Personal Finance Society news update from 30 March to 12 April
2016 on taxation, retirement planning, and investments.
Taxation and Trusts
TAXATION AND TRUSTS
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
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
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
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
(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:
6 June 2016
6 June 2016
1.25% gross1.26% AER
6 June 2016
1 July 2016
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
- 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
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
(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
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
- 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
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
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 amount of the lump sum death benefit before you deducted
- 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
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
(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
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