A news update from the Personal Finance Society covering the
period 22 April 2015 to 5 May 2015: taxation and trusts,
investments and pensions.
Taxation and Trusts
Taxation and trusts
Upper Tax Tribunal confirms partial encashment
'mistake' can be rectified
The Upper Tax Tribunal has ruled that a taxpayer can rectify a
form under which he chose to make a partial encashment across a
series of life assurance policies that resulted in a much higher
tax liability than would have been incurred had he fully encashed a
number of segments.
The case of Joost Lobler v HMRC  concerned a series of
life assurance policies, effected with Zurich Life in 2006, from
which Mr Lobler, the policyholder, withdrew large amounts during
the first two policy years by way of partial surrender resulting in
a significant artificial gain and a substantial tax liability even
though he had not made any real gain on the policies.
The First-tier Tribunal (FTT) was sympathetic to the
policyholder's position (he was effectively bankrupted by the tax
liability) but couldn't find a way to solve the problem because, as
matter of strict law, he had been correctly taxed on the
transactions he undertook.
However, the Upper Tribunal (Lobler v HMRC, 2015 UKUT 0152 TCC)
has overturned the FTT decision on appeal, ruling that Mr Lobler
was entitled to be taxed on the basis that he made a tax-free full
surrender of the policies instead of a partial surrender.
To reach this solution, the appeal judge used the general legal
concept of rectification which allows a mistake about the
consequences of a transaction - which can include tax consequences
- to be corrected if the mistake is sufficiently serious. In Mr
Lobler's case that test was met as the judge said it was common
sense that nobody would willingly contract to pay an amount of tax
that would effectively lead to his own bankruptcy if there were a
choice not to do so and achieve the same goal.
Mr Lobler's appeal was therefore allowed, but only on the
grounds of rectification. All his arguments based on public law and
human rights grounds were dismissed.
The decision has some interesting ramifications, not least
because several cases involving taxpayers in similar circumstances
had been stayed pending the outcome of this appeal. Pursuant to the
case, the Chartered Institute of Taxation now intend to make formal
submissions to HMRC and the Treasury to secure a change in the
HMRC cannot reject income tax rebate claims as 'out of
The Upper Tax Tribunal has ruled that HMRC, contrary to its
long-standing position, cannot refuse a taxpayer's claim for a
refund of overpaid tax, even if the claim is made more than four
years after the end of the tax year concerned.
In a significant reversal of HMRC policy, the Upper Tax Tribunal
has ruled that HMRC has no general right to refuse a taxpayer's
claim for a refund of overpaid tax going back more than four years.
The case (Higgs v Revenue & Customs) concerned
self-employed solicitor Andrew Higgs who had failed to submit his
self-assessment return for the 2006/07 tax year until November
2011, by which time he had realised that he had overpaid £27,000 in
tax for the tax year in question as a result of large payments on
account that were made on the basis of the previous year's
HMRC's policy has always been that s34(1) of the Taxes
Management Act 1970 (TMA) sets a time limit on rebate claims,
with the effect that no assessment to tax may be made later than
four years after the end of the tax year concerned and,
accordingly, HMRC refused to process the form or give him a tax
However, HMRC's position (which it has held for some years) was
rejected by the Upper Tax Tribunal on judicial review. Careful
analysis of the legislation found that the s34 time limit was
intended to apply only to assessments made by HMRC, while taxpayers
have the right to file a self-assessment return many years after
the end of the tax year concerned, and are automatically entitled
to a rebate of any overpaid tax.
Following the decision, HMRC will now be forced to change its
longstanding stance on 'out of time' tax rebate claims. However, it
is important to note that the decision will be limited to instances
where the taxpayer has failed to submit a tax return for the year
in question. Different rules apply to returns submitted on time
that are later found to contain inaccuracies.
GDP figures stumble
The Office for National Statistics' preliminary estimate of UK
economic performance in the first quarter of 2015 shows the economy
has slowed sharply from its 2.8% growth last year.
Shortly before the general election, what the Government did not
want is a set of economic data suggesting that the picture was not
quite as rosy as it had been painted in all that election bumph.
However, that is what has arrived.
The preliminary (important word, that) GDP figures
for the first quarter of 2015 from the Office for National
Statistics (ONS) show the economy grew by 0.3% in the first three
months of the year, half the rate of the previous quarter. The
pundits had been expecting a cooling down to 0.5% because some of
the data coming in had been weak (eg construction), but 0.3% was a
Across the main sectors of the economy, the performance is shown
The total figure is positive by dint of the fact that the
services sector accounts for 78.4% of the economy. Construction,
which only counts for 6.4% of UK plc, took 0.1% off the first
quarter GDP reading. The sector does tend to produce volatile
numbers - the first quarter of 2014 saw growth of 3.7% in
construction whereas the final quarter was -2.2%.
Drill beyond where the politicians will look and you see that
the UK economy as a whole is 4% above its previous peak of seven
years ago (2008 Q1, before the financial crisis hit hard). However,
that is all down to the strong services sector (up 8.5%); the other
sectors are languishing between 4.8% and 10.4% below their 2008 Q1
In last month's Budget the OBR projection for 2015 GDP growth
was 2.5%, which at first glance now looks a tad optimistic.
However, that 0.3% is only a preliminary estimate and, according to
the FT, on average the initial figure has been revised upward by
just under 0.1%.
Add this to zero inflation numbers and the long-predicted first
rise in UK interest rates has probably moved a little further
More market numbers
The last two weeks saw two market events which are worth noting,
but not getting too excited about.
Think back 15 years to the early days of the new Millennium.
Tony Blair was in his first term as Prime Minister and, across the
Atlantic, Bill Clinton was coming to the end of his second term as
President. The UK base rate was 6.0% and the Fed Funds rate was
5.0%. It seems a distant world, doesn't it? Yet last week two
events occurred which harked back to that era:
- On Wednesday the Nikkei 225 Index closed above 20,000 for the
first time since April 2000.
- On Thursday the Nasdaq (or, more accurately, the Nasdaq
Composite) finally surpassed its March 2000 peak, which marked the
popping of the millennial technology bubble.
As happened when the FTSE 100 finally broke new ground after its
end 1999 peak both items grabbed some headlines and raised
questions about the performance - past and future - of equity
investment. There are a few points that should have received a
little more attention in the press:
- The Nikkei 225 may be a widely quoted index, but it is not an
index which meets modern standards. It is weighted by share price
(like the Dow Jones Index) rather than market capitalisation (the
chosen method for virtually every professionally used index).
- 20,000 on the Nikkei is still little more than half its peak
which was 38,916 hit on 10 December 1989. By March 2009 the Nikkei
was teetering around 7,000 - an 80%+ decline over 20 years.
- The Japanese market is much better value than when it was last
at 20,000. According to Bloomberg, the market's price/earnings
(P/E) ratio is now 23 against over 100 back in 2000.
- The tech industry companies which dominate the Nasdaq are also
very much better value than back in 2000. Today's P/E is 26,
whereas in 2000 the figure was 76, with some companies being valued
at over 400 times earnings.
- The Nasdaq may be at the same level as 2000, but the market's
capitalisation has grown by about a quarter over the period as new
companies have entered the market.
- The index's constituents have changed substantially since 2000.
For example, back in 2000 Google was not even listed and Microsoft
was the largest constituent. Apple is now the leader, accounting
for about 10% of the index.
15 years is a long time in investment. For example, US inflation
would have added about 40% to the index.
No NINO - No pension tax relief
A number of payroll professionals and software providers have
challenged pension providers, specifically NEST, who advised that
unless a National Insurance number (NINO) was present for the
pension member, they couldn't have tax relief at source.
Due to the fact payroll cannot withhold pay or in fact do
anything even when a NINO isn't present the Chartered Institute of
Payroll Professionals (CIPP) felt this was rather unfair, given the
automatic enrolment obligations, where employer's cannot delay
their duties because of a lack of NINO.
CIPP challenged NEST and HMRC to provide the legislation to
which the rules dictate employers must provide a NINO for the
member to benefit from tax relief.
HMRC published their latest Pension Schemes Newsletter (no.68)
highlighting the legislative information below which unfortunately
means that if there is no NINO, then there is no entitlement to tax
relief at source.
TPR April 2014 AE update: Companies with no staff
(AF3, RO4, CF4, JO5, FA2)
The Pensions Regulator (TPR) has published an auto enrolment
update aimed at companies who employ no jobholders and therefore,
may not have any automatic enrolment duties. For example a services
company with no staff and a director who has no contract of
There is information on TPR's website on what sole
directors can do if they believe automatic enrolment duties do not
apply to them, as well as further information to help husband
and wife companies and family businesses understand how automatic
enrolment duties apply to them.
If you have clients who do not have staff and who receive a
letter from TPR, you can advise them to write to TPR to explain
their particular circumstances.
UK pension advisers need protection from liability to
The Association of Professional Financial Advisers
(APFA) has become the latest group to call for more clarity from
the Financial Conduct Authority (FCA), as part of its response to
the regulator's consultation on proposed changes to the pension
transfer rules. The Personal Finance Society (PFS) raised
similar concerns about the issue of "insistent" clients determined
to transfer safeguarded defined benefit (DB) savings into more
flexible defined contribution (DC) schemes at the end of last
APFA director general Chris Hannant said that the FCA's proposal
to bring transfers out of safeguarded DB schemes into DC schemes
within its regulatory remit needed further work before it could be
formalised - something that the FCA is keen to do by June.
"The FCA should make it clear that no liability would attach to
advice which, although the recommendation might be against a DB to
occupational DC transfer, acts as 'enabling' advice regardless," he
said. "The FCA must also give the advice industry greater certainty
on where and how liability would attach for advice to 'insistent
clients' who want to go ahead with a transfer against advice."
"While we are confident that the advice industry will continue
to rise to the challenges set in motion by the government's pension
reforms, investment in the retirement advice space is unlikely to
happen without greater FCA clarity on the liability implications of
the new pension transfer rules; this could potentially restrict
consumer access to professional advice at a time when they need it
more than ever," he said.
'Enabling' advice refers to an adviser processing a transaction
despite advising against that course of action.
The FCA recently consulted on its intention to bring advice on
transfers of 'safeguarded' benefits out of DB schemes into DC
schemes into its regulatory remit. This is something that the
regulator feels is necessary in order to ensure that savers seeking
to take advantage of the new flexibilities available to DC pension
scheme members, but not DB scheme members, are properly protected.
Safeguarded pension benefits are benefits other than money purchase
or cash balance benefits, and are usually backed by employer
Under the proposed new rules, advising on the conversion or
transfer of safeguarded pension benefits into flexible benefits
would become a regulated activity in the same way as transfers from
DB schemes, such as self-invested personal pensions (SIPPs) already
are. Those advising on such transfers would be required to hold the
same pension transfer specialist qualification that must be held by
those advising on DB to personal pension transfers.
Hannant said that the FCA also had to clarify "under which
precise circumstances" financial advisers would be required to
obtain a pension transfer specialist qualification before
considering DB benefits. "Our engagement with the FCA on this
consultation leads us to conclude that under the new pensions
regime, nearly all advisers who want to continue offering
retirement planning services will need a pension transfer
specialist qualification," he said.
At the end of March, the PFS warned its members not to process
transfers for 'insistent' clients acting against professional
advice unless and until the FCA had confirmed that neither they,
nor the Financial Services Compensation Scheme (FSCS), would be
liable for claims if those clients later lost out because they
cashed in their safeguarded benefits. It has written to the
government and the FCA urging them to formally address the
"If the government want advisers to help implement greater
consumer choice, we are calling for an urgent change of policy in
recognition of the risks this represents to both the public and the
future reputation of the advice profession," said PFS chief
executive Keith Richards.
"Caveat emptor must become a recognised component of the
insistent client process. Until that happens, advisers should not
get involved in unsuitable facilitation without being protected. It
benefits neither them, the profession nor the public we are here to
serve," he said.
Liberation schemes: Ombudsman rules on
Following on from the recent industry-wide Code of Good Practice
on pension scams, the Pensions Ombudsman has issued his latest
determinations on liberation. These reinforce the obligation on
pension schemes to comply with a member's right to a transfer
(whether under legislation or scheme rules) and also rejects a
complaint by a member after such a transfer took place, noting that
the pension scheme had complied with industry practice when making
Mr Winning: Complaint that transfer made
Two of the new determinations, (PO-5799) and (PO-5930), both of which relate to the same
member, Mr Winning - are the first in which the Ombudsman has ruled
on a member complaint that a transfer to an alleged liberation
arrangement should not have been made.
The member had transferred over £50,000 from two personal
pension plans to the "Capita Oak" pension scheme. However, he had
since been unable to contact his new scheme. He complained to the
Ombudsman, saying that the pension providers should not have
allowed him to transfer in the first place.
The Ombudsman rejected the complaint. The transfer application
had appeared to comply with all statutory requirements. A member
could not be deprived of a statutory right to transfer and to the
extent that each provider had a duty of care to the member, it was
overridden by their legal obligation to make the transfer.
In considering whether there had been maladministration, the
Ombudsman said that he also needed to look at whether the providers
had acted consistently with good industry practice. The transfers
took place in late 2012, but the Pensions Regulator did not issue
guidance about pension liberation until February 2013, guidance
which "could be regarded as a point of change in what might be
regarded as good industry practice". Present standards of good
practice could not be applied to the providers' past actions.
Even if the providers should have carried out greater due
diligence that would not necessarily have lead to the reinstatement
of the member's benefits: it was quite possible that he would still
have proceeded with the transfer in any case.
Mr Harrison: Complaint that transfer
In January, the Ombudsman issued his first determinations about
members who complained that they had not been allowed to transfer
to suspected liberation schemes. He held on the facts that the
pension providers against whom those claims were brought had
properly refused the transfers (on the grounds that the status of
the receiving schemes did not satisfy the formal requirements that
would give the members a statutory right to transfer benefits to
The third determination (PO-3184) issued by the Ombudsman this week
concerned a member, Mr Harrison, who - like the earlier
complainants - complained that his personal pension provider had
blocked his attempt to transfer. In this case, the member's right
to transfer was contractual, rather than statutory. Nevertheless,
the Ombudsman reiterated that a member with a right to transfer
(whether statutory or contractual) should not be denied it. In this
case the contractual conditions were met, and so the Ombudsman
ordered the provider to make the transfer, if the member still
What does this all mean for trustees?
Although the new cases again concerned transfers from personal
pension providers, the principles are relevant to trustees of
occupational schemes who might be faced with similar complaints.
They underline that a member's legal right outweighs trustee or
provider suspicions of liberation activity.
The Ombudsman's focus on the apparent sea-change in good
industry practice in February 2013 means that the Winning
determinations are most relevant to transfers made before that
date. However, the wider reasoning suggests that where trustees
have followed best practice regulatory guidance, as well as the
law, the Ombudsman is unlikely to hold them guilty of
maladministration for letting a transfer take place.
The Harrison case, on the other hand, should leave trustees in
no doubt that they may be in breach of their legal duties where, on
suspected liberation grounds, they do not allow a member to
exercise an otherwise enforceable right to transfer out.
Which?: New pension rules prove taxing
Before we consider the research by Which? It is worth pointing
out that they have included a an on-line calculator, to quote
"Which? has launched a free online calculator to help people work out
the tax they'll pay if they cash in their entire pension pot or
take a lump sum. Our previous research found that if someone really
did use their pension pot to buy a Lamborghini, they could end up
paying enough tax to buy a Porsche."
The calculator ask the user to input the amount to be taken as a
UFPLS and also details of their other income. The main issue is
that in many cases it will understate the tax deducted and this
might cause problems for advisers.
If the inputs of a UFPLS of £30,000 is input with other income
in the year of £10,000 the calculator sets out the answer as
"What you get, and what tax you pay
If you cash in £30,000, you will pay £4,380 in tax.
This means you'll receive £25,620 after tax, which includes a
tax-free lump sum of £7,500.
Whether you take your whole pot or just part of it, 25% of the
withdrawal is tax free. The rest is taxed as income. Making a
series of smaller withdrawals over several years can mean less tax
than if you take your whole pot at once."
However, that might be the tax liability at the end of the tax
year, but in the meantime the pension scheme administrator,
following the HMRC guidance set out in Pension newsletters 66
though to 68, will often apply the PAYE Code on a "month 1 basis"
and as such will deduct more tax than has been intimated by Which?
After speaking to Which?, they have included an explanation as how
PAYE works on a "month 1" basis.
Under the Emergency tax Code of 1060L M1, which will be used in
the majority of UFPLS payments the tax deducted will be as
|Basic Rate Band
|Higher Rate Band
|Additional Rate Band
|Effective Tax Rate on Taxable Element
|Effective Tax Rate on Whole UFPLS
So, the £8,572 tax deduction by the scheme administrator is
almost double that calculated by Which? This highlights the
difference between the PAYE Code of 1060 M1 and the annual tax
Turning now to the Which? survey itself, a summary of their
- The majority of people approaching retirement age are confused
about how tax works in retirement, according to new Which?
- Which? surveyed 1,204 adults aged 55 or over and found that 60%
of people who are not retired do not know the pension reforms allow
you to take up to a quarter of your pot tax-free.
- One in seven (14%) wrongly think their entire pension pot is
tax-free while two thirds (67%) admit they have limited or no
understanding of tax issues in retirement.
- Of those who are retired, only a quarter (25%) think tax has
become simpler since retirement.