only the proportion of the amount of lump sum and tax paid that relates to the amount the individual receives. They must provide this information within 30 days of making the payment to the beneficiary.

Claim by trust beneficiary

An individual who usually completes a Self Assessment tax return and receives a trust payment funded out of a taxable lump sum death benefit will have to include in their return the amount reported to them by the trustees and not the amount they receive. The individual will be able to set off the tax paid on the lump sum death benefit by the scheme administrator (or a proportion of it , where the trust payment is funded by only part of the lump sum death benefit the trustees received) against the tax due on this trust payment. This may lead to a refund of tax.

If the individual doesn't normally complete a Self Assessment tax return, they can provide HMRC with details of any other income they expect to get during the tax year, using the most accurate estimates possible if final figures are not known, to claim a refund. They can use form R40.

DWP publishes new materials on the single-tier state pension

(RO4, AF3, CF4, JO5, FA2, RO8)

The Department of Work and Pensions (DWP) has recently published a resource pack that advisers may well find useful when dealing with client's enquiries relating to the new Single-tier State Pension. The publications include:

In isolation, many advisers may say "so what"? However, these resources can provide a wealth of detail for advisers to use to contact clients via a newsletter etc. setting out the implications of the changes and perhaps using it to encourage clients into reviewing their retirement provision in the coming months.

It might be worth considering sending out this information in whatever format works for your firm to all clients born prior to 1967, suggesting they obtain a State Pension Forecast, (how to do this is explained in the content listed above) and then suggesting once they've received a response, they should book a meeting with you to review their retirement provision in the light of these changes.

Where you know clients were in contracted out DB schemes immediately prior to the changes on 6 April, you might want to explain how their increase EENICs will be calculated, but how their State Pension accrual going forward will be greater going forward.

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