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My PFS - Technical news - 26/09/16

Personal Finance Society news update from 13 September to 26 September 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

Investment planning

Pensions

TAXATION AND TRUSTS

Buy-to-let investors reassured on tax treatment of property disposals

(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 income.

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; and
  • 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 year.

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 investment.

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 fact valid.

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 themselves.

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 attorney.

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 2018/19.

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 earners

(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 article.

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 record.

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 bite.

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:

 

Salary £

Dividend £

Gross profit

1,000.00

1,000.00

Corporation tax @ 20%

N/A

(200.00)

Dividend payable

N/A

800.00

Employer' NIC @ 13.8%

(121.27)

N/A

Salary

878.73

N/A

Employee' NIC @ 12.0%

(105.45)

N/A

Pre-tax amount

773.28

800.00


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 platform.

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 loan. 

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" goal.

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 been published.'

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 stated otherwise.

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 2016.

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!

INVESTMENT PLANNING

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 0.4%.

The flat CPI annual rate was due to two main "upward contributions" being offset by four main "downward contributions", according to the ONS:

Upward

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 June.

Downward

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 data shows.

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 outcome.
  • 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:

  1. 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 uncertain.
  2. 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 extra deficit.
  3. 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.

PENSIONS

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 camps:

  • 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 trustees).
  • 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 person.

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 necessary.

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 of:

  • 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 arrangements?

(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 arrangement.

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 arrangements.

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 integrity.

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.

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