Personal Finance Society news update from 9th January to 19th
January 2016 on taxation, retirement planning, and investments.
Taxation and Trusts
TAXATION AND TRUSTS
Forfeiture rule does not apply to trust interests unless
'created, enlarged or crystallised by the death'
(AF1, RO3, JO2)
In the recent case of Henderson v Wilcox 2015 3469 Ch, the High
Court had reason to consider the application of the forfeiture rule
to trust interests created during the lifetime of the deceased.
It is widely known that the forfeiture rule operates to prevent
someone who has unlawfully killed another person from inheriting an
interest in that person's estate by treating the person whose
interest is forfeited as having predeceased the deceased
(Forfeiture Act 1982 and Estates of Deceased Persons
(Forfeiture Rule and Law of Succession) Act 2011)
In the case in point, the deceased had died as a result of
injuries sustained in an attack by her son, Ian Henderson, and as a
result he was excluded - by reason of the forfeiture rule - from
inheriting the residue of her estate under the terms of her Will.
However, a year or so prior to the death, Mr Henderson and his
mother had, as part of an asset protection strategy, each created
'Family Protection Trusts' into which they had transferred their
respective shares of a property that they had originally owned as
joint tenants, for beneficiaries including both parties.
In considering whether Mr Henderson had acquired a benefit from
the trust as a consequence of the killing, the Court concluded
(from an examination of previous case law) that the key issue is
whether 'the offender's right is caused to come into existence, or
to be enforceable, or the benefit to the offender is caused to
accrue, directly by the death or the criminal act connected with
Drawing a contrast between a trust of a life policy (where it is
the death that causes a pre-existing beneficial interest to become
enforceable in the sense that an entitlement to payment arises) and
the present case, the judge held that "the interests that Mr
Henderson has or may acquire under the Family Protection Trusts do
not arise from (or "result from") the death of Mrs Henderson.
Insofar as he is a discretionary beneficiary of Mrs Henderson's
trust, he acquired that status on the execution of the trust
therefore his interest is neither created nor enlarged by her
death. If the trustees exercise their powers to pay any income or
capital to him, he will receive it as a result of the decision of
the trustees (albeit one they may make in light of the death) and
not by virtue of the death itself."
Accordingly, it was held that the forfeiture rule had no
application to Mr Henderson's interests under the trust - whether
they arise now or in the future as a result of the exercise of the
While no detail on the trusts is provided in the judgement, the
judge's comments suggest that the trustees had an overriding power
to appoint income or capital to any one or more of the
discretionary beneficiaries (including the offender) during the
settlor's lifetime. Consequently, the outcome may have been
different had the discretionary trusts come into effect only on the
settlor's death or had the offender's trust interest been absolute
rather than discretionary.
The OBR reports lower than expected yield
There has been a less than expected tax yield from a range of
anti -avoidance measures.
The Office for Budget Responsibility (OBR) said, in an analysis
progress so far, that some aspects of the anti-avoidance
programme had underperformed compared to the Chancellor's initial
"Most measures are within £50 million of the original estimate
either way, but there have been five measures where the average
yield is lower by more than £50 million a year," the OBR
said. It also said "No measures have significantly
outperformed the original costing."
Some problems with parts of the crackdown are "expected to
continue in future years" the OBR said.
Tax repatriation from the tax havens of the Isle of Man, Jersey
and Guernsey, as well as changes to tax credit calculations, had
fallen short of expectations. Some HMRC
compliance measures were also not bringing in expected
Despite this latest report from the OBR, the government says
that the tax gap is falling over the long-term. The tax gap
(standing currently at around £34bn) is, broadly speaking, the
difference between the tax that the government would expect to
collect if the tax legislation were applied as intended and the
amount that is actually collected. Two of the biggest contributors
to the tax gap are 'evasion and crime' (over 40%) and 'avoidance
and legal interpretation' (together over 20%).
IHT receipts set to rise
The key headlines in relation to IHT that have been produced by
the Office for Budget Responsibility (OBR) are as follows:
- The number of families paying IHT is at a 35 year high.
- The increase in the number paying IHT is due primarily to the
combination of property price increases and the frozen nil rate
- 40,100 families will face (death-related) IHT in this year with
the number increasing to 45,100 in 2016/7
- Only 2.6 % of deaths resulted in IHT in 2009/10. The figure for
2015/6 is 7.1% and is estimated to exceed 8% for 2016/7.
- The average house price in London rose 64% to £531,000 in the 6
years to October 2015.
- IHT receipts are expected to reach £4.4 bn in
- When the RNRB is introduced in 2017/8 the OBR estimates that
the number of deaths that will generate IHT will fall by around a
third to 30,300 (around a third of the total deaths) and then rise
to 6% by 2020/21. Before the RNRB was introduced the number
of estates likely to pay IHT was predicted at 11% of the
- IHT receipts are expected to grow to £5.6 bn by 2020/21.
It still seems that the major part of the IHT yield will
continue to come from the larger estates - as one would expect. The
amount of IHT borne by estates worth over £1m rose from 49% in
2006/7 to over 70% in 2012/13.
The combination of the gift with reservation and POAT provisions
makes effective and acceptable planning with the main residence
While the residence nil rate band will clearly provide help, and
have an impact on the IHT yield, its conditions may well mean that
it is not as helpful as one might think to many of the clients of
advisers. The tapering away of the relief for estates of more than
£2m will clearly have an effect; as will the fact that one ignores
BPR and APR in determining whether the £2m threshold is breached to
Planning with cash and investments remains feasible though.
Through the use of trusts it is possible to have an impact on the
IHT liability but retain some access to capital.
Of course, registered pensions remain extremely IHT
To the extent that a liability to IHT cannot be reduced,
especially relevant for those with large main residences and
estates over £2m, the simplicity and tax effectiveness of
protection policies held in trust should not be overlooked.
Subject to cost of course.
The impact of the new additional 3% SDLT on additional
residential property tax
(AF1, AF2, RO3, JO3)
The impact of the proposed new additional 3% SDLT on additional
residential property tax is leading to fears of property "chain
The Financial Times has recently reported that property
professionals are concerned that the additional 3% Stamp Duty Land
Tax (SDLT) on purchases of residential property, when the purchaser
already owns a residential property, may cause some property chains
The concern is specifically driven by the fact that if one buys
a residence before one sells an existing one (something that a
number of more wealthy older people are able to do) then the
additional SDLT will be payable.
The SDLT is reclaimable if the 'original' residence is sold
within 18 months, but the cash flow detriment is very real.
We have not seen the end of this issue and we can expect further
representations from interested parties. Anything
financial to do with residential property is likely to be of
interest to clients of advisers, so we think it's worth trying to
keep up with developments.
Cash flow is clearly still a big driver in HMRC. As well as the
proposals for more 'real time' collection through digital returns,
we also have Accelerated Payment Notices (APNs) and other
strategies HMRC have implemented to secure tax early.
In relation to this 'payment on completion' part of any
transaction, the government appreciates that, for purchasers who
own two or more properties temporarily due to unintended
circumstances, paying the higher rates of SDLT (and to potentially
claim a refund shortly after) may seem burdensome.
In order to allow individuals whose purchase of a new main
residence precedes the sale of a previous main residence by only a
few days, it states in the consultation that it may be preferable
to allow the normal rates of SDLT to be paid as long as the
previous main residence has been sold by the time the SDLT return
Currently, an SDLT return is due within 30 days of the
completion of a purchase, but at the Spending Review and Autumn
Statement 2015 the government announced plans to consult on
reducing this to 14 days.
For information, HMRC Helpsheet guidance on the payment of SDLT
states the following in relation to collection and payment: 'You
must send an SDLT return to HMRC and pay the tax within 30 days of
completion. If you have a solicitor, agent or conveyancer,
they'll usually file your return and pay the tax on your behalf on
the day of completion and add the amount to their fees. If
they don't do this for you, you can file a return and pay the tax
So if HMRC is prepared to 'trust the taxpayer' and not (as it
seems is the case in most residential purchases) get the SDLT
return submitted and the tax collected by the purchaser's
solicitor, it is clearly possible to remove the cash flow detriment
of the new rule to the purchaser/seller. Most who are
prepared to purchase a new main residence before selling their
existing one would hope to sell their existing property within 18
months. And, unlike HMRC's justification in relation to APNs
(which puts the tax in dispute with HMRC until the case is
resolved) there is no aggressive tax avoidance motive existing in
relation to the ordinary sale and purchase of residential
Dividends, trusts and estates - General tax
(AF1, AF2, AF4, RO2, RO3, JO2, JO3, CF2, FA7)
HMRC has provided further clarification on the rate of tax which
will apply to dividends not directly received by an individual by
way of a reply to the following two questions:
- What rate of tax will be payable on dividends received by
executors/personal representatives during the administration of an
- What rate of tax will be payable on dividends received by
trustees of an interest in possession (IIP) trust?
HMRC has confirmed that the answer to both these
questions will be the dividend ordinary rate, ie 7.5%.
Put thus, it sounds obvious, but there are some
unfortunate consequences. If an executor/PR or IIP trustee receives
£1,000 of dividends in 2016/17 they will have to pay £75 in
ordinary rate dividend tax (£1,000 @ 7.5% - no grossing up). The
estate beneficiary or life tenant will then receive £925 with a
'tax credit' of £75 attaching. Unless the final recipient has
exhausted their dividend allowance, a reclaim will be
In theory it should be possible for IIP trustees
to avoid this issue by mandating the dividend income direct to the
income beneficiary, but this has not been confirmed.
A very similar problem will arise with bank and
building society interest. Interest will be paid gross from 2016/17
and executors/PRs and IIP trustees will have to account for basic
rate tax (this time at 20%), while their beneficiaries may be
non-taxpayers thanks to the personal savings allowance.
At present many executors have nothing to do on the income tax
front because their liability is limited to the basic rate, while
dividends and most interest is paid net. That will change from
The cost of tax reliefs has risen 13 percent
(AF1, AF2, JO3, RO3)
The cost of pensions tax relief has been publicised at well over
£30bn net (over £50 bn gross). The government publicly
started the "review ball" rolling on this with its
"Strengthening the incentive to save" consultation and we expect to
hear more on this around the time of the next Budget on 16th
Overall, though, it has been estimated that the cost of many
other "tax breaks" has also risen considerably over the past few
Exempting the main residence from CGT costs a staggering £180 bn
- up from £105 bn just four years ago. The cost of
entrepreneurs' relief has also, it is reported, increased from £2bn
The opposition are pushing for a review of "tax reliefs and tax
breaks" to assess:
- Are they producing worthwhile benefits - in particular, are
they achieving the objectives that the reliefs were introduced to
- Are they open to exploitation and abuse.
Whenever large sums of money are at stake (as is most definitely
the case with pensions relief) it is natural and right that there
should be a rigorous assessment of the "value" (eg in terms of
savings and investment behaviour) that is being achieved. Care must
also be taken that the system of relief is not being abused so that
more relief than was anticipated is being secured.
The government's relentless attack on tax avoidance,
incorporating legal interpretation based on the substance as
opposed to the mere form of legislation (eg giving tax relief or
exemption), is clear evidence of how the world has changed in this
At a more fundamental level, given the amounts involved, then
more questioning of the basis on which the relief is given, as is
currently going on in relation to pensions relief, can be
Dividends And trusts - Standard rate band
(AF1, AF2, AF4, RO2, RO3, JO2, JO3, CF2, FA7)
HMRC has now confirmed that this will be 7.5%,
in line with the charge for a basic rate taxpayer on dividend
income above the dividend allowance.
This answer is as expected, but does highlight the relatively
generous tax treatment of dividends within UK life companies, where
there is no extra tax charge.
EIOPA consultation: good communication for occupational pension
(AF3, RO4, RO8, CF4, JO5, FA2)
The European Insurance and Occupational Pensions Authority
published a consultation paper on good practices on tools and
channels for communicating to occupational pension scheme
EIOPA examined existing practices to identify ideas for
improving communications, and the Paper highlights the following
- How the welcome or enrolment pack is transmitted to new
- The ways in which active and deferred members receive regular
information about the status
- of their individual pension entitlements;
- Whether there are any retirement planning tools made available
- How ad hoc information on changes directly affecting pension
scheme members is being communicated;
- How to inform scheme members about their options when they
change job, including for pension transfers;
- Once the point of retirement is drawing closer, whether, and
how, scheme members should be informed about the options
The consultation period will end on 22 March 2016.
Retirement income report
(AF3, RO4, RO8, CF4, JO5, FA2)
The FCA have published their latest quarterly
update of the retirement income market. The data collected
shows how consumers accessed their pensions in the period from the
beginning of July to the end of September 2015. The sample of firms
covers an estimated 95% of defined contribution (DC) contract-based
pension schemes assets.
Here is a summary of the findings:
Fully withdrawing money and taking an income
In the quarter July to September 2015 178,990 pensions have been
accessed by consumers to take an income or fully withdraw their
money as cash. Of these:
- 120,969 pensions (68%) were fully cashed out. Of the pensions
that were fully cashed out88% were small pot pensions
- 58,021 pensions (32%) were used to take an income after tax
free cash i.e. using partial drawdown, partial Uncrystallised Fund
Pension Lump Sum (UFPLS) or to buy an annuity
Of the 178,990 pensions that were accessed:
- 60,600 (34%) used UFPLS (both partial and full
- 54,604 (30%) used income drawdown (both partial and full
- 23,385 (13%) were used to purchase an annuity
- 40,401 (23%) were full withdrawals using small pot lump sum
Guaranteed Annuity Rates (GARs)
Fifteen providers in the sample had pension policies with
Guaranteed Annuity Rates (GARs).
Overall 68% of GARs were not taken up. This figure will include
customers who are too young to exercise their GAR. This trend was
higher in small pots, where 79% of those with pensions below
£30,000 with a GAR did not take them up.
Level of withdrawals
Customers using drawdown or UFPLS made partial withdrawals in
the quarter at the following rates as a percentage of their pension
pot after tax free cash:
- Less than 2% 180,321 (71%)
- 2 - 3.99% 32,169 (13%)
- 4 - 5.99% 7,243 (3%)
- 6 - 7.99% 5,862 (2%)
- 8 - 9.99% 4,442 (2%)
- 10% or more 24,396 (10%)
Customers aged 55-59 made the highest level of withdrawals as a
percentage of their pension pot and of these, 27% of these
customers took an income of 10% or more of their pot after any tax
free cash was deducted.
Use of regulated advisers and Pension Wise
The highest levels of adviser use were for customers going into
drawdown (58%). Across all products and withdrawals, consumers with
larger pots were more likely to have used a regulated adviser.
It's still too early to spot any patterns and not surprising
that the initial rush to access funds has slowed by 13%.
Polygamy and pensions
(AF3, RO4, RO8, CF4, JO5, FA2)
The House of Commons Library has
published a briefing paper which looks at polygamy and deals
with the recognition of polygamous marriages, immigration issues,
social security benefits and pension entitlement.
In order to be recognised as valid, all marriages which take
place in the United Kingdom must be monogamous and must be carried
out in accordance with the requirements of the relevant
legislation. For a polygamous marriage to be considered valid
in the UK, the parties must be domiciled in a country where
polygamous marriage is permitted, and must have entered into the
marriage in a country which permits polygamy.
No formal assessment is made of the number of polygamous
It has been the policy of successive governments to prevent the
formation of polygamous households in the UK. A UK resident
cannot sponsor a non-EEA national for permission to enter or remain
in the UK as their spouse if another person has already been
granted such permission, and the marriage has not been
dissolved. However, it is possible for all parties to a
polygamous marriage to be legally present in the UK. For
example, a second spouse may qualify for entry to the UK in a
different immigration category, in their own right.
Social Security Benefits
At present, some benefits can be paid, in certain cases, in
respect of more than one spouse but the allowances that may be paid
in respect of additional spouses are lower than those which
generally apply to single claimants. Universal Credit (UC) is to
replace all existing means-tested benefits and tax credits for
families of working age but is not expected to be fully introduced
until 2021. The 2010 Government decided that the UC rules
will not recognise additional partners in polygamous
relationships. This could potentially result in some
polygamous households receiving more under UC than under the
current benefit and tax credit system.
A wife in a polygamous marriage does not generally have the
right to a State Pension on the basis of her spouse's