Personal Finance Society news update from 13 September to 26
September 2016 on taxation, retirement planning and
Taxation and Trusts
TAXATION AND TRUSTS
Buy-to-let investors reassured on tax treatment of
(AF1, AF2, R03, JO3)
HMRC has reassured the National Landlords Association (NLA) that
an unannounced amendment to the Finance Bill 2016, which provides
that gains from certain property disposals will be charged to
income or corporation tax rather than capital gains tax, will not
adversely affect the majority of buy-to-let investors.
Ordinarily, investors expect any profit made on the disposal of
a buy-to-let property to be charged to capital gains tax (CGT)
rather than income tax. However, legislation included in clauses
75-78 of the Finance Bill 2016 at committee stage provides that
profits made from UK property sold on or after 5 July 2016 will be
taxed as trading income (and so subject to income or corporation
tax) if certain conditions apply.
Many commentators had previously voiced concerns that the
change, which was made at committee stage in July without
consultation, could increase the tax payable by thousands of
individuals and companies invested in UK properties. Implying that
investors in UK property will be subject to income tax rather than
capital gains tax on their disposal gains, if 'one of the main
purposes in acquiring the land' was to make a profit or if they
held the land as trading stock, the change would significantly
increase the tax payable on the disposal. Individuals, of course,
pay CGT at just 18% or 28% on gains from residential property and
at 20%, 40% or 45% (plus National Insurance of 9% or 2%) on trading
However, HMRC's Capital Taxes division have now confirmed in a
letter to the NLA that 'generally property investors that buy
properties to let out to generate property income, and some years
later sell the properties, will [continue to] be subject to capital
gains on their disposals rather than being charged to income on the
disposal'. The confirmation follows a statement from Treasury
minister, David Gauke, who was responsible for the amendment,
explaining that the measure is targeted at those 'who have a
property building trade' and should not impact the ordinary tax
profile for investors in UK property.
However, there are exceptional cases in which the gains will be
charged to income tax. These include:
- where the investor decides to undertake development prior to
sale. In this case the profit on the developed part, from the date
of the decision to develop for sale, will be trading income;
- where the investor sells the land under a contract with a
'slice of the action' clause allowing them to benefit from future
development of the property. In this case the 'slice of the action'
profit will be taxed under the new legislation.
It is understood that the function of the new clauses is to
ensure that profits generated by an individual from dealing in or
developing land will always be chargeable to UK income tax. The
confirmation that the legislation should not affect the majority of
buy-to-let investors will be especially welcome given the onslaught
of tax changes that the buy-to-let market has already seen this
HMRC, will shortly be issuing draft guidance to stakeholders. In
the meantime, the NLA says it will "continue to monitor the
situation closely and ensure the government's intention is made
clear at both Report Stage next week and in the guidance."
By-to-let property (despite the mass of largely detrimental tax
changes) remains an important asset class for many investors in the
UK. This may continue given the relatively low yield
achievable on other asset classes.
This latest clarification will come as a relief to those
investors who may otherwise have feared another blow from HMRC to
their hopes of receiving a decent (post-tax) return on their
Office of the Public Guardian publishes guidance on the
validity of powers of attorney
(AF1, RO3, JO2)
The Office of the Public Guardian (OPG) has published a series
of guidance documents explaining how to identify
whether or not an instrument - such as a power of attorney or
deputyship order, which purports to give another person authority
to act on behalf of a person lacking in mental capacity - is in
A Lasting Power of Attorney (LPA) must be registered with the
OPG before it can be used; while an Enduring Power of Attorney
(EPA) must be registered once the donor becomes mentally incapable.
EPAs were the legal instrument used before LPAs were introduced in
2007 to give someone authority to make property and financial
decisions for someone else. Unlike LPAs, EPAs can be used without
being registered if the 'donor' (the person who made the EPA) still
has mental capacity ie the ability to make decisions for
If, however, the donor has lost mental capacity, the EPA must be
registered by the OPG or the body it replaced, the Public
Guardianship Office, before the attorney is able to use it to act
upon the mentally incapacitated donor's behalf.
A deputyship order may be made by the Court of
Protection to appoint a person to act on behalf of someone who
lacks capacity where there is no power of attorney in place. To be
valid, a deputyship order must have an embossed Court of Protection
stamp on the front page showing the date the order was issued.
The sample documents draw the users' attention to the
appropriate OPG or Court of Protection stamp that will be present
if the instrument has been registered.
Last year, the House of Lords Select Committee recommended that
the government should take steps to address the poor levels of
understanding among professional groups after the Financial
Ombudsman reported a steady rise in complaints about the way
financial firms deal with customers who have set up a power of
The latest guidance reiterates the OPG's commitment to ensuring
that customers with powers of attorney in place receive the service
they should from the financial services sector.
The OPG has also recently published a number of other guidance
documents aimed at helping attorneys understand their role and the
limitations on their authority. All of the OPG guidance material
can be accessed via the OPG website here.
The availability of all this guidance should mean that fewer
disputes arise over the actions of attorneys, particularly those
attorneys who are laymen.
The importance of a power of attorney when it's needed cannot be
overstated. For planners advising an attorney on investment,
having a clear idea of their powers and knowing that the power is
valid in the first place will be an important prerequisite.
Lifetime ISA bonus to be paid monthly
(AF4, RO2, FA7, LP2)
On 15 September the Treasury published an updated design note which confirms that the
Lifetime ISA (LISA) bonus will be paid on a monthly basis from
Previously the bonus would have been paid at the end of the
tax year. This would have meant that someone who paid in
£4,000 on 6 April 2017 would have received a £1,000 bonus (i.e 25%)
around 5 April 2018. This would have meant that anyone who withdrew
funds mid-tax year could have faced a 25% loss on contributions
that had not benefited from the government bonus.
According to the note, the 25% bonus will still be limited to
£1,000 per year. However, it will be paid on the basis of
contributions rather than the size of the investment. This means
that if someone contributed £4,000 they will still receive a £1,000
bonus, even if the value of their investment decreases.
This change comes as good news for savers who choose to invest
in a LISA when it is launched because the earlier savers receive
their bonus, the earlier they can start earning investment growth
or interest on it.
Money payable from HMRC for the investor earlier rather than
later has to be a good thing.
Over time, the payment and investment of bonuses through the
year rather than at the end can (dependent on returns of course)
make a meaningful difference.
Dividend or salary - The position for lower
(AF1, AF2, AF4, RO2, RO3, FA7, LP2)
The arrival of tax year 2016/17 marked:
- The start of the new dividend tax regime, specifically
targeting shareholder directors who used high dividends in place of
salary/bonus payments; and
- A cut in the standard lifetime allowance and the introduction
of annual allowance tapering for high earners.
Both these changes have an impact on the salary v dividend v
pension contribution decision, which will be covered in this
Immediately below we look at some of the basic considerations in
making the selection:
- Generally, a salary of £8,060 will make sense before any other
payment is considered. The figure is chosen to match the primary
earnings threshold and means that there is no employee or employer
NIC involved, but the employee gains a NIC contribution
At this level, the salary will also fall fully within the
individual's personal allowance assuming there is not more than
£2,940 of other earned/pension income and that the personal
allowance is not subject to £100,000+ tapering. Salary is an
allowable expense so provides a corporation tax saving.
A further consideration is the employment allowance, which
effectively negates the first £3,000 of employer's NIC, but not
(for 2016/17 onwards) for companies where the director is the sole
employee. This is an obvious incentive for a director of a
one-person company (eg consultancy) to employ their spouse/civil
partner, typically paying up to their available personal allowance.
If the spouse/civil partner is already a taxpayer, then it will
usually not be worth paying them beyond £8,060, to avoid any NIC
cost. There will be tax on these earnings, but at the margin this
will generally be less than the alternative of a dividend payment
to the director.
If there is any unused employment allowance after covering
employer's NIC payments for other employees, then on an increase in
the director's salary NIC could be saved. The saving would be
made on earned income in excess of £8,112. However, the net
benefit beyond £8,060 is reduced because 12% employee NICs will
Once both employer and employee NICs bite, dividends become a
more attractive option, where payment is possible. The example
below looks at the marginal situation in respect of £1,000 above
the (employer's) secondary threshold of £8,112:
Corporation tax @ 20%
Employer' NIC @ 13.8%
Employee' NIC @ 12.0%
As the rate of tax on earnings in this band will never be less
than that on dividends, the dividend wins.
Financial planners' attention will have been directed to the
impact of the dividend tax charges on investment decision
making. The impact of these changes for business owners is
also important though - and business owners are, for many advisers,
an important client category.
Dividends are still more financially attractive than salary
following the changes - just a bit less so.
ISAs - A reminder on peer-to-peer lending - The
opportunity for increased tax free interest
(AF1, AF2, AF4, RO2, RO3, FA5, FA7, LP2)
While peer-to-peer (P2P) lending has been around since 2008, it
has only recently become popular. This is probably as a result of
the government making changes to benefit those lending through a
Innovative Finance ISAs were launched on 6 April 2016 which
allow lending platforms to wrap P2P loans in the investment. Whilst
at present not many providers offer this facility, this is likely
to change in future. Within these products, individuals can expect
to see annual interest of between 3% - 6%. As it is interest
received in an ISA, it will be tax free.
In addition, those who have already saved the maximum in their
ISA may still be able to obtain interest from P2P loans tax free.
This is because interest from P2P loans counts as savings income
which, for many people, will be covered by the personal savings
allowance. This is set at £1,000 for basic rate taxpayers and £500
for higher rate taxpayers.
Finally, it is important to note that since 6 April 2016 losses
(bad debts) for loans made through a P2P platform will
automatically reduce the amount of interest which will be taxable
on other loans through the same platform. This effectively means if
you make a loss of £200 and in the same tax year earn interest of
£300 on other loans with the same P2P platform, bad debt relief
reduces the taxable interest to £100.
This means that while P2P lending is becoming more popular,
clients should not only understand the tax breaks involved but also
the risks involved if a borrower defaults on repayment of the
Finance Bill 2016 has received Royal Assent
(AF1, AF2, AF3, AF4, RO2, RO3, RO4, RO8, FA2, FA7, JO5, LP2)
So, at last, the Finance Bill 2016 received Royal Assent on
15th September and became the Finance Act 2016.
There had been some conjecture that Royal Assent wouldn't be given
until sometime in October, not far ahead of the next Autumn
Statement which is set for 23rd November.
Given the tumultuous events of earlier this Summer - the
referendum outcome and the new government - there was some genuine
concern that some of the provisions of the Bill might be reviewed,
amended and possibly even dropped.
The key determinants of any such action were thought to be how
the economy had fared post referendum and, of course, the new
government's philosophy in relation to the resulting fiscal
measures. Well, the economy has performed pretty well post
referendum by all accounts. There are, of course, serious
question marks as to the future once we are any clearer on "what
sort of Brexit" we get, but for now things are not too bad.
And we know that the new chancellor, Phillip Hammond, wants to take
a more measured approach to tax policy. We also know that the
new government have dropped George Osborne's "zero deficit by 2020"
So what made it through to final legislation in the Finance
Act? Well, most of what was in the Bill actually.
We knew in August (updated consultation on the reform to the
taxation of non-domiciles) that the introduction of a new 15 years
of residence deemed domicile provision (for all taxes) and some
other related measures would all be deferred out of the draft 2016
Finance Bill to the 2017 Finance Bill. In the referred-to further
consultation it was stated 'Budget 2016 announced that the whole
package of reforms to the non-dom regime would be legislated in
Finance Bill 2017 because the government believes that the changes
will be better legislated as a single package. These include
the deeming provisions, for which draft legislation has previously
So that said, let's remind ourselves of the provisions of
relevance to financial planners thatdidmake it through to the
Finance Act 2016. It has to be said that there's some pretty
relevant stuff and it all takes effect from 6 April 2016 unless
The personal savings allowanceof £1,000 for basic rate taxpayers
and £500 for higher rate taxpayers - nil for additional rate
taxpayers - is introduced delivering 0% tax on the relevant amounts
of savings income.
The removal of deduction of tax at source for deposit
takers. This revolutionises the cash flow consequences of
interest payments and receipts.
The dividend allowanceis introduced delivering tax free
dividends of up to £5,000 pa for individuals, the abolition of
grossing up and tax credits, and rates of 7.5% (for basic rate
taxpayers), 32.5% (for higher rate taxpayers) and 38.1% (for
additional rate taxpayers) for dividends in a tax year that exceed
the dividend allowance. The rate for trustees is 38.1% but
with no dividend allowance. This has important consequences
for investors, SME owners and trustees.
The standard lifetime allowancefalls from £1.25m to £1m from
6th April 2016. CPI-based increases to this
allowance are introduced from April 2017. Schedule 4 of the Act
introduces Fixed Protection 2016 and Individual Protection
The corporation tax rate for 2020is scheduled to reduce to
17%. The (unitary) rate will fall to 19% in 2017. The
UK's low corporation tax rates will undoubtedly be presented as a
powerful contributing reason why business should stay in the UK
even post Brexit.
The capital gains tax rate reductionshave been enacted.
Gains made from 6April 2016 will be charged at 20% (down from 28%)
for higher and additional rate taxpayers and trustees and at 10%
(down from 18%) for basic rate taxpayers. Gains made on the
sale of residential property that is not the disposer's main
residence will remain assessable at the previous (unreduced) rates
i.e 18% and 28% as appropriate.
The downsizing provisionsin relation to the IHT residence nil
rate band are also enacted. These contribute to the already
labyrinthine provisions on this, far too complicated, relief.
As we mentioned at the outset of this article the new domicile
provisions will be incorporated into the Finance Bill 2017 -
something to look forward to then!
The August inflation numbers
(AF4, RO2, FA7, LP2)
Annual inflation on the CPI measure was 0.6% in August,
unchanged on July's figure. Market expectations had been that the
August inflation numbers would be 0.1% up on July's.
The CPI showed prices up 0.3% over the month, whereas between
July and August 2015 there was a 0.2% rise. Thus rounding is the
reason why the CPI did not make the 0.7% the market had expected.
The CPI/RPI gap narrowed by 0.1% over the month, with the RPI down
0.1% on an annual basis to 1.8%. Over the month, the RPI rose by
The flat CPI annual rate was due to two main
"upward contributions" being offset by four main "downward
contributions", according to the ONS:
Transport: Overall prices rose by 0.9% between July and August
this year, compared with a rise of 0.1% between the same two months
a year ago. The largest upward effect came from motor fuels, with
prices falling between July and August 2016, but by less than
between the same two months last year. There was also a large
upward contribution from air fares which rose between July and
August by more than they did last year with the upward effect
coming from European routes - possibly a currency effect.
Food and non-alcoholic beverages: The upward contribution came
from food for which prices, overall, rose by 0.6% between July and
August this year compared with a fall of 0.2% between the same two
months a year ago. The main upward effects came from a range of
bread and cereal products and meat products, reversing downward
effects seen in these categories between June and July. Annual
inflation in the sector remains negative, at -2.2%; it was -2.9% in
Restaurants and hotels: Overall prices fell by 0.4%, compared
with a negligible change a year ago. The main downward contribution
came from accommodation services, in particular overnight hotel
accommodation, for which prices fell by more than a year ago.
Clothing and footwear: Overall prices rose by 1.0% between July
and August this year compared with a rise of 1.5% between the same
two months a year ago. The downward effect came principally from
garments, particularly children's outerwear.
Alcoholic beverages and tobacco: Within this category, the
downward contribution came from alcoholic beverages, for which
prices rose overall by 0.3% between July and August 2016, compared
with a larger rise of 2.4% between the same two months last year.
The effect was primarily due to prices for wine, which rose by less
than they did a year ago, particularly for New World wine. The
expectation is that wine prices will soon start to rise as the
weakness of sterling since 23 June makes itself felt.
Furniture, household equipment and maintenance:The downward
contribution came from furniture and furnishings with prices rising
by less than a year ago across a range of furniture items.
Core CPI inflation (CPI excluding energy, food,
alcohol and tobacco) was flat at an annual 1.3%. Four out of twelve
index components are in negative annual territory, the same as last
month. Goods inflation remained unchanged at -1.4%, while services
inflation increased by 0.1% from July to +2.8%.
August 2015 CPI inflation was 0.0%, on its way down to -0.1% for
September and October. Looking down the line, rising inflation
appears almost certain to continue. The ONS producer prices statistics show total input prices (the
overall price of materials and fuels bought by UK manufacturers for
processing) rising by 7.6% over the year to August. The
corresponding figure for June was -0.5%. Producer output ('factory
gate') prices rose by 0.8% in the year to August, up 0.5% on July
and 1.0% from June.
Whatever way you look at it low inflation has an impact on
financial planning strategy. Importantly, low inflation (as
we have seen) tends to keep interest rates low.
August property valuations and fund moves
(AF4, RO2, FA7, LP2)
On 15 September, IPD's monthly property index for August was published. The index
showed a total return for the month of -0.1%, after a -2.4% figure
for July. The -0.1% August figure mirrors the UK monthly
index result from CBRE, the property consultants. CBRE put the
fall in capital values for the month at 0.5% against a 3.3% drop in
July. CBRE noted that the main drag on returns was the UK office
sector, with capital values declining 0.8%. However, the pace of
office price drops in Central London was much slower in August than
July - 0.9% against 4.1%.
The relative stability of the property market has prompted some
moves in the property fund sector. Columbia Threadneedle announced that it would be ending its property
fund trading suspension from 26 September. It is worth repeating
some of the comments of the manager in its press release:
"In the short period following the referendum we saw animal
spirits drive unprecedented levels of redemptions from daily dealt
open-ended property funds. Much of the earlier commentary now
appears slightly irrational and more informed reflection has
settled the market. Any effects of the Brexit vote on the overall
UK economy - negative or otherwise - will take many months if not
years to transpire and sometime after that for the property market.
In the current climate of low growth and low returns from other
asset classes, and with the UK property market yielding 5%, it is
our view that UK property offers a significant in-built risk
premium for long-term investors."
In response to the redemption demands, since July Columbia
Threadneedle "has completed, exchanged or agreed to sell 25
properties totalling £167m across all UK regions and property
types, with no forced sales" with aggregate prices achieved less
than 1% down from the last pre-referendum valuation.
A number of directly-invested property funds have seen prices
rise in the last month, as a quick look at Trustnet
It remains to be seen whether other funds that suspended dealing
post-Brexit will now resumed trading. Certainly the pressure will
now be on them to justify a continued freeze.
Government borrowing figures improve
(AF4, RO2, FA7, LP2)
It seemed to us that the June government borrowing figures
suggested that Philip Hammond, the new Chancellor, was going to
miss his predecessor's 2016/17 optimistic borrowing target. Move
forward two months and the August public finance figures look no better:
- Borrowing in the month came in £10.5bn, £0.9bn less than in
2015/16 and, according to the OBR, £0.3bnabove market expectations.
- After five months of 2016/17, borrowing has totalled £33.8bn,
£4.9bn lower than for the same period last year.
- To be on track for the OBR's March Budget projection, the
number should have been about £28.1bn, £5.7bn less than the actual
- The maths mean that, to hit target, borrowing in the next seven
months must be £16.1bn lower than 2015/16, ie £2.3bn a month less,
on average, against the roughly £1bn a month average achieved in
the first five months.
The OBR notes that there were a number of one-off factors
reducing receipts to date in 2016/17 compared with last year,
including £0.5bn capital receipts from the British Coal pension
scheme in April 2015. For 2016/17 the OBR continues to pin its
hopes on back-end loaded tax receipts, primarily because of the
dividend tax changes. The OBR estimates that taxpayers who brought
forward dividend income into 2015/16 to pre-empt the higher rates
of tax will boost receipts by £2.5bn billion in 2016/17, via larger
self-assessment (SA) income in January and February 2017.
The latest numbers include two full months of post-referendum
data, which the OBR says is still insufficient to assess the Brexit
impact on the public finances. However, having said that, the OBR
does see "three possible early indicators of its effects" which Mr
Hammond will have to consider on 23 November:
- Corporation TaxJuly CT receipts included quarterly instalment
payments by large firms, which partly reflect their profit
estimates for the whole financial year, most of which falls
post-referendum. July receipts were stronger than expected, but the
OBR reckons much of the strength "related to liabilities from
previous years", leaving any referendum-related effect
- SDLTAt £5.1bn, SDLT receipts were up 10% on a year earlier for
the April-to-August period, although the OBR had forecast in March
that 2016/17 as a whole would see 19% growth. The OBR blames the
shortfall partly on the pre-April 2016 beat-the-3% surge in
transactions. It also notes that referendum uncertainty "seems to
have reduced receipts growth, with falls in receipts from top-end
residential and commercial transactions, particularly in London".
The likely shortfall over the year will translate into £1bn of
- Public Sector Debt Interest PaymentsThese were higher this
August than in 2015, reflecting a technical year-on-year difference
in accrued interest on index-linked gilts. The OBR says that the
0.25% cut in Bank Rate will reduce spending by around £0.2 billion
over the third quarter. However, the drop in the value of the pound
since the referendum could push up RPI inflation via its effect on
import prices, thereby increasing interest costs on index-linked
gilts. While conventional and index-linked gilt yields have
declined further, the impact of this will be slow to appear because
of the long-average maturity of the outstanding stock.
As we have said before, the deteriorating borrowing numbers
relative to Mr Osborne's original target mean that much of Mr
Hammond's possible "fiscal reset" is happening by default.
Potential issues for clients with old EPPs
(AF3, RO4, JO5, FA2, RO8)
Advisers may, or not recall that immediately following on from
A-Day, a significant number of insurance companies refused to
fulfil the role of "scheme administrator". At that time, it did not
seem of any great concern. However, some commentators at the time
observed that it was down to insurance companies not wishing to
take on the reporting and other liabilities under the legislation
as they were deemed onerous. Generally, EPP schemes fell into three
- Those with insurance companies that were willing to fulfil the
role of scheme administrator
- Those that were prepared to undertake the work, but on behalf
of the scheme trustees. This meant the legal responsibility and
obligation rested with the trustees (which may be the sponsoring
employer as a corporate trustee, or one or more individual as named
- Those that were not willing to undertake the role, nor were
they willing to help the trustees with their responsibilities.
And again I hear you say "so what?"
Well, the issue comes down to the changes that were effective
from 1 September 2014 to introduce rules relating to HMRC's "fit
and proper" requirements for "scheme administrators". Whilst at the
time it was widely reported to be a tool aimed at combating pension
liberation fraud, it is clear that the rules apply to all
registered pension schemes.
Advisers need to be aware that, if they have clients who are
members of EPPs or any other scheme such as a SSAS, it is important
to check who is technically the scheme administrator.
If the scheme administrator is the corporate trustee or one or
more of the individual trustees, it is important that the "fit and
proper" requirements, as explained in the pensions tax manual page
PTM15300 are pointed out to them. The main requirement that will
prove difficult for a lay scheme administrator to satisfy is the
one that states a scheme administrator must have:
"a sufficient working knowledge of the pensions and pensions tax
legislation to be fully aware and capable of assuming the
significant duties and liabilities of the scheme administrator, or
does not employ an advisor with this knowledge;"
The scheme administrator may be the employer who set up the
scheme or one or more of the directors of a sponsoring employer.
Such persons normally do not have a detailed knowledge of pensions
and pensions tax legislation. However, HMRC needs to be satisfied
that the reporting and operational duties of the scheme
administrator will be carried out properly. In this situation HMRC
would expect that such a scheme administrator to employ an advisor
such as a pension practitioner/provider who does have such a
working knowledge and will advise them or act on their behalf.
Whilst the fit and proper person test only applies to the scheme
administrator, and not to any advisor, employing an advisor who has
been involved in pension liberation or tax avoidance may lead to
HMRC deciding the scheme administrator is not a fit and proper
The greater the level of involvement by the knowledgeable
adviser with the scheme and its administration, the greater the
weight given to the scheme administrator's relationship with that
adviser in considering whether the fit and proper person criteria
are satisfied. Each situation will be different but the person who
is the scheme administrator must be satisfied that they will be
able to properly fulfil the role of scheme administrator for that
particular scheme, and be able to demonstrate that if
Where does that leave existing schemes?
HMRC assumes that all persons appointed as scheme administrators
are fit and proper persons unless HMRC holds information, or
obtains information, which calls that assumption into question.
HMRC can also de-register a scheme if it appears that one of the
persons who make up the scheme administrator is not a fit and
proper person. This requirement applies to all scheme
administrators, whenever they were appointed.
Why is this important for Advisers?
Its important for advisers to consider if they have any clients
likely to be caught by these issues and advise them accordingly,
i.e. those with EPPs or SSASs. It is worth noting that on a number
of occasion we have spoken to life office admin teams and have been
advised that "yes, they are acting as scheme administrator" only to
subsequently find out that this was in fact not the case. If, as an
adviser you wish to enquire of a life office if they are fulfilling
the duties of scheme administrator in respect of a particular
pension scheme, or even across their EPPs as a whole, it might be
worth asking, in a letter, "if they are fulfilling the duties of
'scheme administrator' within the means of sections 270 to 274 of
Finance Act 2004." These sections set out the duties, obligation
and penalties that apply to an individual or corporate entity
deemed to be the scheme administrator.
It would generally be unadvisable, as a professional, to work
with a client who is fulfilling the responsibilities of "scheme
administrator" for an EPP/SSAS when you are aware they are not able
to satisfy the HMRC "fit and proper" requirements. If it transpires
that the scheme is de-registered, with the subsequent tax charges
- Unauthorised payments charge 40%
- Unauthorised payments surcharge 15%
- Scheme sanction charge 15%
- De-registration charge 40%
As this adds up to more than 100% of scheme assets, valued
immediately prior to the de-registration, individuals will be
looking for someone else to blame.
Is it possible to merge drawdown
(AF3, RO4, JO5, FA2, RO8)
We have been asked on a number of occasion whether it is
possible to merge two or more drawdown pension arrangements into a
single arrangement. Initially this question used to be asked
because of the issue in respect of different capped drawdown review
dates, however, we are now being asked in respect of individuals
who are in flexi-access drawdown which of course no longer have
triennial reviews of the maximum income.
Our position, is, and always has been that it is not possible to
merge two or more drawdown arrangements into a single
What is our reasoning for this?
There are number of reasons:
At the time of the change in the rule allowing individual to
align drawdown pension years, the RPSM was updated (September 2011)
to reflect these changes. We had e-mail correspondence with HMRC
confirming that it was not possible to merge drawdown
The old Registered Pensions Scheme Manual page RPSM09103560 made
it clear it was not possible to change the drawdown pension year
end date for a drawdown pension arrangement prior to an individual
attaining age 75.
The Pensions Tax Manual page PTM062510 explains that a "member
will have one drawdown pension fund for each pension arrangement".
Page PTM062750 confirms that on conversion of a "the member's
capped drawdown fund becomes a flexi-access drawdown fund". Taken
together, we read that as even after conversion to a flexi-access
drawdown, each drawdown fund still has to retain its own
The BCE 5A test on a member with a drawdown pension attaining
age 75, as explained in PTM088650 is a test undertaken at
arrangement level. Therefore, if arrangements are merged, there is
a significant risk that HMRC would believe that the only reason for
that action is to evade a potential LTA liability at age 75. The
following example will help demonstrate this point:
An individual has two drawdown arrangements which at the time of
the original BCE 1 were each valued at £400,000. He has no LTA
remaining. At age 75, if one arrangement is valued at £500,000 and
the other arrangement is valued at £300,000 although the combined
value does not exceed £800,000 there will still be a LTA excess
charge based upon the £100,000 excess in the arrangement valued at
£500,000. Clearly if these arrangements had been merged then this
excess would not be apparent.
We appreciate that both the legislation and the Pensions Tax
Manual is not crystal clear on this point. We have written to HMRC
seeking their clarification and, if arrangements are not to be
merged what, if any, are the consequences, of a merger having taken
place post April 2015. As far as the legislation is concerned, the
only sanction that appears to be open to HMRC would be the scheme
de-registration charge. This is clearly a "nuclear option" but if
one looks at the circumstances under which HMRC can deregister a
scheme (PTM033200) numbers 3 and 10 would seem to apply:
3 "any one of the persons making up the
scheme administrator is not a fit and proper person to be the
scheme administrator" as they do "not have sufficient working
knowledge of the pensions and pensions tax legislation to be fully
aware and capable of assuming the significant duties and
liabilities of the scheme administrator, or does not employ an
advisor with this knowledge" - PTM153000.
10 "any other information provided to HMRC was materially
inaccurate" would seem to apply as the BCE 5A tests undertaken
would have been incorrect and this was as a deliberate series of
steps taken by the scheme administrator.
Why is this important to advisers?
There would seem to be no issue with a scheme administrator
offering a merged view of a number of flexi-access drawdown
arrangements for a member. However, to satisfy their obligations
they would need to be able to track and record the values of each
arrangement separately to be in a position to undertake the BCE 5A
test at age 75.
The risk with an apparent merging of arrangements from a "front
end view perspective" whilst for HMRC reporting purposes they are
separate arrangements is that it would make it less likely to an
adviser (or client) if there is one of the underlying arrangements
with significant growth leading to a potential LTA issue, as it
would be hidden by a reducing value in another.
If this then resulted in an unexpected LTA liability at age 75,
which could have been avoided if the arrangements had been reported
separately, it could lead to a complaint.