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My PFS - Technical news - 19/01/2016

Personal Finance Society news update from 9th January to 19th January 2016 on taxation, retirement planning, and investments.

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Taxation and Trusts

Retirement planning



Forfeiture rule does not apply to trust interests unless 'created, enlarged or crystallised by the death'

(AF1, RO3, JO2)

In the recent case of Henderson v Wilcox 2015 3469 Ch, the High Court had reason to consider the application of the forfeiture rule to trust interests created during the lifetime of the deceased.

It is widely known that the forfeiture rule operates to prevent someone who has unlawfully killed another person from inheriting an interest in that person's estate by treating the person whose interest is forfeited as having predeceased the deceased (Forfeiture Act 1982 and Estates of Deceased Persons (Forfeiture Rule and Law of Succession) Act 2011

In the case in point, the deceased had died as a result of injuries sustained in an attack by her son, Ian Henderson, and as a result he was excluded - by reason of the forfeiture rule - from inheriting the residue of her estate under the terms of her Will. However, a year or so prior to the death, Mr Henderson and his mother had, as part of an asset protection strategy, each created 'Family Protection Trusts' into which they had transferred their respective shares of a property that they had originally owned as joint tenants, for beneficiaries including both parties.

In considering whether Mr Henderson had acquired a benefit from the trust as a consequence of the killing, the Court concluded (from an examination of previous case law) that the key issue is whether 'the offender's right is caused to come into existence, or to be enforceable, or the benefit to the offender is caused to accrue, directly by the death or the criminal act connected with that death'.

Drawing a contrast between a trust of a life policy (where it is the death that causes a pre-existing beneficial interest to become enforceable in the sense that an entitlement to payment arises) and the present case, the judge held that "the interests that Mr Henderson has or may acquire under the Family Protection Trusts do not arise from (or "result from") the death of Mrs Henderson. Insofar as he is a discretionary beneficiary of Mrs Henderson's trust, he acquired that status on the execution of the trust therefore his interest is neither created nor enlarged by her death. If the trustees exercise their powers to pay any income or capital to him, he will receive it as a result of the decision of the trustees (albeit one they may make in light of the death) and not by virtue of the death itself."

Accordingly, it was held that the forfeiture rule had no application to Mr Henderson's interests under the trust - whether they arise now or in the future as a result of the exercise of the trustees' discretion.

While no detail on the trusts is provided in the judgement, the judge's comments suggest that the trustees had an overriding power to appoint income or capital to any one or more of the discretionary beneficiaries (including the offender) during the settlor's lifetime. Consequently, the outcome may have been different had the discretionary trusts come into effect only on the settlor's death or had the offender's trust interest been absolute rather than discretionary. 


The OBR reports lower than expected yield

(AF1, RO3)

There has been a less than expected tax yield from a range of anti -avoidance measures.

The Office for Budget Responsibility (OBR) said, in an analysis of progress so far, that some aspects of the anti-avoidance programme had underperformed compared to the Chancellor's initial promises.

"Most measures are within £50 million of the original estimate either way, but there have been five measures where the average yield is lower by more than £50 million a year," the OBR said.  It also said "No measures have significantly outperformed the original costing."

Some problems with parts of the crackdown are "expected to continue in future years" the OBR said.

Tax repatriation from the tax havens of the Isle of Man, Jersey and Guernsey, as well as changes to tax credit calculations, had fallen short of expectations. Some HMRC compliance measures were also not bringing in expected revenue.

Despite this latest report from the OBR, the government says that the tax gap is falling over the long-term. The tax gap (standing currently at around £34bn) is, broadly speaking, the difference between the tax that the government would expect to collect if the tax legislation were applied as intended and the amount that is actually collected. Two of the biggest contributors to the tax gap are 'evasion and crime' (over 40%) and 'avoidance and legal interpretation' (together over 20%).


IHT receipts set to rise

(AF1, RO3)

The key headlines in relation to IHT that have been produced by the Office for Budget Responsibility (OBR) are as follows:

  1. The number of families paying IHT is at a 35 year high.
  2. The increase in the number paying IHT is due primarily to the combination of property price increases and the frozen nil rate band.
  3. 40,100 families will face (death-related) IHT in this year with the number increasing to 45,100 in 2016/7  
  4. Only 2.6 % of deaths resulted in IHT in 2009/10. The figure for 2015/6 is 7.1% and is estimated to exceed 8% for 2016/7. 
  5. The average house price in London rose 64% to £531,000 in the 6 years to October 2015.
  6. IHT receipts are expected to reach £4.4 bn in 2015/6. 
  7. When the RNRB is introduced in 2017/8 the OBR estimates that the number of deaths that will generate IHT will fall by around a third to 30,300 (around a third of the total deaths) and then rise to 6% by 2020/21.  Before the RNRB was introduced the number of estates likely to pay IHT was predicted at 11% of the total. 
  8. IHT receipts are expected to grow to £5.6 bn by 2020/21.

It still seems that the major part of the IHT yield will continue to come from the larger estates - as one would expect. The amount of IHT borne by estates worth over £1m rose from 49% in 2006/7 to over 70% in 2012/13.

The combination of the gift with reservation and POAT provisions makes effective and acceptable planning with the main residence very difficult.

While the residence nil rate band will clearly provide help, and have an impact on the IHT yield, its conditions may well mean that it is not as helpful as one might think to many of the clients of advisers. The tapering away of the relief for estates of more than £2m will clearly have an effect; as will the fact that one ignores BPR and APR in determining whether the £2m threshold is breached to trigger tapering.

Planning with cash and investments remains feasible though. Through the use of trusts it is possible to have an impact on the IHT liability but retain some access to capital.

Of course, registered pensions remain extremely IHT effective.

To the extent that a liability to IHT cannot be reduced, especially relevant for those with large main residences and estates over £2m, the simplicity and tax effectiveness of protection policies held in trust should not be overlooked. Subject to cost of course.


The impact of the new additional 3% SDLT on additional residential property tax

(AF1, AF2, RO3, JO3)

The impact of the proposed new additional 3% SDLT on additional residential property tax is leading to fears of property "chain collapses".

The Financial Times has recently reported that property professionals are concerned that the additional 3% Stamp Duty Land Tax (SDLT) on purchases of residential property, when the purchaser already owns a residential property, may cause some property chains to collapse.

The concern is specifically driven by the fact that if one buys a residence before one sells an existing one (something that a number of more wealthy older people are able to do) then the additional SDLT will be payable.

The SDLT is reclaimable if the 'original' residence is sold within 18 months, but the cash flow detriment is very real.

We have not seen the end of this issue and we can expect further representations from interested parties.  Anything financial to do with residential property is likely to be of interest to clients of advisers, so we think it's worth trying to keep up with developments.

Cash flow is clearly still a big driver in HMRC. As well as the proposals for more 'real time' collection through digital returns, we also have Accelerated Payment Notices (APNs) and other strategies HMRC have implemented to secure tax early.

In relation to this 'payment on completion' part of any transaction, the government appreciates that, for purchasers who own two or more properties temporarily due to unintended circumstances, paying the higher rates of SDLT (and to potentially claim a refund shortly after) may seem burdensome.

In order to allow individuals whose purchase of a new main residence precedes the sale of a previous main residence by only a few days, it states in the consultation that it may be preferable to allow the normal rates of SDLT to be paid as long as the previous main residence has been sold by the time the SDLT return is filed.

Currently, an SDLT return is due within 30 days of the completion of a purchase, but at the Spending Review and Autumn Statement 2015 the government announced plans to consult on reducing this to 14 days.

For information, HMRC Helpsheet guidance on the payment of SDLT states the following in relation to collection and payment: 'You must send an SDLT return to HMRC and pay the tax within 30 days of completion.  If you have a solicitor, agent or conveyancer, they'll usually file your return and pay the tax on your behalf on the day of completion and add the amount to their fees.  If they don't do this for you, you can file a return and pay the tax yourself.'

So if HMRC is prepared to 'trust the taxpayer' and not (as it seems is the case in most residential purchases) get the SDLT return submitted and the tax collected by the purchaser's solicitor, it is clearly possible to remove the cash flow detriment of the new rule to the purchaser/seller.  Most who are prepared to purchase a new main residence before selling their existing one would hope to sell their existing property within 18 months.  And, unlike HMRC's justification in relation to APNs (which puts the tax in dispute with HMRC until the case is resolved) there is no aggressive tax avoidance motive existing in relation to the ordinary sale and purchase of residential property.



Dividends, trusts and estates - General tax

(AF1, AF2, AF4, RO2, RO3, JO2, JO3, CF2, FA7)

HMRC has provided further clarification on the rate of tax which will apply to dividends not directly received by an individual by way of a reply to the following two questions:

  1. What rate of tax will be payable on dividends received by executors/personal representatives during the administration of an estate? 
  2. What rate of tax will be payable on dividends received by trustees of an interest in possession (IIP) trust?

HMRC has confirmed that the answer to both these questions will be the dividend ordinary rate, ie 7.5%.

Put thus, it sounds obvious, but there are some unfortunate consequences. If an executor/PR or IIP trustee receives £1,000 of dividends in 2016/17 they will have to pay £75 in ordinary rate dividend tax (£1,000 @ 7.5% - no grossing up). The estate beneficiary or life tenant will then receive £925 with a 'tax credit' of £75 attaching. Unless the final recipient has exhausted their dividend allowance, a reclaim will be necessary.

In theory it should be possible for IIP trustees to avoid this issue by mandating the dividend income direct to the income beneficiary, but this has not been confirmed.

A very similar problem will arise with bank and building society interest. Interest will be paid gross from 2016/17 and executors/PRs and IIP trustees will have to account for basic rate tax (this time at 20%), while their beneficiaries may be non-taxpayers thanks to the personal savings allowance.

At present many executors have nothing to do on the income tax front because their liability is limited to the basic rate, while dividends and most interest is paid net. That will change from April.


The cost of tax reliefs has risen 13 percent

(AF1, AF2, JO3, RO3)

The cost of pensions tax relief has been publicised at well over £30bn net (over £50 bn gross).  The government publicly started the "review ball" rolling on this with its  "Strengthening the incentive to save" consultation and we expect to hear more on this around the time of the next Budget on 16th March. 

Overall, though, it has been estimated that the cost of many other "tax breaks" has also risen considerably over the past few years. 

Exempting the main residence from CGT costs a staggering £180 bn - up from £105 bn just four years ago.  The cost of entrepreneurs' relief has also, it is reported, increased from £2bn to £3bn. 

The opposition are pushing for a review of "tax reliefs and tax breaks" to assess: 

  1. Are they producing worthwhile benefits - in particular, are they achieving the objectives that the reliefs were introduced to achieve
  2. Are they open to exploitation and abuse.

Whenever large sums of money are at stake (as is most definitely the case with pensions relief) it is natural and right that there should be a rigorous assessment of the "value" (eg in terms of savings and investment behaviour) that is being achieved. Care must also be taken that the system of relief is not being abused so that more relief than was anticipated is being secured. 

The government's relentless attack on tax avoidance, incorporating legal interpretation based on the substance as opposed to the mere form of legislation (eg giving tax relief or exemption), is clear evidence of how the world has changed in this respect. 

At a more fundamental level, given the amounts involved, then more questioning of the basis on which the relief is given, as is currently going on in relation to pensions relief, can be expected. 


Dividends And trusts - Standard rate band

(AF1, AF2, AF4, RO2, RO3, JO2, JO3, CF2, FA7)

HMRC has now confirmed that this will be 7.5%, in line with the charge for a basic rate taxpayer on dividend income above the dividend allowance. 

This answer is as expected, but does highlight the relatively generous tax treatment of dividends within UK life companies, where there is no extra tax charge.



EIOPA consultation: good communication for occupational pension scheme members

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

The European Insurance and Occupational Pensions Authority (EIOPA) has published a consultation paper on good practices on tools and channels for communicating to occupational pension scheme members.

EIOPA examined existing practices to identify ideas for improving communications, and the Paper highlights the following areas: 

  • How the welcome or enrolment pack is transmitted to new members;
  • The ways in which active and deferred members receive regular information about the status
  • of their individual pension entitlements;
  • Whether there are any retirement planning tools made available to members;
  • How ad hoc information on changes directly affecting pension scheme members is being communicated; 
  • How to inform scheme members about their options when they change job, including for pension transfers; 
  • Once the point of retirement is drawing closer, whether, and how, scheme members should be informed about the options available.

The consultation period will end on 22 March 2016.


Retirement income report

(AF3, RO4, RO8, CF4, JO5, FA2) 

The FCA have published their latest quarterly update of the retirement income market. The data collected shows how consumers accessed their pensions in the period from the beginning of July to the end of September 2015. The sample of firms covers an estimated 95% of defined contribution (DC) contract-based pension schemes assets.

Here is a summary of the findings: 

Fully withdrawing money and taking an income 

In the quarter July to September 2015 178,990 pensions have been accessed by consumers to take an income or fully withdraw their money as cash. Of these: 

  • 120,969 pensions (68%) were fully cashed out. Of the pensions that were fully cashed out88% were small pot pensions
  • 58,021 pensions (32%) were used to take an income after tax free cash i.e. using partial drawdown, partial Uncrystallised Fund Pension Lump Sum (UFPLS) or to buy an annuity 

Consumer choices 

Of the 178,990 pensions that were accessed: 

  • 60,600 (34%) used UFPLS (both partial and full withdrawals)
  • 54,604 (30%) used income drawdown (both partial and full withdrawals)
  • 23,385 (13%) were used to purchase an annuity
  • 40,401 (23%) were full withdrawals using small pot lump sum payments

Guaranteed Annuity Rates (GARs) 

Fifteen providers in the sample had pension policies with Guaranteed Annuity Rates (GARs).

Overall 68% of GARs were not taken up. This figure will include customers who are too young to exercise their GAR. This trend was higher in small pots, where 79% of those with pensions below £30,000 with a GAR did not take them up. 

Level of withdrawals 

Customers using drawdown or UFPLS made partial withdrawals in the quarter at the following rates as a percentage of their pension pot after tax free cash: 

  • Less than 2% 180,321 (71%)
  • 2 - 3.99% 32,169 (13%)
  • 4 - 5.99% 7,243 (3%)
  • 6 - 7.99% 5,862 (2%)
  • 8 - 9.99% 4,442 (2%)
  • 10% or more 24,396 (10%)

Customers aged 55-59 made the highest level of withdrawals as a percentage of their pension pot and of these, 27% of these customers took an income of 10% or more of their pot after any tax free cash was deducted. 

Use of regulated advisers and Pension Wise 

The highest levels of adviser use were for customers going into drawdown (58%). Across all products and withdrawals, consumers with larger pots were more likely to have used a regulated adviser.

It's still too early to spot any patterns and not surprising that the initial rush to access funds has slowed by 13%. 


Polygamy and pensions

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

The House of Commons Library has published a briefing paper which looks at polygamy and deals with the recognition of polygamous marriages, immigration issues, social security benefits and pension entitlement. 


In order to be recognised as valid, all marriages which take place in the United Kingdom must be monogamous and must be carried out in accordance with the requirements of the relevant legislation.  For a polygamous marriage to be considered valid in the UK, the parties must be domiciled in a country where polygamous marriage is permitted, and must have entered into the marriage in a country which permits polygamy.

No formal assessment is made of the number of polygamous households.


It has been the policy of successive governments to prevent the formation of polygamous households in the UK.  A UK resident cannot sponsor a non-EEA national for permission to enter or remain in the UK as their spouse if another person has already been granted such permission, and the marriage has not been dissolved.  However, it is possible for all parties to a polygamous marriage to be legally present in the UK.  For example, a second spouse may qualify for entry to the UK in a different immigration category, in their own right. 

Social Security Benefits

At present, some benefits can be paid, in certain cases, in respect of more than one spouse but the allowances that may be paid in respect of additional spouses are lower than those which generally apply to single claimants. Universal Credit (UC) is to replace all existing means-tested benefits and tax credits for families of working age but is not expected to be fully introduced until 2021.  The 2010 Government decided that the UC rules will not recognise additional partners in polygamous relationships.  This could potentially result in some polygamous households receiving more under UC than under the current benefit and tax credit system.

State Pension 

A wife in a polygamous marriage does not generally have the right to a State Pension on the basis of her spouse's contributions.