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My PFS - Technical news - 02/08/16

Personal Finance Society news update from 20 July to 2 August 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

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HMRC clampdown could result in a significant pay cut for contractors

(AF1, AF2, JO2, JO3, RO3)

According to a recent press article, a vast number of contractors who hire themselves out through personal service contracts could see their average take-home pay reduce by some 13 per cent.

As part of the 2016 Budget announcements HMRC proposed that from April 2017 those working for public sector bodies will see income tax and National Insurance deducted at source by their clients prior to payment of their fees.

At issue are rules called IR35. Many contractors say the IR35 rules are too difficult to follow as neither they, nor their clients, understand them.

Under IR35 those who hire themselves out to a client should pay National Insurance and income tax. In contrast, contractors who earn fees instead via personal service companies pay corporation tax (indirectly) and income tax on dividends, which are generally lower. HMRC has said that 90 per cent of contractors selling services to clients through 'personal service' companies are avoiding National Insurance and income tax. 

At present it appears that HMRC plans to only apply this to public sector contracts undertaken by the self-employed. However, many accountants believe it could be extended to private sector companies such as banks and asset managers.

HMRC is currently consulting on reforming the rules - the consultation closes on 18 August.

HMRC recognises that the current rules are seen as complex and can create uncertainty. However, the intention is to create a simpler set of tests and provide online tools to help ascertain when the rules should apply. In any event, the outcome of the consultation should prove interesting.

Financial Conduct Authority setting up dedicated Brexit team

(AF1, AF4, RO2, RO3, JO2, FA7, CF2)

According to New Model Adviser, the Financial Conduct Authority (FCA) is setting up a new team, "The EU planning and coordination team," dedicated to Brexit.

The team will report into FCA chief executive, Andrew Bailey, and will be charged with managing the Regulator's response as negotiations to leave the EU progress.

The team is currently being put together and will be part of the FCA's markets policy and international division. The markets policy and international division was set up in an internal restructure in December 2014 to 'focus on increasing the FCA's focus and influence on the European stage.'

In a statement in the aftermath of the vote to leave the EU, the FCA said that much of the UK's financial regulation was derived from EU legislation, and that Brexit has 'significant implications' for the UK.

"Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect," the Regulator said.

"The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. We will work closely with the Government as it confirms the arrangements for the UK's future relationship with the EU."

Cohabitation is on the increase

(AF1, AF2, JO2, JO3, RO3)

Latest figures from the Office for National Statistics reveal that nearly 10 per cent of adults in England and Wales are unmarried and living with a partner.

In 2002 people who were cohabiting and who were never married represented 6.8% of the population; this had increased to 9.5% by 2015 showing that cohabitation has become more common as an alternative to marriage, especially at younger ages.

Other main points include:

  • There were 23.8 million people who were married in 2015. This was 50.6% of the population aged 16 and over.

The population aged 16 and over who were single increased from 29.6% in 2002 to 34.5% in 2015.

  • There were 28.4 million people living in a couple in 2015. This was 60.5% of the population aged 16 and over.
  • The population aged 16 and over who were cohabiting and who were never married or in a civil partnership increased from 6.8% in 2002 to 9.5% in 2015.

Pamela Cobb, Population Statistics Division, Office for National Statistics, said:

"Just over half of the population aged 16 and over were married in 2015. This figure has steadily declined since 2002, which could be associated with a rise in cohabiting amongst those who have never married or formed a civil partnership."

While cohabitation appears to be a trend of modern society clients ought to be reminded about the lack of legal and financial protection should they later separate and be advised to undertake suitable planning to ensure they are not left in a vulnerable position in the event that the relationship breaks down. In addition, let's not forget the inheritance tax savings that can be achieved when leaving assets to a spouse or civil partner.

Guidance issued on changes to tax relief for residential landlords

(AF1, RO3, JO2)

HMRC has issued guidance on the changes to tax relief for residential landlords which are to be phased in from April 2017. The changes will restrict relief for finance costs to the basic rate of income tax.

Despite calls on the new Chancellor, Phillip Hammond, to review the government's approach to taxing the buy-to-let sector; HMRC has released guidance that sets out how the new rules restricting tax relief for residential landlords will operate in practice.

Under the new rules - which were announced at Summer Budget 2015 - from April 2017 finance costs (such as interest on mortgages or loans taken out to furnish the property) will no longer be taken into account to work out taxable property profits. Instead, once the income tax on property profits and any other income sources has been assessed, a landlord's income tax liability will be reduced by a basic rate 'tax reduction'.

The rules apply to UK resident individuals that let out residential properties - whether in the UK or overseas - as well as to non-UK resident individuals who let out UK residential property. 'Individuals' for these purposes include individuals who let such properties in partnership as well as trustees or beneficiaries of trusts liable for income tax on residential property profits. The rules do not apply to lettings of commercial properties; or to companies or landlords of furnished holiday lettings.

The restriction will be phased in gradually from 6 April 2017 - at the rate of 25% a year - and will be fully in place from 6 April 2020.

To sit alongside the new guidance, HMRC has also published a series of case studies which demonstrate the potential impact of the changes on individual landlords in a range of specific scenarios.

All individual landlords of residential property will need to consider their position. Existing higher/additional rate taxpaying buy-to-let investors with mortgage interest will be most profoundly affected.  However, the changes could also move some basic rate taxpaying landlords into higher rate tax and/or affect entitlement to allowances, such as child benefit, personal allowances, annual allowances for pension plans and whether chargeable event gains suffer higher rate tax or not.

Finance Bill amendment corrects tax pool problem

(AF1, RO3, JO2)

In the Bulletin covering the period 6 July to 19 July, we reported that the Finance (No. 2) Bill 2016, as drafted, created an increased tax liability for trustees and beneficiaries of discretionary trusts due to the fact that only the difference between the dividend trust rate (38.1%) and the dividend ordinary rate (7.5%) would enter the trustees' tax pool.

Following representations by STEP, technical amendments have now been made to the Bill which ensure that all tax paid by the trustees - including tax paid on dividend income within the first £1,000 of a trust's income - will go into the tax pool.

These amendments ensure that beneficiaries receiving distributions from discretionary trusts get a credit for all of the tax paid by the trustees so that the income is not taxed any more harshly than it would have been had an additional rate taxpaying individual received the dividend directly.

The absence of financial need does not rule out a reasonable provision claim

(AF1, RO3, JO2)

The High Court has ruled that a claim for 'reasonable financial provision' out of the estate of the deceased can succeed even where the applicant is financially independent.

In the recent 'reasonable provision' case of Lewis v Warner 2016 EWHC 1787 Ch, the High Court was required to consider whether a Will could have failed to make reasonable provision for an applicant who is in no financial need. The facts of the case were as follows:

Stanley Warner had been living with Audrey Blackwell in her house in the village of Twyning Green in Gloucestershire since 1995, when he was 70 and she was 62. Mrs Blackwell died in May 2014 when Mr Warner was 91, leaving her entire estate to her daughter.

Over the years, Mr Warner's health had deteriorated and he had grown somewhat reliant on his neighbours (one of whom was a doctor) for friendship and medical support over the 20 years that he had been living in the house owned by Mrs Blackwell. Although Mr Warner was wealthy in his own right, he did not want to leave his home and so, when Mrs Blackwell's daughter, Lynn Lewis, sought to evict him in order to sell the house (that now belonged to her), he responded by making a claim for reasonable provision out of the deceased's estate under the Inheritance (Provision for Family and Dependants) Act 1975. His claim was founded only on the fact that he would be 'very unhappy and very stressed' if he had to move from the property.

In the first instance, the County Court Recorder admitted Mr Warner's claim on the grounds that the maintenance of 'a roof over the head of an applicant for 20 years clearly came within the definition of 'maintenance' and that its removal, by there being no provision for the continuance of the same, meant that the Will failed to make reasonable financial provision for Mr Warner. However, in view of Mr Warner's financial position, the solution put forward was for Mr Warner to buy the house from his former cohabitant's estate for £385,000 (the highest market value estimate).

Mrs Lewis and her husband appealed this decision on the grounds that the Recorder had both come to 'utterly wrong conclusions' and had 'exceeded his powers' by making an order that he had no authority to make.

However, the appeal was dismissed by the High Court on the basis that 'maintenance' need not necessarily mean a transfer of money from the estate to the claimant and, moreover, that the Recorder was entitled to decide that Mrs Blackwell's Will failed to make reasonable provision for Mr Warner, notwithstanding his financial means. Accordingly, Mr Warner was entitled to buy the house for £385,000.

HMRC criticised for being too optimistic about technological change

(AF1, AF2, JO2, JO3, RO3)

A recent report, put together by the National Audit Office (NAO), confirms that HMRC has not tried to estimate the costs for individual taxpayers and businesses of its planned transition to online quarterly financial reporting.

The proposals appeared in a discussion document 'Making Tax Digital', which envisaged that every individual and small business will, this year, be given access to their own 'digital tax account'. This would mean that, from April 2018, businesses whose main source of income is from self-employment, or property income, would need to update HMRC quarterly and by 2020 the system would be phased in for all businesses.

However, the NAO's review of HMRC's 2015/2016 annual accounts warns that HMRC's planning has suffered from 'optimism bias in key assumptions', resulting in a collapse of its service to personal taxpayers in 2014/2015 and the first half of 2015/2016.

It appears that HMRC has not taken account of software updates that individuals and businesses will require to adapt to this change. However, HMRC has said that it plans to develop a fuller picture of what it will cost taxpayers and businesses to use the new systems over the next year and will also continue to set out clear guidelines of what it expects and by when.

While it is often the case that  change of this nature will experience initial 'teething' problems, for many moving to an online digital account will be desirable. However, to be implemented successfully it will be paramount for HMRC, individual taxpayers and businesses to work together to supply all the relevant information in a timely manner to enable a smooth transition.


The June inflation numbers

(AF4, RO2, FA7, CF2)

Annual inflation on the CPI measure was 0.5% in June, 0.2% up on May's figure. Market expectations had been that the June inflation numbers would be up 0.1% from May.

The CPI showed prices up 0.2% over the month, whereas between May and June 2015 there was virtually no change. The CPI/RPI gap was unchanged over the month, with the RPI also up 0.2% on an annual basis to 1.6%. Over the month, the RPI rose by 0.4%.

The uplift in the CPI annual rate was due to three main "upward contributions", offset by a two main "downward contributions", according to the ONS:


Transport: Overall prices rose by 1.1% between May and June this year compared with a rise of 0.2% between the same two months a year ago. The largest upward effect came from air fares, which rose by more than a year ago, with the main contribution coming from European routes. Some commentators have blamed the flock of UK fans to the Euro championships for the inflation increase.

A 10.9% rise in fares this year was the largest May to June movement on record although air fares are often highly variable. Diesel and petrol prices also rose by more than a year ago.

Recreation and culture: Overall prices rose by 0.6% this year compared with a fall of 0.1% a year ago. The upward contribution came principally from games, toys and hobbies (particularly computer games) with prices rising between May and June 2016 compared with a fall last year. Other smaller upward effects came from cultural services and books.

Communication: Overall prices rose by 0.6% between May and June this year compared with a fall of 0.2% between the same two months a year ago. The effect came principally from mobile phone charges which fell this year but by less than a year ago.


Furniture, household equipment and maintenance: Prices overall fell by 0.3% between May and June this year but rose by 0.3% between the same two months a year ago. The downward contribution came almost entirely from furniture and furnishings, particularly kitchen units.

Restaurants and hotels: Overall prices rose by 0.1% this year compared with a larger rise of 0.4% a year ago. The downward effect came from accommodation services, where prices for overnight hotel accommodation fell this year but rose a year ago.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) rose by 0.2% to an annual 1.4%. Four out of twelve index components were in negative annual territory, one more than last month. Goods inflation continues to be solidly negative (up 0.2% at -1.6%), while services inflation increased by 0.2% from May to +2.8%.

We remarked last month that goodsdeflationis largely imported while servicesinflationis domestically generated.  With the pound down about 10% in the wake of the Brexit vote, that deflationary element is now at risk. However, it will take some while to work through, not only because of hedging already in place, but also because of the difficulties retailers will face in terms of raising prices. In any case it is clear that the Bank of England will 'look through' any currency-induced inflation, just as it did 2010/12.

Brexit = Dividend growth?

(AF4, RO2, FA7, CF2)

Earlier in the year we commented that the outlook for dividends in 2016 was not particularly bright. Capita's latest quarterly dividend monitor suggests that the picture has now changed, largely due to sterling's demise since the Brexit vote. According to Capita:

  • The second quarter of 2016 saw UK dividends rise to a quarterly record of £28.8bn, up 7.6%.
  • Special dividends quadrupled, with a record 22 companies making payments.
  • The Q2 divided growth is not all it seems. Capita reckons that underlying dividends (ie excluding the one-off specials) fell by 2.7% year on year. 
  • All industries, except basic materials, saw dividend payouts increase. However, dividends from miners halved year on year as the fall in commodity prices worked through to the bottom line.
  • Financial companies were the largest payers in Q2, helped by a doubling of Lloyds' dividend and big increases by life insurers. Banks are now under orders not to increase their dividends, following the Bank of England's relaxation of capital rules in response to Brexit.
  • Payouts from the Top 100 companies rose 9.9% year on year, helped by special dividends. The more UK-focused Mid 250 registered a 5.5% decline, mainly due to changes in constituents.
  • "The Brexit vote has completely changed the picture for dividends this year and beyond." Underlying dividends are now forecast to grow by 0.5% in 2016 and total payouts by 3.8%. In Q1, Capita's corresponding figures werefallsof 1.7% and 1.5%. The pound's demise has added £4.5bn to the amount of dividend payments. Five of Q2's top dividend payers set their payments in dollars.

The demise of sterling benefits not only dividends from UK-listed companies with overseas exposure. It will also mean higher sterling-translated dividends from non-UK holdings. If nothing else, Brexit has served as a reminder of the virtues of diversification outside the UK.

Interest rates

(AF4, RO2, FA7, CF2)

The FCA has published its second "Sunlight Remedy" reporting looking at cash savings rates.

The financial services industry is notorious for rewarding loyal customers with higher costs or lower returns than new customers. From household insurance through mortgages to cash ISAs, it is all too often the case that staying put is the expensive option.

The FCA is attacking this loyalty deficit in the savings market by publishing data showing the lowest interest rates offered by 32 providers of easy access cash savings accounts and easy access cash ISAs. The second set has just emerged.  

The FCA notes at least half of the providers sampled offered a lowest interest rate of 0.10% or less on branch-based closed easy access cash savings accounts (0.1% means £1 annual interest from a £1,000 deposit). For the corresponding ISA accounts, at least half of the providers paid no more than 0.5%.

At a time when inflation has picked up to 0.5% and looks likely to rise due to sterling's demise, we are heading back into the world where deposits destroy buying power over time.

The FCA research underlines the importance of checking closed accounts, which usually offer a lower rate than new accounts. It also shines a light on the relative attractiveness of the UK stockmarket's dividend yield (currently 3.53% on the FTSE All-Share).


Valuing pensions benefits for IP14 and/or IP16

(AF3, RO4, RO8, JO5, FA2, AF3, CF4)

HMRC has recently published a timely reminder as to how to value different forms of pension benefits for the purposes of electing for individual protection 14/16.

This explains in a relatively straight-forward manner the calculations for:

Amount A: Pre-commencement pensions

  • 25 X the current income if there have been no post A-Day BCEs
  • The adjusted value at the date of the first post A-Day BCE

Amount B: Pensions crystallised from A-Day up to 5 April 2014 or 5 April 2016 as appropriate

  • The value based upon the percentage of the LTA at the time of the original BCEs adjusted to reflect the change in the LTA since then.

Amount C: Uncrystallised pension benefits

  • The value of any uncrystallised pension funds, (insurance contracts should be valued in accordance with the agreed ABI protocol), plus
  • 20 times the value of any accrued DB rights, and where PCLS isn't by commutation, add the value of any accrued PCLS, plus
  • The capital value of any cash balance arrangements.

Amount D: Contributions made to a relieved non-UK pension in respect of a relieved member

  • The total value of any UK tax-relieved contributions paid since A-Day.

Remember, the deadline for electing for individual protection 2014 is 5 April 2017. So it is still not too late to make such an election. Consideration should be given for making such an election for any client who had a pension value as at 5 April 2014 of more than £1.25m even if they already have an election for enhanced protection or fixed protection 2014 or 2014. All of these elections can be lost, and having a protective election for IP14 may prove beneficial for some clients who inadvertently lose their other protection.

NEST consultation: Pensions freedoms

(AF3, RO4, RO8, JO5, FA2, AF3, CF4)

The consultation will consider whether the National Employment Savings Trust's (NEST) remit needs to better reflect recent changes to the pensions landscape, including the introduction of the pension freedoms and the new State Pension, to meet the needs of its 3 million members. This may include providing new ways for members to access their pension savings and expanding the scheme to enable individuals, employers and other schemes to access NEST's services.

NEST was set up in 2010 ahead of the drive to automatically enroll all employees into workplace pensions. So far 6.3 million people have been automatically enrolled into schemes, a number that is set to rise with the rollout of automatic enrolment to smaller employers.

The consultation is seeking views from industry and the public and will run for 12 weeks.

The consultation seeks views on:

(a) Extending the decumulation services to offer flexibility options within NEST

(b) Expanding the access to NEST where currently if an employee has no eligibility under the automatic enrolment provisions, they cannot use NEST: contractual enrolment for example.

(c) Accommodating bulk transfers

(d) Access to NEST for individuals

Court upholds decision to deny same-sex survivor's pension

(AF3, RO4, RO8, JO5, FA2, AF3, CF4)

The European Court of Human Rights (ECHR) has upheld the ruling against a retired worker in his bid to see his husband receive the same pay out from his pension scheme in the event of his death as a spouse of the opposite sex would be entitled to.

The case concerned was Aldeguer Tomás v Spain - 35214/09 (Judgment (Merits and Just Satisfaction): Court (Third Section)) [2016] ECHR 526 (14 June 2016)

ECHR has backed the Spanish government against a man who was denied a survivor's pension on the death of his same-sex partner. The death occurred in 2002, three years before same-sex marriage was introduced in Spain. The ECHR reached a similar conclusion from the UK Employment Appeal Tribunal in Innospec v Walker UKEAT/0232/13/LA. That the change in the consensus about sexual orientation did not require the retrospective rewriting of rules to put right past unequal treatment.

Aldeguer Tomás argued that his circumstances were analagous to the surviving partner of a heterosexual cohabiting couple prevented from marrying before Spain changed the law to permit divorce in 1981. The ECHR rejected this, ruling that Tomás' situation was different in nature and context. It said changes to help heterosexual couples had been introduced against a background of pension rights being built up unequally between the sexes, because women were underrepresented in the work force.

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