Personal Finance Society news update from 4 November 2015 - 17
November 2015 on taxation, retirement planning, and
Taxation and Trusts
Taxation and trusts
HMRC wins Rangers EBT appeal
(AF1, AF2, RO3, JO3)
Scotland's Inner Court of Session has ruled in
favour of HMRC in its long-running battle with the Murray group and
the former Glasgow Rangers football club, despite two earlier
HMRC forced the club's original owners, Murray Group Holdings,
into liquidation in 2012 after raising assessments to income tax
and National Insurance on the basis that payments totalling £47.65m
made to players and staff from the employee benefits trusts (EBTs)
between 2001 and 2010 constituted disguised remuneration.
The club argued that the payments were genuine discretionary
loans that could be recovered rather than actual earnings and were
not therefore subject to tax on the employees; and in 2012 the
First-tier Tax Tribunal found in the club's favour.
HMRC then took the case to the Upper Tax Tribunal where, in
2014, Rangers won again. Initially HMRC was refused leave to appeal
this decision, but later obtained leave to refer it toScotland's
Inner Court of Session.
The Court (in Advocate General for Scotland v
Murray Group Holdings) has now accepted HMRC's argument
that the cash payments made by the employer to the EBTs were in
consideration of earned services by the employees and found that
both earlier Tribunal decisions were wrong in law.
It considered the fact that some of the employees had been given
a secret 'side letter' separate from the employment contract
implied that the EBT formed part of their remuneration package, and
ultimately found that the scheme amounted to "a mere
redirection of employment income".
The decision (which may yet be appealed to the Supreme Court)
supports HMRC's long-standing position on the effectiveness of EBTs
and may well be used as a basis for serving an accelerated payment
notice on any company which has yet to settle.
EISs over the last 12 months: A summary
(RO2, AF4, CF2, FA7)
How has the enterprise investment scheme (EIS) market changed
over the last twelve months? We think that most of the changes have
been things that have been driven externally, rather than
internally. Reforms to theUKpensions system are probably the
biggest driver. Lower limits on the amounts that can be saved and
the threat to higher rate tax relief (still in place at the time of
writing though) mean that higher earners need to find alternative
tax-efficient investments, and this is encouraging many advisers
and investors to consider EISs. We also find that EISs are being
used in tax-efficient decumulation strategies that are becoming
more popular in the light of pension freedoms and the removal of
compulsory annuity purchases.
Legislative changes to secure EU State Aid approval have had a
bigger impact on the VCT scheme. EIS investments were already
focused on younger, high growth companies and company acquisitions
and MBOs were much less common. Nevertheless, the new rules will
have some impacts on the EIS. On the positive side, the transition
between SEIS and EIS funding has been smoothed out by the removal
of the requirement to spend 70% of SEIS money before raising funds
via the EIS. But the SEIS will remain directed at small, young,
high growth companies. This could be considered a negative from the
point of view of how much risk investors have to expose themselves
to, or a positive from the point of view of ensuring the SEIS
directs capital to where it is needed most.
The end to the renewables story is another externally imposed
change. Renewable Energy products only make up 5% of the investment
opportunities open today, compared to nearly 40% in 2014. The
double benefit of being able to invest tax-efficiently into firms
benefiting from renewables subsidies had been responsible for a
large number of new products and subsequent investment inflows.
Providers and investors both filled their boots. Now that the party
is over we will have to wait and see where that money is going to
go. Peak (or Reserve) Power investments were looking like
candidates that had similar features and could take the place of
renewable energy, but as the Finance Bill worked its way through
Parliament this asset class was also excluded. There have
been some changes though that have been driven internally by the
EIS industry itself. The ability of platforms to carry out
research, due diligence and investment are making life easier for
advisers and investors.
We've also noted a slight reduction in the number of open
capital preservation EIS investments compared to the historical
norm. This could be attributed to the reduction in renewables, but
the upshot is that there are more growth-focused EISs to invest in
than previously, at a time when the economy seems to be picking up.
The average target level of return in open investments (as stated
by the Investment Memorandum) has also ticked up compared to the
historical average. One would expect that this is linked to the
higher number of growth-focused EISs, but actually there are some
real anomalies in these figures: some investments with a stated
objective of capital preservation are targeting higher returns than
growth EISs. Perhaps the take-away is this: take the stated target
level of returns with a pinch of salt.
Finally, establishing a performance track record and charging
structure on a basis that allows meaningful comparisons between
products remains as elusive as ever. Our guess is that as long as
there are big drivers for increased EIS inflows (pension limits,
IHT planning, more sophisticated clients), the EIS industry won't
be overly concerned with these issues. We know, and we accept, that
there are good reasons why performance measurement is difficult and
charges are high - but we still feel that the industry could be
Overall, though, the industry continues to both raise and deploy
more money and the products remain uniquely suited to meet some of
the financial planning needs of wealthier clients, in areas where
research has shown that clients feel advisers really add value for
Attorney's expense claim 'excessive' and 'repugnant'
(AF1, AF2, RO3, JO3)
An attorney, who charged his elderly widowed mother 'out of
pocket expenses' amounting to more than £117,000 for visiting her
in her nursing home and acting as her attorney, has
(unsurprisingly!) had his appointment revoked by the Court of
Protection in Re SF,  EWCOP 68.
The Court heard that the attorney used his usual daily charging
rate from when he was a self-employed independent consultant prior
to his retirement to clock up the astronomical bill.
The Public Guardian launched an enquiry after the local
authority raised concerns about the attorney's conduct when an
ongoing dispute with the NHS over who should be responsible for the
care fees led to unpaid nursing bills of nearly £30,000. The
Public Guardian agreed with the local authority that it was in the
best interests of the donor for her fees to be paid pending the
outcome of the dispute and launched the enquiry which ultimately
led to an application for the Court to revoke the Enduring Power of
Attorney ('EPA') when the extent of the attorney's abuse of power
In issuing an order to revoke the power the judge commented that
"one would be hard pressed to find a more callous and calculating
attorney, who has so flagrantly abused his position of trust".
The judge added that "charging one's elderly mother a daily
rate of £400 for visiting and acting as her attorney is
Despite the fact that an attorney may be the sole beneficiary of
the donor's estate, an attorney's fiduciary duty means that
attorneys must never take advantage of their position or put
themselves in a position where their personal interests conflict
with their duties. Further, attorneys must not profit or derive any
personal benefit from their position, apart from receiving gifts
where the legislation allows it, whether or not it is at the
Unequal distribution of equity on remortgage infers intention
to vary beneficial ownership
(AF1, AF2, RO3, JO3)
Ordinarily, where a property is jointly owned and there is no
express declaration of trust setting out terms to the contrary, the
equity in the property is deemed to be owned in equal shares.
However, in Barnes v Phillips  EWCA Civ 1056, the Court of
Appeal has decided that unequal cash distributions made to the two
parties on remortgage of the property demonstrated a change to the
original intention to hold the property in equal shares even though
no express declaration to vary the beneficial ownership was ever
The case concerned a cohabiting couple - Mr Barnes and Ms
Phillips - who had been together since 1983 and had two children
together. In 1996 the couple purchased a property as joint tenants
for the sum of £135,000. Some years later, when the property had
increased in value to £350,000, the couple remortgaged and used
£66,069 of the funds raised to pay off business debts that had
accrued to Mr Barnes while the balance was used to redeem the
Shortly thereafter the parties' relationship broke down and it
fell to the Court to determine the parties' respective interests in
the property. On the basis that one party (Mr Barnes) had received
the sole benefit of 25% of the equity in the property when the
property was re-mortgaged, the Court of Appeal held that there was
to be inferred a common intention at that point to vary their
interests in the property. Taking into account the extent of each
party's contribution towards the children (including sums
outstanding due from Mr Barnes to the CSA), repairs to the property
and mortgage repayments since the breakdown of the relationship;
the Court of Appeal upheld the conclusion of the first instance
judge that a fair division was 85/15 in Ms Phillips' favour.
This decision represents a shift away from previous precedent
which suggested that where property is owned as joint tenants, a
common intention to depart from a 50/50 division could only be
established in the most unusual of circumstances.
New Gift Aid declaration forms
(AF1, AF2, RO3, JO3)
On 22 October HMRC released a set of new and
simplified model Gift Aid declaration forms aimed at combating the
Gift Aid "tax gap".
Charities can use the old forms until 5 April 2016, but
declarations signed from 6 April 2016 must be based on the new
model declarations, as failure to do so may result in claims
The new model Gift Aid forms seek to make it clear that
individuals will be personally liable for the amount claimed by the
charity in cases where they pay insufficient tax. They are also
intended generally to be simpler and easier to understand.
The new statement included in the declaration reads:
'I am a UK taxpayer and understand that if I pay less Income
Tax and/or Capital Gains Tax in the current tax year than the
amount of Gift Aid claimed on all my donations it is my
responsibility to pay any difference.'
It appears many donors do not appreciate the way that Gift Aid
operates and a considerable number of donors sign declarations
where they don't pay sufficient tax to cover the relief.
Usually HMRC will first repay the basic rate of tax claimed by
the charity and then check whether the relevant individual has paid
enough tax. This can obviously lead to payments of Gift Aid in
error - otherwise known as the Gift Aid "tax gap". A report by the
National Audit Office in November 2013 put the figure for payments
in error at around £55 million per year ("Gift Aid and reliefs on
donations" report by the Comptroller and Auditor General, 21
In theory, HMRC's principal route to recovering these sums is
directly via the individual's self-assessment returns. However,
HMRC will often first ask the charity to voluntarily repay the Gift
Aid received. Despite this, in many cases these sums must be
written off. Hopefully the new forms will serve to reduce the
number of such cases.
The UK "tax gap" continues to fall
(RO2, AF4, CF2, FA7)
HMRC has published its statistics on the 'tax gap' for 2013/14,
showing that the tax gap has fallen from 6.6% to 6.4%, with an
overall total gap at £34bn. This indicates that more than 93% of
the tax due in 2013/14 was collected.
The tax gap estimate of £34 billion is £11 billion lower than it
would have been if the percentage tax gap had remained at the
2005/06 level of 8.4%.
The Corporation Tax and Excise percentage gaps have seen the
largest reductions from 2005/06 to 2013/14, by just over half and
just over a third respectively, while small and medium-sized
enterprises account for the largest portion of the overall tax gap
(just under half), followed by large businesses (just over a
David Gauke, Financial Secretary to the Treasury, said:
"The UK has one of the lowest tax gaps in the world, and
this government is determined to continue fighting evasion and
avoidance wherever it occurs.
If the tax gap percentage had stayed at its 2009 to 2010
value of 7.3%, £14.5 billion less tax would have been
There is understandable anger when individuals or companies
are perceived not to be contributing their fair share, but we can
reassure the public that the proportion going unpaid is low and
this government is dedicated to bringing it down further."
In recent years we have seen the introduction of a number of
anti-avoidance measures and a steady decline in the figures
illustrate that HMRC's approach is delivering sustained
A US rate rise for Christmas?
(RO2, AF4, CF2, FA7)
As widely expected, the US Federal Reserve has recently decided
not to raise interest rates. Less expected was what else it
In mid-September, the Federal Reserve, (theUScentral bank), met
after its summer break and to the surprise of about half the
experts (and smug satisfaction of the other 50%) announced that it
would not be increasing short-term rates.
On 27/28 October, the Fed met again and, once more, decided to
hold interest rates. This time around, do nothing was what nearly
everyone expected, mainly on the basis that there was no press
conference scheduled for after the meeting. However, the Fed's
October pow-wow did produce the usual statement and it is this
which has set the interest rate rise hares running.
In the September post-meeting statement the Fed said "Recent
global economic and financial developments may restrain economic
activity somewhat and are likely to put further downward pressure
on inflation in the near term". This was widely viewed as a nod
towards the issues of slowing growth, market falls and currency
devaluation inChina. Several commentators said that in September
the Fed had adopted the role of being the world's central bank
rather than just theUSA's.
The October statement dropped this international reference. It
also switched stance from saying
- "In determining how long to maintain this target range
[0-0.25%], the Committee will assess progress - both realized and
expected - toward its objectives of maximum employment and 2
- "In determining whether it will be appropriate to raise the
target range at its next meeting, the Committee will…"[our
Wall Street viewed the revised wording as a much clearer signal
that December would see the Fed raise rates for the first time
since 2006. US share prices jumped over 1% in the final hours of
trading after the announcement, the dollar strengthened and US
Treasury bonds fell in value as investors took comfort in what
seemed to be a long-awaited end to uncertainty. The next Fed
meeting is on the 15/16 December and a press conference is
scheduled for afterwards.
The specific reference to raising rates at the next meeting
means that it will probably require something quite economically
seismic for Christmas to arrive without a hike is US interest
(RO2, AF4, CF2, FA7)
The new Bank of England Quarterly Bulletin has reduced growth
forecasts and pushed out interest rate rise expectations.
The November Bank of England Quarterly Inflation
Report (QIR) arrived as part of the second Super
Thursday package, incorporating the latest (no-change) decision on
interest rates and minutes of the Monetary Policy Committee (MPC)
Mark Carney, the Bank's Governor, had some
interesting insights to offer in his presentation of the latest
QIR, some of which echoed those of hisUScounterpart, Janet
- The outlook for global growth has weakened since the last QIR
in August. Many emerging market economies have slowed sharply in
2015, causing the MPC to reduce its medium-term growth forecasts.
While growth in advanced economies has continued and broadened, the
MPC still believed that the overall pace of UK-weighted global
growth would be slower than it thought in August.
- As the Federal Reserve hinted when it put rates on hold in
September, the major downside risk to growth is a more abrupt
- In theUK, the MPC says "private domestic demand remains
resilient, despite ongoing fiscal consolidation," which will cheer
Mr Osborne ahead of this month's Autumn Statement. After the recent
GDP deceleration, the Bank projects that economic growth will pick
up a little towards the middle of next year thanks to a tighter
labour market and stronger productivity supporting real income
growth and consumption.
- As he explained in Thursday's
"why-I-missed-the-inflation-target letter" to the Chancellor, Mr
Carney put 80% of the blame for sub-target inflation on energy,
food and other imported goods prices, with the balance down to
"subdued domestic cost growth". In other words, the fault rests in
areas beyond the Bank's control. It is a mirror image of the excuse
Mr Carney's predecessor used when inflation was
- The Bank sees CPI inflation "likely to remain below 1% until
the second half of next year, reflecting the continuing drag from
commodity and other imported goods prices." The famous inflation
'fan' chart in the QIR suggests the Bank's central case is for
inflation not to reach 2% until around the middle of 2017.
- The market's implied gently rising path for interest rates,
with a 1% base rate not reached until the end of 2017, seemed to
meet with Mr Carney's approval: "Were Bank Rate to follow that very
gradually rising path, the MPC's best collective judgement is that
inflation would slightly exceed the 2% target in two years and then
rise a little further above it, reflecting modest excess demand."
The August implied forecast was that a 1% base rate would arrive
around the middle of next year, an indication of how expectations
have moved over the past three months.
Back in July Mr Carney was talking about a rate rise coming
"into sharper focus around the end of this year", much as Ms Yellen
was hinting at the time. Now the UK focus has blurred and become
more distant, just as Ms Yellen said (on Wednesday 4 November) that
a Fed rate rise in December remains "a live possibility".
The cost of pensions tax relief
(RO4, AF3, CF4, JO5, FA2, RO8)
Although a response to the July Budget
consultation on savings incentives has been deferred until March,
the delay has not stopped the House of Commons Library issuing a
50-page paper on tax relief and pensions.
The paper is a helpful resume of the various
opinions that have been expressed about potential changes to tax
relief from the usual suspects, including all the main political
parties, the Institute for Fiscal Studies, the Pension Policy
Institute and Michael Johnson at the Centre for Policy Studies. The
paper also looks at the various cut backs to relief since the
arrival of the 'simplified' regime in 2006 with a lifetime
allowance of £1.5m and an annual allowance of £215,000.
The paper sets out how the Treasury arrives at
its "near £50bn" gross cost of pension reliefs in 2013/14 referred
to in the July consultation document:
Income tax relief on:
Contributions from employees
Contributions from employers
Contributions from self-employed
Investment income of pension funds
National Insurance relief
Against this can be set the tax received on
private pensions, which in 2013/14 amounted to £13.1bn, leading to
a net cost of £35.2bn. However, the Treasury argues that such an
offset could be misleading given that the tax "received by the
government from pensions in payment will in all likelihood come
from pensions which received tax relief many years ago." The
Treasury also reasonably states that "tax rates of individuals may
change over their lifetime and therefore the rate of relief they
may not correspond to the amount of tax they ultimately pay on
While the paper refers to recent data on the net
cost of tax relief, it does not reproduce HMRC's own chart which
shows the net cost declining steadily from £38.1bn in 2010/11 and
the cost of income tax relief also heading down from the same date,
as annual allowance cuts took effect.
One issue which is quietly coming to the fore in the context of
the cost of pension tax relief is the impact of auto-enrolment.
Earlier this month, the chairman of the Association of Consulting
Actuaries (ACA) warned a conference organised by the Westminster
Employment Forum that the combination of rising auto-enrolment
numbers and the implementation of the national living wage would
put "a real strain on Treasury finances". And that without
considering the ACA's suggestion that the auto-enrolment rate
should be increased from the 2018 8% ceiling to 16%, going up by 1%
every two years.
Pension Policy Institute looks beyond 2017
(RO4, AF3, CF4, JO5, FA2, RO8)
In April 2017 the ban on transfers into NEST and
the contribution limit (£4,700 in 2015/16) will be removed. 18
months' later auto-enrolment will reach its final 8% contribution
level. A review point for auto-enrolment is scheduled for 2017 -
five years on from its birth - and in preparation the TUC
commissioned the Pensions Policy Institute (PPI) to examine future
contribution levels and increase mechanisms, with their resultant
effects on benefits.
The PPI paper examines different scenarios applied to
four TUC-set individual profiles (low and median earnings) and does
not make any specific recommendations. Nevertheless, there are some
interesting points that emerge:
- The current 8% of earnings band system (£5,824 to £42,385 in
2015/16) equates to 6.3% for the median earner and 3.3% at the
£10,000 income trigger level. The PPI notes that "These levels are
lower than the contribution level required to achieve a good chance
of an adequate level of retirement income."
- The PPI considers four triggers to increase contributions:
- age, with contributions increasing as the worker becomes
- job tenure, with contributions increasing with length of
- pay increase, with part of any increase diverted to raise the
contribution level; and
- pay level, under which the PPI suggests the contribution rate
is linked to individual earnings and these are compared to National
Average Earnings in setting the contribution rate.
- The PPI notes that job churn will impact on 2, while low
earners will still see low contributions under 4.
- The current system of 8% contributions of banded earnings has a
tax relief cost of £3.3bn per year. The PPI puts the cost of tax
relief at £0.4bn for each additional 1% of contribution, implying a
10% contribution would cost £4.1bn in tax relief. Two thirds of the
current tax relief cost on automatic enrolment contributions is
spent upon basic rate taxpayers.
- The issue of low pay/low contribution prompted the PPI to
examine a flat rate annual bonus of £500 added to all
contributions, paid for by the Government at a cost to the
Exchequer of £4.5bn a year. The total cost of tax relief plus the
bonus approximately equates to the tax relief cost upon a
contribution level of 19% of band earnings, according to the PPI.
88% of the bonus cost an 80% of total cost (including tax relief)
would go to basic rate taxpayers. Not unreasonably, the PPI suggest
that a £500 incentive "may reduce opt-out rates increasing costs
What comes next after 8% may seem a long way off, but it is one
of the factors which must be weighing on the Treasury's mind as it
contemplates pension tax relief reform.
21,600 Lamborghinis in six months
(RO4, AF3, CF4, JO5, FA2, RO8)
According to data from HMRC, individuals over the age of 55
have cashed in £2.7 billion of their pensions since changes toUK
pension rules gave them full access to their funds. Based
upon Autocar and the price of the cheapest Lamborghini at £125,000
that equates to 21,600 cars in six months or 182 cars each day or
nearly five an hour.
According to HMRC, £1.5bn of pension payments were made in the
second quarter of 2015, and £1.2bn in the third.
HMRC did not say how much tax had been paid on the cashed-in
funds since April. Any withdrawal above 25% of a saver's fund will
be subject to their marginal rate of income tax.
According to Simon Tyler of Pinsent Masons: "The Treasury will
be pleased with the high take-up of the new freedoms and choice
measures introduced for pension savers. Whether this indicates a
success story for pension savers is another matter."
We can only guess whether all those who cashed out their
pensions acted wisely. Some may unwittingly have taken themselves
into a higher income tax bracket; which could have been avoided if
they had spread out their payments. Others may have blown all their
pension savings, whether on a Lamborghini or a dodgy investment
scam. Guidance and advice are there to help out, but the Work and
Pensions Committee has concluded that take up of guidance offered
by Pension Wise is lower than anticipated, and many savers believe
they cannot afford to take financial advice. We need more
information to work out whether pension savers are doing the right
The Work and Pensions Committee said earlier in October thatUK pension
providers and regulators must do more to encourage savers to access
financial guidance or advice at the point of retirement, or risk
"another financial mis-selling scandal".
The committee said that the success of the new pension rules
depended on "good quality, co-ordinated and accessible guidance and
advice". Reports of "lower than anticipated" take-up of Pension
Wise, the free-to-access government-backed guidance service, were a
cause for concern, it said.