Personal Finance Society news update from 15 - 28 March 2018 providing the latest information on taxation and trusts, investment planning and pensions.
Taxation and Trusts
TAXATION AND TRUSTS
The Finance Act 2018 has received Royal Assent
(AF1, AF2, AF3, FA2, JO3, JO5, RO3, RO4, RO8)
Two days after the Chancellor delivered his Spring Statement – and a week later than expected – the Finance Act 2018 received Royal Assent.
The Act, which started life as the Finance (No. 2) Bill last December, is much shorter than its recent predecessors, running to a mere 193 pages. It implements the proposals in the Autumn Budget. The key changes to note for financial advisers are:
- The reforms to venture capital schemes (EIS, VCT and SEIS);
- The cessation of the indexation allowance for corporate capital gains from January 2018;
- The new SDLT relief for first-time buyers of property valued up to £500,000;
- The introduction of the right to claim the transfer of the marriage allowance on behalf of deceased spouses and civil partners from 29 November 2017;
- The new higher diesel supplement for virtually all diesel cars from 2018/19; and
- New rules that align the HMRC pension scheme tax registration process for Master Trust schemes with the Pension Regulator’s authorisation and supervision regime, recently amended by the Pension Schemes Act 2017.
As this Act started life as the third Finance Bill to come before Parliament in 2017, it is as well it was short. Somehow it seems unlikely that a precedent has been set…
NS&I Junior ISA rate increased
Back in August, National Savings & Investments (NS&I) launched a Junior ISA, a move ahead of the closure of the Children’s Bond.
We remarked at the time that the original launch rate on offer (2%) was “far from outstanding”. In November NS&I raised the JISA rate to 2.25%, in line with the rise in the Bank of England Base Rate.
NS&I has announced that the rate has been increased again, to 2.50%, with effect from 12 March 2018. The rate remains uncompetitive – several High Street names offer a rate of 3.0% or more.
The status of tax policy consultations
(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)
The government reintroduced their online tax consultation tracker on 13 March 2018. This follows a commitment in their policy paper - The new Budget timetable and the tax policy making process - to hold more early stage policy consultations and be more transparent about tax policy making, facilitating scrutiny of policy and legislation.
The table below summarises key tax policy consultations included in HMRC’s tracker.
*From April 2019, employers will no longer be required to check receipts when reimbursing employees for subsistence using benchmark scale rates. The existing concessionary accommodation and subsistence overseas scale rates will be placed on a statutory basis, to provide greater certainty for businesses.
Tax-free child care
The planned abolition of the childcare vouchers scheme for new claimants has been deferred for 6 months.
One of the measures announced in George Osborne’s last Budget two years ago was the replacement of Childcare Vouchers scheme with Tax-Free Childcare. The two have similar goals, but radically different structures which have created winners and losers. The then Chancellor said that the new scheme would replace the voucher scheme (technically “Employer-supported Childcare”) from April 2018, although pre-existing claims would continue to be met
HMRC started to roll out the new scheme in April 2017 and immediately ran into complaints about its Childcare website, eventually forcing the government to make nearly £1m of payments in lieu to parents. After this somewhat inauspicious start, the scheme was gradually put in place, with all working parents with a youngest child under the age of 12 becoming eligible on 14 February 2018. With that point reached, it looked as if the closure of the voucher scheme was on course for the end of the tax year.
It was therefore something of a surprise that in a debate on Universal Credit on 13 March (Spring Statement day), the education secretary, Damian Hinds, revealed that “we will be able to keep the voucher scheme open to new entrants for a further six months”. The news came in a response to a question from a DUP MP, following a cross-party letter to the Chancellor asking for the voucher scheme to be kept open.
The HMRC childcare choices website now states that the voucher scheme will ‘remain open to new joiners until October 2018’. However, as many employers have been working to a 5 April deadline for closure, there may be problems for employees making fresh claims in 2018/19, only to find the scheme has closed, as planned.
This is not HMRC’s finest hour and, given the timing of the announcement, the phrase “a good day for burying bad news” does spring (sic) to mind.
The impact of Scotland's income tax changes on tax reliefs
The move by the Scottish Government in its December Budget to create five tiers of income tax left some unanswered questions about the implications for marriage allowance.
HMRC has now issued a Notice explaining how the UK government will ensure that tax reliefs, including the marriage allowance, will continue to work as they were intended when Scottish income tax rates and bands change in April 2018.
1. Marriage allowance
Marriage allowance allows taxpayers to transfer 10% of their tax-free personal allowance to their spouse or civil partner, reducing their tax bill by up to £230 in 2017/2018, and £238 in 2018/2019.
The UK government will ensure that all those claiming marriage allowance in Scotland can continue to do so at the current rate (20%).
2. Gift Aid
Gift Aid allows charities to claim back 25p for every £1 donated.
The UK government will make changes to ensure that Scottish taxpayers can benefit from the right rate of tax relief on Gift Aid.
Gift Aid will continue to be paid to charities at the basic rate, with Scottish taxpayers able to claim the correct amount of additional relief on top of this.
3. Pensions relief at source
The UK government confirmed that current processes will continue while it works with stakeholders to establish how this will work in the longer term.
For 2018/2019, Scottish taxpayers who receive relief on their contributions at source will, therefore, continue to receive relief in their pension pot at 20%, with no adjustment for those taxed at a rate of less than 20%, and scope for those taxed at a rate higher than 20% to claim additional relief.
4. Social security pension lump sum
The UK government will make changes so that Scottish taxpayers who receive a social security pension lump sum will be taxed, where appropriate, at the new Scottish starter rate.
5. Finance cost relief
This will continue to apply at 20%, so the same rate is applicable to landlords across the UK.
Trail commision, loyalty bonuses and income tax
(AF4, FA7, LP2, RO2)
HMRC has lost an important test case in the First-tier Tax Tribunal on the taxation of trail commissions.
Just about five years ago HMRC delivered a bolt out of the blue with the announcement in Revenue & Customs Brief 04/13 that it thought trail commission – notably in the form of unit trust and OEIC annual rebates – was subject to income tax. We commented at the time that the new HMRC insight had come some 16 years after SP4/97 appeared to have settled the issue of taxing rebated commission. At the time of HMRC’s revelation, Hargreaves Lansdown said that it would challenge the change of view.
The result of that challenge has just emerged in the transcript of Hargreaves Lansdown Asset Management Ltd and the Commissioners for Her Majesty’s Revenue and Customs, 2018] UKFTT 127, TC06383. Judge Thomas Scott, sitting in the First-tier Tax Tribunal, decided in favour of Hargreaves Lansdown (HL), although HMRC can – and probably will – appeal to the Upper Tier Tribunal.
A reading of the case highlights several subtle nuances which may mean the result will not be applicable to every instance of rebated commission. For a start HL referred to the payments as “loyalty bonuses” rather than rebated commission and gave themselves considerable discretion in how much – if anything – they would pay to fund investors.
The HMRC case revolved around the payments falling into the category of “annual payments not otherwise charged” under section 683 ITTOIA 2005. The judge referred to five cases as leading authorities in determining what constituted an “annual payment” as the legislation was less than precise. He highlighted four characteristics:
- It must be payable under a legal obligation.
- It must recur or be capable of recurrence, although the obligation to pay may be contingent.
- It must constitute income and not capital in the hands of the recipient.
- It must represent “pure income profit” to the recipient.
Despite some interesting (and creative) arguments from HL, the judge found that the loyalty bonuses satisfied the first two conditions, while HL accepted the third income point. On the fourth condition, HL won the day.
HMRC argued that the payment was “pure income profit” because all an investor had to do to receive it under HL’s terms was to hold the relevant investment at the end of the month. HMRC refused to accept that payment was dependent on the investor paying the fund’s annual management charge (AMC) for the month in question. HMRC’s stance was that the AMC was not paid by the investor, but by “the fund entity to the fund provider”. HL argued the opposite and was helped by HMRC’s statement of case setting out in a “factual summary” that “The fund provider levies an initial charge when the investor makes an investment and then raises annual management charges on the investor”.
The judge concluded that “the evidence makes it plain that the nature and quality of a Loyalty Bonus payment is that it is not a “profit” to an investor, but a reduction of his net cost.” As such it was thus not an annual payment and therefore not taxable.
As HL’s press statement makes clear, “the champagne is on ice” until any appeal is over – HMRC has 56 days to launch an appeal and will probably do so. At stake, as far as HL is concerned, is £15m of tax it has deducted at source. Overall there is potentially a much higher figure, as other platforms adopted a similar approach and some recipients will have suffered higher or additional rate tax on the payments. Whether the “reduction in net cost” argument stretches to rebated renewal commission on life policies, VCTs, etc is a moot point.
The February inflation numbers
(AF4, FA7, LP2, RO2)
The CPI for February showed an annual rate of 2.7%, 0.3% down from the previous month. Across the month prices rose by 0.5%, 0.2% lower than between January 2017 and February 2017. The market consensus had been for a 2.8% annual rate, meaning that this was a month in which the forecasters had overshot after two months of undershooting. The CPI/RPI gap narrowed by 0.1% to 0.9%, with the RPI annual rate falling from 4.0% to 3.6%. Over the month, the RPI was up 0.8%.
The ONS’s favoured CPIH index also fell, but by 0.2% to 2.5%. The ONS notes the following significant factors across the month:
Transport: Overall this category supplied the largest downward contribution, particularly motor fuels and sea fares. Average petrol prices fell by 0.2p per litre between January and February this year compared with a rise of 1.6p between the same two months a year ago.
Restaurants and hotels: These also had a large downward effect, with prices of overnight hotel accommodation falling this year but rising a year ago. These prices can be reasonably volatile but (as with sea fares in the transport category), the ONS says that the rise in 2017 may have been influenced by the timing of Valentine’s Day.
Food and non-alcoholic drinks: This category was a third provider of a large downward effect, with prices rising by 0.1% between January and February this year compared with a rise of 0.8% a year ago. The downward effect was widespread within the broad group, with the largest single contribution coming from vegetables where prices fell in 2018 compared with a rise in 2017, when there were reports of shortages of certain greens and salad vegetables.
Food and non-alcoholic beverage annual inflation is now running at 3.0%, down from a peak of 4.2% last November. A year ago, it was 0.2%.
Recreational and culture: There was a smaller downward effect that came from recreation and culture. Within this group, the downward contributions came from a range of recreational goods and services, particularly audio-visual equipment.
Clothing and footwear: This category provided the largest upward effect in February. Prices rose as usual following the January sales period, but they rose by 1.7% between January to February 2018 against 1.2% between the same months in 2017. This effect came from footwear, particularly women’s footwear.
The disparity between the CPIH at 2.5% and CPI at 2.7% remains largely down to the “H”. Owner occupiers housing costs (the “H”) are over a sixth of the CPIH and have seen a falling level of annual inflation in recent months, although this month the annual rate remained unchanged at 1.2%. OOH does not directly measure mortgage costs.
In three of the twelve broad CPI categories, annual inflation increased, while six categories posted a decline. Alcoholic drinks and tobacco remains the only category with an annual inflation rate of above 4%, mainly due to the Budget timing which helped lift the annual figure to 5.8% in February.
Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell 0.3% to 2.4%. Goods inflation fell 0.2% to 3.0%, while services inflation dropped 0.4% to 2.4%.
Producer price inflation (PPI) numbers both fell. The input PPI inflation figure was 1.1% below January’s figure at 3.4%. Output price (aka factory gate price) inflation decreased, by 0.2% to 2.6%.
The improved inflation figures suggest that the impact of the Brexit-driven devaluation of the pound is now waning. Sterling is up about 14% over the past 12 months against the US dollar and is virtually unchanged against the euro.
HMRC newsletter 97
(AF3, FA2, JO5, RO4, RO8)
HMRC has recently published Newsletter 97 which covers:
- Scottish Relief at source - annual return of individual information for 2017 to 2018 onwards
- Relief at source excess relief
- Reporting overseas transfers
- New pensions online service newsletter
- Finance Act 2018
- Annual Allowance
- Outstanding AFT changes
Of notable interest –
Relief at source excess relief – extension granted to scheme administrators that need time to update their systems. Transitional arrangements are to be put in place for 2018-2019.
On March 15 2018, Finance (No 2) Bill 2017 gained Royal Assent to become Finance Act 2018. Finance Act 2018 makes changes to the legislation for registering and de-registering pension schemes from April 2018. This affects pension schemes that:
- are Master Trusts
- have a dormant company as a sponsoring employer
The Pensions Tax Manual and other pensions guidance on GOV.UK will be amended in April 2018 to reflect the new legislation.
Annual allowance - new guidance published called pension schemes: work out your reduced (tapered) annual allowance to help scheme member’s work out their tapered annual allowance.
PS18/6 – FCA Policy Statement advising on pension transfers
(AF3, FA2, JO5, RO4, RO8)
The FCA have published the much awaited Policy Statement PS18/6. It includes the feedback on CP17/16 as well as final rules and guidance on advising on pension transfers.
The majority of rules will come into force from 1 April 2018, with those relating to Transfer Value Comparator and Appropriate Pension Transfer Analysis from 1 October 2018. The final changes which relate to assumptions used for revaluating benefits will come into force on 6 April 2019.
One change to the initial proposals include the fact that the FCA have decided not to proceed with the proposed change to the “starting assumption” for advice. The “starting assumption” will remain that all transfers are unsuitable. The FCA explain that they have seen a significant proportion of unsuitable advice and so they do not see that now is an appropriate time to change this. The reference British Steel as an example of this. They also comment that area is linked to charging structures and so will be discussed further in CP18/7 issued alongside PS18/6.
Changes have been made to some of the other guidance on suitability and confirms that a firm can only make a recommendation if all the information required can be obtained. It also makes it clear that alternative ways to meet the clients objectives should be considered.
Role of the Pension Transfer Specialist
The proposals are continuing unchanged and the Handbook text has been updated to reflect the expectations from the FCA that the PTS is to:
- check the entirety of the advice process, not just the numerical analysis, and consider whether the advice is sufficiently complete;
- confirm that the personal recommendation is suitable; and
- inform the firm in writing that they agree with the advice, including any recommendation, before the report is given to the client.
There were also discussion areas in CP17/16 including those about qualifications and outsourcing. These will be picked up further in CP18/7.
Analysis to support advice
Appropriate Pension Transfer Analysis
The FCA considered the feedback provided and have set out a framework for the APTA which is designed to help demonstrate the suitability of a personal recommendation. It can include both behavioral and non-financial analysis as well as considering the other ways of achieving the client’s objectives.
The FCA do not intend to provide detailed rules and guidance on what should be included for each individual because advisers are best placed to decide this. They consider it for the advisers to decide if a critical yield approach is valid for some circumstances. They do warn that advisers should be aware of the risks for doing so for uncertain futures of for clients that may not understand it.
Advisers can use appropriate modelling tools to support their recommendations but should be mindful of the way these are used to explain the options. They shouldn’t be used to limit the adviser’s responsibility in any way.
There have been no changes to the handbook text with reference to death benefits. However the following changes have been made.
- A new rule requiring advisers to consider the impact of tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold/band.
- A new rule to clarify that the APTA must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out.
- A revised rule requiring advisers to consider trade-offs more broadly.
- New guidance on considering the safety nets – the PPF and Financial Services Compensation Scheme (FSCS) in the UK – that cover both the current and receiving schemes in a balanced and objective way.
- New guidance that if information is provided on scheme funding or employer covenants, it should be balanced and objective.
Stochastic modelling - Other areas for discussion with regards to the APTA the included the used of Stochastic modelling. The FCA have added handbook guidance that explains that it can be used as long as the outcomes at the 50th percentile are at least as cautious as the outcomes from using the assumptions in COBS19 Annex 4C.
Transfer Value Comparator
The FCA intend to proceed with the mandatory TVC. The purpose of which is to provide consumers with some context for the level of their CETV and to help them make an informed decision.
The TVC shows a comparison of the CETV and the estimated cost of acquiring the same promised income in a DC scheme. A CETV is generally based on the full value of the expected pension income. The TVC should not take account of any personal circumstances because these will be addresses in the APTA.
Some of the underlying assumptions proposed for the TVC have been amended to make it more generic and for a fairer comparison with the DB scheme. The investment growth rate will be based on gilt yields and firms should assume product charges of 0.75% during the accumulation phase. There is no explicit allowance for adviser charges. A 4% annuity charge is designed to cover product and adviser costs are annuitisation. Annuity factors should allow for the same basis as the defined benefit scheme options.
Firms can use their own colours and scales on the chart provided the y-axis starts at zero.
Annuity interest rate - The AIR will be calculated on the 6th of each month. It will be based on the average of the most recent three monthly yield calculations as determined on the 15th of the month. The monthly yield calculation is itself an average of two gilt yields adjusted by 0.5%
Mortality – The FCA are retaining the ONS mortality basis in the final guidance as they consider this to be the most appropriate, and readily available.
Growth Rate - The growth rate for the TVC will now be based on a risk-free rate, determined from published gilt yields and dependent on the term until benefits become payable.
Charges – The FCA proceeding with the proposal to require firms to incorporate charges in APTAs, whether or not the client pays them through the receiving scheme.
Revaluation and indexation assumptions
The discussion on these has been rolled into CP18/7.
Insistent clients – PS17/25 confirmed additions to the Handbook setting out how firms may comply with the FCA obligations when dealing with insistent clients. These are already in force.
Opt-outs – The FCA are proceeding with proposals to not require APTA or TVC in opt outs but does allow for similar approaches.
Overseas transfers – The FCA considers that the approach can accommodate overseas transfers. However the FCA expect advisers to pay particular attention to the characteristics of the transfer and the destination of the pension. This is to take account of economic issues such as taxation and inflation.
Streamlined advice – FG17/8 set out the expectations of firms providing streamlined advice and that the amount of information a firm requires to conduct a pension transfer makes it unlikely to be possible under streamlined advice.
The majority of the proposals have been adopted as originally stated with a few minor amendments and additions. It may be a challenge for the industry to bring in the new reports and comparators this year but if it improves outcomes for consumers then it will be a job worth doing.
TPR and FCA have issued a joint call for input on "Regulating the pensions and retirement income sector: our strategic approach"
(AF3, FA2, JO5, RO4, RO8)
The call for input states “It is important for regulation in any sector to reflect the potential harms and risks in the current landscape. It must also consider future changes and developments that could lead to new risks. While our statutory remits as set by Parliament are different, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) work in tandem to address risks and harms in the pensions and retirement income sector. This is especially the case where we share concerns or our remits intersect.
The pensions and retirement income sector includes how people build up (accumulate) and use (decumulate) their retirement savings. There are two main ways that people accumulate retirement savings – workplace pensions and non-workplace pensions. There are also a range of different products and services to manage and spend savings in retirement. Our intention in this paper is to cover all aspects of the sector”
The document then goes on the set the scene detailing where each regulator sits in the pension landscape and who covers which aspects. The call for input is designed to seek feedback on the way things work now and how the joint strategy can be improved in the medium term.
Each section discusses the regulators views and asks for opinion on them. The following is a list of the questions raised.
- FCA and TPR’s remits intersect in some areas. Do you see this working effectively, or are there areas where this could be improved?
- Do you agree that the areas we have identified are the right ones? If not, which themes would you add or remove from our list? In which areas could the FCA and TPR singly or jointly have the most impact?
- Given our regulatory remits, what more, if anything, should the FCA and TPR do to support people as they start to save in a pension?
- Is there more scope for TPR/FCA working, either singly or jointly, in this area? To what extent should the emphasis be on collaboration with a wider group of bodies to improve the advice and services supplied to schemes (e.g. administrators, investment consultants)?
- How can pension providers and schemes, employers and other firms in the sector improve the security of the money and data they hold? What role is there for FCA and TPR in further driving up standards?
- Are there any further opportunities for FCA and TPR to support the delivery of value for money, either singly or together?
- How can FCA and TPR work, singly or together, to ensure that information and advice helps people make appropriate decisions? When are people most vulnerable to taking poor decisions?
- Do you believe that the macro trends that we have identified are those most likely to drive change across the pensions and retirement sector? If not, what are the trends that matter? Which trends should be the highest priority for TPR and FCA?
In addition there have also been three face to face workshops looking at these questions in round table discussions. The first of which was filmed and will be available on the FCA website in April.