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My PFS - Technical news - 26/04/16

Personal Finance Society news update from 13 April to 26 April 2016 on taxation, retirement planning and investments.

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Taxation and Trusts

Investment planning



Government drops 'Granny Annexe' stamp duty hike

(AF1, AF2, RO3, JO3)

The recent stamp duty increase for second homes will not apply to the majority of 'granny annexes' despite the fact that they may be treated as a separate dwelling.

In last year's Autumn Statement, the chancellor, George Osborne, announced plans to increase stamp duty on buy-to-let properties by 3%.

Based on this announcement alone it appeared that family homes with a 'granny annexe' could also be hit by this tax increase on the basis that it would be classed as a second property. Essentially the buyer would be deemed to be acquiring a second home if the so-called 'granny annexe' is part of the dwelling on the basis that it could be deemed to be a separate dwelling regardless of whether it shares a wall with the main property. Campaigners have raised concern about the position and the topic has also been subject of recent press coverage. 

However, the Treasury minister, David Gauke, has now reassured campaigners this was not the intention and an amendment will be made to the Finance Bill 2016 which would exempt the majority of 'granny annexes' from the tax increase.

Former secretary of state for communities and government, Eric Pickles, who has campaigned for the exemption, welcomed the change.

"It is important in terms of social policy, as annexes are used not only by elderly relatives but by other family members, disabled children with special needs and so on," he said.

This is a welcome change as one wonders whether or not this potential issue was considered when the legislation was initially drafted. 

Making tax digital

(AF1, AF2, RO3, JO3)

HMRC has outlined how it will transform the tax system so that it is more effective, more efficient and easier for taxpayers.

At the March 2015 Budget, the government set out its vision for a transformed tax system and the end of the tax return. The vision set out is about much more than simply adding digital tools to the current system: it is about transforming the UK tax system into something that feels completely different.

By 2020, HMRC will have moved to a fully digital tax system. The transformed tax system of 2020 has four foundations:

Tax simplified- Taxpayers should not need to provide HMRC with information that it already holds or can obtain from elsewhere, for example from employers or banks and building societies. It will be possible for taxpayers to see the information that HMRC holds through their digital tax accounts which they will be able to check and correct at any time.

Tax in one place- By 2020 taxpayers will be able to see their complete financial picture in one place similar to that of online banking which means they will be able to set  an overpayment on one tax against an underpayment on another - thus it will feel like they pay a single tax.

Making tax digital for businesses- Businesses won't have to wait until the end of the tax year (or longer) before knowing how much tax they need to pay. From April 2018 businesses, including those who let out property, will update HMRC on a quarterly basis where it is their main source of income or a secondary source of income above £10,000.

Making tax digital for individuals- By April 2016 every individual or small business will have access to a digital tax account which presents a personalised picture of their tax affairs, and one that enables them to interact with HMRC digitally.

In a nutshell, businesses and individual taxpayers will be able to register, file, pay and update their tax information at any time of the day or night, and at any point in the year, to suit them and, for the vast majority, there will be no need to fill in an annual tax return.

For more details on HMRC's vision, together with a discussion paper and illustrative case studies, please see here.

The government said it is committed to reducing burdens for taxpayers, so building a transparent and accessible tax system fit for the digital age achieves just that.

The impact for financial advisers of the "Panama Papers"

(AF1, RO3)

This article is a short summary of events and some thoughts on their implications for financial planners.

What happened: In brief

The Panama Papers represent an unprecedented leak of 11.5m files from the database of offshore law firm, Mossack Fonseca.  The records were obtained from an anonymous source by the German newspaper, Suddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ).  The ICIJ then shared them with a large network of international journalistic and other media partners.

The documents show the many (seemingly relatively easy) ways in which certain beneficial offshore tax regimes can be exploited with multi-layered "Russian doll" like structures making it next to impossible to establish where the true ownership of assets lies.  Reports indicate that 12 national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.

Among national leaders with offshore wealth are Nawaz Sharif, Pakistan's prime minister; Ayad Allawi, ex-interim prime minister and former vice-president of Iraq; Petro Poroshenki, president of Ukraine; Alaa Mubarak, son of Egypt's former president; and the prime minister of Iceland, Sigmundur Davio Gunnlaugsson.

And, of course, the prime minister's father, Ian Cameron, established a fund, Blairmore, established through Mossack Fonseca, the law firm at the centre of the leak.  The fund was apparently incorporated in Panama but based in the Bahamas.  No tax was paid by the fund but then neither is it by any offshore fund.  To legitimately have no UK corporation tax liability an offshore corporation or fund must not be genuinely managed and controlled from the UK.  And as long as the UK resident domiciled owners pay tax on the dividends and realised capital gains from the structure there is no avoidance or evasion.

The leak is one of the biggest ever.  There are 11.5m documents and 2.6 terabytes of information drawn from Mossack Fonseca's internal database.

What are the implications?

Clearly, for the overwhelming majority of financial planners, the "Panama papers" leak and the consequences of the leak will have no direct impact.

The scale of the leak and the public interest (and shock) at what it reveals will, however, no doubt serve to enhance further the global efforts of governments to act against evasion and aggressive avoidance; and to push for greater obligatory transparency and disclosure.  But it won't be easy.  And, let's not forget that while offshore companies, trusts and funds (and multi layered structures) will undoubtedly have been established by many to hide money and avoid tax, some will have been established for legitimate commercial reasons.

In the UK we have seen the relentless introduction of specific and general anti-avoidance provisions and the clear, resulting positioning of aggressive avoidance as tantamount to evasion. 

We have also seen the diverted profits tax introduced and the collective efforts of the countries in the EU/OECD on "BEPS" (Base Erosion and Profit Shifting).

The structures that have no commercial justification for their existence and revealed in the Panama papers leak appear to have delivered the end result desired by those who establish them - mainly through the inability of authorities to identify and attach the income and gains arising in the structures to the people who establish them.

"Substance over form" is one thing but substantiating who is entitled to the income and gains is often very difficult with multi-layered corporate and trust structures.

And the numbers in terms of potentially lost tax are likely to be huge.

Aside from further galvanising nations to accelerate plans for co-operation to stop "base erosion" and secure greater transparency, the leak has caused uproar among ordinary working people and businesses who do pay their tax.

First, there will be further pressure on elected governments to act and be seen to act to stamp out this type of tax avoidance and evasion seemingly only known about and accessible to the rich and famous.

And there may well be resulting nervousness among the clients of financial planners about considering any form of planning involving anything "offshore" eg funds and insurance-based investment bonds.

Both of these offshore investment structures, of course, offer legitimate tax deferment permitted (indeed specifically granted) by the legislation.  These products can, in the right circumstances, deliver legitimate, permissible and tax-effective outcomes.

As was the case when individuals involved in tax avoidance were "named and shamed" in the UK and then companies like Google, Amazon and Starbucks, the public are likely to be both outranged but also wary of "anything offshore".

For financial advisers there is an important job of "non-sensationalist" reassurance required - even with their professional connections.

Especially for this latter group, being able to reference the relevant legislation that supports the validity of the proposed strategy may well be helpful.  The strong message must be "just because a course of action (even incorporating an offshore investment) is tax effective it doesn't make it likely to be challenged.  And, especially so when it is specifically provided for by the legislation".

OPG to review guidance to attorneys on delegation of investment management

(AF1, JO2, RO3)

In September 2015 the Office of the Public Guardian (OPG) published an updated version of its guidance 'Make and Register your Lasting Power of Attorney (LPA): A Guide (LP12)'. The updated guidance stated that an attorney under a financial LPA would not be able to use, sign up to or continue acting under a discretionary investment management arrangement without specific authority being contained in the LPA itself.

The guidance goes on to state that, in the absence of express permission from the donor in the LPA,  the attorney will have to apply to the Court of Protection for authority to appoint a professional investment manager on a discretionary basis.

This represented a significant change of practice and raised a number of legal issues - particularly for those attorneys who are already operating a discretionary management system under a registered LPA without such specific authorisation.

Following representations from a number of concerned professional bodies, the OPG has confirmed that the guidance is now under review and that a test case may well be taken to clarify whether the delegation of investment management by an attorney to a discretionary investment manager is, in fact, already legally permissible.

Practitioners will welcome clarification on this matter which, as its stands, leaves many attorneys in a position where they have no choice other than to apply to the Court of Protection for specific authority to employ a discretionary investment manager - a process which is expensive, can take some time and which could lead to valuable investment opportunities being lost in the meantime.

Court sets aside trust on basis of the settlor's mistake as to inheritance tax consequences

(AF1, JO2, RO3)

The England & Wales High Court has agreed to unwind an arrangement by which a married couple took steps to transfer their home into trust shortly after the date on which theFinance Act 2006made such transactions liable to an immediate inheritance tax (IHT) charge and subsequent ten-year anniversary charges. Philip Van Der Merwe and Deborah Goldman - who were both non-UK domiciled at the date of the settlement - were not aware of the Budget announcement of 22 March 2006 when they executed the relevant documents on 24 and 27 March 2006 (Der MerwevGoldman & Ors, 2016 EWHC 790 Ch).

The placing of the house into a trust, under which the settlor had an interest in possession, at a time when the settlor was non-UK domiciled for IHT purposes, provided the couple with certain IHT advantages (that incidentally are no longer relevant following legislation on excluded liabilities introduced in Finance Act 2013); and prior to 22 March 2006, the transfer of property into such a trust would not have given rise to any immediate or other IHT consequences due to the fact that the settlor would have been treated as remaining beneficially entitled to the trust property by virtue of  section 49(1) IHTA. 

As it was, it was announced at Budget 2006 that all lifetime trusts other than bare trusts or trusts for the disabled created on or after Budget Day (22 March 2006) would be subject to the relevant property regime. For Mr Van der Merwe - who did not become aware of these changes until some years later - this meant an IHT liability of around £200,000 arising as a result of the transfer to the trust, interest and penalties for late payment of around £60,000 and a 10-year anniversary charge - on 27 March 2016 - of around £120,000.

The Court accepted that had Mr Van der Merwe been aware of the changes announced in the 2006 Budget, he would not have pursued the idea of a settlement after that date; and so, taking account of the relevant legal principles pertaining to gifts made as the result of a mistake (as recently restated in Pitt v Holt, 2013), the trust was set aside on those grounds.

While recent cases might appear to pave the way for an onslaught of rescission claims where ignorance of the law has led to a false belief or assumption about the tax consequences of a transaction, it is important to note the distinction between a mistake that involves running a risk about a possible liability to pay tax and the situation in the present case where the claimants believed there to be no question of a charge to tax by reason of their actions. It is considerably less likely that applications for transactions to be overturned will be successful where tax avoidance is involved.

Government to reform the rules on taxation of life policy excesses

(AF1, AF2, JO3, RO3)

At the March 2016 Budget, the government announced its intention to change the tax rules for excess events on part surrenders and part assignments of life insurance policies, following consultation, so as to prevent gains arising which are disproportionate to the policy's underlying economic gain.

The consultation, which runs from 20 April to 13 July 2016, invites views on three options for change designed to ensure disproportionate gains no longer arise for both new and existing policyholders, while maintaining the familiar and popular tax-deferred allowance.

These options are:

  • Taxing the economic gain- this option would retain the current 5% tax-deferred allowance but would bring into charge a proportionate fraction of any underlying economic gain whenever an amount in excess of 5% was withdrawn.
  • The 100% allowance- under this option no gain would arise until all of the premiums paid have been withdrawn, after which all withdrawals would be taxed in full, effectively changing the current cumulative annual 5% tax-deferred allowance to a lifetime 100% tax-deferred allowance. This is the simplest of all the options.
  • Deferral of excessive gains- this more complicated option would maintain the current method for calculating gains but would limit the amount of gain that could be brought into charge on a part surrender (or part assignment for value) to a pre-determined amount of the premium (e.g. a cumulative 3% for each year since the policy commenced), holding the remaining gain over until the next part surrender or part assignment when the process would begin again until final surrender when all deferred gains would be brought into charge.

The consultation document sets out the options in detail with examples illustrating how they would work in practice and considers the potential impacts on policyholders and insurers.

The options will be reviewed in the light of representations received and a response will be published in Autumn 2016 with a view to including legislation for the preferred option in Finance Bill 2017.

Artificial gains on life insurance policies will frequently arise where a large part surrender is taken early in the lifetime of the policy. Because the gain is calculated as the excess over the allowable amount, this can result in income tax liabilities even though the investment has in reality shown little or no growth. The inequity of this aspect of the chargeable event regime was highlighted in the Joost Lobler case where the First-tier Tribunal was unable to offer a remedy to a result that it referred to as 'repugnant to common fairness'.

Changes to the regime will provide relief for the huge number of policyholders that currently make ill-advised partial withdrawals instead of fully surrendering individual policies more tax-efficiently, but could require significant system changes for the industry, have an effect on the market for life insurance products and/or add further complexity to the legislation depending upon which option is chosen to carry forward.


A cooling commercial property market

(AF4, FA7, CF2, RO2)

The outlook for commercial property is looking less bright.  At the end of last month, the Investment Association (IA) revealed that in February the property sector saw a net retail outflow of £119m, its biggest loss since the doom-laden days of November 2008. In February 2015 the same sector had recorded its biggest everinflow, at just over £300m. Retail net sector flows have been on a general decline since last July, with the first dip into negative territory (£27.4m) recorded in January 2016. Institutional investor interest has also been waning - in February they withdrew a net £93.6m.

One month's IA net flow figures need treating with caution, as we have said before. February was a grim month generally - the IA saw a total net retail outflow of almost £400m. However, the commercial property figure does echo other indicators in the property market. For example:

  • What amounted to an increase of up to almost 1% in SDLT for institutional-sized commercial property prompted corresponding cuts in some deal prices and valuations: the purchaser paid no more, but what the seller lost passed to the H M Treasury.
  • The biggest real estate investment trusts (REITs) have seen share price falls over the last six months: Land Securities is down 12.6%, while British Land has declined by 15.9%. Both these FTSE 100 REITs are standing at significant discounts to their September 2015 reported net asset values - 18% for Land Securities and 20% for British Land. There have even been suggestions that they may be taken private by bidders looking to buy portfolios at a discount.
  • Returns from commercial property are slowing. The IPD UK monthly figures for February 2016 showed a return of 2.4% over the past three months, 5.9% over the last six months and 13.3% over the last twelve months. At the end of last week Cluttons, one of the leading commercial agents, forecast that returns would halve to 6.5% in 2016 against 13.8% in 2015 and 19.3% in 2014.
  • Like others, Cluttons put part of the blame for lower return expectations on the uncertainties created by the Brexit vote. Anecdotal evidence suggests some foreign buyers - major players in the London market - are adding Brexit break-clauses to their purchase contracts.

Commercial property currently offers a rental yield of nearly 5%, against a miserable 1.4% on 10 year gilts. There remains scope for rental growth as the supply of new space is limited in the office and industrial sectors, while demand remains solid. However, the overall message is that, once again, the main part of the investment return from commercial property will be from income, not capital gain. 

The March inflation numbers

(AF4, FA7, CF2, RO2)

Annual inflation on the CPI measure was up 0.2% in March, with the rate rising to +0.5%, the highest since December 2014. Market expectations were that the March inflation numbers would register a 0.1% rise.

The CPI showed prices up 0.4% over the month, whereas between February and March 2015 they rose 0.2%. The CPI/RPI gap widened by 0.1% this month to 1.1%, with the RPI up 0.3% on an annual basis to 1.6%. Over the month, the RPI rose by 0.4%.

The rise in the CPI annual rate was due to three main "upward contributions", offset by a single main "downward contribution", according to the ONS:


Transport:Prices overall rose by 1.7% between February and March this year compared with a rise of 0.7% between the same two months a year ago. By far the largest upward effect came from air transport: the early Easter contributed to fares rising by 22.9% between February and March 2016 against 2.7% between the same two months in 2015. There was also a smaller upward effect from rail passenger transport with fares rising this year but falling a year ago. Air and rail fare rises were partially offset by a downward contribution from motor fuels with petrol prices rising by 0.9p per litre this year compared with 3.8p per litre a year ago. Year-on-year transport prices are still falling, but by only 0.1% against 1.1% last month.

Clothing and footwear:Overall prices rose by 1.0% between February and March this year compared with a fall of 0.1% between the same two months a year ago. Last year was the first time that prices had fallen between February and March since the CPI started in 1996 - usually they experience a post-January sale increase.

Restaurants and hotels:Overall prices rose by 0.5% between February and March 2016 compared with a rise of 0.2% between the same two months a year ago. The upward effect came principally from restaurant and café prices rising by more than a year ago.


Food and non-alcoholic beverages:Overall prices fell by 0.6% between February and March this year compared with a fall of 0.2% between the same two months a year ago. The overall downward contribution came from a variety of product groups, most notably vegetables. Deflation in this CPI component is now -2.7% on an annual basis.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) jumped 0.3% to an annual for 1.5%. Reuters reported a market expectation that this figure would rise to 1.3%. As for last month, there are three out of twelve index components in negative annual territory. Goods inflation continues to be solidly negative (unchanged at -1.6%), while services inflation is distinctly positive (up 0.4% at +2.8%).

The rise in core inflation may be a first sign of the impact of the National Living Wage. It is notable that restaurants and hotels, one of the hardest hit sectors, had a relatively sharp increase in prices. However, one month's figures always need to be treated with caution, especially when there are seasonal distortions like the timing of Easter.

Dividends - Slow growth

(AF4, FA7, CF2, RO2)

Dividend growth shows signs of slowing significantly.

In recent times dividends have been a hot topic because of the tax changes announced last summer that have now come into being. However, taking a longer term view, dividends as a source of income have always been important for UK retail investors. The latest IA statistics value the UK Equity Income sector at £57.7bn, making it the third largest.

At present, the IA sector definition requires that a UK Equity Income fund must "intend to achieve a historic yield on the distributable income in excess of 110% of the FTSE All Share yield at the fund's year end". With the FTSE All Share yielding 3.7% (as at 18 April 2016), that implies a minimum yield of nearly 4.1% for a UK Equity Income fund. However, a quick look at Trustnet tables reveals that only about 60% of funds in the sector currently meet this target.

Equity income fund managers are having a hard time at present and the latest quarterly dividend monitor from Capita will not make good reading for them. According to Capita:

  • The first quarter of 2016 saw BHP, Rio Tinto, Barclays, Rolls Royce and Morrison among others announce dividend cuts, although many will not take effect until later in the year. Capita estimates the cuts announced in Q1 amount to £2.7bn.  In 2015 total dividend payments amounted to £79.2bn.
  • It is not unusual for a few companies to cut dividends in any one year but, as Capita points out, what is significant is that the cuts have come from some of the largest dividend payers.
  • While the cuts from FTSE 100 companies grabbed the headlines and will make a big impact on overall payments, 35 out of 39 sectors saw dividends rise, the best ratio for nearly three years.
  • Total dividend payments in Q1 were up 6.4% against Q1 2015. This handsome increase is largely down to £973m of one-off special dividends from the likes of Next, Mediclinic and John Matthey. Strip these out and underlying dividend growth was 1.3%, the slowest for a year.
  • Even this modest growth is not all it seems. Capita reckons that dividends increased by about 2.6% (£350m) due to the fall in the value of sterling against the dollar, the accounting (and dividend payment) currency of choice for many multinationals.  
  • The concentration of dividend payments was underlined by the fact that the top five companies accounted for 53% of all dividend payments in Q1.
  • A further complication for equity income fund managers is the growing importance of Shell, a dollar dividend payer. Its shares-and-cash takeover of BG completed in Q1. The extra Shell shares issued as a consequence yield about four times as much as the BG shares they replaced. Capita reckons this will add £1.4bn to total dividend payments in 2016 and leave Shell increasing its dividend payout by one third to £10bn - about 13% of the projected UK total for the year.
  • Capita expects underlying dividends to fall by 1.7% overall in 2016, the first decline since 2010. Add in special dividends and the cut is marginally smaller, at 1.5%.

The current dividend yield for Shell is 7.3% and its market capitalisation is 50% bigger than the second largest FTSE 100 constituent. It is therefore very difficult for any UK equity income fund manager to ignore this company. However, Shell's earnings per share for 2015 were 30c against a dividend of 188c…


DWP published Q&A on the single-tier state pension for stakeholders

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

The Department of Work and Pensions (DWP) has published a series of questions and answers on the StSP aimed at Stakeholder. However, this document would also be useful for advisers.

As well as the Q&As, they have also published a set of slides which would form a very good basis for a seminar to clients or prospects.

New armed forces NI credit is available for spouses and civil partners who joined their partners on overseas postings

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

The DWP has announced it will provide extra support for armed forces spouses and civil partners to help protect their state pension. The new credit covers the years spent abroad from 6 April 1975 onwards and counts towards the new State Pension. Up to 20,000 armed forces spouses may be eligible for a new National Insurance credit if they have previously joined their partners on an overseas posting. They may have been unable to work while abroad and therefore could not make National Insurance contributions.

The new credit has been taken forward under the armed forces covenant, which states that members of the armed forces and their families should receive fair treatment from the nation which they serve.

The DWP has published detailed guidance for individuals to find out how to claim Class 3 National Insurance credits if they:

  • are (or were) married to or the civil partner of a member of the armed forces, and
  • went with them on an overseas posting after 6 April 1975.

The new application form is available.

On 6 April 2010, the government introduced a National Insurance credit for which an accompanying spouse or civil partner on an overseas posting can apply. Applications must be made by the end of the tax year following the one in which the posting ends. It is still possible to apply for this credit which may also help if the spouse or civil partner wants to claim a working age benefit.

Pensions Minister Ros Altmann said: "Our armed forces protect our country and it is only right that in turn, we help protect their partners' ability to receive the full state pension when they reach state pension age. This new credit will help ensure people who choose to support their partners abroad don't miss out on a good state pension."

Workie's working!

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

The latest research into employers' and intermediaries' awareness of automatic enrolment undertaken by The Pensions Regulator (TPR) shows that 79% of employers remember seeing or hearing at least one of the campaign adverts while intermediaries who have seen the adverts found them relevant and memorable.

TPR has recently published findings from their recent intermediary tracker research analysis and employers analysis.

Key findings from the intermediaries' survey:

  • Bookkeepers and accountants saw significant increases in overall understanding of automatic enrolment compared to Spring 2015, from 78% to 93% and 85% to 96% respectively. 
  • Knowledge of the need for employers to complete a declaration of compliance with The Pensions Regulator increased significantly, from 79% to 94% amongst IFAs and from 60% to 84% amongst accountants.
  • Around half of accountants, bookkeepers and payroll administrators felt only partially able to answer clients' queries. Confidence was higher amongst IFAs at 73%.

Key findings from the employer survey:

  • Awareness of AE remained similar to Spring 2015 among small and micro employers (90% and 78%) while understanding increased significantly (68% among small employers 56% among micros).
  • Correspondence from the regulator was the main trigger for employers to take action to prepare for automatic enrolment (76%), followed by information from an adviser (43%), and then seeing or hearing advertising (23%).
  • A majority of employers continue to agree that automatic enrolment is a good thing in principle for their employees (77% of small, 65% of micros). 

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