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My PFS - Technical news - 24/11/2015

Personal Finance Society news update from 4 November 2015 - 17 November 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

HMRC wins Rangers EBT appeal

(AF1, AF2, RO3, JO3)

Scotland's Inner Court of Session has ruled in favour of HMRC in its long-running battle with the Murray group and the former Glasgow Rangers football club, despite two earlier Tribunal defeats.

HMRC forced the club's original owners, Murray Group Holdings, into liquidation in 2012 after raising assessments to income tax and National Insurance on the basis that payments totalling £47.65m made to players and staff from the employee benefits trusts (EBTs) between 2001 and 2010 constituted disguised remuneration.

The club argued that the payments were genuine discretionary loans that could be recovered rather than actual earnings and were not therefore subject to tax on the employees; and in 2012 the First-tier Tax Tribunal found in the club's favour.

HMRC then took the case to the Upper Tax Tribunal where, in 2014, Rangers won again. Initially HMRC was refused leave to appeal this decision, but later obtained leave to refer it toScotland's Inner Court of Session.

The Court (in Advocate General for Scotland v Murray Group Holdings) has now accepted HMRC's argument that the cash payments made by the employer to the EBTs were in consideration of earned services by the employees and found that both earlier Tribunal decisions were wrong in law.

It considered the fact that some of the employees had been given a secret 'side letter' separate from the employment contract implied that the EBT formed part of their remuneration package, and ultimately found that the scheme amounted to "a mere redirection of employment income".

The decision (which may yet be appealed to the Supreme Court) supports HMRC's long-standing position on the effectiveness of EBTs and may well be used as a basis for serving an accelerated payment notice on any company which has yet to settle.


EISs over the last 12 months: A summary

(RO2, AF4, CF2, FA7)

How has the enterprise investment scheme (EIS) market changed over the last twelve months? We think that most of the changes have been things that have been driven externally, rather than internally. Reforms to theUKpensions system are probably the biggest driver. Lower limits on the amounts that can be saved and the threat to higher rate tax relief (still in place at the time of writing though) mean that higher earners need to find alternative tax-efficient investments, and this is encouraging many advisers and investors to consider EISs. We also find that EISs are being used in tax-efficient decumulation strategies that are becoming more popular in the light of pension freedoms and the removal of compulsory annuity purchases.

Legislative changes to secure EU State Aid approval have had a bigger impact on the VCT scheme. EIS investments were already focused on younger, high growth companies and company acquisitions and MBOs were much less common. Nevertheless, the new rules will have some impacts on the EIS. On the positive side, the transition between SEIS and EIS funding has been smoothed out by the removal of the requirement to spend 70% of SEIS money before raising funds via the EIS. But the SEIS will remain directed at small, young, high growth companies. This could be considered a negative from the point of view of how much risk investors have to expose themselves to, or a positive from the point of view of ensuring the SEIS directs capital to where it is needed most.

The end to the renewables story is another externally imposed change. Renewable Energy products only make up 5% of the investment opportunities open today, compared to nearly 40% in 2014. The double benefit of being able to invest tax-efficiently into firms benefiting from renewables subsidies had been responsible for a large number of new products and subsequent investment inflows. Providers and investors both filled their boots. Now that the party is over we will have to wait and see where that money is going to go. Peak (or Reserve) Power investments were looking like candidates that had similar features and could take the place of renewable energy, but as the Finance Bill worked its way through Parliament this asset class was also excluded.  There have been some changes though that have been driven internally by the EIS industry itself. The ability of platforms to carry out research, due diligence and investment are making life easier for advisers and investors.

We've also noted a slight reduction in the number of open capital preservation EIS investments compared to the historical norm. This could be attributed to the reduction in renewables, but the upshot is that there are more growth-focused EISs to invest in than previously, at a time when the economy seems to be picking up. The average target level of return in open investments (as stated by the Investment Memorandum) has also ticked up compared to the historical average. One would expect that this is linked to the higher number of growth-focused EISs, but actually there are some real anomalies in these figures: some investments with a stated objective of capital preservation are targeting higher returns than growth EISs. Perhaps the take-away is this: take the stated target level of returns with a pinch of salt.

Finally, establishing a performance track record and charging structure on a basis that allows meaningful comparisons between products remains as elusive as ever. Our guess is that as long as there are big drivers for increased EIS inflows (pension limits, IHT planning, more sophisticated clients), the EIS industry won't be overly concerned with these issues. We know, and we accept, that there are good reasons why performance measurement is difficult and charges are high - but we still feel that the industry could be more transparent.

Overall, though, the industry continues to both raise and deploy more money and the products remain uniquely suited to meet some of the financial planning needs of wealthier clients, in areas where research has shown that clients feel advisers really add value for them.


Attorney's expense claim 'excessive' and 'repugnant'

(AF1, AF2, RO3, JO3)

An attorney, who charged his elderly widowed mother 'out of pocket expenses' amounting to more than £117,000 for visiting her in her nursing home and acting as her attorney, has (unsurprisingly!) had his appointment revoked by the Court of Protection in Re SF, [2015] EWCOP 68.

The Court heard that the attorney used his usual daily charging rate from when he was a self-employed independent consultant prior to his retirement to clock up the astronomical bill.

The Public Guardian launched an enquiry after the local authority raised concerns about the attorney's conduct when an ongoing dispute with the NHS over who should be responsible for the care fees led to unpaid nursing bills of nearly £30,000.  The Public Guardian agreed with the local authority that it was in the best interests of the donor for her fees to be paid pending the outcome of the dispute and launched the enquiry which ultimately led to an application for the Court to revoke the Enduring Power of Attorney ('EPA') when the extent of the attorney's abuse of power was discovered.

In issuing an order to revoke the power the judge commented that "one would be hard pressed to find a more callous and calculating attorney, who has so flagrantly abused his position of trust".  The judge added that "charging one's elderly mother a daily rate of £400 for visiting and acting as her attorney is repugnant".

Despite the fact that an attorney may be the sole beneficiary of the donor's estate, an attorney's fiduciary duty means that attorneys must never take advantage of their position or put themselves in a position where their personal interests conflict with their duties. Further, attorneys must not profit or derive any personal benefit from their position, apart from receiving gifts where the legislation allows it, whether or not it is at the donor's expense.


Unequal distribution of equity on remortgage infers intention to vary beneficial ownership

(AF1, AF2, RO3, JO3)

Ordinarily, where a property is jointly owned and there is no express declaration of trust setting out terms to the contrary, the equity in the property is deemed to be owned in equal shares. However, in Barnes v Phillips [2015] EWCA Civ 1056, the Court of Appeal has decided that unequal cash distributions made to the two parties on remortgage of the property demonstrated a change to the original intention to hold the property in equal shares even though no express declaration to vary the beneficial ownership was ever made.

The case concerned a cohabiting couple - Mr Barnes and Ms Phillips - who had been together since 1983 and had two children together. In 1996 the couple purchased a property as joint tenants for the sum of £135,000. Some years later, when the property had increased in value to £350,000, the couple remortgaged and used £66,069 of the funds raised to pay off business debts that had accrued to Mr Barnes while the balance was used to redeem the original mortgage.

Shortly thereafter the parties' relationship broke down and it fell to the Court to determine the parties' respective interests in the property. On the basis that one party (Mr Barnes) had received the sole benefit of 25% of the equity in the property when the property was re-mortgaged, the Court of Appeal held that there was to be inferred a common intention at that point to vary their interests in the property. Taking into account the extent of each party's contribution towards the children (including sums outstanding due from Mr Barnes to the CSA), repairs to the property and mortgage repayments since the breakdown of the relationship; the Court of Appeal upheld the conclusion of the first instance judge that a fair division was 85/15 in Ms Phillips' favour.

This decision represents a shift away from previous precedent which suggested that where property is owned as joint tenants, a common intention to depart from a 50/50 division could only be established in the most unusual of circumstances.


New Gift Aid declaration forms

(AF1, AF2, RO3, JO3)

On 22  October HMRC released a set of new and simplified model Gift Aid declaration forms aimed at combating the Gift Aid "tax gap".

Charities can use the old forms until 5 April 2016, but declarations signed from 6 April 2016 must be based on the new model declarations, as failure to do so may result in claims being invalid.

The new model Gift Aid forms seek to make it clear that individuals will be personally liable for the amount claimed by the charity in cases where they pay insufficient tax. They are also intended generally to be simpler and easier to understand.

The new statement included in the declaration reads:

'I am a UK taxpayer and understand that if I pay less Income Tax and/or Capital Gains Tax in the current tax year than the amount of Gift Aid claimed on all my donations it is my responsibility to pay any difference.'

It appears many donors do not appreciate the way that Gift Aid operates and a considerable number of donors sign declarations where they don't pay sufficient tax to cover the relief.

Usually HMRC will first repay the basic rate of tax claimed by the charity and then check whether the relevant individual has paid enough tax. This can obviously lead to payments of Gift Aid in error - otherwise known as the Gift Aid "tax gap". A report by the National Audit Office in November 2013 put the figure for payments in error at around £55 million per year ("Gift Aid and reliefs on donations" report by the Comptroller and Auditor General, 21 November 2013).

In theory, HMRC's principal route to recovering these sums is directly via the individual's self-assessment returns. However, HMRC will often first ask the charity to voluntarily repay the Gift Aid received. Despite this, in many cases these sums must be written off. Hopefully the new forms will serve to reduce the number of such cases.


Investment planning

The UK "tax gap" continues to fall

(RO2, AF4, CF2, FA7)

HMRC has published its statistics on the 'tax gap' for 2013/14, showing that the tax gap has fallen from 6.6% to 6.4%, with an overall total gap at £34bn. This indicates that more than 93% of the tax due in 2013/14 was collected.

The tax gap estimate of £34 billion is £11 billion lower than it would have been if the percentage tax gap had remained at the 2005/06 level of 8.4%.

The Corporation Tax and Excise percentage gaps have seen the largest reductions from 2005/06 to 2013/14, by just over half and just over a third respectively, while small and medium-sized enterprises account for the largest portion of the overall tax gap (just under half), followed by large businesses (just over a quarter).

David Gauke, Financial Secretary to the Treasury, said:

"The UK has one of the lowest tax gaps in the world, and this government is determined to continue fighting evasion and avoidance wherever it occurs.

If the tax gap percentage had stayed at its 2009 to 2010 value of 7.3%, £14.5 billion less tax would have been collected.

There is understandable anger when individuals or companies are perceived not to be contributing their fair share, but we can reassure the public that the proportion going unpaid is low and this government is dedicated to bringing it down further."

In recent years we have seen the introduction of a number of anti-avoidance measures and a steady decline in the figures illustrate that HMRC's approach is delivering sustained progress.


A US rate rise for Christmas?

(RO2, AF4, CF2, FA7)

As widely expected, the US Federal Reserve has recently decided not to raise interest rates. Less expected was what else it said.

In mid-September, the Federal Reserve, (theUScentral bank), met after its summer break and to the surprise of about half the experts (and smug satisfaction of the other 50%) announced that it would not be increasing short-term rates.

On 27/28 October, the Fed met again and, once more, decided to hold interest rates. This time around, do nothing was what nearly everyone expected, mainly on the basis that there was no press conference scheduled for after the meeting. However, the Fed's October pow-wow did produce the usual statement and it is this which has set the interest rate rise hares running.

In the September post-meeting statement the Fed said "Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term". This was widely viewed as a nod towards the issues of slowing growth, market falls and currency devaluation inChina. Several commentators said that in September the Fed had adopted the role of being the world's central bank rather than just theUSA's.

The October statement dropped this international reference. It also switched stance from saying

  • "In determining how long to maintain this target range [0-0.25%], the Committee will assess progress - both realized and expected - toward its objectives of maximum employment and 2 percent inflation"


  • "In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will…"[our italics].

Wall Street viewed the revised wording as a much clearer signal that December would see the Fed raise rates for the first time since 2006. US share prices jumped over 1% in the final hours of trading after the announcement, the dollar strengthened and US Treasury bonds fell in value as investors took comfort in what seemed to be a long-awaited end to uncertainty.  The next Fed meeting is on the 15/16 December and a press conference is scheduled for afterwards.

The specific reference to raising rates at the next meeting means that it will probably require something quite economically seismic for Christmas to arrive without a hike is US interest rates.


Another Super-Thursday

(RO2, AF4, CF2, FA7)

The new Bank of England Quarterly Bulletin has reduced growth forecasts and pushed out interest rate rise expectations.

The November Bank of England Quarterly Inflation Report (QIR) arrived as part of the second Super Thursday package, incorporating the latest (no-change) decision on interest rates and minutes of the Monetary Policy Committee (MPC) meeting.

Mark Carney, the Bank's Governor, had some interesting insights to offer in his presentation of the latest QIR, some of which echoed those of hisUScounterpart, Janet Yellen:

  • The outlook for global growth has weakened since the last QIR in August. Many emerging market economies have slowed sharply in 2015, causing the MPC to reduce its medium-term growth forecasts. While growth in advanced economies has continued and broadened, the MPC still believed that the overall pace of UK-weighted global growth would be slower than it thought in August.
  • As the Federal Reserve hinted when it put rates on hold in September, the major downside risk to growth is a more abrupt slowdown inChina.
  • In theUK, the MPC says "private domestic demand remains resilient, despite ongoing fiscal consolidation," which will cheer Mr Osborne ahead of this month's Autumn Statement. After the recent GDP deceleration, the Bank projects that economic growth will pick up a little towards the middle of next year thanks to a tighter labour market and stronger productivity supporting real income growth and consumption.
  • As he explained in Thursday's "why-I-missed-the-inflation-target letter" to the Chancellor, Mr Carney put 80% of the blame for sub-target inflation on energy, food and other imported goods prices, with the balance down to "subdued domestic cost growth". In other words, the fault rests in areas beyond the Bank's control. It is a mirror image of the excuse Mr Carney's predecessor used when inflation was runningabovetarget.
  • The Bank sees CPI inflation "likely to remain below 1% until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices." The famous inflation 'fan' chart in the QIR suggests the Bank's central case is for inflation not to reach 2% until around the middle of 2017.
  • The market's implied gently rising path for interest rates, with a 1% base rate not reached until the end of 2017, seemed to meet with Mr Carney's approval: "Were Bank Rate to follow that very gradually rising path, the MPC's best collective judgement is that inflation would slightly exceed the 2% target in two years and then rise a little further above it, reflecting modest excess demand." The August implied forecast was that a 1% base rate would arrive around the middle of next year, an indication of how expectations have moved over the past three months.

Back in July Mr Carney was talking about a rate rise coming "into sharper focus around the end of this year", much as Ms Yellen was hinting at the time. Now the UK focus has blurred and become more distant, just as Ms Yellen said (on Wednesday 4 November) that a Fed rate rise in December remains "a live possibility".


The cost of pensions tax relief

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

Although a response to the July Budget consultation on savings incentives has been deferred until March, the delay has not stopped the House of Commons Library issuing a 50-page paper on tax relief and pensions.

The paper is a helpful resume of the various opinions that have been expressed about potential changes to tax relief from the usual suspects, including all the main political parties, the Institute for Fiscal Studies, the Pension Policy Institute and Michael Johnson at the Centre for Policy Studies. The paper also looks at the various cut backs to relief since the arrival of the 'simplified' regime in 2006 with a lifetime allowance of £1.5m and an annual allowance of £215,000.

The paper sets out how the Treasury arrives at its "near £50bn" gross cost of pension reliefs in 2013/14 referred to in the July consultation document:



£ billion

Income tax relief on:




Contributions from employees



Contributions from employers



Contributions from self-employed



Investment income of pension funds


National Insurance relief on:




Employer contributions





Against this can be set the tax received on private pensions, which in 2013/14 amounted to £13.1bn, leading to a net cost of £35.2bn. However, the Treasury argues that such an offset could be misleading given that the tax "received by the government from pensions in payment will in all likelihood come from pensions which received tax relief many years ago." The Treasury also reasonably states that "tax rates of individuals may change over their lifetime and therefore the rate of relief they may not correspond to the amount of tax they ultimately pay on their pension."

While the paper refers to recent data on the net cost of tax relief, it does not reproduce HMRC's own chart which shows the net cost declining steadily from £38.1bn in 2010/11 and the cost of income tax relief also heading down from the same date, as annual allowance cuts took effect.

One issue which is quietly coming to the fore in the context of the cost of pension tax relief is the impact of auto-enrolment. Earlier this month, the chairman of the Association of Consulting Actuaries (ACA) warned a conference organised by the Westminster Employment Forum that the combination of rising auto-enrolment numbers and the implementation of the national living wage would put "a real strain on Treasury finances". And that without considering the ACA's suggestion that the auto-enrolment rate should be increased from the 2018 8% ceiling to 16%, going up by 1% every two years.

Pension Policy Institute looks beyond 2017

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

In April 2017 the ban on transfers into NEST and the contribution limit (£4,700 in 2015/16) will be removed. 18 months' later auto-enrolment will reach its final 8% contribution level. A review point for auto-enrolment is scheduled for 2017 - five years on from its birth - and in preparation the TUC commissioned the Pensions Policy Institute (PPI) to examine future contribution levels and increase mechanisms, with their resultant effects on benefits.

The PPI paper examines different scenarios applied to four TUC-set individual profiles (low and median earnings) and does not make any specific recommendations. Nevertheless, there are some interesting points that emerge:

  • The current 8% of earnings band system (£5,824 to £42,385 in 2015/16) equates to 6.3% for the median earner and 3.3% at the £10,000 income trigger level. The PPI notes that "These levels are lower than the contribution level required to achieve a good chance of an adequate level of retirement income."
  • The PPI considers four triggers to increase contributions:
    • age, with contributions increasing as the worker becomes older;
    • job tenure, with contributions increasing with length of service;
    • pay increase, with part of any increase diverted to raise the contribution level; and
    • pay level, under which the PPI suggests the contribution rate is linked to individual earnings and these are compared to National Average Earnings in setting the contribution rate.
    • The PPI notes that job churn will impact on 2, while low earners will still see low contributions under 4.
  • The current system of 8% contributions of banded earnings has a tax relief cost of £3.3bn per year. The PPI puts the cost of tax relief at £0.4bn for each additional 1% of contribution, implying a 10% contribution would cost £4.1bn in tax relief. Two thirds of the current tax relief cost on automatic enrolment contributions is spent upon basic rate taxpayers.
  • The issue of low pay/low contribution prompted the PPI to examine a flat rate annual bonus of £500 added to all contributions, paid for by the Government at a cost to the Exchequer of £4.5bn a year. The total cost of tax relief plus the bonus approximately equates to the tax relief cost upon a contribution level of 19% of band earnings, according to the PPI. 88% of the bonus cost an 80% of total cost (including tax relief) would go to basic rate taxpayers. Not unreasonably, the PPI suggest that a £500 incentive "may reduce opt-out rates increasing costs further". 

What comes next after 8% may seem a long way off, but it is one of the factors which must be weighing on the Treasury's mind as it contemplates pension tax relief reform.

21,600 Lamborghinis in six months

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

According to data from HMRC, individuals over the age of 55 have cashed in £2.7 billion of their pensions since changes toUK pension rules gave them full access to their funds.  Based upon Autocar and the price of the cheapest Lamborghini at £125,000 that equates to 21,600 cars in six months or 182 cars each day or nearly five an hour.

According to HMRC, £1.5bn of pension payments were made in the second quarter of 2015, and £1.2bn in the third.

HMRC did not say how much tax had been paid on the cashed-in funds since April. Any withdrawal above 25% of a saver's fund will be subject to their marginal rate of income tax.

According to Simon Tyler of Pinsent Masons: "The Treasury will be pleased with the high take-up of the new freedoms and choice measures introduced for pension savers. Whether this indicates a success story for pension savers is another matter."

We can only guess whether all those who cashed out their pensions acted wisely. Some may unwittingly have taken themselves into a higher income tax bracket; which could have been avoided if they had spread out their payments. Others may have blown all their pension savings, whether on a Lamborghini or a dodgy investment scam. Guidance and advice are there to help out, but the Work and Pensions Committee has concluded that take up of guidance offered by Pension Wise is lower than anticipated, and many savers believe they cannot afford to take financial advice. We need more information to work out whether pension savers are doing the right thing."

The Work and Pensions Committee said earlier in October thatUK pension providers and regulators must do more to encourage savers to access financial guidance or advice at the point of retirement, or risk "another financial mis-selling scandal".

The committee said that the success of the new pension rules depended on "good quality, co-ordinated and accessible guidance and advice". Reports of "lower than anticipated" take-up of Pension Wise, the free-to-access government-backed guidance service, were a cause for concern, it said.

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