Personal Finance Society news update from 8 November to 21
November 2016 on taxation, retirement planning and investments.
Taxation and Trusts
TAXATION AND TRUSTS
The triple lock
(RO4, AF3, JO5, FA2, RO8)
The Work & Pensions Select Committee has joined the chorus
of voices against continuation of the triple lock ie. the increase
in the State pension every year by the higher of CPI inflation,
average earnings and a minimum of 2.5%.
The House of Commons Work & Pensions Select Committee,
chaired by Frank Field, published its 3rd report on intergenerational fairness.
Unsurprisingly, it sees "an economy skewed towards baby boomers
[born 1945-1965] and against millennials [born 1980-2000]." The
report quotes the frequently cited statistic that "pensioner
household incomes now exceed those of non-pensioners after housing
costs", creating a risk of the millennial generation "being the
first in modern times to be financially worse off than its
The crux of problem is that:
- The birth rate during the baby boomer generation was between
800,000 and 1,000,000 a year, whereas subsequent generations have
seen typically 700,000-800,000. There is thus a greater strain on
the post-baby boomer generations to support the retiring baby
- The swollen baby boomer generation is also hanging around
longer thanks to improved life expectancy. The report notes that 'a
boy born in 1955, in the middle of the baby boom, had an 83% chance
of living to at least 65, compared with 45% of those born in 1895.'
The net result of these two factors is that 'The share of the
population aged 65 and over is projected to grow from 18% in 2014
to 24% in 2039, while the proportion 80 and over is expected to
grow from 5% to 8% over the same period.'
- The baby boomer generation was a winner in the housing lottery:
'The opportunities that were open to baby boomers to buy a home
with a relatively small deposit are closed to today's young.'
Getting onto the housing ladder early helped the baby boomers to
build up wealth.
The report's main proposal is that triple lock increases to the
basic and single tier state pension should be abandoned when the
current commitment to maintain it expires in 2020. Retaining the
lock 'would… tend to lead to state pension expenditure accounting
for an ever greater share of national income. At a time when public
finances are still fragile, this is unsustainable.' The option of
accelerating state pension age increases as an alternative to
removing the lock is dismissed because it 'would disproportionately
affect the young and those socio-economic groups with lower life
expectancies in retirement,' a point which echoes concerns raised
in John Cridland's SPA review for the DWP.
The report suggest that the triple lock should be replaced by a
"smoothed earnings link". Under this mechanism the 2020 state
pension would set the base and increases would normally be linked
to earnings. In periods when earnings increases lagged behind price
inﬂation, an above-earnings increase would be applied. Then, when
real earnings growth resumed, (CPI) price indexation would continue
until the state pension reverts to its 2020 benchmark as a
proportion of average earnings.
Based on the estimate in the most recent Fiscal Sustainability Report from the Office
for Budget Responsibility (OBR), the long term effect of reverting
to an earnings link would be that state pensions rose by about 0.4%
a year less than they would under the triple lock. That may not
sound a great deal, but its cumulative effect is significant:
the OBR estimated that the annual cost of the triple lock relative
to earnings uprating will be an additional 1.3% of GDP by
The report is also critical of universal pensioner benefits,
such as the Winter Fuel Payment (cost about £2bn a year) and free
TV licences for the over-75s. The report states such benefits 'have
been deployed by successive governments for reasons of short term
expediency. Such measures, which do not tend to be subject to
indexation, lead to ill-targeted support, further complicate the
benefits system and are politically and administratively far harder
to put right than to introduce in the first place… They should …not
be off limits when spending priorities are set in future
There is growing pressure to remove the triple
lock when it reaches its currently scheduled expiry date in 2020.
However, as that year will see the next general election - assuming
no Article 50 snap election - politicians must be prepared to anger
the (baby boomer) grey vote and face the inevitable
HMRC publishes detailed guidance on the residence nil
HMRC has published detailed guidance on the residence nil rate band which
is due to come into effect for deaths occurring on or after 6 April
2017. The guidance is supplemented by a series of case studies that show how the new rules will
work in a number of specific, less straightforward situations such
as where the home is left to a trust, where the estate exceeds the
£2 million taper threshold and where the deceased has downsized or
disposed of their property before their death.
The guidance confirms a number of important points such as the
fact that RNRB (or combined RNRB in the case of second death
claims) is set against the value of the estate first with the
existing NRB (and any transferred NRB) then set against the
remaining value of the estate; and that a non-UK domicile can
benefit from RNRB if they have a UK property within the scope of
IHT that they have at some point occupied as their home. However,
the most complicated aspect of the new rules is undoubtedly the
calculation of the downsizing addition and this is where the
guidance will be most useful.
Downsizing addition will be available where a deceased has
disposed of a former home that would have been eligible for RNRB
had it been owned at the date of death, and either downsized to a
less valuable home, or ceased to own a home, on or after 8 July
2015. The amount of the downsizing addition will generally be equal
to the RNRB that has been lost as a result of the disposal.
However, the position will not always be this straightforward as
the actual amount of 'lost RNRB' must be calculated in percentage
terms in accordance with a fairly involved formula.
In a downsizing situation, the addition will generally be equal
to the difference between the RNRB that would have been available
at the date of death if a house equivalent in value to the former
residence formed part of the estate, andthe RNRB that is actually
available at the date of death by virtue of the downsize. The
guidance makes it clear that:
- For the purposes of the calculation, the RNRB that would have
been available if the disposal of the former home had not taken
place, is made up of the maximum RNRB due at the date of disposal
and any transferred RNRB which is available atthe date of
- Neither the RNRB nor the downsizing addition will be available
unless the new, lower value residence is closely inherited;
- The actual amount of the downsizing addition depends on the
value of other assets that are left to direct descendants (or their
- Where a person's right to occupy a home held in a trust ceases,
for example on re-marriage, this is also treated as a disposal for
the purposes of the downsizing rules.
These points may be best illustrated by examples
Example 1 - downsize - no transferred RNRB
Jeremy, a divorcé, downsizes from a large house worth £500,000
to a small flat in May 2018 when the RNRB is £125,000. He dies in
September 2020, when the RNRB is £175,000, leaving the flat (worth
£105,000) to his son, and the rest of his estate worth £50,000 to
his 2 daughters. The RNRB available would be calculated in
accordance with the following steps:
- Express value of former home as a percentage of RNRB at date of
disposal (i.e. £500,000/£125,000) = 400%. Note that where this is
more than 100% this is limited to 100%.
- Express value of new residence as a percentage of RNRB at date
of death (i.e. £105,000/£175,000) = 60%
- Calculate difference between percentages at steps 1 and 2 (i.e.
100% - 60%) = 40%
- Multiply RNRB at date of death by % at step 3 to give total
lost RNRB (i.e. £175,000 x 40%) = £70,000
Jeremy's estate will benefit from RNRB of £105,000 (as this is
the value of the residence that is being closely inherited); plus
downsizing addition of £50,000. Although the maximum downsizing
addition available is £70,000, this is restricted to the value of
other assets being closely inherited, giving a total RNRB of
£155,000 (£105,000 + £50,000).
Example 2 - disposal - transferred RNRB
Elizabeth sold her home for £285,000 in October 2019 to go into
residential care. The maximum RNRB in the tax year 2018 to 2019 is
She dies in March 2021 when the maximum RNRB is £175,000. As
Elizabeth inherited her husband's entire estate on his death in
September 2017, Elizabeth's estate will be entitled to transferred
RNRB of £175,000.
The RNRB to be used in Step 1 of the calculation is the maximum
RNRB at the date of the disposal plus the transferred RNRB to which
the estate isactuallyentitled at the date of death i.e. £150,000 +
£175,000 = £325,000.
Where RNRB has been lost as a result of a disposal (so that
there is no residence in the estate at the date of death), the
calculation of the lost RNRB is simplified because the percentage
at step 2 will always be 0% and the result at step 3 will always be
the same as the figure at step 1. This means that steps 2 and 3 can
be missed out and the downsizing addition will be equal to the lost
RNRB (provided other assets equivalent in value to that amount are
left to direct descendants). Putting the figures into the
calculation will help illustrate this:
- £285,000/£325,000 = 88%
- £0/£350,000 = 0%
- Difference between 0% and 88% = 88%
- 88% x RNRB available at date of death = 88% x £350,000 =
The 'lost RNRB' is therefore £308,000. However, the actual
amount of the downsizing addition is the lower of the value of
other assets left to a direct descendant and the lost RNRB.
Provided therefore that Elizabeth leaves other assets worth at
least £308,000 to her children, her estate will benefit from a
downsizing addition of that amount, otherwise it will be restricted
accordingly. Of course, Elizabeth's estate will also benefit from a
standard nil rate band of £650,000 giving her a potential total NRB
The new rules - and the downsizing rules in particular - are
extremely complicated and this is acknowledged by HMRC who
reiterate the importance of professional legal advice throughout
the guidance note.
One aspect of the new rules that is still not completely clear
is how entitlement to the RNRB will be 'policed' - for example,
what information and evidence personal representatives (PRs) will
need to provide to satisfy HMRC that an estate should be entitled
to downsizing addition or, indeed, RNRB itself. In this regard, the
guidance simply confirms thatthe PRs will need to provide 'details
of the amount due and supporting information on the IHT return
following the death'. Record keeping will therefore be essential -
particularly where a downsizing move or disposal occurs.
Further details will no doubt emerge over the next few months.
In the meantime, the latest guidance and case studies will be a
valuable resource for those trying to get to grips with the
fundamentals of the new rules in advance of implementation next
IHT scheme involving settlement of reversionary interest
in offshore trust held to be successful
The First-tier Tribunal have held that the transfer of a
reversionary interest in an offshore trust that was settled by a
non-UK domiciled individual was not a transfer of value for IHT
purposes despite arguments that the scheme should be looked through
because it served no commercial purpose other than to avoid tax (M
L Salinger and J L Kirby v HMRC  UKFTT 677).
The facts of the case are as follows. Mr Salinger had entered
into a tax planning arrangement to reduce the amount of IHT payable
on his death. The arrangement involved the transfer of a
reversionary interest in an Isle of Man trust (apparently for no
consideration) to the Salinger Family Trust ('the DSFT'). He died
in February 2011.
The questions for consideration by the Tribunal were:
- Whether the reversionary interest acquired by Mr Salinger was
excluded property (or whether the interest had, in fact, been
acquired for consideration and so was not); and
- Whether Mr Salinger had made a transfer of value when his
reversionary interest was transferred to his family trust
subsequent to him purchasing an option to acquire the income
interest in the same offshore trust in which he held the reversion,
but before actually exercising it.
The Appellants' case was that the reversionary interest was
excluded property because no consideration was given for its
acquisition. Further, in any event there had been no transfer
of value when it was transferred to the DSFT due to it being
essentially worthless at that time.
By contrast HMRC contended that whilst direct consideration had
not been given, consideration had been indirectly given (because
realistically the irrevocable acquisition of the reversionary
interest was part of a composite series of transactions for which
money was paid). Furthermore, Mr Salinger had made a transfer of
value of £820,000 when he transferred his reversionary interest to
While the Tribunal agreed with HMRC that the reversionary
interest had been acquired as part of a package for which Mr
Salinger had paid £890,000 (the rest of the 'package' consisting of
an option that, if exercised, would give Mr Salinger the rights to
the income under the trust, thereby ultimately ensuring that his
entitlement could not be defeated) and so was not excluded
property; it held that its later transfer to the DSFT caused no
loss to Mr Salinger's estate and so was not a transfer of value.
The Tribunal dismissed HMRC's argument that by transferring the
reversionary interest to the trust before he exercised an
earlier-acquired option to purchase the income interest under the
same trust - thereby deliberately blocking the possibility
thatSaunders v Vautiermight apply - Mr Salinger omitted to do
something he could easily have done resulting in him making a
disposition of the total value of the trust fund.
This type of scheme has now been blocked by legislation
introduced in Finance Act 2012 which ensures that any reduction in
the value of a person's estate as a result of the acquisition of an
interest in settled property in an excluded property trust is
charged to inheritance tax (IHTA 1984, s74A-C). However, the
arguments based on the failure of a beneficiary to exercise a power
to bring a trust to an end have not been made before, and the
decision that such an omission cannot be a disposition for
inheritance tax (other than in specific circumstances laid down in
statute) is useful confirmation of the point.
The October inflation numbers
(RO2, AF4, FA7, LP2)
After four months in which CPI inflation rose from 0.3% to 1.0%,
this month's inflation story took a different direction, with
annual inflation dropping by 0.1% to 0.9%. Market expectations had
been that the October inflation numbers would be 0.2% up on September's, so
there was some surprise that the figure moved in the opposite
The CPI showed prices up 0.1% over the month, the same as
between September and October 2015. Thus, rounding has once again
played its part in determining the final number. The CPI/RPI gap
widened by 0.1% over the month, with the RPI flat on an annual
basis at 2.0%. Over the month, the RPI was flat.
Aside from rounding, the fall in the CPI annual
rate was due to two main "upward contributions" being offset by
four main "downward contributions", according to the ONS:
Transport:The upward contribution came largely from motor fuels,
with prices rising by 2.3% between September and October 2016,
partly due to the depreciation of sterling against the dollar. Over
the same period last year, fuel prices fell by 0.9%.
Furniture, household equipment and maintenance:Overall prices
increased by 0.5% between September and October 2016, compared with
a fall of 1.0% a year ago. This increase follows a period of
unusually low prices between June and September, when a relatively
high proportion of items were on sale compared with recent
Clothing and footwear:The downward effect came mainly from
garments, for which prices rose by 0.2% between September and
October 2016, compared with a rise of 2.3% a year earlier. However,
this followed a relatively large increase in prices in September
2016, which resulted in an upward contribution to the change in the
rate of a similar magnitude to the downward effect seen this
Recreation and culture:Overall prices increased by 0.2% between
September and October 2016, compared with an increase of 0.8% a
Education: Overall charges rose by 2.0% between September and
October this year compared with a rise of 3.6% between the same two
months a year ago. The downward contribution came principally from
UK and EU student tuition fees, where the impact from the rise in
the cap for tuition fees was smaller this year than in 2015 because
nearly all students are already paying the higher rate of fees
whereas last year the fees for fourth year courses rose to the
Restaurants and hotels: Overall prices fell by 0.1% between
September and October 2016, having risen by 0.1% a year earlier.
The ONS notes that prices for overnight hotel stays have been
volatile in recent months.
Food and non-alcoholic beverages: Overall, this group made a
small downward contribution to the rate, with the most pronounced
effect from non-alcoholic beverages, which saw prices falling by
3.2% between September and October 2016, having been unchanged
between the same two months a year ago.
Core CPI inflation (CPI excluding energy, food,
alcohol and tobacco) was down 0.3% at an annual 1.2%. Three of
twelve index components are now in negative annual territory, one
more than last month. Goods inflation rose by 0.1%, but remained
negative at -0.4%, while services inflation decreased by 0.2% from
September to +2.4%.
While the CPI figures took an unexpected turn, the story on the
producer price side was much as expected.
Factory gate prices (output prices) for goods produced by UK
manufacturers rose 2.1% in the year to October 2016, compared with
a rise of 1.3% in the year to September 2016. The overall price of
materials and fuels bought by UK manufacturers for processing
(total input prices) rose 12.2% in the year to October 2016,
compared with a rise of 7.3% in the year to September 2016. Between
September and October, total input prices rose by a record 4.6%,
compared with an increase of 0.1% the previous month.
These numbers suggest that the October dip in the CPI will soon
Should you top up?
(RO4, AF3, JO5, FA2, RO8)
If, as part of a financial planning exercise, a shortfall in
state pension entitlement is discovered, should you top up?
To answer this question you will have worked out the following
for your client:
- The current accrued Single-tier State Pension (StSP)
- The shortfall, if any, that needs to be made up
- How many potential qualifying years there are from now to
- How many more qualifying years the client is likely to achieve
from work or personal circumstances.
The answers to these will allow you to decide if there is a
potential shortfall to be made up.
If there is a shortfall that needs to be made up, there are two
- If there are likely to be tax years in the future where the
client will not achieve a qualifying year because of insufficient
earnings or Credits, then in those years, it is possible to pay
Voluntary or Class 3 NICs.
- If there are historic gaps in a client's NI record, it may be
possible to pay Voluntary or Class 3 NICs as a one-off lump sum to
make up any shortfall.
If a client has the option to make Voluntary Class 3 for future
years and to pay them in respect of earlier years, the DWP will be
able to provide a quotation for the cost of back-filling each
available year individually. A decision can be made which year(s)
it is most cost-effective to pay one or more one-off contributions
to, based upon the DWP quote.
It is worth noting the following:
If there are eight tax years between the current tax year and 5
April prior to the client's birthday immediately prior to their
SPA, it is only possible to pay Class 3 Voluntary Contributions to
secure eight qualifying years. If additional qualifying years are
needed, the only option will be to explore the potential for making
contributions to back-fill any missing years.
Generally, it is only possible to fill historic gaps in
qualifying years in respect of the previous six tax years. So, the
deadline for the 2010/11 tax year is 5 April 2017.
The exception to the six-year cut off applies to males born
after 5 April 1951 or females born after 5 April 1953 who have
until 5 April 2023 to pay voluntary contributions to make up for
gaps between April 2006 and April 2016. A discount is available if
these contributions are paid on or before 5 April 2019.
Be aware if a client has got one or more historic gap years that
can be filled, filling them now may be a waste of money if they
achieve sufficient qualifying years in the future, but equally if
the future anticipated qualifying years are not achieved for
whatever reason, it may then be too late to make the Voluntary or
Class 3 NICs for those historic years.
Lastly and probably most important of all, jointly with the
client look back at any historic gaps in their qualifying years to
ensure they were not entitled to NI Credits for any of those years.
It is also always a possibility, albeit a remote one, that the
DWP's records are not 100% accurate.
Are Class 3 NICs Good "Value for Money"?
The short answer is; "probably, yes"!
A payment of £14.10 p.w. will secure, in today's terms an
indexed linked pension of £4.44 per week, but remember there is no
spouse's pension under the StSP. Whilst this cost is paid out of
taxed income, it is almost certainly a better return than making
similar level of contributions to a PPP.
However, it is important to consider some of the drawbacks with
the StSP, the main ones are:
The pension ceases on the individual's death.
If they retire abroad, residents of many jurisdictions do not
receive any indexation of their State Pension.
Whilst indexation applies with residents of EU Member States,
will that still be the case post-Brexit?
IFS Report on the latest AE data
(RO4, AF3, JO5, FA2, RO8)
The Institute of Fiscal Studies (IFS) has published new research on the results of automatic enrolment
(AE) drawing on data from the Annual Survey of Hours and Earnings
(ASHE) produced by the Office for National Statistics. The ASHE
covers a 1% sample of employees in Britain, so it gives a good view
of what is going on. The IFS highlighted the following findings
(based on April 2015 data):
The impact of AE is estimated to have increased the proportion
of eligible employees participating in a workplace pension by
almost 37%. This means that for employers with 58 or more employees
in April 2015, 88% had pension membership. Pre-AE the corresponding
figure was 49%.
The biggest boost given by AE was among:
- those aged 22 to 29;
- those earning between £10,000 and £17,000 per year; and
- those who have been with their current employer for less than a
For each of these groups, for whom pre-AE pension coverage was
very low, AE increased membership rates by over 50% percentage
points. In 2015 coverage among all of these groups had risen to
To date most of those captured by AE have only low levels of
contributions. There has been a 24% increase in the proportion of
eligible employees who have contributions around the current AE 2%
of qualifying earnings level.
AE has also raised the numbers of employees contributing much
more than the current minimum amount into a workplace pension. The
proportion placing 5% or more of their total earnings into a
workplace pension has increased by 7% percentage points. The IFS
believes that this appears to be a positive decision by employees
and not simply the result of employers setting up 8% total
contribution rates today, rather than waiting for the contribution
minimum to reach that level in April 2019.
AE has more than doubled membership of workplace pensions among
those not directly targeted, such as employees aged under 22 or
over SPA and those earning less than £10,000 per year. Automatic
enrolment increased pension membership rates across the excluded
groups by 18%, with the largest effect (+28%) among those earning
under £10,000 per year.
The IFS estimates that in April 2015 a total of £2.5bn a year
more was saved in workplace pensions as a result of AE.
The IFS notes that "The story of automatic enrolment is
certainly a case of so far so good." However, it also says that
looking forward "A key issue is whether those brought into
workplace pensions at low contribution rates will remain in when
minimum contribution rates start rising."
It's important that planners keep up to date with current
opinion about the success of AE so far and how much there is still
left to do in terms of financial education of the savers.
Transitional Protection update
(RO4, AF3, JO5, FA2, RO8)
HMRC has recently updated its gov.uk page explaining how to make
an election for individual protection 2014 or 2016 (IP14 or IP16)
and fixed protection 2016 (FP16).
As well as being a useful summary of the rules, and which
elections you can have and still apply for FP16 or IP14/IP16, it
In the case of an election for IP14 where there is also an
election for FP16 it will be dormant and IP14 will be open. For all
other protections, IP14 will be dormant until the earlier
protection is lost or revoked. However, the page reminds readers it
is necessary to inform HMRC in writing if either of these events
IP16 will remain dormant if you have any other form of
transitional protection, unless or until you write to HMRC to
revoke the earlier election, or until you invalidate an earlier
FP16 will remain dormant if whilst there is a valid election in
place for IP14
The page goes on to explain the different ways in which
individuals can inform HMRC of a loss of protection. In many cases
(where the protection is set out on a paper certificate) this needs
to be done in writing, but in cases where there is only an
electronic reference number, it is also possible to inform HMRC by
It's well worthwhile bookmarking the relevant page on gov.uk as
it is regularly updated and saves time!