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My PFS - Technical news - 14/04/2015

PFS news update from 25 March 2015 - 7 April 2015 covering tax, investments and retirement planning.

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Taxation and Trusts

Investment planning

Retirement planning

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 was needed.

NHS funded nursing care rates increased from 1 April 2015

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 follows:

  • 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 interest

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 [2015] 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 interest.

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 and statute.

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 fraud.

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 going forwards.

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 shares);
  • 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 companies; and
  • 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 April 2015.

Investment planning

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:

Source

£bn

Income tax (gross of tax credits)

170.5

Value added tax

114.3

National insurance contributions

113.2

Corporation tax

42.1

Council tax

28.3

Business rates

28.0

Fuel duties

27.0

VAT refunds paid to government departments

13.9

Stamp duty land tax

10.4

Tobacco duties

9.1

Other HMRC taxes

6.8

Capital gains tax

6.5

Environmental levies

5.9

Vehicle excise duties

5.8

Inheritance tax

4.2

Wine duties

3.9

Bank levy

3.6

Beer and cider duties

3.4

Stamp taxes on shares

3.3

Spirits duties

3.2

Air passenger duty

3.1

Licence fee receipts

3.1

Insurance premium tax

3.0

Climate change levy

2.0

Petroleum revenue tax

0.0

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 Easter.

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 little light.

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 sales ending.

The CPI/RPI gap widened this month, with the RPI dropping to 0.4% on an annual basis. Over the month, the RPI rose by 0.4%.

The CPI annual rate fall from January to February was driven by three main downward factors according to the ONS:

  • 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 groups.
  • 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 territory.

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 thereafter.

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 expensive benefit.

Zero inflation - and possibly a dip below zero in the next few months - is not yet something to be worried about.

Pension planning

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 income-related benefits:

  • 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 schemes.

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 means-tested benefits.

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 made.

2. Claimants who have attained the qualifying age for pension credit.

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 income withdrawn.

"Notional" income is an amount equivalent to the income the claimant is expected to have received if an annuity had been secured.

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 excess capital.

Deprivation rule

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 benefit entitlement.

Contributory benefits

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 account.
  • 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 benefit.

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 following assumptions:

  • 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:

  • Age 40                       £423,000
  • Age 45                       £502,000
  • Age 50                       £596,000
  • Age 55                       £708,000
  • Age 60                       £841,000

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

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