Personal Finance Society news update from 1 July 2015 - 14
Jult 2015 on taxation, retirement planning, and investments.
Taxation and Trusts
Taxation and trusts
Significant increase in ATED receipts
(AF1, AF2, JO3, RO3)
The latest tax and NIC receipts released from HMRC
show that the yield from the annual tax on enveloped
dwellings (ATED) has increased
The latest monthly figures for tax receipts show that ATED
receipts for April - May 2015 amounted to £135 million, compared to
£91 million for the same period in 2014. Extrapolating for the
remainder of the year indicates that total 2015/2016 receipts will
be about £172 million, compared to £116 million for 2014/2015.
The tax charge was initially introduced in April 2013 and is
payable by corporate bodies (i.e. companies, partnerships and
collective investment schemes) on high value residential
At the time it was first introduced, ATED applied only to
properties valued above £2 million, but it has been significantly
extended in scope since then. At the 2014 Budget it was announced
that new ATED charges would apply to properties worth between £1
million and £2 million from 1st April 2015, and properties worth
between £500,000 and £1 million from 1 April 2016.
The disclosure of the ultimate beneficial owners of trusts
(AF1, JO2, RO3)
The fourth Anti-Money Laundering Directive
(AMLD) requires disclosure of the ultimate beneficial
owners (UBOs) of companies and trusts. Does this mean the end
of privacy for settlors and beneficiaries of trusts? Not
necessarily, although some crucial matters are yet to be
The fourth AMLD defines an ultimate beneficial owner (UBO) as
any natural person(s) who ultimately owns or controls the corporate
entity or trust and/or the natural person(s) on whose behalf a
transaction or activity is being conducted.
As a primarily Anglo Saxon structure trusts have always been
viewed in continental Europe with suspicion. There is, of course,
no doubt that in many cases trusts have been used in tax avoidance,
or even tax evasion, as well as money laundering schemes and so it
was only a matter of time that some rules would be introduced to
prevent this. The issue of terrorism funding have added urgency to
this whole subject.
EU Member States have until July 2017 to implement the fourth
AMLD into national legislation.
In the case of trusts (the position for companies was covered in
the last bulletin), the EU member states must provide for a central
register for UBOs of trusts governed by their law that will, in
principle, only be accessible to competent authorities, EU
Financial Intelligence Units and obliged entities that are
conducting customer due diligence, but not to the public. EU Member
States must include UBO-information in this register in respect of
trusts and comparable legal arrangements that are governed under
the law of the relevant EU Member States if the trust gives rise to
tax consequences. However, the meaning of the term "tax
consequences" has not yet been clarified.
The information included in the trust register should include
the identity of:
- the settlor;
- the protector(s) (if any);
- the beneficiaries or classes of beneficiary; and
- any other natural person exercising effective control over the
It is anticipated that in due course these registers will be
linked at EU level through a central European platform.
The legal view in the UK (represented by the Law Society) has
always been that while they accept that public beneficial ownership
registers may assist competent authorities and obliged entities,
making all trusts subject to such a register would have some
unfortunate unintended consequences for citizens' privacy in all
member states, but particularly so in the UK.
Of course, given that the information on trusts will be
accessible only to the authorities and obliged entities and not the
general public, presumably this satisfies those whose main concern
was privacy and data protection.
Information about beneficial owners already needs to be provided
to financial institutions, for example when an investment is
purchased or an account opened, if only as part of the FATCA
Furthermore, given that the registers will only list trusts that
generate tax consequences, and will only contain information that
is being made available to tax authorities as part of international
initiatives for the automatic exchange of tax information, this
means that not all trusts will have to be disclosed. Clearly, the
meaning of the "tax consequences", when it is clarified, will be of
crucial importance. Will a trust generate tax consequences only
when a taxable event occurs? Or will the possibility of a tax
charge at any time in the future be sufficient? An example of a
bond in trust, where there may never be any tax charge on the
trustees, comes to mind. What about trusts holding private
residences occupied rent free by the beneficiaries? What about life
policies held in trusts? We await further clarification on in due
FSCS cash compensation limit cut from 1 January 2016
From 1 January 2016, the Financial Services Compensation Scheme (FSCS)
will reduce the compensation limit for savers from £85,000 to
Currently, anyone with savings up to £85,000 (or up to £170,000
for joint accounts) in a bank or building society would be covered
for this amount if the institution goes bust.
The limit is set by the European Union Deposit Guarantee Schemes
Directive that fixes the level of protection across Europe at
€100,000 or its equivalent. When the level was agreed in 2010, that
figure translated into £85,000. But the FSCS said that due to the
value of the euro falling against the pound, the limit is being set
based on the exchange rates applying on 3 July.
Mark Neale, chief executive of FSCS, said:"The countdown to
a new FSCS savings limit is under way. Until December 31 2015
people are protected up to £85,000. People have six months to get
ready for the change, if necessary. What won't change is the
service FSCS provides to the people using banks, building societies
and credit unions. We will continue to be there for them."
He added:"The new £75,000 limit will protect more than 95pc
of all consumers."
Ninety-eight per cent of the British population are covered by
the £85,000 compensation safety net.
Importantly, advisers should ensure that clients are fully aware
of their position in regard to what would or would not be covered.
Note that in the situation where a bank shares a banking license
with other banks, savings which are split between the various banks
which share the same license will only usually be covered if the
total amount does not exceed the current limit of £85,000.
It is evident that the benefit of warning clients of this type
of change well in advance (6 months in this case) means that they
can consider their overall position in terms of whether to
potentially move savings between different account providers or
consider alternative savings and investment vehicles.
Investors kick start legal battle against Ingenious Media
Ingenious Media promoted various investment schemes, many of
which were designed to take advantage of tax breaks by investing in
the film industry.
The schemes attracted billions from around 1,300 investors and
many offered generous tax benefits. However, it was recently
reported in the press that many investors are suing finance firm
Ingenious Media over the billion pound film production schemes that
have been labelled as tax avoidance arrangements by HMRC. Investors
claim they were wrongly advised and were not made aware of the
More than 100 investors, including Ken Costa, former chairman of
investment bank Lazard, and Christian Hess of investment bank
Investec, have issued a writ in the High Court against Ingenious
and more than 50 associated companies.
Among these are a group of financial intermediaries, including
Coutts, which specialises in providing banking services for the
very wealthy, HSBC Private Bank and Swiss investment bank, UBS.
Ahead of a further legal showdown HMRC has demanded investors
pay any disputed tax upfront, on the condition that it will be
repaid if Ingenious wins the Court battle.
In a statement given to the Daily Mail, Ingenious said:
'The film partnerships run by Ingenious Media have already
generated over £1 billion in taxable income for the Treasury. They
helped to bring movies including Avatar, Vera Drake and Hotel
Rwanda to the screen and are clearly run for profit. These claims
are entirely without merit and we will vigorously defend any
actions brought against us'.
Six months on …
(AF4, RO2, CF2, FA7)
The first half of 2015 was marked by the continued threat of
rising US interest rates, the start of Eurozone quantitative easing
(QE), the UK general election and, in the dying days, Greece's path
to default. The results are shown in the table below.
Change to 30/6
FTSE 350 Higher Yield
FTSE 350 Lower Yield
Euro Stoxx 50 (€)
Bank base rate
2 yr UK Gilt yield
10 yr UK Gilt yield
2 yr US T-bond yield
10 yr US T-bond yield
2 yr German Bund Yield
10 yr German Bund Yield
Brent Crude ($)
A few points to note from this table are:
- The FTSE 100 has gone virtually nowhere in six months, despite
the resilience of the economic numbers and minimal inflation.
However, the FTSE 250 tells a different story, with a rise of
nearly 9%. The gap between the two indices reflects the fact that
mid-size domestically oriented companies did better than their more
international counterparts in the Footsie. The latter include big
names affected by the decline in commodity values, be they miners
or energy companies.
- The US market performed in a similar way to the UK. However,
the dollar weakened slightly against sterling.
- Eurozone QE, which started in January, boosted the European
stock markets. Despite the problems with Greece, the Eurozone
markets outperformed the US and UK in local currency terms. The
flipside of QE was that the euro weakened over the six months -
down 8.7% against sterling, just in time for the summer
- After years of being the dog that didn't bark, bond yields
started rising. Yields had been higher during the period - German
10 year bond yields briefly touched 1% in early June having fallen
to 0.05% in late April. However, by the end of the half year Greece
has prompted a flight to quality, bringing yields back down.
- After last year's sharp falls, oil recovered somewhat in the
first half of 2015, with Brent Crude up 10% over the period. That
will eventually feed through to the inflation numbers.
The next three months will see continued Eurozone and Japanese
QE and the next stage in the Greek tragedy. In the USA, there is an
expectation that September will mark the first increase in interest
rates by the Federal Reserve for almost 10 years. Another
rollercoaster may be the order of the day.
Inheritance tax and drawdown funds; important developments
(AF3, RO4, CF4, JO5, FA2, RO8)
Over the past few weeks there has been uncertainty as to whether
the pension funds of an individual who is taking income drawdown
will be free of IHT on their death. Similar uncertainty exists in
relation to drawdown funds held for beneficiaries, nominees and
HMRC have now provided clarification of the position.
In Finance Act 2011, the 55% recovery charge was introduced.
This applied to pension funds of people who died either
- owning crystallised pension funds (on death at any age) or
- owning uncrystallised funds where they were aged 75 or over on
At the same time an exemption was introduced in section 12 (2ZA)
of the IHT Act to remove an inheritance tax charge under the
"omission to exercise a right" rules in section 3(3) IHT Act. The
offending "omission" being the omission to actually draw funds that
had been designated to drawdown.
Introduction of Flexi-Access Pensions
As part of the flexi - access pensions "revolution", the
coalition Government introduced provisions which made the taxation
of death benefits more favourable. In effect, if the member died
below age 75 no income tax liability would arise irrespective of
whether benefits were taken as a lump sum or left into drawdown. In
the event of death at 75 or over, a 45% tax charge would arise on
lump sum payments with drawdown payments being taxed as income of
It was assumed that under the new regime inheritance tax would
not be an issue. However, some commentators queried this analysis
stating that section 3(3) could still apply in cases where the
member died having designated his pension fund to drawdown. This
was on the basis that the exemption in section 12(2ZA) only applied
to the member's right to elect to crystallise the plan and so draw
benefits. The exemption did not apply to the member's rights to
draw the funds having gone into drawdown ie where the funds had
already been designated to drawdown but just hadn't been fully
drawn at the point of death.
Joe is age 73 and dies owning an uncrystallised pension plan.
Whilst technically he has omitted to exercise a right in that he
could have crystallised his plan and taken benefits, section 12
(2ZA) will provide an exemption from such a change.
Bert is aged 75. On 1 May 2015, he crystallised his pension plan
with his original pension provider. He took his PCLS but took no
other benefits. He dies on 1 August 2015. The exemption in section
12(2ZA) will not apply because he is already in income drawdown and
so section 3(3) can possibly apply to the invested funds (but see
HMRC's stance on the position
HMRC agree with this interpretation of section 12(2ZA). In other
words, notwithstanding the introduction of the exemption in section
12(2ZA) of IHTA by Finance Act 2011, section 3(3) can still
potentially apply to tax funds held in drawdown on an individual's
death and therefore those undrawn benefits can be subject to
However they have also stated that their existing guidance
confirms that a charge under section 3(3) will be considered only
where there is evidence that the member's intention in failing to
actually draw retirement benefits was to benefit others on death
rather than to benefit the member. In practice, they say, this
means that a claim would only arise where the member was in
ill-health at the time he took a decision
- designate funds for drawdown, or
- change the established pattern of withdrawals from drawdown
resulting in reduced benefits being taken by the member.
HMRC has confirmed that a member would be accepted as having
been in normal health in the event that they survive for two years
from the relevant decision.
So what happens now?
We have been informed by HMRC that it was never intended that
section 3(3) should apply to any funds designated for drawdown but
undrawn at the date of death. HMRC has been made aware that
technically a charge to inheritance tax can arise in these
HMRC make the point that the circumstances in which a possible
section 3(3) charge could actually arise are extremely limited. In
practice HMRC have not come across any cases where the charge has
arisen to date.
They are however considering the position in the light of the
pension changes in April 2015 and whether a legislative change
should be made to put the position beyond doubt. Any legislative
change could apply retrospectively back to the introduction of
section 12(2ZA) IHTA 1984 in 2011.
Whilst this news is very comforting, clearly an essentially
unsatisfactory position exists. The position is that technically,
the crystallised funds of some individuals who die (having been
motivated to omit to exercise their right to actually draw benefits
by virtue of their serious ill health) may be subject to
inheritance tax despite this not being the intention of the
Government. We would hope to see the position clarified by the
introduction of revised legislation and from the correspondence we
have had, HMRC do not seem averse to doing so in order to put the
position beyond doubt.
We are still in discussion with HMRC over certain points of
interpretation on the IHT treatment of pension funds and will
report further in due course. On balance though we believe the tone
of the responses we have received from HMRC to be essentially
New ROPS notifications list now posted
(AF3, RO4, CF4, JO5, FA2, RO8)
HMRC have posted an updated
list of the schemes that meet the requirements to be a
Recognised Overseas Pension Scheme.
Headline numbers suggest that on the list published
1st June 2015, there were in the order of 3600 schemes
that met the requirements and on the list published today
(1st July) there are now only 660 - approximately an 80%
reduction in schemes.
Scheme administrators that have made transfers to a QROPS since
6th April 2015 should revisit these transfers to ensure
that the QROPS did meet the new requirements from that date, most
notably meeting the Pension Age Test.
If a scheme is not a QROPS then a transfer to that scheme will
not be tax-free. Scheme administrators (and the transferring
member) will need to satisfy themselves that the scheme they are
transferring their UK pension benefits/fund to is a QROPS. As part
of the checks scheme administrators should always confirm with the
scheme manager of the scheme accepting the transfer that scheme
meets all of the requirements to be a ROPS, including the Pension
Age Test, from 6 April 2015 onwards.
If a scheme has ceased to be a QROPS, individuals who
transferred their pension savings to that pension scheme before it
ceased to be a QROPS will be subject to UK tax on the same basis as
if the scheme had remained a QROPS. They will be able to remain as
members and receive a pension paid from the sums transferred
without automatically incurring additional UK tax charges.
The penalties for transferring to a non UK pension scheme that
is not a QROPS are significant and would result in charges of at
least 70% of the transferred amount, made up of:
- 40% unauthorised payment charge,
- 15% unauthorised payment surcharge, and the
- 15% scheme sanction charge, which could be as much as 40% if
the member doesn't pay their unauthorised payments charge.
Of this up to 40% could be charged to the scheme administrator
and of course by the time the charge is applied the transfer will
have completed, meaning that the assets are no longer held in the
registered UK pension scheme are no longer in the scheme for the
administrator to appropriate (as is often a clause in their rules)
to pay the scheme sanction charge and therefore the charge could
fall of the scheme administrator.
Pension liberation fraud cases on the rise
(AF3, RO4, CF4, JO5, FA2, RO8)
Cases of so-called pension liberation rose last year, accounting
for the vast majority of pension-related frauds in 2014, according
to data collected by Action Fraud and the Office
for National Statistics (ONS).
Of the 863 pension-related fraud cases recorded in 2014, 758
involved pension liberation; up from 719 the previous year. Action
Fraud, the UK's national fraud-reporting authority, first began
recording pension liberation cases as a separate category in
Pension disputes expert Ben Fairhead of Pinsent Masons, said
that the fact that reported cases continued to rise in 2014 despite
increased warnings from the both The Pension Regulator (TPR) and
the FCA was a concern. He went on to say:
"This might, however, simply reflect more individuals
discovering belatedly that they have lost out as a result of
pension liberation scams, perhaps where the original transfers were
made much earlier. That said, notwithstanding warnings from TPR,
there are still plenty of individuals who are significantly
desperate for cash to be lured into these scams, even though they
are sometimes aware that there are risks attached.
It will be interesting to see how the statistics for the
current year compare once they eventually come through. Cases of
conventional pension liberation (individuals releasing cash
payments before the normal minimum pension age of 55) might well
reduce through increased public awareness, a reluctance by those in
the industry faced with making transfers into suspicious
schemes to proceed, and possibly an evolving approach by the
fraudsters choosing to target those aged 55 and above given the new
flexibilities in place since April."
Under rules governing occupational pension schemes, an
individual can only claim pension benefits from the age of 55
unless doing so on ill-health grounds. Tax charges on unauthorised
payments can be as much as 70% of the value of the payment. Changes
to the law from April this year give members of defined
contribution (DC) schemes more freedom to access their savings any
way that they wish once they turn 55 without incurring heavy tax
penalties, although the rules remain as they are for those that
have not yet reached pension age.
Traditional pension liberation arrangements are designed to get
around the restrictions by transferring money representing a
saver's pension rights out of their existing scheme into a new
scheme, and then making the money available as a loan back to the
saver either in whole or in part. As well as substantially reducing
a pension scheme member's savings through punitive tax charges and
hefty introduction fees, any funds remaining in a pension
liberation scheme after the initial payment tend to be invested in
exotic, unregulated structures that do not live up to the
As of May 2015, over 1,000 people had already complained to the
UK's Information Commissioner's Office about unsolicited calls or
texts relating to their pensions this year. TPR, which re-launched
its campaign against pension 'scams' last year, has said that
scammers will likely evolve to keep up with the changes in the law
and begin targeting people approaching 55, seeking to exploit their
interest in accessing their pensions flexibly.