PFS What's new bulletin - March II

TAXATION AND TRUSTS

Low income trusts and estates - a reminder of the changes

(AF1, JO2, RO3)

 

The March 2024 edition of HMRC’s Agent Update includes a reminder of the changes coming into force from 6 April 2024.

 

From 6 April 2024, settlements and estates with income of all types up to £500 will not pay income tax on the considered income as it arises. Where income exceeds £500, tax will be payable on the full amount. 

 

For trusts, the de minimis amount is reduced for some groups of trusts set up by the same settlor. 

 

For accumulation and maintenance trusts and discretionary trusts with income that exceeds £500 the default basic rate (20%) and dividend ordinary rate (8.75%) will no longer apply to the first £1,000 of trust rate income.  

 

Tax pool adjustment payments, due when a discretionary distribution is made, continue to be payable, irrespective of the level of trust income in a year.  

 

For estates, the £500 tax-free amount will apply to all types of income, after taking off ISA income which continues to be exempt after a person has died until closure or up to three years following the death. 

 

More detail is included in HMRC’s Trusts and Estates Newsletter. Further information regarding tax returns and related reporting forms will be available for the end of the 2024/25 tax year.

 

 

Income tax take rockets £2bn after self-assessment spike

(AF1, RO3)

 

The latest provisional receipts data for April 2023 to February 2024 have been published. These HMRC figures showed a more than £2bn increase in income tax receipts compared to the same month in the 2022/23 tax year, driven by a strong self-assessment period.

 

The hike in income tax more than made up for the slight drop in National Insurance contributions (NICs) in February after the Chancellor cut employee NICs by 2%. For the month of February, NICs dropped by just over £3m compared to February 2023

 

With two months of NICs cuts in the figures, and the earlier hikes in the class 1 primary threshold and class 2 threshold, it might be assumed that the total take of NICs would reduce. However, since April 2023 there has been nearly £1bn more taken in NICs compared to the same period of the 2022/23 tax year.

 

The figures offer a stark reminder that the tax burden is the highest it has been for decades. And this is a trend that is expected to continue. The latest Office for Budget Responsibility Budget 2024 Economic and Fiscal Outlook (EFO) projections suggest that, by 2025/26, there will be extra income tax revenue of £27.8bn a year, and that by 2028/29 there will be extra income tax revenue of £34.5bn a year.

 

Rachael Griffin, tax and financial planning expert at Quilter said in their Press Release that: “Despite the cut to national insurance, the government’s tax take has continued to soar. New HMRC figures reveal PAYE income tax and NIC1 [Class 1 NIC receipts] for April 2023 to February 2024 were £369.1 billion, which is £23.4 billion higher than the same period last year.”

 

“These figures include the first two months of the government’s 2% cut to national insurance from 12% to 10% for the main rate of Class 1 employee NICs, and this morning’s data suggests it has done little to slow the rate at which the government’s increase in tax take grows. Though the Chancellor confirmed at his spring budget that a further 2% cut will be implemented from 6 April, we can expect that the fiscal drag effect driven by frozen income tax thresholds will keep the government’s coffers well topped up.”

 

The total tax receipts reached £761.1bn from April 2023 to February 2024, which was £36.3bn higher than for the same period the year before, mostly increased by income tax, capital gains tax (CGT) and NICs. VAT was also £9bn higher than for the same period of 2023 and business taxes were up £8.2bn.

 

Additionally, inheritance tax (IHT) hit another record-breaking month, rising by more than £0.4bn on the year to just over £6.8bn, taking £564m in February 2024, £33m more than for February 2023. No changes were announced to IHT in the Chancellor’s Budget, despite rumours in the weeks beforehand, and these latest tax take figures illustrate why the Chancellor would have been keen to leave IHT well alone.

 

 

A High Income Child Benefit Charge case won by HMRC

(AF1, RO3)

 

The case of Mr Adrian Ward, in which he tried, unsuccessfully, to argue that he was not liable to pay the High Income Child Benefit Charge (HICBC) as his ex-wife was in receipt of the Child Benefit.

 

Child Benefit is paid, upon a claim, to the parent or carer of a child up to the age of 16, or 20 if in approved education or training.

 

The aim of the HICBC is to make any Child Benefit recipient repay some or all of their Child Benefit back (as tax) if they or their partner has an individual adjusted net income exceeding £50,000 per year. The repayment is at the rate of 1% of total benefit paid for each £100 of income above the threshold, up to £60,000, at which point the tax charge matches the total benefit.

 

In the recent case of Adrian Ward v The Commissioners for HMRC, the taxpayer, Mr Adrian Ward, became liable for the HICBC because he was the person who filled in the forms and made the Child Benefit claim, despite the money being paid directly to his ex-wife, the mother of his children.

 

Mr Ward first applied for Child Benefit in 2004. Some eight years later, he separated from his then wife and as part of their financial settlement, Mr Ward arranged for the Child Benefit payments to be made directly into her bank account. When, in the tax year 2018/19, Mr Ward's adjusted net income tipped over £60,000 he became liable to pay back the full amount of child benefit through the HICBC - £1,076.

 

Mr Ward did not believe himself to be liable to the charge, assuming that the person receiving the Child Benefit, his ex-wife, must have been liable to pay it back. He tried to argue that as his ex-wife had received the money, the fact that the claim had been made in his name should not make a difference.

 

He argued that "the difference was purely of form rather than substance".

 

Unfortunately, for Mr Ward, the case ultimately hinged on the interpretation of the phrase "entitled to an amount in respect of child benefit" in Subsection (a) of Condition A in s 681B ITEPA. The First-tier Tax Tribunal (FTT) concluded: "The statutory wording is clear, the tax charge arises as a result of the taxpayer being entitled to particular amounts. It does not require the taxpayer to actually receive those amounts."

 

The taxpayer's appeal was, therefore, dismissed.

 

From 6 April 2024, the Government is increasing the income threshold at which the HICBC applies from £50,000 to £60,000 and the top of the taper threshold will also increase from £60,000 to £80,000. The change will mean the higher earning partner will be charged 1% of their Child Benefit for every £200 of income which exceeds £60,000 – as opposed to the current 1% for every £100 of income which exceeds £50,000.

 

This measure is designed to address the current inequality that exists between families with two working parents and families with only one earner. Because the clawback threshold applies to the higher earner, from 6 April 2024 a family with two working parents can have adjusted net income (£59k + £59k = £118k (currently £98k)) and retain 100% of the Child Benefit, whereas a single working parent starts to see their Child Benefit withdrawn when their adjusted net income reaches £60k (currently £50k).

 

The Government estimates that approximately 180,000 more families may be able to claim Child Benefit, 170,000 will no longer be liable for the HICBC and for 135,000 others their HICBC will reduce. Overall, the Government estimates that increasing the HICBC threshold will have a positive impact for around 485,000 families will gain an average of £1,260 in Child Benefit in 2024/25 as a result of these changes.

 

In addition, by April 2026 the Government plans to administer the HICBC on a household income-based system rather than on an individual basis. A consultation will be launched in due course.

 

Comment

 

The HICBC has been heavily criticised for the way two-income families, where both earn less than £50,000, are treated compared to a single parent earning more than £50,000.

 

So, its good news that many individuals will now be entitled to claim this benefit/lose less of this benefit due to the increased thresholds. It may also be worth considering increased pension contributions to reduce adjusted net income and so restore the benefit. Generally, advisers should ensure that their clients are fully aware of these changes and any impact they may have on other parts of their financial plan.

 

Applying the HICBC on a household level seems like a good solution in principle. Some concerns have been raised that such a change may have unwanted implications for (often vulnerable) people who need to be able to keep their finances private from their partner, for their own protection.

 

However, as the HICBC is currently means tested on the higher earner, there is already an element of disclosure between couples. Individuals need to be aware of each other's income to determine whose is the higher earner, and whether a Child Benefit claim is worthwhile.

 

There will be practical implementation challenges and so a consultation period is sensible. However, it is also increasingly likely that, by 2026, we will have a new party, or parties, in power, possibly with different plans for the HICBC's future. We will, of course, keep you up to date with any further developments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

British Savings Bond

(AF4, FA7, LP2, RO2)

 

National Savings & Investments has announced the interest rates for its three-year British Savings Bonds, which were trailed by the Chancellor in the Budget:

 

Type of BSB	Rate
Guaranteed Growth Bond	4.15% gross/AER
Guaranteed Income Bond	4.07% gross/4.15% AER

 

The best three-year accumulated interest rate in the market according to Moneyfacts is 4.69%. For monthly interest, the rate drops to 4.53% (4.63% AER).

 

The nearest three year gilt, Treasury 3.75% 2027 (maturing 7/3/2027) has a gross redemption yield of 4.19% - more than the BSB offers.

 

For higher rate taxpayers, the 2.49% net return from the new bond is beaten by Treasury 1.25% 2027 (maturing 22/7/2027) with a net redemption yield of 3.47%.

 

Comment

 

The British Savings Bond is no pre-election bribe, unlike the 2015 Pensioners Bond offered by George Osborne.

 

 

A good quarter for equities, not bonds

(AF4, FA4, FA7, LP2, RO2)

 

The markets performance in the first three months of 2024, which showed equities outperforming bonds as expectations of rate cuts shrink.

 

	30/12/2023	29/03/2024	Change in Q1
FTSE 100	7733.24	7952.62	2.84%
FTSE 250	19689.63	19884.73	0.99%
FTSE 350 Higher Yield	3606.84	3661.21	1.51%
FTSE 350 Lower Yield	4521.44	4688.51	3.70%
FTSE All-Share	4232.01	4338.05	2.51%
S&P 500	4769.83	5245.35	9.97%
Euro Stoxx 50 (€)	4521.65	5083.42	12.42%
Nikkei 225	33390	40369.44	20.90%
Shanghai Composite	2974.93	3041.17	2.23%
MSCI Em Markets (£)	1502.535	1545.095	2.83%
UK Bank base rate	5.25%	5.25%
US Fed funds rate	5.25%-5.50%	5.25%-5.50%
ECB refinance rate	4.50%	4.50%
2-yr UK Gilt yield	4.00%	4.19%
10-yr UK Gilt yield	3.56%	3.98%
2-yr US T-bond yield	4.25%	4.63%
10-yr US T-bond yield	3.87%	4.21%
2-yr German Bund Yield	2.39%	2.82%
10-yr German Bund Yield	2.02%	2.29%
£/$	1.2748	1.2632	-0.91%
£/€	1.154	1.1697	1.36%
£/¥	179.7026	191.1854	6.39%

After a good 2023, markets entered 2024 optimistic that central banks would soon be cutting interest rates. The initial consensus for the US Federal Reserve was that it would make six or seven cuts before 2025 arrived. By the end of March, rate cut expectations had themselves been cut back – three cuts are now thought to be on the Fed’s agenda. That change in outlook pushed up Government bond yields in the USA, with the UK and Eurozone following suit. However, equity markets paid little heed and generally rose over the quarter, with the global equity market yardstick, the MSCI ACWI up 8.77% in sterling terms (and 7.78% in its US$ base currency).  

 

A few points are worth noting from the table and beyond:

 

• The standout market in terms of local performance was Japan, despite its central bank having raised interest rates in March (albeit only from -0.1% to 0.0%). Japan is becoming viewed as an alternative to China by some investors. However, its currency remains weak, reducing returns for unhedged investors.
• In round numbers the S&P 500 rose by 10% after adding almost 25% in 2023. It is now more a Magnificent Five than a Magnificent Seven (M7) driving up the market – Apple and Tesla both fell over the quarter. The equal-weighted S&P 500, which gives the M7 a mere 1.4% weight – about one twentieth of their market cap weight – rose by 7.4% over the quarter.
• The US, UK and Eurozone central banks all held interest rate during the quarter but gave strong hints that the first cut is not far away. While the bond markets were disappointed that the downward march had not begun (other than in Switzerland), the rise in bond yields was modest and they did not come near the highs seen in October, the peak of higher-for-longer.
• Brent crude ended the quarter up nearly 13%, which will eventually work through to the inflation numbers.
• Bitcoin posted a rise of 67% over the quarter, trouncing everything in the table (but not the darling of the M7, Nvidia, up 82.5%). There is some debate about whether bitcoin’s performance can be attributed to the arrival of a clutch of bitcoin ETFs in the USA from leading ETF providers.

 

Comment

 

The US yield curve remains downward sloping, a shape that traditionally has signaled a recession is on its way. However, it has been that shape since July 2022, a period which is now long enough to be a record. The performance of the S&P 500 suggests this once reliable indicator has been consigned to history.    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC Pension Scheme Newsletter 157 – March 2024

(AF8, FA2, JO5, RO4, AF7)

 

Pension scheme newsletter 157 covers the following:

 

• Statutory Instruments
• Applications to register new pension schemes
• Managing Pension Schemes service ― additional security
• Relief at Source
• Pension Scheme Return
• Pension Scheme Migration
• Transfers to Qualifying Recognised Overseas Pension Schemes (QROPS) ― changes to forms
• Event Report
• Lifetime Allowance (LTA) abolition - frequently asked questions

 

Areas of particular interest

 

Statutory Instruments

 

The newsletter notes three statutory instruments have been laid and are currently before Parliament:

 

The Finance Act 2004 (Registered Pension Schemes and Annual Allowance Charge) Order 2024

 

As previously announced, this instrument will allow for negative pension input amount in a legacy final salary public service pension scheme to be offset against positive pension input in a connected reformed career average scheme as part of the annual allowance calculation. This will have effect for pension input periods for tax year 2023/24 onwards.

 

The Authorised Surplus Payments Charge (Variation of Rate) Order 2024

 

This instrument will reduce the amount of tax due on an authorised surplus payment from 35% to 25% from 6 April 2024.

 

The Pensions (Abolition of Lifetime Allowance Charge etc) Regulations 2024

 

These regulations make further technical changes aiming to achieve the abolition of the LTA. 

 

Note that HMRC’s Pensions Taxation Manual has been updated to reflect the abolition of the LTA. However, the manual does not currently reflect the latest changes in the regulations above. Therefore, some of the information in the manual will not currently be correct.

 

Lifetime Allowance (LTA) abolition – frequently asked questions

 

The newsletter contains another 39 frequently asked questions and answers relating to the abolition of the LTA. Once again all will be essential reading for pension schemes and those who advise clients in this area.

 

Question 7 (and Question 1) Testing lump sums against dependant’s, nominees’ or successors’ allowances

 

One key change and point of clarification is outlined in question 7. This confirms that lump sums paid on death from dependant’s, nominees’ or successors’ drawdown funds will now be tested against these individual’s lump sump sum and death benefit allowances. HMRC states this is the case as the benefits will not have previously been tested. Any tax charges can be avoided by the initial beneficiary passing the funds to their successor via drawdown rather than a lump sum – this is reconfirmed in question 1. In addition, any funds crystallised prior to 6 April 2024 will not be retested.

 

 

DWP: State Pension underpayments: progress on cases reviewed to 29 February 2024

(AF8, FA2, JO5, RO4)

 

The Department for Work & Pensions (DWP) has published an update to its summary management information relating to the Legal Entitlements and Administrative Practice exercise to correct underpayments of the State Pension. Between 11 January 2021 and 29 February 2024, the checking process has identified 97,016 underpayments, amounting to a total of £571.6m owed.

 

• Almost 100,000 underpayments have been located, worth around £5,900 each on average.
• The Office for Budget Responsibility has previously estimated the correction exercise could eventually cost the DWP almost £3 billion (OBR April 2021 supplementary release).
• Administration errors over decades by the DWP which led to people being underpaid their state pension have previously been labelled a “shameful shambles” by MPs of the Public Accounts Committee: “Shameful shambles” of DWP’s long term underpayment of state pensioners with “little interest” in full consequences.

 

Background

The scandal of state pension underpayments relates to those who should have been entitled to uplifts under the pre-2016 system, but due to administrative errors did not receive them. These errors have been found to date back as far as 1985.

 

The main people likely to have been underpaid their state pension include:

• ‘Category BL’ pensioners: pensioners who are receiving a low basic state pension in their own right, but are entitled to increase it using their living spouse or civil partner’s contributions once their partner becomes entitled to state pension;
• ‘Widowed pensioners’: widows and widowers who are not entitled to a full basic state pension based on their own contributions can inherit a basic state pension from their spouse or civil partner up to the full basic state pension rate;
• ‘Category D’ pensioners: men and women previously receiving no or low amounts of basic state pension, who may be able to increase their state pension from age 80.

 

 

FCA asks Financial Advisers to review their processes in retirement income support

(AF8, FA2, JO5, RO4, AF7)

 

The FCA has published its Retirement income advice thematic review (TR24/1) and as a follow-up from that has written a “Dear CEO” letter. Whilst the FCA believes that advisers are mostly, providing a good service to retirement income clients, there are areas for improvement and are therefore asking firms to take the steps necessary to address the reviews findings in their firms.

 

Some of the key areas identified by the FCA were:

 

• the approach to determining income withdrawals was applied without taking account of individual circumstances, or based on methods and assumptions that were not justified or recorded.
• risk profiling was not evidenced, was inconsistent with objectives and customer knowledge and experience, or lacked consideration of capacity for loss.
• failure to get necessary information about customers to demonstrate advice suitability, including expenditure or other financial provision, or not exploring future objectives or circumstances, including income needs or lifestyle changes.
• periodic review of suitability, where relevant, was not always delivered to customers that had paid for ongoing advice inaccurate or insufficient records held as the control framework to enable customer outcomes to be assessed and track whether periodic review services were delivered.
• Whilst this review did not consider files against the requirements of the Consumer Duty since it was not in force at the time. However, we note that it is unlikely that most firms would comply with some requirements of the Duty without taking appropriate action to address our concerns.
• There were also concerns about the way in which cashflow modelling was undertaken and also how capacity for loss was assessed.

 

The FCA has produced a new tool: The Retirement Income Advice Assessment Tool (RIAAT) which works along the same lines as the DBAAT for DB transfer advice. There is also a set of instructions for using the RIAAT. Advisers should start using this tool immediately for all new “at retirement advice” delivered along with past cases at each annual review. There should be no doubt in anyone’s mind that the steps the FCA will take following on from this Thematic Review will not be dissimilar to those following of from the one into DB transfers. Many firms giving DB transfer advice will have gone on to give drawdown advice and they must surely be in the FCA’s cross hairs.

 

Sarah Pritchard, Executive Director of Markets and International at the FCA, said in their Press Release that: “Financial advisers have a vital role in helping consumers to make the right decisions now to support them long into the future. Decisions for consumers approaching retirement are complex, with the potential for risk. We want to support a sector that can help consumers access pension benefits, invest with confidence and have a sustainable income when they retire. Some firms are getting this right and making a real difference to their customers. However, others are not even getting the basics right and putting their customers’ futures at risk. We urge all firms to take on board our findings and review their own processes. Where they do not, we will act.”

 

 

TPR: Poor-value schemes are wound up as TPR takes tough action

(AF8, FA2, JO5, RO4 AF7)

 

The Pensions Regulator (TPR) has issued a Press Release setting out the early findings from its pilot initiative on value for member requirements. TPR launched the initiative to check if DC schemes are benefitting from rules that require trustees to assess whether they are delivering value for members, and in particular whether trustees of DC schemes with assets under management of less than £100m are complying with regulations that came into force in October 2021. TPR said that 16% of schemes from the pilot have opted to wind up their schemes having concluded that they do not offer good value. Following the initial pilot, TPR said it will scrutinise information from DC scheme returns with the potential for fines to be issued for non-compliance. TPR also confirmed that it has issued a fine of £12,500 against a corporate trustee.

 

TPR Interim Director for Frontline Regulation Mel Charles commented that: “Where trustees are found to be in breach of their duties on value, we’ll want to understand how they’ll improve. But, if they can’t or won’t, we expect them to transfer members to a better-value scheme and consider winding up their scheme. It is encouraging that our initiative has shown schemes are now actively choosing to wind up in the face of the new regulations.”