Personal Finance Society news update from 11 October to 24
October 2016 on taxation, retirement planning and investments.
Taxation and Trusts
TAXATION AND TRUSTS
A reasonable provision claim has been denied where
unemployment was a 'lifestyle choice'
(AF1, RO3, JO2)
A woman's reasonable provision claim on her father's estate has
been dismissed because, among other reasons, she was capable of
working and her lack of employment was a 'lifestyle choice'.
In the latest in a growing trend of reasonable provision cases,
the Central London County Court has dismissed a daughter's claim on
her father's estate, concluding that her lack of employment, being
a lifestyle choice, was sufficient to defeat her claim.
Like so many of the reasonable provision claims brought under
the Inheritance (Provision for Family and Dependants) Act 1975 (the
1975 Act), Danielle Ames' claim on her late father's estate was
borne out of the fact that he died leaving his entire estate to a
second wife, Elaine (who was not the claimant's mother).
Danielle, aged 41, and her two teenage children are dependent on
her long-term cohabitant as she has no paid work. Her claim for
reasonable provision under the 1975 Act was based on the assertion
that the family had become reliant on funds provided by Danielle's
father on an ad-hoc basis - by way of gift and payment for working
in his business - to bridge the deficit between their income and
However, taking account of all the factors set out in section 3
of the 1975 Act, including 'the financial resources and financial
needs which the applicant, and any beneficiary of the estate of the
deceased, has or is likely to have in the foreseeable future'
(which was particularly relevant because the size of the estate was
not felt to be large enough to support both Elaine and Danielle),
the judge rejected Danielle's claim saying that while Elaine was
ill and over the age of 60 with no substantial surplus of income
over expenditure, Danielle, as an adult fully capable of working,
had not discharged the burden of proving either her current and
future needs and resources or any continuing obligation or
responsibility on her father's part which survived his death.
He therefore rejected Danielle's claim and Elaine Ames will now
inherit the entire estate as set out in her husband's Will (Ames v
Jones, 2016 EW Misc B67 CC).
The decision in this case reiterates the fact that, in practice,
an adult child is unlikely to succeed in a reasonable provision
claim unless they can demonstrate that the balance comes down in
their favour after considering all the factors in section 3 of the
Danielle's unemployment was deemed to be a 'lifestyle choice' as
she had failed to show that she was unable to obtain work and this,
in itself, was considered sufficient to defeat her claim. This is,
however, in stark contrast to the 2013 Court of Appeal decision in
Ilott v Mitson in which the claimant's 'obviously constrained and
needy financial circumstances' weighed heavily in the outcome
(although there were other factors at play).
The Ilott case is not yet fully decided - the UK Supreme Court
is due to hear it on 12 December - and it is hoped that the
final outcome will provide some clarityof the extent to which the
Courts are able to interfere with testamentary freedom. Watch this
'Making Tax Digital' will cost businesses
(AF1, AF2, JO3)
As part of the Making Tax Digital initiative all businesses with
a turnover of more than £10,000 will be required to update tax
information on a quarterly basis online. While the Government
states that the move will save HMRC £400 million in administration
costs Graham Lamont, chief executive of a leading accountancy
practice based in Cumbria, says that it will also lead to increased
accountancy fees and software costs for the majority of the 2.6
million small businesses in the UK - and, with the average cost of
transition estimated at £1,250, the total cost to industry could be
in the region of £3.25bn.
Urging stakeholders to take action against the proposals, he
says "Having assessed these documents it has become clear that
these new policies will place a significant financial and
administrative burden on the majority of small businesses, many of
whom represent the backbone of the British economy".
The Making Tax Digital programme was published in broad outline
last year and in August 2016 HMRC published a series of
consultations on specific aspects of the proposed system. The
consultation process runs until 7 November. It is not easy at this
stage to determine the extent to which the initiative will benefit
the UK economy as a whole.
Industry bodies call for changes to simplify the making
of tax policy
(AF1, AF2, RO3, JO3)
Three industry bodies have joined together to urge the
Chancellor to overhaul the way tax policy is made in the UK. The
changes proposed include returning to a single annual fiscal event
to stop Autumn Statements (the next one is due on 23 November)
becoming second Budgets.
The Institute for Government (IFG), the Institute for Fiscal
Studies (IFS) and the Chartered Institute of Taxation (CIOT) have
written a joint letter urging the Chancellor, Philip Hammond, to
use his first Autumn Statement and Budget to lay the ground for a
raft of changes that they believe will improve and simplify the
making of tax policy in the UK.
In particular, the Chancellor is encouraged to:
- Consider returning to a single annual fiscal event, to stop
Autumn Statements morphing into second Budget announcements, which
the authors state leads to 'a proliferation of measures and very
long finance bills';
- Start the consultation process for tax changes at an earlier
stage to avoid unforeseen consequences being raised by outsiders
after the Government is already committed to a course of
- Set out, in the Autumn Statement, clear guiding principles and
priorities for the tax system as a whole;
- Extend the roadmap approach - used by the last Parliament in
relation to corporate tax in 2010 - more widely to areas where
taxpayers need to plan and make long-term decisions, such as
pensions and savings; and
- Prepare the ground for future policy changes through external
reviews to open up public debate about the tax system.
The open letter (the full text of which can be accessed from the
CIOT website here) reflects initial findings from a project being carried out by the IFG, IFS
& CIOT looking at how to improve Budgets and tax. A full
report will be published later in the year.
Chancellors have been required to deliver two economic updates a
year since 1976. Over the years, the Autumn Statement morphed into
the Summer Statement before Gordon Brown introduced the Pre-Budget
Report - a decision reversed by George Osborne. Philip Hammond is
due to deliver his first Autumn Statement on 23 November and it
will be interesting to see the extent, if any, to which he has had
regard to the suggestions made above. Most would agree that
this is an area which is begging for change.
Reasonable provision claims on the increase
(AF1, RO3, JO2)
The number of claims for reasonable provision under the
Inheritance (Provision for Family and Dependants) Act 1975 (the
Act) has increased eight-fold since 2005. Experts attribute the
rise to a range of factors including increasingly complex family
Latest figures show that the number of disputes between family
members taken to the High Court under the Act has reached a record
high. In 2005 just 15 such cases were heard compared to 116 in
A number of factors can be attributed to this boom:
- People are more likely now than ever to cohabit outside of
marriage and if no Will is made a cohabitant will receive nothing -
in such cases, a claim under the Act may be the only way
- Second or multiple marriages are also increasingly common but
this can lead to discord if children from one marriage appear to
receive more than those from another;
- A gradual rise i property prices may make a challenge seem more
- High profile cases, such as Illott v Mitson, have led to
enhanced knowledge amongst the general public of the possibility of
making claims under the Act; and
- Widely publicised victories may be incentivising other
disinherited adult children to contest their deceased parents'
Family or reasonable provision claims can be brought under the
Act in cases where a claimant, who falls into one of six specified
categories, asserts that the deceased's Will or intestacy failed to
make reasonable provision for the claimant. Until the intestacy
laws are updated to reflect modern family life, it is likely that
the upward trend in claims under the Act will continue.
Rooney could face a large bill for alleged tax
According to a press article, footballer Wayne Rooney could face
up to a £5 million charge as a result of a film investment scheme.
The article indicated that HMRC has told him that it believes he is
liable for the sum. However, it appears that he has not yet
received a formal tax demand.
The scheme in question involved Invicta 43, a film investment
partnership that generated tax relief for its investors to shelter
£12.5 million from tax.
According to the article Rooney was put in the scheme by the now
defunct Financial Management Group (FMG), described by the paper as
a wealth management group, at one time chaired by the
former Liverpool manager Kenny Dalglish.
It said Invicta is thought to have paid a commission, possibly
2% of Rooney's £12.5 million total investment, to FMG.
The article stated that 225 Invicta investors collectively
bought the rights to two Hollywood films, Fred
Claus and 10,000 BC.
The scheme is complex but, broadly, worked by allowing partners
in the scheme to claim tax relief on the cost of purchasing
the films. Partners were expected to pay the tax in later years as
income was generated from leasing the movies back to the studios -
thereby allowing for tax deferral. In light of this, HMRC argued
that Invicta structured the scheme in breach of its guidance and
questioned why investors were able to delay repaying most of the
tax until 2023.
Rooney's spokesman would not comment on this but said: "Wayne's
tax affairs have always been conducted in full compliance with the
Fellow footballer investors include former Manchester
United defender Wes Brown, and the Senegalese former player
Abdoulaye Faye, of Newcastle United and Stoke City.
The article stated that there is no suggestion that any named
investor has behaved illegally or will not be able to pay.
According to the article,HMRC contacted investors to inform them
of its objections to Invicta and following this it issued some of
them with partner payment notices (PPNs), asking for an
upfront tax payment. Under the PPN rules, recipients have 90
days to hand over the disputed tax and can get it back only if
the scheme is upheld in Court.
IHT windfall to follow rise in millionaire
(AF1, AF2, RO3, JO3)
According to recent research carried out by financial services
company NFU Mutual there could be a rise to almost 500,000
millionaires in the UK this year meaning the growth in wealth will
push more people into the inheritance tax net - especially given
that the nil rate band remains frozen at £325,000 until 2021.
By analysing HMRC's UK Personal Wealth Statistics, NFU Mutual
found the number of millionaires in the UK rose 27 per cent to
409,000 between 2008 and 2013.
The company has predicted the number of millionaires in the UK
could reach 495,000 this year and 585,000 by 2020, based on the
rate of previous wealth increases.
It is inevitable that as a result more and more people are
likely to want to consider inheritance tax planning providing
advisers with an opportunity to contact clients to ensure the
necessary action is taken. Clients ought to be reminded that making
use of exemptions is just the starting point and that there are
other tried and tested schemes, such as loan trusts and discounted
gift trusts, which can be used to provide an inheritance tax
reduction with continued access for the settlor (donor).
The Autumn Statement
(AF1, AF2, AF4, RO3, RO5, RO7, RO8, JO2, JO3, JO5)
The FT reported on 24 October that the Chancellor is considering
ditching the annual Autumn Statement as he seeks to rein back the
role of the Treasury and focus its tax and spending decisions on
the spring Budget.
Philip Hammond has told colleagues he wants to
move away from "gimmicks" and micromanagement, and is looking at
the possibility that the Autumn Statement would - in future years -
return to its original function of fiscal forecasting and not
represent what is, in effect, just another Budget rammed full of
But fear not ... this year's Autumn Statement will go ahead as
planned on November 23 and most expect it to be a pretty big
occasion. It is Mr Hammond's first chance to map out the
Government's new economic and fiscal policy following June's Brexit
Among issues relatively widely expected to be covered is tax
relief on pensions. There have been no official statements on this
but the cost of tax relief is high (over £30bn) and the Government
is avowedly "inclusive". Shifting to a flat rate of relief, that
gives more to basic rate taxpayers and less to higher rate
taxpayers, would be aligned with this "mantra" - albeit not saving
much, if anything, in the long term.
The FT published what, in effect, amounted to a useful "history
of the Autumn Statement".
It seems that the Treasury has been a slave to "two fiscal
events" since the 1975 Industry Act compelled the government to
publish at least two economic forecasts "with the aid of [an
economic model]" which is "maintained on a computer".
In the Callaghan and Thatcher governments, a Spring Budget that
focused on taxation was augmented by an Autumn Statement setting
out the government's spending plans for the next year.
Ken Clarke overturned that system in 1993 with a unified
tax-and-spending statement in an Autumn Budget, with a short Summer
economic forecast to update the figures.
But this single event lasted only until Gordon Brown
reintroduced the Spring Budget and added an Autumn or Winter
pre-Budget Report (PBR) in 1998.
Initially the PBR was billed as a short consultative document in
the Autumn without any tax measures, to improve the discussion of
tax proposals, but it soon morphed into a second annual Budget.
Although Mr Osborne returned to the name of the Autumn
Statement, the format was identical to Labour's second Budget and
it often contained more tax measures than in the Spring Budget.
Most commentators, it seems, support the return to one Budget to
deal with taxation with a possible Autumn Statement focused
entirely on forecasting.
Treasury to ease on non-dom crackdown
According to the Financial Times, the Treasury is considering
altering the way it taxes offshore trusts on fears its proposals
could force out wealthy foreigners.
Despite a number of changes being announced in the Budget last
year involving reforms to the tax treatment of non-domiciled
individuals, non-domiciled trusts initially escaped the
crackdown after the Treasury said it wanted to spare wealthy
families who had set up an offshore trust before the new rules were
'[They] would find it very punitive and administratively
burdensome to have to recreate sufficient history of the
transactions that may have taken place in the trust,' the Treasury
said at the time.
However, in August this year the Government toughened its
stance, unveiling proposals to remove the tax-exempt status of
offshore trusts if any benefits are paid out.
Criticising George Osborne's planned crackdown on "fundamental
unfairness" in the tax regime for residents whose permanent home is
outside Britain, the Institute of Chartered Accountants in England
and Wales warned that "the potential damage to the UK economy could
outweigh any anticipated exchequer gain".
In addition, a group of professional bodies - including the
Institute of Chartered Accountants, Chartered Institute of
Taxation, Law Society and Society of Trust and Estate Practitioners
- said it would be better to reform and simplify the existing
system of taxation of offshore structures. They said the Treasury's
plans would create particular difficulties when it came to taxing
"dry" structures (those that did not create income or gains), such
as those holding residential property and art.
Following such criticism, the Treasury is now looking at a
different approach - we could see the removal of taxation on all
future payout gains,with those gains only subject to capital gains
tax when the payment is made to a UK resident - only time will
Government borrowing figures: A half-term
(RO2, AF4, FA7, LP2)
The September borrowing figures were much worse than expected
and not what the Chancellor wants to see ahead of his Autumn
The Office for National Statistics has just released the Public
Sector Finance data for September 2016, ie half way through
the 2016/17 financial year and roughly three months either side of
the Brexit vote. The numbers have further reduced the wriggle room
available to the Chancellor in next month's Autumn Statement:
- Borrowing in the month came in at £10.6bn, £1.3bn more than in
2015/16 and about £2bn above market expectations.
- After half of 2016/17, borrowing has totalled £45.5bn, just
£2.3bn lower than for the same period last year.
- To be on track for the OBR's March Budget projection of £55.5bn
for 2016/17, the Government should have borrowed about £35bn,
£10.5bn less than the actual outcome.
- In theory, to hit the year-end target the Government will have
to borrow only a net £10bn over the next six months. As the OBR says, its "March forecast is very unlikely to
be met." In 2015/16 second half net borrowing was £28.3bn, despite
a bumper £12.3bn surplus in January 2016.
This coming January the OBR reckons dividend tax changes are due
to deliver a £2.5bn self-assessment boost. Even so, the eventual
outturn for this financial year looks likely to be around £70bn of
borrowing against £76.0bn for 2015/16.
The OBR notes that there was weakness in income tax and NIC
receipts which "could reflect uncertainty in the run-up to and
aftermath of the referendum." It also examines three possible
indicators of Brexit effects:
- SDLT receipts in the July-to-September post-referendum period
were up 0.4%, whereas the OBR forecast in March was for 19% growth
over the year as a whole. The OBR observed "falls in receipts from
top-end residential and commercial transactions, particularly in
- Debt interest payments were higher this September than last
year. However, the OBR says this does not yet fully reflect recent
increases in RPI inflation because of the lag in the way interest
is calculated on index-linked gilts. The OBR goes on to comment
that "To the extent that the drop in the value of the pound …
pushes up RPI inflation …, that will raise spending associated with
index-linked gilts" further over time. While ordinary gilt yields
have also risen, this will take much longer to show through in debt
interest payments because of the long-average maturity of the
- Corporation tax receipts were weak - down 0.2% year-on-year in
September - which the OBR believes "partly reflect [large
companies'] expectations of profits for the whole financial
The next set of ONS data arrives on 22 November, which is too
late for the OBR's Autumn Statement Economic and Financial Outlook.
Thus the OBR's Autumn Statement projections will be based on the
September 2016 data discussed above, together with whatever updated
information can be gleaned from "administrative sources".
Enhanced and primary protection without any PCLS
(AF3, RO4, RO8, JO5, FA2)
Individuals who have either enhanced protection and/or primary
protection, but no form of lump sum protection are currently being
penalised in respect of their PCLS entitlement. The issue has
arisen alongside the reduction in the lifetime allowance (LTA) from
£1.25m to £1m on 6 April 2016. Legislation (see below) was put in
place to protect these individuals when the LTA reduced from £1.5m
to £1.25m on 6 April 2014. However, as we will see below, this
wording didn't envisage a further reduction in the LTA. This means
this wording no longer works as intended and needs to be
altered. HMRC are aware of the issue and it is to be hoped
legislation will be included in the Finance Bill 2017, but there is
of course a risk that it may not be deemed important to be
The Government's intention was explained in the old Pension
Schemes Manual pages RPSM09104541 and RPSM09104541, but not in the
replacement Pensions Tax Manual. The wording stated that the
purpose of this clause was to ensure "Individuals with existing
A-day primary or enhanced protection but who do not have lump sum
protection will retain a right to a tax free lump sum of up to 25
per cent of £1.5 million when the standard allowance is reduced to
£1.25 million. This change ensures that individuals in this
position do not have a reduced tax free lump sum when the
lifetime allowance is reduced."
There was also a similar wording in Pension Schemes Newsletter
The problem lies in the Finance Act 2013 wording. Those
individuals with enhanced protection and/or primary protection but
with no lump sum protection were protected from having their
maximum PCLS cap potentially further eroded by the fall in the SLA
to £1.25m. This applied in respect of BCEs taking place on or after
6 April 2014. However, because of the further reduction in the SLA
on 6 April 2016, the legislation is no longer effective.
The maximum PCLS is ultimately limited by the upper cap of 'the
available portion of the lump sum allowance' (para 2(6) of
Finance Act 2004). From 6 April 2014, this is now for those with
enhanced protection and/or primary Protection and no form of lump
sum protection '£1.5m - AAC / 4', with 'AAC' being previous
crystallisations. This is through Paragraph 8 of Schedule 22 to
Finance Act 2013 (which introduces new clauses to Paragraph 2 of
Schedule 29 of Finance Act 2004 replacing "CSLA" with £1.5m in
Paragraph 2(6) of Schedule 29 to Finance Act 2014).
Unintended Consequences of the Current Legislation
Depending on fund size, the provision only works fully if the
individual crystallises all sufficient benefits, at the same time,
on or after 6 April 2014 to fully utilise their PCLS entitlement of
£375,000. If they phase, or have more than one uncrystallised
arrangement, on or after 6 April 2014, they will not be able to
take PCLS up to the full 25% of £1.5m i.e. the £375,000.
The issue is that for those protected individuals caught, the
new clauses index up all past crystallisations (within 'AAC')
by '£1.5m / PSLA' ('PSLA' being the SLA at the
previous crystallisation). Now this seems reasonable for any
previous BCEs that occurred before 6 April 2014, as the SLA at
that time would have been £1.5m or higher. But the
indexation applies to all previous BCEs to the current one,
even if those earlier BCEs occurs on or after 6 April 2014 when the
LTA will be £1.25m (PSLA in the indexation). This unfairly uplifts
its value within AAC by 20% (£1.5m / £1.25m) without any rise
in the SLA or their starting entitlement.
The following example will help to demonstrate the potential
Mavis has enhanced protection but no lump sum protection. She
has two separate pension schemes:
Arrangement A, and
During 2014/15 she fully crystallises Arrangement A when it was
valued at £1,250,000. She took her maximum PCLS entitlement of
She then crystallises Arrangement B during 2016/17. AAC needs to
be revalued by dividing £1.5m by the current Standard LTA of
£1,000,000. This means the PCLS taken in 2014/15 will be treated as
being not the £312,500 actually taken but as if it were £468,750
meaning that no further PCLS is available.
The member therefore has no benefit of the transitional
provision, being effectively capped at the £312,500 original
payment even though they the intention was to allow them to benefit
from PCLS of £375,000.
Maxis would have had a similar problem, even if she has
crystallised the two arrangements at the same time. As far as HMRC
is concerned, on crystallisation takes place before the other, and
the second has to undertake the AAC revaluation in respect of the
However, in circumstances where an individual has two or more
arrangements, and they are intending to crystallise at least £1.5m,
then if two arrangements are merged to allow the £1.5m to be
crystallised from within the same arrangement then the full
£375,000 could be paid out.
We understand that HMRC Pensions Policy are aware of the issue.
We also understand that this is also due to put on the agenda of an
upcoming meeting with HMRC in relation to pension matters.
Financial planners should take into account the current flaw in
the legislation in calculating PCLS for those with enhanced
or primary protection and appreciate that there may not be a quick
fix to this problem.
FCA publishes thematic review of annuity sales
(AF3, RO4, RO8, JO5, FA2)
The Financial Conduct Authority (FCA) has recently published the
findings of its thematic review of non-advised annuity sales
The FCA wanted to establish whether firms provided customers
with sufficient information about enhanced annuities. The FCA
looked at whether firms made customers aware of their potential
eligibility for enhanced annuities and whether they encouraged them
to shop around in order to potentially get a higher income from
The FCA reviewed non-advised sales of annuities made by pension
providers to their customers between May 2008 and April 2015. The
FCA looked at the information provided in respect of enhanced
(sometimes called impaired life) annuities.
The FCA review looked at more than 1,200 non-advised sales at
seven firms which between them account for approximately two-thirds
of the annuity market.
The FCA found no evidence of an industry-wide or systemic
failure to provide customers with sufficient information about
enhanced annuities through non-advised sales. The FCA found many of
the firms provided clear and comprehensive information to customers
with written communication tending to meet the standards
At a small number of firms, the FCA did have concerns when
significant communications took place orally, normally over the
phone, which was likely to have caused some customers to purchase a
standard annuity when they may have been eligible for an enhanced
These failings were of sufficient concern at a small number of
firms that they are now being asked by the FCA to review all
non-advised sales from July 2008 and, where appropriate, provide
redress; these firms are also being investigated by the FCA's
Enforcement Division to determine whether further action is
Megan Butler, director of supervision - investment, wholesale
and specialist at the FCA said: "Annuities play an important role
in providing an income for retirement. It is important that
consumers get the right information at the right time in order to
make the right decision for their retirement.
While we have found particularly poor behaviour at a small
number of firms, there is no evidence that firms have systemically
failed to provide customers with the information required by our
rules. Firms, particularly those outside our sample, should look at
the report we have published today and consider whether they can
As part of the paper published by the FCA it has highlighted a
number of areas of concern found as part of its review. These
- call handlers sometimes being heavily reliant on call scripts,
which meant that they were often unable to respond to the clients'
needs or clarify areas of misunderstanding;
- customers were not always made aware that they could obtain a
higher income by shopping around, even when enhanced annuities were
- clear messages about enhanced annuities were sometimes
undermined by subsequent comments which included call handlers
under-playing the level of increase which a consumer may obtain by
- where firms do not sell enhanced annuities, they did not always
inform customers of this or may not even mention enhanced annuities
at all when speaking to customers.
In the report, the FCA encourages all firms to consider how
their communications and sales process may be strengthened to
ensure consumers are getting all the information they require at
the time they require it. The FCA also encourages any customers who
have already taken out an annuity, but feel they may have been
given insufficient information about enhanced annuities, to raise
this directly with their annuity provider.
Approximately a third of the sector falls outside the FCA's
sample. In order to take a rigorous and comprehensive approach the
FCA will also be asking a small number of the largest firms not
involved in the original sample to carry out a review to ensure
they do not have any concerns about their non-advised annuity
sales. This review will be overseen by the FCA.
Planners should be aware of the review and keep up to date with
Secondary annuity market scrapped
(AF3, RO4, RO8, JO5, FA2)
The government has confirmed that it is scrapping its plans to
create a secondary annuity market because the consumer protections
required will undermine the market development.
The government has been consulting with the industry and
regulators over the recent months and have concluded that a
'vibrant and competitive market with multiple buyers and sellers of
annuities, could not be balanced with sufficient consumer
The estimated take up of the secondary annuity market reforms is
5% of annuity holders which reinforces the government's stance that
an annuity is usually the best means of providing a guaranteed
income stream in retirement.
Planners may need to contact their clients who were waiting for
the annuity market to be established and review their financial