Personal Finance Society news update from 25 October to 07
November 2016 on taxation, retirement planning and investments.
Taxation and Trusts
TAXATION AND TRUSTS
Court of appeal victory for civil partner after partner
was dishonest about her wealth
The Court of Appeal has confirmed that the asset disclosure
rules can continue to apply after the death of one of the parties
in a divorce or civil partnership dissolution.
A woman who discovered that her civil partner, who died
intestate in 2013, had hidden business assets worth millions
of pounds during the dissolution of their relationship has
succeeded in the Court of Appeal as she seeks to set aside the
In the case in question, (Roocroft V Ball EWCA Civ 1009),
the couple dissolved their civil partnership in 2009 having been
together for 18 years. One of the partners (A) was a successful
property developer and provided by far the largest part of the
couple's income during their partnership. A consent order was made
giving the other partner (B) £162,000 based on the Court's
assessment of the matrimonial assets as disclosed at the time. The
order was to include provision that, upon termination of the
periodical payments order, the appellant agreed not to make any
claims against the deceased's estate upon her death.
Three years later A died. It then emerged that she had misled
the Family Court about the extent of her assets by claiming she had
lost large sums in the 2008 property crash. B accordingly sought to
overturn the original consent order so that a more generous order
could be negotiated with A's estate.
A had died without leaving a Will, so her estate was defended by
her personal representative who had obtained letters of
administration. The lower courts refused to vary the consent order,
citing administrative issues. However, B instructed her solicitors
to prepare an appeal anyway.
The appeal was heard in July this year and judgment has been
given in her favour.
The case is the first to consider the discovery of
non-disclosure of assets after the death of one of the parties,
says lawyers Irwin Mitchell.
Last year there were two cases (Gohil v Gohil  EWCA Civ
274and Sharland v Sharland  UKSC 60) raising similar issues
of non-disclosure, both of which were decided in favour of the
This judgment, however, confirms that same-sex couples can also
have the same rights as heterosexual partners under family law and
reiterates the message that dishonesty will not be tolerated by the
Step seeking comments on LPA discretionary investment
(AF1, R03, J02)
The Society of Trust and Estate Practitioners (STEP) is looking
for practical examples of the difficulties faced by attorneys
affected by the Office of the Public Guardian's (OPG's) latest
guidance on the delegation of investment management decisions to a
discretionary investment manager. The guidance provides that
delegation will only be possible if specific authority is contained
in the power.
In September 2015, the OPG published guidance on the
circumstances in which attorneys acting under a Lasting Power of
Attorney (LPA) can delegate investment management decisions to a
discretionary investment manager.
The guidance states that an attorney may appoint a bank or an
IFA to act on their behalf to make investment decisions but only
where specific wording, along the following lines, has been
incorporated into the LPA:
'My attorney(s) may transfer my investments into a discretionary
management scheme. Or, if I already had investments in a
discretionary management scheme before I lost capacity to make
financial decisions, I want the scheme to continue. I understand in
both cases that managers of the scheme will make investment
decisions and my investments will be held in their names or the
names of their nominees'.
This, of course, creates an issue for attorneys acting under a
power that pre-dates the guidance who are already using
discretionary managers without explicit permission in the LPA.
If the donor still has capacity, it will be possible to re-do
the LPA. However, in many cases the LPA will have already
been registered, in which case the attorney will need to apply to
the Court of Protection (CoP) for the retrospective authority to
appoint an investment manager. Both scenarios present cost issues
and are likely to be time consuming - especially given that
different fund managers appear to be taking different stances and
attorneys/donors may therefore need to take the extra step of
confirming the firm's particular policy before deciding what action
STEP is hoping to present a test case to the OPG that will
highlight the practical difficulties faced as a result of the
guidance and to this end is asking members to provide examples. The
hope is that the test case will allow the OPG to determine that the
delegation of investment management by an attorney to a
discretionary investment manager is already legally permissible
without the need to retrospectively apply for it through the Court;
and amend its guidance accordingly.
Attorneys already using a discretionary manager without an
express power could avoid a CoP application by changing to an
advisory manager (so that they are still ultimately making the
investment decisions). However, this may give rise to potential
liability issues and it may therefore be prudent to do nothing
until a further update becomes available.
Capital gains tax is now raising more revenue than
The latest figures published by HMRC show that £6.9 billion of
capital gains tax (CGT) was paid by more than 220,000 individuals
in 2014/15. Here we look at some simple planning strategies that
might help to reduce the burden.
While CGT has historically earned comparatively little for the
exchequer, over the last few years CGT receipts have been
increasing steadily, with recent figures from HMRC reporting a 22%
increase to £6.9 billion in 2014/15. With inheritance tax producing
a yield of just £3.8 billion in the same period, CGT is clearly no
longer the poor relation and the haul for subsequent years is
likely to be even greater as investors continue to take advantage
of a buoyant stock market and landlords (who continue to pay CGT at
the higher rates of 18/28% on residential property disposals) sell
to cash in on rising house prices.
Fortunately, there are a number of simple things that taxpayers
can do to reduce their chances of being one of the 220,000 or so
individuals lining the government's coffers. These include:
- Minimise tax on realised gains - there is an appreciable
difference in the rate of CGT paid by basic and higher rate
taxpayers. For married clients, it can therefore be beneficial to
ensure that taxable gains are made by the lower-taxed spouse where
this is possible (remember that transfers between spouses or civil
partners living together are made on a 'no gain/no loss' basis).
With an annual exemption of £11,100 in 2016/17, even if both
spouses are taxed at the same rate, there may still be the
opportunity to use two annual exemptions rather than one.
- Make additional pension contributions - as the rate of CGT paid
is determined by the level of combined taxable income and capital
gains, those who are not married or in a civil partnership can
still reduce the rate at which they pay CGT on non-exempt gains by
reducing their level of taxable income. One way that this can be
achieved is by making additional pension contributions. As higher
rate tax relief on a pension contribution continues to be given by
the extension of the basic rate band payment of an allowable
pension contribution could result in an equivalent amount of a
capital gain that would otherwise be subject to CGT at the higher
rate of 20% now being taxed at 10% - reducing the rate of CGT paid
by up to 50%.
- Make full use of the annual exemption - the annual exemption is
given on a 'use it or lose it' basis. So if individuals are relying
on certain investments for additional income, re-balancing asset
allocation within their investment portfolio could provide the
opportunity to use their annual exemption. In some cases
considering a phased sale of shares over two tax years can prove to
be beneficial as it is possible to benefit from the use of two
- Make the most of reliefs - entrepreneurs' relief, for
example,can be very valuable, potentially reducing the capital
gains tax on the sale of a business from a rate of 20% to 10% for
the first £10 million of cumulative lifetime gains. However, the
relief is only available as long as the qualifying conditions are
met. Timing and advice will both be essential in order to maximise
the relief available.
- Retain investments showing substantial gains - selling or
gifting assets during lifetime could result in a CGT liability that
would otherwise be wiped out altogether if the investments had been
held until death. Where the taxpayer is elderly or in ill-health, a
lifetime gift of chargeable assets may be particularly detrimental
given the enhanced possibility that the donor may fail to survive
the seven year 'PET' period and so make no IHT saving either.
With the average CGT bill now at £28,500, and possible changes
to existing reliefs being mooted as the Autumn Statement
approaches, the importance of planning ahead with the benefit of
informed advice should not be underestimated.
National Audit Office report on collecting tax from high
net worth individuals
(AF1, AF2, R03, J03)
The National Audit Office (NAO) has examined HMRC's approach to
high net worth individuals (HINWIs).
In 2009 HMRC set up a HINWIs Unit to focus on
the tax and financial position of individuals with a net worth of
more than £20 million. At the start of 2015/16 HMRC reckoned there
were around 6,500 such individuals, roughly 0.02% of the taxpayer
population. Unsurprisingly, they pay a considerable amount of tax:
over £4.3bn in 2014/15 of which £3.5bn was income tax and National
Insurance (1.3% of the total revenue for those taxes) and £880m was
capital gains tax (15% of all CGT).
The NAO has examined how the HINWI unit is
working and reported the following:
- HMRC is currently running a formal enquiry on around a third of
high net worth taxpayers, with an average of four issues being
examined per taxpayer. Total tax at risk is £1.9bn of which £1.1bn
relates to marketed avoidance schemes.
- 15% of HINWIs have used at least one avoidance scheme.
- The HINWI enquiries can be slow to reach a resolution, with
6,000 issues under enquiry open for more than 18 months, 4,000 of
which have been open for more than three years.
- HMRC recorded yield of £416m in 2015/16 from the work of the
HINWI unit, £166m more than its own internal target.
- HMRC prioritises the recovery of tax in cases of fraud rather
than criminal prosecution, a point some journalists seem to have
ignored. In the last five years, HMRC has investigated and closed
72 cases relating to high net worth individuals. 70 of these were
investigated with civil powers, raising £80m in compliance yield
and penalties. Two cases were criminally investigated but only one
was taken forward and successfully convicted. At October 2016 HMRC
was criminally investigating a further 10 high net worth
- Identifying HINWIs is not straightforward for HMRC, as most of
the information about their wealth, such as sources of income or
assets owned, does not need to be reported. In 2015/16, HMRC
undertook a review and identified an extra 1,000 HINWIs.
- Since 2009 the HINWI unit has moved from information gathering
to become 'increasingly focused on the riskiest taxpayers'.
- HMRC has not evaluated its approach to HINWIs, according to the
NAO. While HMRC has gained more insight into HINWIs since 2009, it
has not looked at what works and why in its current approach. The
NAO believes HMRC could use such analysis to increase the impact of
It's encouraging to note the success of this Unit in exceeding
its 2015/16 target. As a well-known advert puts it 'Every
Current tax consultations - where are we
(AF1, AF2, R03, J02, J03)
What follows is a brief summary of some of the recent
consultations which we feel may be of relevance to financial
planners and their clients - we provide an overview of each of the
consultations which have recently closed and are currently being
reviewed by HMRC - it may be the case that we will have further
details in the up-coming weeks or even on the eve of, or shortly
after, this year's Autumn Statement on 23 November.
Part surrenders and part assignments of life insurance
Following the case of Joost Lobler, where the taxpayer suffered
a chargeable event gain on taking a large part withdrawal from an
investment bond, HMRC decided to consult on the tax treatment of
part surrenders and part assignments from a single premium life
insurance policy (commonly referred to as a "bond"). This
consultation was to look at three alternative ways of taxing life
- Taxing the economic gain
- The 100% allowance (from the date of investment as opposed to
accruing it at the rate of 5% pa for 20 years)
- Deferral of excessive gains
While legislation is not expected until the 2017 Finance Act,
the closing date for comments was 13 July although the government
said it hoped to provide responses in 12 weeks this has not yet
happened. It could be that some more information will be divulged
in the upcoming Autumn Statement, if not before. It's fair to say
that most in the sector favour the attraction and simplicity of the
Salary sacrifice for the provision of benefits in
The purpose of this consultation is to explore potential impacts
on employers and employees if the government decides to change the
way the benefits code applies when a benefit in kind is provided in
conjunction with a salary sacrifice or flexible benefit scheme.
Importantly, pension saving, employer supported childcare and cycle
to work schemes are excluded.
The closing date for comments was 19 October so HMRC is
currently reviewing the responses.
Tackling offshore tax evasion: a requirement to
This consultation is about introducing new legislation which
will require taxpayers with outstanding tax liabilities relating to
offshore interests to come forward and correct those liabilities by
September 2018. The consequence of not meeting the requirement and
carrying out the necessary correction within the defined window
would see the taxpayer subjected to a new set of legal sanctions
for ''failing to correct''.
This consultation closed on 19 October so HMRC is currently
reviewing the responses.
Tackling disguised remuneration: technical
At Budget 2016 the government announced a package of changes to
tackle disguised remuneration avoidance schemes to ensure users of
these arrangements pay their fair share of income tax and National
This technical consultation includes more detail on the changes
the government will introduce in Finance Bill 2017 as well as
details of proposals to tackle similar schemes used by the
self-employed, and proposals to restrict the tax relief available
to employers in connection with the use of these schemes.
This consultation closed on 5 October so HMRC is currently
reviewing the responses.
Reforms to the taxation of non-domiciles: further
At the Summer Budget 2015, the government announced a series of
reforms to the way that individuals with a foreign domicile
('non-doms') are taxed in the UK. These changes will bring an end
to permanent non-dom status for tax purposes and mean that non-doms
can no longer escape a UK inheritance tax (IHT) charge on UK
residential property through use of an offshore structure like a
company or a trust. In particular, we are looking at the likelihood
of a 15/20 year residence test to imply deemed domicile status for
all tax purposes.
At the Autumn Statement 2015, the government made a further
announcement that it would consult on how to change the Business
Investment Relief rules to encourage greater investment into UK
Further consultation and draft legislation was published in
August 2016 setting out the detail of the proposals to deem certain
non-doms to be UK-domiciled for tax purposes.
This consultation closed on 21 October so HMRC is currently
reviewing the responses.
Personal portfolio bonds - reviewing the property
At the 2016 Budget, it was announced that the government would
review the categories of permitted investments which could be held
in a life assurance bond without it becoming taxable as a personal
Broadly, there are three types of investment vehicles which are
being considered to be included within the permitted category list.
- real estate investment trusts (both UK and foreign
- overseas equivalents of UK approved investment trusts; and
- UK authorised contractual schemes.
The consultation closed on 3 October 2016 and draft legislation
is expected in advance of Finance Bill 2017.
Simplification of the tax and National Insurance treatment
of termination payments
The government announced at Budget 2016 that it would make
changes to the taxation of termination payments.
The changes include:
- clarifying the scope of the exemption for termination payments
to prevent manipulation by making the tax and National Insurance
contributions (NICs) consequences of all post-employment payments
- aligning the rules for income tax and employer NICs so that
employer NICs will be payable on payments above £30,000 (which are
currently only subject to income tax)
- removing foreign service relief
- clarifying that the exemption for injury does not apply in
cases of injured feelings
The government published an initial consultation looking at
these changes and has also published a follow-up consultation on
draft legislation, which explains the policy underpinning the
changes in greater depth. The draft legislation is intended to give
effect to the changes, and the government invites views on whether
this objective is achieved.
This consultation closed on 5 October so HMRC is currently
reviewing the responses.
The old lady has second thoughts
(R02, AF4, FA7, LP2)
The Bank of England's latest quarterly Inflation Report has
backtracked on much of the gloom in the August report.
November 3 was a "Super Thursday", the day when the Bank of
England revealed its interest rate decision and published its
quarterly inflation report (QIR). The August QIR, coming six weeks after the Brexit vote,
was a gloomy affair. Indeed, the forecasts were so dire that the
Bank announced a range of measures to boost the economy, including
£70bn more quantitative easing (QE) and a cut in base rate to
0.25%. At the time the Bank thought:
- The UK "was likely to see little growth in GDP during the
second half of the year".
- For 2017 growth would be just 0.8%, 1.5% lower than the May QIR
forecast (which did not consider Brexit). This was the biggest cut
ever seen from one Inflation Report to the next, even exceeding
that of the financial crisis. For 2018, the Bank estimated growth
would recover to 1.8%, still 0.5% below the May projection.
- Inflation would pick up because of the weakness of sterling.
For the final quarters of 2016, 2017 and 2018, the Bank's CPI
projections were 1.2%, 2.0% and 2.4%.
Three months further on the Bank is taking a rather different
view, coincidentally issuing its QIR on the same day the High Court ruled that Parliament should have a vote on
invoking Article 50. In the latest Report, the Bank expressed the
- The 0.5% growth recorded by National Statistics in its first estimate is unlikely to be altered as further
data emerge: this is 0.4% above the Bank's August forecast. The
final quarter of 2016 is projected to provide another 0.4% growth,
meaning that the Bank's overall projection for growth in the second
half of 2016 has risen by 0.7% between Reports;
- For 2017, growth is now expected to be 1.4%, 0.6% up on
August's estimate. However, the forecast for 2018 growth has fallen
by 0.3% to 1.5%;
- CPI inflation in the final quarters of 2106, 2017 and 2018 is
now projected to be 1.3%, 2.7% and 2.7%. The Bank expects this
largely currency-induced inflation will start to drop in 2019. It
is only in 2020 that the Bank sees inflation "likely to return to
close to the target".
The Bank explains its changed views in terms of household
reactions. To quote Mark Carney in his opening
remarks at the QIR press conference, "...consumption has been
even stronger [than expected], with households appearing to
entirely look through Brexit-related uncertainties. For households,
the signs of an economic slowdown are notable by their absence.
Perceptions of job security remain strong. Wages are growing at
around the same modest pace as at the start of the year. Credit is
available and competitive. Confidence is solid."
Nevertheless, the Bank sees much Brexit-related uncertainty
ahead, with Mr Carney giving the High Court judgement as a good
example. The Bank's stance at present is to keep interest rates
down, choosing "a period of somewhat higher consumer price
inflation in exchange for a more modest increase in
A further cut in base rate, as was mooted at the last QIR press
conference, now seems unlikely. However, the latest QIR's graph of
market-implied interest rates suggests that a return to a 0.5% base
is three years away.
The triple lock
(R04, AF3, J05, FA2, R08)
Over the weekend, the House of Commons Work & Pensions
Select Committee, chaired by Frank Field, published its 3rd report
on intergenerational fairness. Unsurprisingly, it sees "an economy
skewed towards baby boomers [born 1945-1965] and against
millennials [born 1980-2000]." The report quotes the frequently
cited statistic that "pensioner household incomes now exceed those
of non-pensioners after housing costs", creating a risk of the
millennial generation "being the first in modern times to be
financially worse off than its predecessors."
The crux of problem is that:
The birth rate during the baby boomer generation was between
800,000 and 1,000,000 a year, whereas subsequent generations have
seen typically 700,000-800,000. There is thus a greater strain on
the post-baby boomer generations to the support the retiring baby
The swollen baby boomer generation is also hanging around longer
thanks to improved life expectancy. The report notes that "a boy
born in 1955, in the middle of the baby boom, had an 83% chance of
living to at least 65, compared with 45% of those born in 1895."
The net result of these two factors is that "The share of the
population aged 65 and over is projected to grow from 18% in 2014
to 24% in 2039, while the proportion 80 and over is expected to
grow from 5% to 8% over the same period."
The baby boomer generation was a winner in the housing lottery:
"The opportunities that were open to baby boomers to buy a home
with a relatively small deposit are closed to today's young."
Getting onto the housing ladder early helped the baby boomers to
build up wealth.
The report's main proposal is that triple lock increases to the
basic and single tier state pension should be abandoned when the
current commitment to maintain it expires in 2020. Retaining the
lock "would… tend to lead to state pension expenditure accounting
for an ever greater share of national income. At a time when public
finances are still fragile, this is unsustainable." The option of
accelerating state pension age increases as an alternative to
removing the lock is dismissed because it "would disproportionately
aﬀect the young and those socio-economic groups with lower life
expectancies in retirement," a point which echoes concerns raised
John Cridland's SPA review for the DWP.
The report suggest that the triple lock should be replaced by a
"smoothed earnings link". Under this mechanism the 2020 state
pension would set the base and increases would normally be linked
to earnings. In periods when earnings increases lagged behind price
inﬂation, an above-earnings increase would be applied. Then, when
real earnings growth resumed, (CPI) price indexation would continue
until the state pension reverts to its 2020 benchmark as a
proportion of average earnings.
Based on the estimate in the most recent Fiscal Sustainability
Report from the Office for Budget Responsibility (OBR), the long
term effect of reverting to an earnings link would be that state
pensions rose by about 0.4% a year less than they would under the
triple lock. That may not sound a great deal, but its cumulative
effect is significant: the OBR estimated that the annual cost
of the triple lock relative to earnings uprating will be an
additional 1.3% of GDP by 2064/65.
The report is also critical of universal pensioner benefits,
such as the Winter Fuel Payment (cost about £2bn a year) and free
TV licenses for the over-75s. The report says such benefits "have
been deployed by successive governments for reasons of short term
expediency. Such measures, which do not tend to be subject to
indexation, lead to ill-targeted support, further complicate the
benefits system and are politically and administratively far harder
to put right than to introduce in the first place… They should …not
be oﬀ limits when spending priorities are set in future
There is growing pressure to remove the triple lock when it
reaches its currently scheduled expiry date in 2020. However, as
that year will see the next general election - assuming no Article
50 snap election - politicians must be prepared to anger the (baby
boomer) grey vote and face the inevitable pension-snatcher
The Pensions Regulator issues its compliance and
enforcement bulletin for the quarter to 30 September
(R04, AF3, J05, FA2, R08)
The Pension Regulator (TPR) has recently issued it latest
Compliance and Enforcement Bulletin for the quarter ending 30
September 2016. This once again highlights continuing rise in
the number of penalties issued, including Escalating Penalty
Notices, as the whole AE process spreads out to encompass more
The rise is in line with the sharp increase in employers
reaching their deadline to comply with AE duties. Although the vast
majority of employers are successful in meeting their duties, the
minority of employers who fail to listen to warnings from TPR are
subject to fines.
The report also highlights that explanations given for
non-compliance such as illness, being short staffed or confusion
between employers and their advisers are not a 'reasonable
The Bulletin includes three case studies (starting on page 4 of
the PDF) where an employer appealed against a TPR fine for not
completing their declaration in time and explains why the basis for
the appeal was not upheld by the tribunal. They go on to give
examples of when "is a reasonable excuse not a reasonable
In this quarter, TPR issued 3,728 Fixed Penalty Notices to
employers for failing to meet their automatic enrolment duties.
After asking TPR to review their decision, a number of them
contested their fines at a tribunal, claiming that their
non-compliance was unintentional and that they had a "reasonable
The circumstances that employers are citing in their defence
include confusion between the employer and the payroll
administrator as to who is supposed to be doing what, illness, and
being short-staffed. However, as the case studies illustrate, in
the eyes of the law, these reasons are not sufficient to avoid a
The idea of a reasonable excuse is also used by HMRC for appeals
against tax penalties, but the tribunal has made it clear that the
two regimes are separate. The same basic principle applies, in that
a reasonable excuse is something unexpected or outside your control
that stopped you meeting your statutory duties. But because the
automatic enrolment and tax duties are different, something that
amounts to a reasonable excuse for HMRC's purposes may not be
enough to avoid an automatic enrolment fine.
For example, HMRC guidance says that a problem with their online
service is a reasonable excuse for failing to file a tax return on
time. However, the tribunal has rejected it as an excuse for
failing to complete a declaration of compliance, because we offer
an alternative telephone service, and because of the number of
reminders that we give employers to complete their declaration in
The following do not amount to a reasonable excuse for a failure
to complete the declaration of compliance:
- You relied on someone else and they let you down
- You found the online system too difficult to use
- You didn't get a reminder
- You made a mistake
- You or a member of staff were ill
For planners that are helping employers along the automatic
enrolment journey, it's important that TPR do not take kindly to
noncompliance, 3700 fixed penalty notices in one quarter is
testament to how seriously these duties are taken.
State Pension top up - Six months left to
(R04, AF3, J05, FA2, R08)
The Department of Work and Pensions (DWP) has recently issued a
reminder to all those who have expressed an interest in topping up
their Additional State pension by up to £25 per week. The option to
make Class 3A Voluntary Contributions applies to individuals who
attained their SPA on or before 5 April 2016, i.e. individuals who
receive, or will receive, their State Pension under the old
Why is this important to planners to revisit this with
It has been possible to make the Class 3A Voluntary NIC payment
since October last year. When the Government announced the details
of these earlier, they stated that the rate offered would be in
line with the market. However, even when they became available it
was not possible for a healthy individual to secure a pension
annuity paying the same level of income as achieved from paying
Class 3A NICs. However, since then, annuity rates have been falling
and then, post BREXIT, nose-dived.
So, for an individual aged 66, to secure an income of £1,300
p.a. with a 50% spouse's pension that is index-linked would cost
over £46,900, according to the MAS site on 28 October.
To obtain the same level of income a Class 3 would cost £21,775
based upon the DWP calculator run on the same date.
In simple terms, the Government offer which was generous when it
was launched has, due to the changes in the annuity market, become
It may be worth advisers who have clients who attained their SPA
on or before 5 April 2016, who have spare capital and are bemoaning
the low level of cash deposit interest rates, making them aware of
the options from paying Class 3A NICs which the offer is still on
the table. It may well be, depending upon the terms of your
engagement with your client, it may head-off a potential complaint
in the future.