Personal Finance Society news update from 3 June 2015 - 16
June 2015 on taxation, retirement planning, and investments.
Taxation and Trusts
Taxation and trusts
Court revokes transfer into trust which resulted in
inheritance tax charges
(AF1, RO3, JO2, JO3)
In the recent case of Freedman v Freedman 2015 (EWHC 1457 Ch)
the England and Wales High Court agreed to set aside a father's
gift of a house into trust for his daughter after it triggered an
unexpected inheritance tax (IHT) charge of £156,000.
The brief facts of the case were as follows:
In 2001, the father lent his daughter £279,950 to buy a property
for her to live in with her child. In around 2004/2005, when her
relationship with her then partner ended, her father agreed to
forgo the loan and the charge was removed.
Then, in 2010, the daughter asked her father to lend her
£530,000 to buy a house for her and her child to live in while she
was selling her previous home. The loan was agreed by her father on
the condition that it would be repaid.
At the time, her father suggested that both properties should be
placed in trust to protect them from any claim from her previous
partner (the father of her child) or any future partners . However,
the father felt that giving money to his daughter directly was
unfair to his other children, so he decided to appoint his other
son and daughter as discretionary beneficiaries under the terms of
the trust. The daughter, without taking any advice of her own,
agreed to this and on this basis the trust was set up.
The father had, however, taken advice at the time, but the
adviser, his solicitor, failed to realise that the rules introduced
in Finance Act 2006 meant that the gift into trust would be a
chargeable lifetime transfer for IHT purposes. On this basis, the
transfer into trust triggered an immediate 20% entry charge and
could also be subject to future exit and periodic charges which
effectively meant that the daughter would not be able to repay the
loan to her father.
When this came to light, the family sought to have the
settlement revoked on the grounds of equitable mistake. HMRC
opposed this and sought payment of the tax charge.
At the hearing both the family and HMRC based their cases on the
Supreme Court's decision in Pitt v Holt and Futter v Futter (2013
In his judgment, Lord Walker observed that in Pitt v.
Holt "a court might think it right to refuse relief in some
cases of artificial tax avoidance, either because the claimants
must be taken to have accepted the risk that the scheme would prove
ineffective, or on the ground that discretionary relief should be
refused on grounds of public policy."
Therefore, an important factor in this case was whether or not
the trust had been set up to avoid IHT. The evidence given by the
family members showed that the trust had not been set up for
tax-planning purposes; instead it had been set up to protect the
properties from any claims that might be made on them by the
daughter's previous (or future) partner.
HMRC argued that the daughter's failure to check her father's
legal advice implied that there had been no mistake in creating the
trust. However, the High Court Judge disagreed on the basis that
the daughter had read the legal advice and based on that advice she
broadly understood that there would be no adverse tax consequences
for her in entering into the settlement. Accordingly, it seemed his
daughter made a distinct and serious mistake of the kind described
by Lord Walker in the cases of Pitt & Futter.
The settlement was not created for tax avoidance reasons but to
protect the interests of the beneficiaries. Taking the matter in
the round and based on the facts in this case, it was therefore
appropriate for the settlement to be set aside on the grounds of
This recent case comes as good news as it shows that the Court
is willing to set aside a trust in the event that the taxpayer can
show that they have made a genuine mistake and/or has been
incorrectly advised as to the tax and legal consequences of the
transaction. It is, however, important to note that this is not the
same as the situation where a taxpayer, who has entered into a tax
avoidance scheme, suffers disappointment because the scheme fails
to work as intended .
Class 4 National Insurance Contributions
(AF1, AF2, R03, JO3)
The Queen's Speech may have indicated that NIC
rates were frozen, but the Treasury has its doubts...
In the recent Queen's Speech it was stated that
"Legislation will be brought forward to ensure … there are no rises
in Income Tax rates, Value Added Tax or National Insurance for the
next 5 years". It has now emerged that this statement has the same
robustness as George Bush's memorable line, "Read my lips, no new
We have been musing how no change in NIC rates
would be squared with the announcement in the March Budget that
"…the government will abolish Class 2 NICs in the next Parliament
and will reform Class 4 to introduce a new contributory benefit
test" . It now transpires that when questioned by BBC Radio 4
Moneybox, the Treasury was unable to confirm that Class 4 fell
within the ambit of no increases to NICs legislation.
Class 2 is small beer in terms of what it brings
to the Exchequer - about £420m a year - but every little helps when
the target is a £12bn reduction in spending. To complicate matters
further, there is the arrival of the single tier pension in
2016/17. This will mean increased state pension benefits for the
self-employed, who are currently excluded from S2P.
So could Class 4 be due a hike from April 2016?
HMRC's ready reckoner suggests an extra 1% on the main rate
(currently 9%) would be worth £290m in 2016/17. Bringing Class 4
into line with the Class 1 Primary (employees) rate of 12% is an
idea that is floating around and would benefit the Treasury to the
tune of about £450m a year once Class 2 goes.
This will be an area to watch on 8 July. A NIC increase - and a
seeming break of a promise - are both best done early in a new
Platform trusts - Bonds are not the only investments
that can be used in trust planning
(AF1, AF4, R03, R02, JO2, CF2, FA7)
Most investments made on a platform or wrap that are not wrapped
in a pension or an ISA will be in the form of unwrapped collectives
e.g. in a GIA.
This isn't to say that offshore and UK investment bonds have no
place in modern financial planning, just that for a number of
reasons it seems that far fewer are being deployed these days and,
when they are, a fair proportion seem to be executed "off
Undoubtedly, the greater prevalence of platforms as a central
part of the financial planner's investment management proposition
has meant that the extra steps (and thus degree of difficulty) that
the use of a bond implies means that it will inevitably be used
less and even be less front of mind than it used to be when
designing the financial plan. There is also the fact that in a
number of cases it may not be possible to access the chosen
investments in the bond wrapper available - this challenge is more
likely to be encountered with the UK bond where "open architecture"
is rarely available.
Leaving aside the "rights and wrongs" of bond investment, the
fact is the majority of non-pensions / non-ISA investment is in
And, if that is the case, there must be a number of
circumstances where inheritance tax and estate planning will be on
the planning agenda of the investor. Fortunate then that the
majority of platforms and wraps have a reasonably well developed
range of trusts to work with their unwrapped investments. Yes, they
take a bit more work in relation to managing the income tax and
capital gains tax implications but this needn't be that onerous and
is something that most financial planners can become proficient
Alternatively, trust tax management could offer an opportunity
for collaboration with other professionals. Absolute, interest in
possession and discretionary gift trusts are all available together
with loan trusts. Discounted gift trusts provide a greater
challenge but even these aren't impossible provided you are willing
to modify/ restrict your portfolio choice.
Most of the platforms and wraps providing draft trusts will also
provide detailed completion and technical notes and some will
facilitate a referral to in- house or outsourced technical support.
This will be in addition to (usually) detailed guidance notes and
Defaulting to bonds in trust cases because they are "simpler to
manage in trust situations" doesn't really hold water as it stands
as a sole justification for selecting an investment bond . That's
not to say that bonds can never be suitable investments for trusts
- they may well be - it's just that the making of the adviser's
life simpler as a reason on its own is unlikely to engender strong
The European Parliament formally votes to adopt the
EU's Fourth Money Laundering Directive
The European Parliament has now formally voted to
adopt the Fourth Money Laundering Directive, the agreed texts of
which became available in January. This is the last stage of
the Directive's progress through EU institutions, having been
formally endorsed by the European Council in February, and member
states will have two years (up until July 2017) to transpose the
Directive into their national laws.
A major provision of the Directive is the compulsory
introduction of registers of beneficial ownership in all EU
countries. The registers will apply to both companies and trusts,
although different rules will apply to each.
'Competent authorities', such as national tax authorities, law
enforcement agencies and 'obliged entities' (such as banks
conducting due diligence checks), will be granted unrestricted
access to the registers.
In addition, those who can demonstrate a 'legitimate interest',
such as investigative journalists and other 'concerned citizens',
will also be granted conditional access. It should be noted that
member states will only be able to prevent citizens' access to the
registers 'on a case-by-case basis in exceptional
Information on trusts will be accessible only to the authorities
and obliged entities. These 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.
The text also clarifies the rules on "politically-exposed
persons", i.e. people at a higher than usual risk of corruption due
to the political positions they hold, such as heads of state,
members of government, supreme court judges and members of
parliament, as well as their family members.
Financial institutions that have high-risk business
relationships with such persons should consider putting additional
measures in place, e.g. to establish the source of wealth and
source of funds involved.
The new triple lock - The Queen's Speech confirmed a
new 'triple lock' to taxes
(AF1, AF2, JO3, R03)
In the Queen's Speech we were told that
"Legislation will be brought forward to ensure … there are no rises
in Income Tax rates, Value Added Tax or National Insurance for the
next 5 years". This law brings into being the Conservative's
manifesto commitment, which arrived at the very end of the
Parliament. A former Conservative Chancellor, Lord (Nigel) Lawson,
was highly critical of the move, saying that the legislation was
purely about politics. He noted that no Chancellor can know what
economic conditions the next five years will bring and therefore
should not tie their hands unnecessarily.
Ruling out rate increases in these three taxes
means putting constraints on the three largest sources of
government revenue, worth a total of nearly £400bn in 2015/16 -
that is 64% of all tax receipts. The fourth biggest tax raiser -
corporation tax - supplies only about 10% of what the top trio
yield and the rate could hardly be a candidate for future
increases, given that Mr Osborne has spent the last five years
bringing the mainstream figure down from 28% to 20%. So where might
Mr Osborne look if he has to raise taxes (alongside the inevitable
The first thing to note is that the pledge
appears to be only about rates. As
the Institute for Fiscal Studies (IFS) remarked in its review of
the manifestos, the rate lock "...does not rule out raising
revenue from these taxes in other ways". So we could see some
manipulation of tax and NIC bands and even, in theory, a reduction
in the starting point for additional rate tax. The Conservatives
did pledge a £50,000 higher rate threshold in their manifesto, but
this need not arrive until 2020/21. It is worth remembering too
that for anyone in a contracted out defined benefit pension scheme,
the promise of no increases to NICs will look rather odd from next
tax year, when contracting out and the related NIC rebates
There is plenty of scope to reduce income tax
reliefs - as has already been pencilled in with the manifesto's
promise of the next reduction in the annual allowance for those
with incomes above £150,000. We could also see an overhaul of the
relief given on interest, which some economists believe has created
dangerous distortions in company finances. The time to cut such
relief is when rates are low - ie now. Buy-to-let investors and
private equity firms could be in for a nasty surprise.
Capital gains tax was not within the triple lock
and this could be another source of extra income, eg by tightening
the rules for entrepreneurs' relief which has proved much more
costly than expected.
Stamp duty is also an area where more revenue
could be raised, perhaps with some justification for cooling the
housing market. There could also be a rise in Council Tax, possibly
through the creation of additional bands, thereby spiking any
future mansion tax plans from the other political parties.
It will be interesting to see whether we get any clues to future
rises on 8 July. The politics dictate that the medicine is
dispensed as early as possible after the election (and as far as
possible from the next trip to the polls).
Trustees seeking the Court's approval
(AF1, R03, JO2)
When trustees have difficulties reaching a decision they may
apply to Court for directions or for a blessing. Two recent cases
illustrate how this works: Cotton & Another v
Brudenell- Bruce & Others  EWCA Civ 1312,
in which Lord Cardigan was challenging a previous High Court
blessing, and Re Merchant Navy Ratings Pension Fund; Merchant
Navy Ratings Pension Trustees Ltd v Stena Line Ltd and
others  EWHC 448 (Ch),  where the High Court
approved a new deficit contribution regime for a large pension
Occasionally, trustees find themselves in a situation where they
have difficulty in making a decision. Often this will be the case
with trustees of discretionary trusts where they may have to weigh
up conflicting beneficial interests or may be facing external
pressures. There may be a fear of a challenge from a disgruntled
beneficiary which trustees will be keen to avoid. In such
circumstances both statute and common law principles allow a
trustee to invoke the Court's supervisory jurisdiction of a trust
by making administrative trust applications to seek the Court's
The four categories of such applications were recited in the
decision in Public Trustee vCooper  WTLR 901 as
- A construction application: is a particular action within the
- A blessing sought for a particularly significant or momentous
course of action: is a particular course of action a proper
exercise of the trustee's powers?
- Trustee asking the Court to decide upon a course of action:
these applications involve the Court taking a decision in place of
the trustees because the trustees are genuinely conflicted;
- Retrospective blessing sought for a particular action: were the
trustees right to pursue a course of action?
In the above-mentioned Cotton case Lord Cardigan was challenging
whether previous High Court judges were correct, in effect having
approved the trustees' intended sale of the main trust asset,
In summary, Lord Cardigan claimed that the expert advice which
the trustees received raised a number of questions which ought to
have prevented the Court from approving the intended sale; whereas
the trustees' view was that they should not be required to second
guess that advice.
The Court of Appeal agreed with the trustees. In the course of
the judgment, the trustees' obligations to provide information to
the Court was emphasised by Lord Justice Vos who said that "In
order to succeed in such an application, the trustees
must,… put the Court in possession of all relevant facts
so that it may be satisfied that the decision of the
trustees is proper and for the benefit of the
beneficiaries. Moreover, it must be demonstrated that the
exercise of their discretion is untainted by any
Where the trustees have concerns about confidentiality
obligations that they owe to beneficiaries, they may consider
it appropriate for any confidential material to be disclosed only
to the Court.
In MNRPF Trustees Ltd v Stena Line Ltd and others the
High Court was asked by the trustee of the MNRPF to approve a
proposed amendment to the rules governing the fund. The power to
amend the rules was vested solely in the trustee. The amendment
would introduce a new contribution regime under which all employers
which had adhered to the fund since its inception in 1978 could be
made liable to repair its current funding deficit estimated at
£333m. Under the current regime only some 40% of employers were
liable to restore the deficit.
Needless to say, the historic employers opposed the amendment.
They argued that the trustees' decision to introduce the new regime
was improper/irrational and failed to take account of relevant
information, and/or was outside the trustees' powers because of its
allegedly retrospective effect .
The trustees' application was also opposed by a representative
beneficiary of the MNRPF. He argued, among other things, that the
trustees had misdirected themselves in law by failing to recognise
"a fiduciary duty to act in the best interests of members", and
that the trustees had acted for an improper purpose for the benefit
of current employers (said to be the alleged purpose of eradicating
cross-subsidy among employers).
Nevertheless, the judge approved a new deficit contribution
regime and determined a number of technical points on the employer
debt legislation of the Pensions Act 1995, section 75 (PA
The judge also concluded that the trustees had applied the
correct legal test as to their duties, that they had acted within
the scope of their powers, and that they had made their decision
properly and in a 'meticulous manner'.
It is evident that the above-mentioned remedy is used more
frequently by professional trustees than by lay trustees. Such an
application will involve a great deal of effort and costs. All the
parties, as well as the Court, must be provided with the relevant
information, otherwise the trustees may not get an indemnity in
relation to the costs . In short, applications to the Court should
be seen as a last resort, but the remedy is there if needed.
Charities defeat nephew's death bed gift
(AF1, AF2, JO2, JO3, R03)
A group of animal charities have succeeded in their appeal
against the High Court decision in the case of King v Dubery and
others (2014). The facts of the case were as follows:
Mrs Fairbrother executed a will in 1998 leaving modest legacies
to various members of her family and naming several animal
charities as the residuary beneficiaries of her estate.
Some nine years later, Mrs Fairbrother had become frail and her
nephew, Kenneth King, moved in to care for her in return for free
board and lodging. King lived with Mrs Fairbrother until the time
of her death in 2011 and claimed that she had promised him the
house would be his after her death, even handing him the deeds to
However, no actual transfer of title took place and consequently
the charitable beneficiaries of the 1998 will expected to receive
their legacies following Mrs Fairbrother's death. King, who was
still living in the property, applied for a court declaration that
his aunt had already made him a gift of the house in anticipation
of her death - a donatio mortis causa - thereby overriding
the terms of the will.
The High Court, taking account of the physical evidence
presented by King (which included a signed note from Mrs
Fairbrother, witnessed by one friend, stating that in the event of
her death she left her house and her property to her nephew 'in the
hope that he will care for my animals until their death' as well as
an unwitnessed standard form will on the same terms) found in his
The charities accordingly appealed, submitting that Mrs
Fairbrother did not have capacity to make the donatio mortis
causa; or, if she did, then she had revoked it by her
subsequent (though ineffective) will making.
The Court of Appeal considered the criteria for a valid
donatio mortis causa and determined that these criteria
had not been met. In particular, Mrs Fairbrother, while elderly and
frail, was not suffering from any specific illness and so could not
have been contemplating her impending death when she had the most
crucial conversation with King. The appeal judges also took a
completely different view of the physical evidence of Mrs
Fairbrother's intentions as presented by King to the High Court,
ruling that she could not have made a gift of the house at the
alleged time, because she later attempted to make a will that
disposed of it.
The appeal court accordingly reversed the High Court decision,
nullifying the donatio mortis causa gift, although King
did later succeed in his claim for reasonable financial provision
under the 1975 Inheritance (Provision For Family And Dependants)
Actand will consequently receive £75,000 from his aunt's estate
(King v The Chiltern Dog Rescue & Anor, 2015 EWCA Civ 5).
A donatio mortis causa is a lifetime gift which is
conditional on death. There are three main requirements that must
be satisfied for a valid donatio mortis causa to be
- The gift must be in contemplation of death (for example, where
the testator is suffering from a serious illness or is about to
have a risky operation);
- The gift must be conditional on death (that is, it will not
take effect if the donor recovers from the contemplated cause of
- The donor must part with dominion of the property before death
(that is, the subject matter of the gift or the means of obtaining
it must be handed over to the done)
In the King case, the Court of Appeal questioned the usefulness
of the doctrine of donatio mortis causa in modern times stating
that it 'paves the way for all of the abuses which the Wills Act
and the Law of Property Act are intended to prevent'.
No tax relief on a flat not 'exclusively' rented for
(AF1, AF2, JO3, R03)
Tim Healy, the actor, who lives in Cheshire, decided to rent a
flat in London while he was working in the West End for nine months
during the 2005/06 tax year. He never intended to make London his
home and the weekly cost of renting the flat was comparable to that
of staying in a hotel or similar accommodation while giving him
additional space for practice and coaching. He duly claimed the
cost of the rental against his income for that year, as a necessary
part of his expenses.
However, HMRC disallowed the claim on the basis that the rental
represented a private living cost rather than a cost of doing
Healy first appealed to the First-tier Tax Tribunal (FTT) in
April 2012, where he won. The Tribunal agreed that he had not moved
house and so his expenses were wholly and exclusively work-related,
in accordance with the Income Tax (Trading and Other Income) Act
2005, section 34(1)(a). Accordingly, he was granted relief on all
his accommodation costs.
But, the case was sent back to the FTT for reconsideration on
appeal by HMRC with the instruction that the actor's intentions at
the time of entering into the tenancy agreement should be taken
The FTT has now given its second judgment in the case, taking
account of the fact that Healy admitted in his evidence that part
of his reason for renting a flat was that he wanted space for
guests. This, said the FTT, meant that the flat rental was not
wholly and exclusively incurred for the purpose of his business.
The fact that the flat cost no more than a hotel was irrelevant to
this duality of purpose. Nor could the non-business use of the flat
be apportioned. It thus ruled against him and disallowed the claim
(Healy v HMRC, 2015 UKFTT 233 TC).
Although the decision is this case was undoubtedly disappointing
for the taxpayer, it is highly significant for other self-employed
taxpayers who go away on business in that it leaves room for
similar claims to succeed in cases where such an admission is not
A deed of variation can be rectified to add a missing
(AF1, AF2, R03, JO2)
In the latest in a wave of rectification cases, the High Court
has held that a post-death variation that did not include a
statement that the parties were claiming retrospective tax
treatment for inheritance tax (IHT) purposes under section 142(1)
of the Inheritance Tax Act 1984 could be rectified so as to insert
the missing statement because, without it, it did not achieve what
the parties had intended.
Evidence presented to the Court in the case of Vaughan-Jones
and another v Vaughan-Jones and others  EWHC 1086 (Ch),
suggested that the solicitor, being under pressure to get the deed
completed before the expiry of the two-year window, had used an
out-of-date precedent that did not reflect the 2002 changes to the
rules on deeds of variation which made it a condition that a
statement claiming retrospective tax treatment must be included in
the deed in order to achieve the desired IHT result.
The Court refused, however, to rectify the deed to include the
corresponding statement required by section 62(7) of the Taxation
of Chargeable Gains Act 1992 for retrospective capital gains tax
treatment, as there was insufficient evidence to suggest that the
parties had even considered the capital gains tax position when the
instructions were given.
Prior to Finance Act 2002 an election, to be effective for IHT
purposes, did not need to be contained within the deed of variation
itself, but it had to be sent to the Capital Taxes Office within
six months of the deed being executed.
This case highlights the importance of keeping abreast of
changes in the law and ensuring that precedents are up to date so
that client objectives can be properly achieved; and reiterates
that a misunderstanding as to the tax consequences of executing a
particular document will not in itself justify an order for its
rectification - the specific intention of the parties is key.
Premium Bond investment limit rises
(R02, AF4, CF2, FA7)
The 2014 Budget gave a multi-stage fillip to National Savings
& Investments Premium Bonds, with an increase in the maximum
investment from £30,000 to £40,000 from 1 June 2014 and, two months
later, a doubling of the number of £1m monthly prizes (to two!)
together with a 0.05% increase in the payout rate.
1 June 2015 marked the final stage of the improvements, with the
maximum investment rising to £50,000. There have been no further
changes to the interest rate for the prize money, which remains at
the 1.35% set in August 2014, because there is no revision to the
pattern of prizes: the main reason for the extra 0.05% in 2014 was
to avoid reducing the number of prizes to finance the extra £1m
prize. Those tempted to add another £10,000 to their holding might
like to contemplate the pattern of June's prize distribution,
|Prize fund rate (pa)
|Odds of monthly win
||1 in 26,000
|Monthly Prize Distribution* by Number
|Number of £1m prizes
|Number of Bonds in Draw
* To four decimal places.
Premium Bonds, with a 1.35% prize rate, continue to look
attractive in a world where, according to Money facts, there are
only three providers (West Brom, with limited access, BM Savings
with a 1% one year bonus and Kent Reliance (branch only) ) offering
a higher gross rate on instant access accounts. However, with
average luck Premium Bonds willnotpay 1.35% because of the nature
of the prize distribution.
China MSCIS out
(R02, AF4, CF2, FA7)
MSCI has decided that now is not the time to include China A
Shares in its global equity indices.
Companies incorporated in China often have two
classes of share:
- A Shares are the main share category and are
denominated in renminbi, the Chinese currency. They are listed on
the Chinese stock exchanges, the main two of which (in Shanghai and
Shenzhen) were established in December 1990. Until 2002, A shares
could only be purchased by mainland China investors.
- H Shares are Hong Kong listed shares of Chinese
incorporated companies. These first appeared in 1993 and are listed
in Hong Kong dollars (which is pegged to the US dollar). H shares
were traditionally the main route for foreign investors to gain
access to Chinese companies.
China has gradually relaxed restrictions on the
ownership of A shares, first through the Qualified Foreign
Institutional Investor (QFII) scheme and then, in 2011, through the
Renminbi Qualified Foreign Institutional Investor (RQFII)
programme. The RQFII allowed the Hong Kong subsidiaries of Chinese
fund management and securities companies to recycle offshore
renminbi deposits into A shares. Last November a further relaxation
took place with the launch of the Shanghai-Hong Kong Stock Connect
program ("Stock Connect") which permits investors in Hong Kong to
trade in A shares listed in Shanghai (and vice versa), albeit again
subject to a quota.
The increasing international availability of A
shares has posed problems for global equity index providers, such
as FTSE Russell and MSCI: at what point did China's liberalisation
of dealings mean that A shares were sufficiently available to
include in market indices? FTSE Russell recently took a step
towards welcoming China into the index world by creating the FTSE
China A Inclusion Indexes, a suite of indexes which includes A
Shares. However, there was no change to the standard FTSE Global
Equity Index Series, so investors were effectively given a
The big China index decision occurred on
Tuesday, when MSCI announced the results of the 2015 Market
Classification Review. There had been much speculation that MSCI
would give the nod to including China A shares in its global
indices. In anticipation, the two primary Chinese A share indices
had risen over 150%, year on year. In the event, MSCI decided that
the quota allocation process, capital controls and questions over
beneficial ownership meant the answer was "no, not this year".
It is only a matter of time before A shares reach the major
global indices. FTSE Russell reckons "It is increasingly likely
that within two to three years China A shares will become eligible
for inclusion", while MSCI says "China A shares will remain on the
2016 review list for potential inclusion into Emerging Markets"
Tax trap for pension lump sums and how to reclaim
(R04, AF3, CF4, JO5, FA2, R08)
If you are 55 or over with a money purchase pension fund
(broadly, one that doesn't promise benefits linked to your service
with, and salary from, your employer) then you can't have missed
that from 6th April this year you can take your entire
fund in cash - regardless of its value.
Next question - should you?
Well that all depends. For many and for many reasons it may be
tempting....but maybe not advisable.
As with most big decisions there'll be many factors to take into
account - and one of them has to be tax.
There is more than one way to take benefits from your pension
fund but if you take all or a chunk of your pension fund in cash
(known as an "uncrystallised funds pension lump sum" - UFPLS) then
25% of it will be tax free . The remainder will be taxable as
income in the tax year you take it.
So if you take £60,000 from your fund as a UFPLS, £15,000 will
be tax free and £45,000 will be taxable . Basically, the taxable
part will be added to your other income in the tax year you take it
to determine how much tax is payable . As a reminder, the first
£10,600 of your income (in most cases) is tax-free as your personal
allowance is tax free . The next £31,785 is taxed at 20% and
taxable income between £31,785 and £150,000 is taxed at 40%
.Anything over £150,000 is taxed at 45%.
Given all of this, you can easily see how substantial pension
lump sums could be taxed at rates of 40% or even 45%.
Say if the £45,000 I refer to above sat on top of other taxable
income of around £50,000, £18,000 would be lost in tax leaving a
But the immediate position, when you receive the benefit, could
be worse. Why is this? Well because of the way the tax system
operates in relation to "one-off payments".
The payer, (the pension company), has to deduct tax on the
payment it makes under the PAYE system. But it won't know exactly
how much tax to deduct because the payment will be made during a
tax year and they won't know what your other income for the tax
year will be . So what happens?
Well, it all depends on your circumstances. Unless you have a
P45 from a previous source of income or employment that you
received in the tax year in which you received the payment from
your pension, then the pension company needs to operate the
"Emergency code" on a so called "Month 1" basis.
Your personal allowance (and the "Emergency" basis) for the
2015/16 year is £10,600 . This will be divided into 12 to determine
your "tax free" pay for the month - just over £833 . The crazy
thing is, unless you can present the pension company with a P45 for
the year of payment, in order to decide the rate of tax to apply to
the payment, they have to assume that the amount of the payment you
actually receive will be received for every month
of the tax year . The rate deducted could thus easily be at 40% or
even 45% . The amount of tax you should actually pay may well only
be at 20%.
Say you received £24,000 from your pension fund in April and
expected to have enough other income in the year to use up your tax
free personal allowance of £10,600. The £18,000 taxable part
(£6,000 would be tax free) of your lump sum should only bear tax at
basic rate - 20% . But on the presumption that you would receive
£216,000 in the year (12 x £18,000) the average rate of tax
deducted will be around 36.4% . So over £6,500 will be deducted
from the £18,000 instead of about £3,600 . So when added to your
tax free cash you receive about £17,400 . You should receive about
£20,400 . So you'll be owed £3,000 from HMRC . The numbers depend
on your circumstances but many will have tax "over deducted".
How can you claim it back? Well, it all depends on the
There are three main forms to use to get your over deducted tax
back without having to wait until the end of the tax year.
- If you took your entire pension fund and have no other income
in the year you need form P50Z.
- If you took your whole pension but have some other taxable
income eg from work or benefits, you need form
- If you have taken cash from your pension fund but not withdrawn
the entire amount and are not making any other
withdrawals in the same tax year then you need form
In situations 1 and 2 the pension provider is likely to provide
you with a form P45 to help with the claim.
The forms can be accessed on-line or at the Post Office and it
is estimated that refunds will take up to 30 days.
If your circumstances don't match one of 1-3 above then it seems
that you will have to wait until the end of the tax year to tidy up
your affairs and get any tax back through the self-assessment
system . HMRC will usually work out the over payment and repay it
Finally, it's worth noting that once you have taken more than
just tax free cash from a pension fund you need to tell the
providers of any other pension funds you are paying into as your
annual contribution maximum will then fall from £40,000 to
PO fines SSAS trustee for transfer delays
(R04, AF3, CF4, JO5, FA2, R08)
The trustee of a plumber's benefit plan, the TPR Executive
Pension Scheme, a SSAS, has been fined £250 for not responding to
pension transfer requests from a fellow trustee.
The Deputy Pensions Ombudsman, Jane Irvine, ordered that Robert
Evans sign the transfer release forms within 21 days and pay the
fine. Jane Irvine said: "In the circumstances, Mr Robert Evans has
breached his duty as trustee and caused inconvenience to the
Summary of the Case
Robert Evans had ignored written requests and telephone calls
from Peter Evans for about a year. The two men were the only
trustees of the scheme and both their signatures were required to
approve the transfer request.
Summary of the Ombudsman's determination and
The complaint should be upheld against Robert Evans because:
- the evidence supports the Applicant's contention that Robert
Evans failed to sign the relevant documentation; and
- the respondent has not provided any compelling reasons why,
despite having been contacted on a number of occasions, he did not
sign the transfer forms.
This demonstrates some of the potential problems with a SSAS
when there is breakdown in the relationship between the member
trustees. Even, as appears to be the case, when they are family
members . A SSAS offers many benefits over a SIPP small business
owners, but this case demonstrates the pitfalls of unanimous
investment decisions and the requirement for the signature of all
member trustees . Prior to A-Day a sponsoring employer could only
ever have one SSAS. However, since April 2006, that requirement has
fallen away. There is no reason why a company cannot have one SSAS
for each director which may or may not also include their wider
Advisers with clients with a SSAS should consider whether they
should discuss this case as a salutary lesson as what can go wrong
with a SSAS and if it may be appropriate to restructure the
existing pension arrangement into more than one scheme. The
occupational structure of a SSAS may still be appropriate for each
director, but for those nearing retirement, a SIPP may be more
appealing as they may be looking to sever their involvement in the
company on retirement.