PFS news update from 25 March 2015 - 7 April 2015 covering tax,
investments and retirement planning.
Taxation and Trusts
Taxation and trusts
Finance Bill has received Royal Assent
(AF1, AF2, RO3, JO3)
Along with a number of other Bills, the Finance (No.2) Bill
2014-15 Received Royal Assent on 26 March 2015 as the
Finance Act 2015. As expected, the Bill completed all its
stages in the Commons on 25 March and also moved to the Lords where
it completed its stages the following day.
ISAs: The transfer of benefits to a surviving spouse or
civil partner upon death
(AF4, RO2, CF2)
The newly issued Tax Information and Impact (TIIN) updates the
TIIN published on 20 January 2015.
While much of the content appears to be similar, the earlier
TIIN, which covered eligibility for the additional allowance and
which ISA provider can receive the additional allowance
subscriptions, made no reference to the process which would need to
be followed for making additional subscriptions. The updated TIIN
states that the ISA regulations will be amended to include details
of the process which will need to be followed together with making
all the other required changes to implement this change.
The issue of updated guidance on the process to follow for
making additional ISA subscriptions will no doubt be welcomed as
the earlier TIIN raised a few questions and clarity in this area
NHS funded nursing care rates increased from 1 April
The NHS contribution towards the costs of a place in a care home
with nursing - for people assessed as requiring the help of a
registered nurse - is being increased by 1% for 2015/16.
From 1 April 2015, the rates for eligible care home residents
assessed to require the help of a registered nurse will be as
- the standard rate will be increased to £112.00 per week
- the higher rate will be increased to £154.14 per week
These increases are in line with the increase in NHS nursing
staff pay of 1%.
While most people in residential care will be expected to pay
something towards the costs of their accommodation, board and
personal care from their income and capital, eligible nursing care
needs are met by the NHS regardless of means.
Insurance contract law reform - insurable
One of the areas of insurance law still open to reform is the
requirement for insurable interest. The final report on this from
the Law Commission is expected later this year. Meanwhile, in a
recent case the defence of lack of insurable interest did not
impress the judge.
The case in question is Western Trading Ltd v Great Lakes
Reinsurance (UK) Ltd  EWHC 103 (QB). Although the case
concerned the issue of indemnity under a property insurance policy,
the decision is of interest given the judge's approach to a range
of policy defences raised by the insurance company resisting the
claim following a fire in a property owned by the claimant. The
defences ranged from misrepresentation to a breach of warranty but
of particular interest was the defence of lack of insurable
The principle of insurable interest applies to all forms of
insurance, including life assurance, and means that an insurance
policy will be invalid if the insured does not have an "insurable
interest", i.e. stands to suffer financial loss from the loss of
the subject matter of the insurance.
In the case in question the insurance company claimed that the
policyholder had no interest in the insured properties in question
which had been empty. Based on the facts, the judge decided that
the properties had been let and that the properties were insured as
a source of rental income for the claimant.
What was more interesting were the judge's comments on this
point. Notably, the judge highlighted that it was unusual for
insurers to raise questions of insurable interest except in the
context of fraud, and tacitly criticised the insurer for taking a
point in circumstances where it had taken no interest in this issue
prior to inception of the policy.
It has been said that the precise application of the principle
of insurable interest has become confused, with a mix of common law
The Law Commissions propose that the requirement for insurable
interest should be imposed by statute alone. They propose a
statutory restatement confirming that the requirement for an
insurable interest applies to all forms of insurance (and, in the
absence of which, the policy will be void - with the insured
entitled to a refund of their premium payments).
As far as life assurance is concerned, it is proposed that the
law is changed so as to widen the category of those able to insure
the life of another on the basis of financial loss. Indeed, there
was widespread support for widening the test to one based on a
reasonable expectation of economic loss.
Hopefully the reform of insurable interest will be finally
concluded in the near future, but in the meantime it is reassuring
that the Courts are taking a pragmatic approach.
The above decision also brings into focus the importance for
insurers of considering, in advance of inception of the policy, any
concerns which they may have over the policyholder's insurable
interest or lack of it. Otherwise, once the contract is concluded,
the Court is likely to be reluctant to find that the policyholder
does not have such an interest, save potentially in cases involving
Draft legislation has been published on rule changes to
EISs and VCTs
(RO2, AF4, CF2, AF1, RO3)
Budget 2015 announced a number of changes to the tax-advantaged
venture capital schemes - the EIS, SEIS and VCTs - to ensure that
they continue to be effective in supporting higher-risk small and
growing businesses to access finance, and that they are sustainable
Draft legislation, accompanied by explanatory notes, has now
been published setting out the new rules which will:
- require that all investments are made for the purpose of
business growth and development;
- require that all EIS investors are independent from the company
at the time of the first share issue (excluding founder
- introduce new qualifying criteria to limit relief to companies
whose first commercial sale took place within the previous 12 years
unless the company has received a previous investment under
SEIS/EIS/VCT (follow-on funding is not restricted). This rule will
apply except where the total investment represents more than 50% of
annual turnover averaged over the preceding 5 years;
- cap the total investment a company may receive at £20million
for companies that meet certain conditions demonstrating that they
are 'knowledge intensive' and £15million for other qualifying
- increase the employee limit for knowledge-intensive companies
to 499 employees
The above changes are subject to State Aid approval but it is
intended that they will take effect at the earliest legislative
opportunity after approval is secured.
In addition, from 6 April 2015, the government will remove the
requirement that 70% of SEIS money must be spent before EIS or VCT
funding can be raised.
These new rules will all apply in addition to the current rules
on the tax-advantaged venture capital schemes. Therefore,
qualifying EIS and VCT companies will still be able to receive up
to £5 million annual investment under the schemes. The new limits
on the age of qualifying companies and the total amount of
investment that they can receive will affect which investments are
treated as 'qualifying investments' (or form part of qualifying
holdings for VCTs) under the schemes. The changes will not affect
other conditions for VCT qualifying status.
Interested parties are invited to comment on the draft
legislation via email by 15 May 2015.
While it is estimated that more than 95% of companies qualifying
under the current rules will continue to remain eligible for
tax-advantaged investments, some companies may find that they no
longer qualify for support under the scheme.
While it is unusual for the government to introduce changes that
limit the availability of tax relief with retrospective effect, to
be certain of securing tax relief investors should be cautious
about making investments which exceed the new capped limits from 6
Tax revenue: how the exchequer fills its coffers
(AF4, RO2, CF2)
The final round of Prime Minister's Questions (PMQs) on
Wednesday 25 March saw Mr Cameron ruling out any increase in VAT in
the next parliament and Mr Miliband pledging no rise in NICs. So
how will they deal with a deficit that is running at £90bn in
2014/15? We will only learn after 7 May…
The Office for Budget Responsibility's Economic and Fiscal Outlook and the Treasury's
Budget Red Book both contain the same table entitled
"Current Receipts". This shows how much is expected to flow into
the government's coffers from taxes levied. For the coming year
(2015/16), the table is summarised below:
Income tax (gross of tax credits)
Value added tax
National insurance contributions
VAT refunds paid to government departments
Stamp duty land tax
Other HMRC taxes
Capital gains tax
Vehicle excise duties
Beer and cider duties
Stamp taxes on shares
Air passenger duty
Licence fee receipts
Insurance premium tax
Climate change levy
Petroleum revenue tax
The table makes all too clear that there are
only three big money raisers - income tax, VAT and National
Insurance contributions. According to the HMRC ready reckoner, a 1% increase in the standard
VAT rate would raise about £5.25bn, while a 1% across the board
increase in NICs (Class 1 employers and employees and Class 4)
produces £9.6bn. The last PMQs appeared to rule out either avenue
for the main parties.
Labour has said it will return the mainstream
rate of corporation tax to 21%, reversing next month's cut, but
this is only worth about £1.65bn in a full year and has already
been earmarked for cutting small business rates. The promised move
to push the additional rate of tax back to 50% is worth just
£0.8bn. Even that modest figure is subject to major uncertainty
because of what are euphemistically labelled "behavioural effects"
- there may be some big bonuses and dividends paid before
So where does deficit reduction come from? The
Conservatives are saying that between 2015/16 and 2017/18 there
will be £12bn in welfare cuts, £13bn departmental expenditure cuts
and £5bn in tax avoidance measures, giving a £30bn overall cut in
the government's Total Managed Expenditure. As the Institute for
Fiscal Studies noted in its post-Budget presentation "The cuts of
more than 5% implied in each of 2016/17 and 2017/18 are twice the
size of any year's cuts over this parliament". What Labour would do
remains unclear, although their deficit reduction target is not as
tightly defined as the Conservatives'.
It will not be until the likely summer Budget that we find out
what the new government's plans for tax and spending will be. In
the meantime expect plenty of noise - as in that last PMQs - but
The February inflation numbers
(AF4, RO2, CF2)
Inflation on the CPI measure dropped again between January and
February, bringing the rate down to a nice round 0%, its lowest
since the CPI was launched as an inflation measure in 1989. The February inflation numbers from the Office for
National Statistics (ONS) bettered market expectations, which had
not been for a zero figure to arrive this month.
The CPI still showed prices rising 0.3% over the month - as they
usually do after the new year begins - but between January and
February 2014 they rose by 0.5% (0.1% is lost to rounding). Prices
normally rise after the turn of the year as a result of the January
The CPI/RPI gap widened this month, with the RPI
dropping to 0.4% on an annual basis. Over the month, the RPI rose
The CPI annual rate fall from January to
February was driven by three main downward factors according to the
- Recreation & culture: Overall prices were little
changed between January and February this year compared with a rise
of 0.8% between the same two months a year ago. The downward
contribution came from price movements for a range of recreational
goods and services.
- Food & non-alcoholic beverages: Overall prices
fell by 0.2% between January and February 2015, compared with a
rise of 0.5% between the same two months a year earlier. The fall
in prices this year is the first between January and February since
1998. The downward effects came from a variety of product
- Furniture, household equipment & maintenance:
Overall prices rose by 1.4% between January and February, compared
with a larger rise of 2.4% between the same two months a year ago.
The downward contribution came principally from furniture &
furnishings where prices rose by less than a year ago following the
January sales period.
The ONS said that there were no notable upward
contributions to the change in the CPI 12-month rate between
January and February 2015.
Although inflation is now zero, eight of the
twelve components of the CPI index remain in positive territory.
The zero reading number is mainly down to Transport, (about 15% of
the index) which showed a year-on-year fall of 2.7% and Food and
Non-alcoholic drink (11% of the index) which recorded an annual
decline of 3.3%, whereas last month's reading was a 2.5% drop.
Recreation and culture is now also in negative year-on-year
The ONS notes that 'The food and motor fuels groups in total
reduced the CPI 12-month rate by approximately 0.9 percentage
points', which highlights how much influence these two sectors are
having on the inflation numbers. However, even underlying
inflation, which strips out volatile items of food, energy, alcohol
and tobacco, fell by 0.2% to 1.2%. The markets interpreted the zero
CPI reading as putting off a rise in interest rates and sterling
weakened as a consequence.
Does zero inflation matter?
(AF4, CF2, RO2)
Annual CPI inflation was nil in February 2015, but does it
matter that prices have stopped rising? CPI inflation dropped again
between January and February, leaving the rate down at zero. The
absence of inflation has prompted a variety of comments, not all of
them well informed.
For a start it is worth remembering that we are not talking
about the old, discredited but still widely used RPI yardstick.
That is still running at 1%. The RPI has also been wellbelowzero in
recent times: back in June 2009 it hit a low of -1.6% and spent
eight months of that year in negative territory. The cause then was
due to a single factor; a precipitous fall in interest rates, which
fed through to mortgage interest costs (included in the RPI, but
not the CPI).
The current drop in CPI inflation is driven largely by two
factors: the decline in the price of oil ('fuel and lubricants' are
down 16.6% year on year) and food prices (down an overall 3.4%, in
part due to Russia's import ban). The impact of both oil and food
prices could reverse quite quickly. For example, if food prices
remain unchanged until September, by then the food price inflation
will be running at +1.0%. Similarly, if fuel prices stay flat (and
they have been nudging up), then fuel deflation will be 4.9%.
Together the two would add about 0.7% to the CPI number.
That helps explain why Mark Carney, the Bank of England
Governor, is still talking in terms of the next interest rate
movement being upward rather than downward, even if some of his
fellow MPC members are more dovish. Just as happened when the CPI
hit 5.2% in September 2011, the Bank will tend to ignore the
immediate noise - over which it has little control - when
considering its actions.
From the Treasury's viewpoint low inflation is generally good
news. The picture is complicated by the way in which the government
chooses to use the RPI for increases to indirect taxes and
index-linked gilt interest, but CPI for income tax, NICs and
benefits. The latest estimate from the Office for Budget
Responsibility (OBR) is that a 1% rise in RPI and CPI inflation
adds £3.5bn to government spending 'in year' and £7bn
However, care is needed in making an assumption that a 1% fall
produces an equal saving because of the triple lock on pensions,
which sets a minimum increase of 2.5% on the basic state pension.
The OBR notes in its Budget document that its forecast "now implies
that [the basic state pension] will be uprated by this minimum
again in 2016/17, which would be the fifth successive year since
the triple-lock was announced that the basic state pension had
increased faster than average earnings, with a cumulative
difference over that period of 8.2%". 'Triple lock' has proved an
Zero inflation - and possibly a dip below zero in the next few
months - is not yet something to be worried about.
Pension flexibilities and DWP benefits
(AF3, RO4, CF4, JO5, FA2)
The DWP has at last published a fact sheet to
explain how the pension flexibility rules could affect an
individual's entitlement to certain means-tested benefits.
There are rules around how pension benefits, will be treated in
the calculation of an individual's entitlement to the following
- Employment and Support Allowance (income-related)
- Housing Benefit
- Income Support
- Jobseeker's Allowance (income-based)
- Pension Credit
- Universal Credit
These rules apply from an individual's qualifying age for
Pension Credit, i.e. a female's SPA for women and for men, the SPA
of a woman with the same date of birth.
For individuals living on their own, the means-testing us done
solely on the individual, for those living as a couple (whether or
not they are married or in a civil partnership) the means-testing
is undertaken on the couple and either parties pension funds could
impact on either parties means-tested benefits. In both cases,
wherever we use the term "claimant" we mean the individual, or the
individual and their partner as appropriate.
Whilst we set out the new rules below, it is worth mentioning
that these are less stringent than the rules that applied prior to
6 April 2015. Under those rules, for many means-tested benefits,
the notional income rules applied from age 55 for personal pension
plans and the scheme's NPA in respect of occupational pension
The new rules
The DWP state that in all cases, it is the responsibility of
each individual claimant to inform the DWP and, where appropriate
the Local Authority, if they or their partner, withdraw any
benefits from a money purchase pension scheme.
Already the DWP are provided details by HMRC of bank interest
received by individuals so that they can cross check this
information with claimants. One would assume that in due course
they will look to obtain similar data relating to pension schemes.
It should of course not be forgotten that the DWP run the existing
Pension Tracing Agency.
1. Claimants where they have not attained the qualifying
age for pension credit.
Where a claimant below the qualifying age for Pension Credit
does not access any benefits from a money purchase (or any pension
for that matter) pension scheme then the existence of an
uncrystallised pension will not impact on the eligibility for any
However, as soon as benefits are crystallised the claimant must
inform the DWP and where appropriate the Local Authority.
The benefits crystallised will be treated as either income or
capital, depending on, for example, how regularly withdrawals are
2. Claimants who have attained the qualifying age for
Claimants who have attained the qualifying age for Pension
Credit are expected to use their pensions to help support
themselves. Were benefits are taken in a form other than an annuity
after reaching the qualifying age for Pension Credit, an amount of
income taken into account when calculating any means-tested
benefits is the greater of the "notional" income or the actual
"Notional" income is an amount equivalent to the income the
claimant is expected to have received if an annuity had been
Where a cash lump sum is withdrawn, this will be taken into
account as capital. Remember different benefits have different
capital disregards. However, where a claimant has capital in excess
of the disregard, the excess is deemed to provide a level of weekly
"assumed income" of £1 for every £500 (or part of £500) of the
If a claimant spends, transfers or gits away any money withdrawn
from a pension the DWP will consider whether the claimant has
deliberately deprived themselves of that money in order to secure
(or increase) a benefit entitlement
If the DWP decide that the claimant has deliberately deprived
themselves, they will be treated as still having that money and it
will be taken into account as income or capital when calculating
Pension income over a certain level can also affect entitlement
to contributory benefits, i.e. benefits paid as a result of a
claimant's NIC record. Currently,
- For Employment and Support Allowance (contribution based), half
of your pension income over £85 per week will be taken into
- For Jobseeker's Allowance (contribution based), all of your
pension income over £50 per week will be taken into account.
Leaving benefits uncrystallised will not impact upon
contributory benefits. Any cash lump sum you take that is deemed to
be capital will not affect entitlement to a contributory
LTA reduction to £1 million
(AF3, RO4, CF4, JO5, FA2)
After the Budget, MGM Advantage published a Press Release setting out their view of the
implications of the LTA reduction.
They included a table showing where people should potentially
consider stopping saving into a pension, as they may be in danger
of breaching the £1m Lifetime Allowance.
They based this on the current value of the benefits, and the
- 6% investment growth a year after charges, and
- a planned retirement age of 65
- no further pension contributions made.
- LTA increases with inflation at 2.5% from 2018
Pension funding, they suggest should stop at the following ages
with the indicated fund value:
Alternate planning strategy
MGM Advantages suggested strategy has its merits, but what are
some of the alternative strategies that could be considered.
Understandably, MGM Advantage being an annuity office assumes
that benefits are secured by means of a lifetime annuity. However,
if, rather than securing a lifetime annuity, the individual decided
to utilise a scheme pension annuity, the amount assessed against
the LTA wouldn't be the £750,000 assumed purchase price of the
annuity after taking the PCLS, but 20 X the initial income. So, if
the PCLS has used up £250,000 of the LTA, that leaves £750,000 LTA
to set against the initial level of scheme pension income