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My PFS - Technical news - 21/07/2015

Personal Finance Society news update from 1 July 2015 -  14 Jult 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

Significant increase in ATED receipts

(AF1, AF2, JO3, RO3)

The latest tax and NIC receipts released from HMRC show that the yield from the annual tax on enveloped dwellings (ATED) has increased dramatically.

The latest monthly figures for tax receipts show that ATED receipts for April - May 2015 amounted to £135 million, compared to £91 million for the same period in 2014. Extrapolating for the remainder of the year indicates that total 2015/2016 receipts will be about £172 million, compared to £116 million for 2014/2015.

The tax charge was initially introduced in April 2013 and is payable by corporate bodies (i.e. companies, partnerships and collective investment schemes) on high value residential property.

At the time it was first introduced, ATED applied only to properties valued above £2 million, but it has been significantly extended in scope since then. At the 2014 Budget it was announced that new ATED charges would apply to properties worth between £1 million and £2 million from 1st April 2015, and properties worth between £500,000 and £1 million from 1 April 2016.

The disclosure of the ultimate beneficial owners of trusts

(AF1, JO2, RO3)

The fourth Anti-Money Laundering Directive (AMLD) requires disclosure of the ultimate beneficial owners (UBOs) of companies and trusts. Does this mean the end of privacy for settlors and beneficiaries of trusts? Not necessarily, although some crucial matters are yet to be clarified.

The fourth AMLD defines an ultimate beneficial owner (UBO) as any natural person(s) who ultimately owns or controls the corporate entity or trust and/or the natural person(s) on whose behalf a transaction or activity is being conducted.

As a primarily Anglo Saxon structure trusts have always been viewed in continental Europe with suspicion. There is, of course, no doubt that in many cases trusts have been used in tax avoidance, or even tax evasion, as well as money laundering schemes and so it was only a matter of time that some rules would be introduced to prevent this. The issue of terrorism funding have added urgency to this whole subject.

EU Member States have until July 2017 to implement the fourth AMLD into national legislation.

In the case of trusts (the position for companies was covered in the last bulletin), the EU member states must provide for a central register for UBOs of trusts governed by their law that will, in principle, only be accessible to competent authorities, EU Financial Intelligence Units and obliged entities that are conducting customer due diligence, but not to the public. EU Member States must include UBO-information in this register in respect of trusts and comparable legal arrangements that are governed under the law of the relevant EU Member States if the trust gives rise to tax consequences. However, the meaning of the term "tax consequences" has not yet been clarified.

The information included in the trust register should include the identity of:

  • the settlor;
  • trustee(s);
  • the protector(s) (if any);
  • the beneficiaries or classes of beneficiary; and
  • any other natural person exercising effective control over the trust.

It is anticipated that in due course these registers will be linked at EU level through a central European platform.

The legal view in the UK (represented by the Law Society) has always been that while they accept that public beneficial ownership registers may assist competent authorities and obliged entities, making all trusts subject to such a register would have some unfortunate unintended consequences for citizens' privacy in all member states, but particularly so in the UK.

Of course, given that the information on trusts will be accessible only to the authorities and obliged entities and not the general public, presumably this satisfies those whose main concern was privacy and data protection.

Information about beneficial owners already needs to be provided to financial institutions, for example when an investment is purchased or an account opened, if only as part of the FATCA compliance.

Furthermore, given that the registers will only list trusts that generate tax consequences, and will only contain information that is being made available to tax authorities as part of international initiatives for the automatic exchange of tax information, this means that not all trusts will have to be disclosed. Clearly, the meaning of the "tax consequences", when it is clarified, will be of crucial importance. Will a trust generate tax consequences only when a taxable event occurs? Or will the possibility of a tax charge at any time in the future be sufficient? An example of a bond in trust, where there may never be any tax charge on the trustees, comes to mind. What about trusts holding private residences occupied rent free by the beneficiaries? What about life policies held in trusts? We await further clarification on in due course.

FSCS cash compensation limit cut from 1 January 2016

From 1 January 2016, the Financial Services Compensation Scheme (FSCS) will reduce the compensation limit for savers from £85,000 to £75,000.

Currently, anyone with savings up to £85,000 (or up to £170,000 for joint accounts) in a bank or building society would be covered for this amount if the institution goes bust.

The limit is set by the European Union Deposit Guarantee Schemes Directive that fixes the level of protection across Europe at €100,000 or its equivalent. When the level was agreed in 2010, that figure translated into £85,000. But the FSCS said that due to the value of the euro falling against the pound, the limit is being set based on the exchange rates applying on 3 July.

Mark Neale, chief executive of FSCS, said:"The countdown to a new FSCS savings limit is under way. Until December 31 2015 people are protected up to £85,000. People have six months to get ready for the change, if necessary. What won't change is the service FSCS provides to the people using banks, building societies and credit unions. We will continue to be there for them."

He added:"The new £75,000 limit will protect more than 95pc of all consumers."

Ninety-eight per cent of the British population are covered by the £85,000 compensation safety net.

Importantly, advisers should ensure that clients are fully aware of their position in regard to what would or would not be covered. Note that in the situation where a bank shares a banking license with other banks, savings which are split between the various banks which share the same license will only usually be covered if the total amount does not exceed the current limit of £85,000.

It is evident that the benefit of warning clients of this type of change well in advance (6 months in this case) means that they can consider their overall position in terms of whether to potentially move savings between different account providers or consider alternative savings and investment vehicles.

Investors kick start legal battle against Ingenious Media

(AF1, RO3)

Ingenious Media promoted various investment schemes, many of which were designed to take advantage of tax breaks by investing in the film industry.

The schemes attracted billions from around 1,300 investors and many offered generous tax benefits. However, it was recently reported in the press that many investors are suing finance firm Ingenious Media over the billion pound film production schemes that have been labelled as tax avoidance arrangements by HMRC. Investors claim they were wrongly advised and were not made aware of the risks involved.

More than 100 investors, including Ken Costa, former chairman of investment bank Lazard, and Christian Hess of investment bank Investec, have issued a writ in the High Court against Ingenious and more than 50 associated companies.

Among these are a group of financial intermediaries, including Coutts, which specialises in providing banking services for the very wealthy, HSBC Private Bank and Swiss investment bank, UBS.

Ahead of a further legal showdown HMRC has demanded investors pay any disputed tax upfront, on the condition that it will be repaid if Ingenious wins the Court battle.

In a statement given to the Daily Mail, Ingenious said: 'The film partnerships run by Ingenious Media have already generated over £1 billion in taxable income for the Treasury. They helped to bring movies including Avatar, Vera Drake and Hotel Rwanda to the screen and are clearly run for profit. These claims are entirely without merit and we will vigorously defend any actions brought against us'.

Investment planning

Six months on …

(AF4, RO2, CF2, FA7)

The first half of 2015 was marked by the continued threat of rising US interest rates, the start of Eurozone quantitative easing (QE), the UK general election and, in the dying days, Greece's path to default. The results are shown in the table below.




Change to 30/6

FTSE 100




FTSE 250




FTSE 350 Higher Yield




FTSE 350 Lower Yield




FTSE All-Share




S&P 500




Euro Stoxx 50 (€)




Nikkei 225




Bank base rate




2 yr UK Gilt yield



10 yr UK Gilt yield




2 yr US T-bond yield




10 yr US T-bond yield




2 yr German Bund Yield




10 yr German Bund Yield
















Brent Crude ($)




Gold ($)




A few points to note from this table are:

  • The FTSE 100 has gone virtually nowhere in six months, despite the resilience of the economic numbers and minimal inflation. However, the FTSE 250 tells a different story, with a rise of nearly 9%. The gap between the two indices reflects the fact that mid-size domestically oriented companies did better than their more international counterparts in the Footsie. The latter include big names affected by the decline in commodity values, be they miners or energy companies.
  • The US market performed in a similar way to the UK. However, the dollar weakened slightly against sterling.
  • Eurozone QE, which started in January, boosted the European stock markets. Despite the problems with Greece, the Eurozone markets outperformed the US and UK in local currency terms. The flipside of QE was that the euro weakened over the six months - down 8.7% against sterling, just in time for the summer holidays.
  • After years of being the dog that didn't bark, bond yields started rising. Yields had been higher during the period - German 10 year bond yields briefly touched 1% in early June having fallen to 0.05% in late April. However, by the end of the half year Greece has prompted a flight to quality, bringing yields back down.
  • After last year's sharp falls, oil recovered somewhat in the first half of 2015, with Brent Crude up 10% over the period. That will eventually feed through to the inflation numbers.

The next three months will see continued Eurozone and Japanese QE and the next stage in the Greek tragedy. In the USA, there is an expectation that September will mark the first increase in interest rates by the Federal Reserve for almost 10 years. Another rollercoaster may be the order of the day.


Inheritance tax and drawdown funds; important developments

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

Over the past few weeks there has been uncertainty as to whether the pension funds of an individual who is taking income drawdown will be free of IHT on their death. Similar uncertainty exists in relation to drawdown funds held for beneficiaries, nominees and successors.

HMRC have now provided clarification of the position.


In Finance Act 2011, the 55% recovery charge was introduced. This applied to pension funds of people who died either

  • owning crystallised pension funds (on death at any age) or
  • owning uncrystallised funds where they were aged 75 or over on death

At the same time an exemption was introduced in section 12 (2ZA) of the IHT Act to remove an inheritance tax charge under the "omission to exercise a right" rules in section 3(3) IHT Act. The offending "omission" being the omission to actually draw funds that had been designated to drawdown.

Introduction of Flexi-Access Pensions

As part of the flexi - access pensions "revolution", the coalition Government introduced provisions which made the taxation of death benefits more favourable. In effect, if the member died below age 75 no income tax liability would arise irrespective of whether benefits were taken as a lump sum or left into drawdown. In the event of death at 75 or over, a 45% tax charge would arise on lump sum payments with drawdown payments being taxed as income of the recipient.

It was assumed that under the new regime inheritance tax would not be an issue. However, some commentators queried this analysis stating that section 3(3) could still apply in cases where the member died having designated his pension fund to drawdown. This was on the basis that the exemption in section 12(2ZA) only applied to the member's right to elect to crystallise the plan and so draw benefits. The exemption did not apply to the member's rights to draw the funds having gone into drawdown ie where the funds had already been designated to drawdown but just hadn't been fully drawn at the point of death.

Example (1)

Joe is age 73 and dies owning an uncrystallised pension plan. Whilst technically he has omitted to exercise a right in that he could have crystallised his plan and taken benefits, section 12 (2ZA) will provide an exemption from such a change.

Example (2)

Bert is aged 75. On 1 May 2015, he crystallised his pension plan with his original pension provider. He took his PCLS but took no other benefits. He dies on 1 August 2015. The exemption in section 12(2ZA) will not apply because he is already in income drawdown and so section 3(3) can possibly apply to the invested funds (but see below).

HMRC's stance on the position

HMRC agree with this interpretation of section 12(2ZA). In other words, notwithstanding the introduction of the exemption in section 12(2ZA) of IHTA by Finance Act 2011, section 3(3) can still potentially apply to tax funds held in drawdown on an individual's death and therefore those undrawn benefits can be subject to IHT.

However they have also stated that their existing guidance confirms that a charge under section 3(3) will be considered only where there is evidence that the member's intention in failing to actually draw retirement benefits was to benefit others on death rather than to benefit the member. In practice, they say, this means that a claim would only arise where the member was in ill-health at the time he took a decision to:                   ·

  • designate funds for drawdown, or
  • change the established pattern of withdrawals from drawdown resulting in reduced benefits being taken by the member.

HMRC has confirmed that a member would be accepted as having been in normal health in the event that they survive for two years from the relevant decision.

So what happens now?

We have been informed by HMRC that it was never intended that section 3(3) should apply to any funds designated for drawdown but undrawn at the date of death. HMRC has been made aware that technically a charge to inheritance tax can arise in these circumstances.

HMRC make the point that the circumstances in which a possible section 3(3) charge could actually arise are extremely limited. In practice HMRC have not come across any cases where the charge has arisen to date.

They are however considering the position in the light of the pension changes in April 2015 and whether a legislative change should be made to put the position beyond doubt. Any legislative change could apply retrospectively back to the introduction of section 12(2ZA) IHTA 1984 in 2011.


Whilst this news is very comforting, clearly an essentially unsatisfactory position exists. The position is that technically, the crystallised funds of some individuals who die (having been motivated to omit to exercise their right to actually draw benefits by virtue of their serious ill health) may be subject to inheritance tax despite this not being the intention of the Government. We would hope to see the position clarified by the introduction of revised legislation and from the correspondence we have had, HMRC do not seem averse to doing so in order to put the position beyond doubt.

We are still in discussion with HMRC over certain points of interpretation on the IHT treatment of pension funds and will report further in due course. On balance though we believe the tone of the responses we have received from HMRC to be essentially reassuring.

New ROPS notifications list now posted

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

HMRC have posted an updated list of the schemes that meet the requirements to be a Recognised Overseas Pension Scheme.

Headline numbers suggest that on the list published 1st June 2015, there were in the order of 3600 schemes that met the requirements and on the list published today (1st July) there are now only 660 - approximately an 80% reduction in schemes.

Scheme administrators that have made transfers to a QROPS since 6th April 2015 should revisit these transfers to ensure that the QROPS did meet the new requirements from that date, most notably meeting the Pension Age Test.

If a scheme is not a QROPS then a transfer to that scheme will not be tax-free. Scheme administrators (and the transferring member) will need to satisfy themselves that the scheme they are transferring their UK pension benefits/fund to is a QROPS. As part of the checks scheme administrators should always confirm with the scheme manager of the scheme accepting the transfer that scheme meets all of the requirements to be a ROPS, including the Pension Age Test, from 6 April 2015 onwards.

If a scheme has ceased to be a QROPS, individuals who transferred their pension savings to that pension scheme before it ceased to be a QROPS will be subject to UK tax on the same basis as if the scheme had remained a QROPS. They will be able to remain as members and receive a pension paid from the sums transferred without automatically incurring additional UK tax charges.

The penalties for transferring to a non UK pension scheme that is not a QROPS are significant and would result in charges of at least 70% of the transferred amount, made up of:

  • 40% unauthorised payment charge,
  • 15% unauthorised payment surcharge, and the
  • 15% scheme sanction charge, which could be as much as 40% if the member doesn't pay their unauthorised payments charge.

Of this up to 40% could be charged to the scheme administrator and of course by the time the charge is applied the transfer will have completed, meaning that the assets are no longer held in the registered UK pension scheme are no longer in the scheme for the administrator to appropriate (as is often a clause in their rules) to pay the scheme sanction charge and therefore the charge could fall of the scheme administrator.

Pension liberation fraud cases on the rise

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

Cases of so-called pension liberation rose last year, accounting for the vast majority of pension-related frauds in 2014, according to data collected by Action Fraud and the Office for National Statistics (ONS).

Of the 863 pension-related fraud cases recorded in 2014, 758 involved pension liberation; up from 719 the previous year. Action Fraud, the UK's national fraud-reporting authority, first began recording pension liberation cases as a separate category in 2013.

Pension disputes expert Ben Fairhead of Pinsent Masons, said that the fact that reported cases continued to rise in 2014 despite increased warnings from the both The Pension Regulator (TPR) and the FCA was a concern. He went on to say:

"This might, however, simply reflect more individuals discovering belatedly that they have lost out as a result of pension liberation scams, perhaps where the original transfers were made much earlier. That said, notwithstanding warnings from TPR, there are still plenty of individuals who are significantly desperate for cash to be lured into these scams, even though they are sometimes aware that there are risks attached.

It will be interesting to see how the statistics for the current year compare once they eventually come through. Cases of conventional pension liberation (individuals releasing cash payments before the normal minimum pension age of 55) might well reduce through increased public awareness, a reluctance by those in the industry faced with making transfers into suspicious schemes to proceed, and possibly an evolving approach by the fraudsters choosing to target those aged 55 and above given the new flexibilities in place since April."

Under rules governing occupational pension schemes, an individual can only claim pension benefits from the age of 55 unless doing so on ill-health grounds. Tax charges on unauthorised payments can be as much as 70% of the value of the payment. Changes to the law from April this year give members of defined contribution (DC) schemes more freedom to access their savings any way that they wish once they turn 55 without incurring heavy tax penalties, although the rules remain as they are for those that have not yet reached pension age.

Traditional pension liberation arrangements are designed to get around the restrictions by transferring money representing a saver's pension rights out of their existing scheme into a new scheme, and then making the money available as a loan back to the saver either in whole or in part. As well as substantially reducing a pension scheme member's savings through punitive tax charges and hefty introduction fees, any funds remaining in a pension liberation scheme after the initial payment tend to be invested in exotic, unregulated structures that do not live up to the advertised claims.

As of May 2015, over 1,000 people had already complained to the UK's Information Commissioner's Office about unsolicited calls or texts relating to their pensions this year. TPR, which re-launched its campaign against pension 'scams' last year, has said that scammers will likely evolve to keep up with the changes in the law and begin targeting people approaching 55, seeking to exploit their interest in accessing their pensions flexibly.

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