TAXATION AND TRUSTS

UPDATE from 15 December 2023 to 11 J
Making Tax Digital - consultation on recent changes

(AF1, (AF2, JO3, RO3)

From April 2026, Making Tax Digital (MTD) for income tax, will apply to unincorporated businesses and landlords (relevant persons) with business and/or property income over £50,000, followed by those with income over £30,000 from April 2027.

The Income Tax (Digital Requirements) Regulations 2021 (SI 2021 No 1076) set out the requirements that relevant persons must comply with under MTD for income tax. These include the use of MTD-compatible software to keep and preserve their business records (business income and expenses) digitally, send quarterly updates of their records to HMRC, and submit an end of period statement to HMRC.

In the November 2023 Autumn Statement, the Government said it would make design changes to the MTD for income tax, to:

simplify the requirements for all taxpayers providing quarterly updates, and for taxpayers with more complex affairs, such as landlords with jointly-owned property;
remove the requirement to provide an End of Period Statement;
exempt some taxpayers, including those without a National Insurance number, from MTD;
enable taxpayers using MTD to be represented by more than one tax agent.

The Government said that it will keep under review the decision on further mandation of businesses and landlords with income below £30,000.

It was back in December 2022 that the Government announced that those with annual income over £50,000 would be mandated to join MTD from April 2026, followed by those with income over £30,000 from April 2027. The Government said that it remained committed to the future introduction of MTD for income tax to partnerships as part of its tax administration strategy.

The draft regulations published on 7 December amend the 2021 regulations and have been published with supporting draft notices. These reflect the above changes announced by Government, including:

the revised MTD mandation date and threshold;
improving the design of quarterly updates;
removing End of Period statements;
introducing easements for landlords with jointly owned property;
exempting specific groups from MTD requirements.

Stakeholders highlighted a need to amend the design of quarterly updates to make it easier to amend or correct errors throughout the tax year. The Government has agreed that this will simplify and improve the design of quarterly updates. So, rather than a total for the three-month period covered within the update, each update will be a cumulative total of income and expenses accumulated during the tax year to-date. This will remove the burden upon taxpayers of having to resubmit a previous update where corrections to previously submitted figures are required.

The Government recognised that some landlords with jointly-owned property could have encountered challenges with the existing design of MTD because they would have needed to compute their share of income and expenses each quarter, requiring them to transfer transactional records to one another. So, to reduce the administrative burden for landlords with jointly-owned property, landlords will be able to:

choose not to submit quarterly updates of their expenses which relate to jointly owned properties, which will reduce their in-year administration. These records will still need to be submitted before taxpayers finalise their tax position for the year;
keep less detailed digital records in relation to their jointly owned properties, therefore simplifying the transfer of records between joint owners.

One taxpayer group identified as deriving limited gains from MTD is foster carers. The Government will therefore remove the need to operate MTD for income tax in relation to receipts for qualifying care income. In addition, the Government recognised that taxpayers who are unable to obtain a National Insurance number face barriers to accessing HMRC’s digital services, and so will be unable to comply with MTD requirements. The Government will introduce an exemption from MTD requirements for taxpayers who are unable to obtain a National Insurance number. In cases where a taxpayer’s inability to acquire a National Insurance number is temporary, the Government’s intention is that they would subsequently be mandated into MTD.

Please see:

This consultation closes at 11:59pm on 12 January 2024.

Issues with estimating taxable profits

The Government’s reforms to the basis period rules will be introduced from 2024/25, two years ahead of the first mandation into MTD.

The Government believes that most users will have accounting periods that are aligned with the tax year (equivalent to 31 March to 5 April) by the time MTD is mandated in 2026. However, it recognises that there will be a small minority of users who will continue to have ‘non-aligned’ accounting periods. Compared to aligned users, this will create some complexity and reduce the accuracy of MTD’s in-year estimates. HMRC is working with software developers to explore the development of software functionality to improve the taxpayer experience within MTD for those with accounting periods that do not align with the tax year.

Case won by taxpayer at FTT re a series of renovated properties (AF1, RO3)

A First tier Tribunal (FTT) decision has overturned income tax and CGT charges on three renovations in five years. This was an appeal by Mr Gary Ives (“Mr Ives”) against four discovery assessments and related penalty determinations issued by HMRC for the tax years 2003/4 to 2006/7 and three closure notices, one each for the tax years 2010/11, 2011/12 and 2013/14, and related penalty assessments for deliberate inaccuracies. The total amount of tax and penalties in issue was just under £1 million.

The discovery assessments related to rental income totalling £8,436 over the four years in question, which HMRC said Mr Ives received from letting out a flat he owned in Hamilton House, Putney. The closure notices were much more significant, and are what we will cover here. They each related to the profit derived by Mr Ives from transactions in relation to the following three properties:

27 Ringmer Avenue, Fulham (“Ringmer”). This property was purchased by Mr Ives in November 2008 as two flats for £760,000 and sold as a single dwelling in August 2010 for £1.775 million.
69 Wandsworth Bridge Road (“Wandsworth”). Mr Ives owned this property from 1 October 2010 to 16 January 2012. He bought it for £750,000 and sold it for £1.5 million.
24 Crondace Road, Fulham (“Crondace”). Mr Ives owned this property from 4 July 2012 to 20 December 2013. He bought it for £1.731 million and sold it for £3.25 million.

In the case of all three properties, Mr Ives and his wife carried out a significant amount of work during his period of ownership, between November 2008 and December 2013. HMRC argued that the profits derived by Mr Ives from these properties were trading profits subject to income tax. HMRC assessed him for income tax on the proceeds, stating that his activities had the hallmarks of a property development trade ('badges of trade') so that the gains were taxable as trading profits.

Looking at the badges of trade, HMRC argued there was:

Repetition - Mr Ives made a “quick profit” on three properties in relatively short succession.
Whilst Mr Ives may not be a property developer, building work is related to his core trade.
The pattern of the activities is like a property developer. Planning applications are put in before the property is acquired, significant amount of work is done on the property and then it is sold.
As far as finance is concerned, significant amounts of debt were needed for these projects and (in the case of Ringmer) additional borrowings had to be taken out to complete the work.
Mr Ives never really lived in the properties or enjoyed them as a home and his intention was always to sell the properties as soon as he could.

In addition, the 2010/11 closure notice includes rental income of £2,950 HMRC say Mr Ives received from his son’s girlfriend who was living at 27 Fullbrooks Avenue (“Fullbrooks”), a property owned by Mr Ives and his wife.

Mr Ives’ daughter Laraine lived at the property. She had always helped Mr Ives with his books and finance.

As far as principal private residence relief was concerned, although HMRC accepted that Mr Ives lived at Crondace for a period, it said this was incidental and Mr Ives always intended to sell the property. As far as Ringmer and Wandsworth were concerned, HMRC said that Fullbrooks was always Mr Ives’ main residence and Mr Ives never really lived there at all.

Mr Ives, on the other hand, argued that the profit arising from each of these transactions was a capital gain arising from the disposal of his sole or main residence and accordingly exempt from capital gains tax as a result of principal private residence relief. Mr Ives appealed to the First-tier Tax Tribunal (FTT), claiming that the property dealings were no more than normal domestic transactions. He had amassed a considerable amount of evidence in support of his argument.

Mr Ives was born in London, and he and his wife decided, in 2008, to move out of the city and into the suburbs. However, the onset of the banking crisis, and ill health in their family, forced them to move house several times in quick succession, as well as doing a significant amount of work on each property to meet their individual requirements.

Mr Ives argued that it was family and financial issues that led to the frequent changing of houses and not the desire for trading profits, although he did not deny the moves generated a profit. He also presented several witness statements supporting his account of why he had bought and sold the properties and the nature of his occupancy. It was also relevant that, although he was a builder by profession, he worked on a smaller scale rather than on large renovation projects. In addition, the evidence showed that all three homes were used as family homes and each house was furnished and occupied with the intention of residency being permanent.

Mr Ives moved into the properties on his evidence with a view to making them his home in the long term. On his evidence (and that of the other witnesses who appeared in the Tribunal) furniture was moved into the properties as soon as this could be done and the properties were then enjoyed as homes, albeit not for a very long period.

Post continued to go to Fullbrooks for a long time. However, the FTT accepted Mr Ives’ argument that he drew a distinction between personal matters (the Royal British Legion and the golf club), which he dealt with from the property he was living in, and formal correspondence, which continued to go to Fullbrooks. In part this was so that Laraine could deal with business correspondence and the other reason was simply that the properties were undergoing some work at least for a period and it was safer for the correspondence to go to Fullbrooks.

The FTT judges accepted Mr Ives' argument, although they noted that it contained some inconsistencies. However, ultimately, the FTT ruled that Mr Ives was not carrying on a trade and that the properties were family homes subject to capital gains tax.

Applying the test of residence, the FTT found that all three properties were actively occupied by Mr Ives as his residence. At least once the significant work had been completed, the properties were furnished and enjoyed socially in the way one would expect an ordinary family home to be occupied. Mr Ives intended that occupation to be permanent. His occupation of these properties was not intended to be fleeting or transitory. It turned out to be relatively short term, but that was because of the way his family circumstances changed. For all these reasons, which overlap with some of the reasons that led the FTT to conclude that the transactions were not trading in nature, the FTT found that these properties were occupied by Mr Ives as his residence and therefore private residence relief was available in relation to the gains which arose on their disposal. As they were his main residences, Mr Ives was entitled to full private residence relief from capital gains tax on all three properties, so there was no tax to pay.

You can read the full case details here: Ives v HMRC, 2023 UKFTT 968 TC.

FTT decides shares gifted to a charity by a taxpayer were overvalued

(AF1, RO3)

A FTT case, where it was decided that the valuation of shares donated to charity should be based on all available information, not just the AIM quoted share price, particularly in cases where the shares are relatively illiquid.

It was in giving 190,000 AIM-listed shares to charity that Mr Kay hoped to receive £81k of tax relief. Some 13 years after opening an initial enquiry, HMRC issued a closure notice which reduced the relief from £80,750 to £17,936.

Mr Kay made the gift of shares in a company called Access Intelligence plc (Access Intelligence) to the Lord’s Taverners, a charity which supports underprivileged children through sports, on 2 April 2004. He had himself been given the shares the previous day (by a friend who had sold their interest in another company).

At the time of Mr Kay's gift to the charity, section 587B of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’) provided tax relief in respect of gifts of qualifying investments to charities. Where the whole of the beneficial interest in the qualifying investment was given to a charity, relief was available as a deduction for income tax purposes of an amount equal to the market value of the qualifying investment at the time of disposal.

That the Access Intelligence shares met the “qualifying investment” condition was not disputed. It was the "market value" of the shares at the time of the gift that caused controversy and sparked the appeal to the First-tier Tribunal (FTT).

Mr Kay had claimed tax relief on his 2003/04 self-assessment tax return using a valuation of 42.5p per share, being the quoted AIM share price on the date of the gift. HMRC argued that other factors should be considered, not just the quoted share price, and reduced the valuation to 9.44p per share. Kay appealed.

According to section 272 TCGA 1992 “market value” in relation to any assets means “the price which those assets might reasonably be expected to fetch on a sale in the open market”.

That price, according to the legislation, should be based on prices quoted in the Stock Exchange Daily Official List except where special circumstances prevent the quoted prices from being a proper measure of market value.

Looking to case law, the FTT referred to Netley v HMRC [2017] UKFTT 442 (TC) (Netley) in which the judge held that there was insufficient liquidity in the market for the company's shares for the listed price to be taken as a proper measure of market value. It was also noted in Netley that “AIM shares are unlisted shares not in the Official List” so AIM quoted prices were not a reliable open market valuation.

The Access Intelligence shares were, according to HMRC, similarly illiquid as evidenced by the very limited extent of trading. Based on reports from Daniel Ryan of Berkeley Research Group and Richard Lamb of HMRC’s Shares and Assets Valuation department, HMRC concluded that the AIM price was not a reliable indicator of the value of the shares.

The Tribunal heard evidence from Clare Rooney, HMRC senior officer and a qualified associate member of the Royal Institution of Chartered Surveyors. Her analysis produced a 64-page report, in which she considered the background and trading activity of Access Intelligence; her interpretation of the legislation; and various alternative valuation methods.

She argued, having “considered the information that would have been available to an uninfluential minority purchaser as at the valuation date” and “taken the view that this would be restricted to published information only”, that the Access Intelligence shares had a market value of just 9.42p on the disposal date.

Mr Kay contended that he “thought AIM was a recognised stock exchange and he had used what was available to him at the time to arrive at the correct value”.

However, Ms Rooney felt that a prudent purchaser would have considered other publicly available information including Companies House data, prospectus details and internet searches, as well as the AIM listings. She referred to such sources for her own valuation and noted that, although the prospectus showed a share price of 37p, the related transactions were not at arm's length. She considered the shares to be “thinly traded” such that the AIM listing was not a reliable measure.

The FTT, although understanding of Mr Kay's position, gave weight to Ms Rooney's expert evidence. The judge stated: "We must, however, consider the hypothetical purchaser to be a reasonably prudent purchaser who has informed himself as to all relevant facts.”

Based on the detailed analysis and explanations in Ms Rooney's report, the judge found that the value of the Access Intelligence shares was not the 42.5p claimed by Mr Kay, nor even the 9.44p given by HMRC. The correct valuation according to the FTT was the 9.42p determined by Ms Rooney.

IR35: taxpayer loses against HMRC

(AF1, RO3)

The case of Sky Sports pundit, Phil Thompson, whose contracts with Sky have been judged to be caught by IR35. Sky Sports pundit, Phil Thompson, provided services to Sky on Soccer Saturday and other programmes through his personal service company, PD & MJ Ltd. HMRC argued that IR35 applied and that PD & MJ Ltd owed £294,306.68 for PAYE and national insurance contributions (NICs) between 2014 and 2108 and found in HMRC’s favour.

The First-tier Tribunal (FTT) looked at whether there was a hypothetical contract and whether, under that hypothetical contract, Phil Thompson had a contract of employment with Sky or was self-employed under a contract for services, and it found that the hypothetical contract would have been a contract of employment. This result contrasts with HMRC’s defeat in the Kaye Adams case in November. In the Phil Thompson case, the FTT sighted following reasons for its decision:

There was mutuality of obligations (MOO) between the worker to supply services and the engager to pay (the MOO test). Phil Thompson’s obligation under the hypothetical contract would be to provide the services in accordance with the terms of the contract, and Sky’s obligation would be to pay the agreed fee. (Note that it was also agreed that there was mutuality of obligations in the Kay Adams case.)
Sky’s contractual right to require Phil Thompson’s performance of the services at a location of their choosing was consistent with an employment relationship. The control was regular and although there was consensus, it did not detract from the level of Sky’s contractual right. This level of control was reinforced by the inclusion of a non-compete clause in the contract, giving Sky the right to “prevent Mr Thompson from working for competitors”. (Note that it was also found in the Kaye Adams case that the BBC had “significant” control.)
The hypothetical contract restricted Phil Thompson’s ability to be able to exploit his opinions and analysis and intellectual property more generally, and this was other than in accordance with its terms.
The hypothetical contract provided for termination by Sky but, not by Phil Thompson.
Phil Thompson had become associated with Soccer Saturday and, in his evidence, he said that the viewing public would expect to see him on the programme. (This can be contrasted with the FTT’s decision in the Kaye Adams case, that being “part and parcel” of the BBC was neutral, because although the Kaye Adams show had become integral to the BBC, it was not an organisational part.)
The payment was paid in a block fee regardless of airtime, but the FTT considered that this was a neutral factor. Whether this was a salary or a fee depended on whether the arrangement was an employment contract or not on the contract’s choice of label.
Phil Thompson’s work at Sky was the substantial majority (an average of 80% during the relevant periods) of PD & MJ Ltd’s income.
There was an absence of perks and benefits that Sky gave to employees but, not to Phil Thompson. This was, according to the FTT, outweighed by the other factors.

Looking at the whole picture, the FTT found that these factors combined to create a contract of employment. The FTT also noted that they had reached a contrary conclusion to that in Stuart Barnes vs HMRC [2023] UKFTT 00042 on the basis that the facts were different. Stuart Barnes appeared to have been in business on his own account to a greater degree than in the Phil Thompson case. Stuart Barnes was also entitled to reproduce his opinions in other media and was known as the “voice of rugby” generally rather than being associated with one broadcaster, as Phil Thompson was with Sky.

It also appears that the taxpayer’s success in earlier cases, such as Kaye Adams, Lorraine Kelly, Adrian Chiles and Stuart Barnes, hinged on the basis of the individual being a brand or persona. Although a well-known former footballer, Phil Thompson was not thought of as a brand or persona. He worked mainly for Sky, and the public perception was that he was a Sky pundit on Soccer Saturday.

It should be noted that, as this is a FTT decision, it does not set a precedent and Phil Thompson has 56 days from the release of the FTT judgment to appeal.

INVESTMENT PLANNING

The FTSE 100 takes its turn for a relatively disappointing year

(AF4, FA7, LP2, RO2)

The FTSE 100, which ended the year up 3.8%, significantly lagging most developed market indices.

	30/12/2022	29/12/2023	Change in 2023
FTSE 100	7451.74	7733.24	3.78%
FTSE 250	18853.00	19689.63	4.44%
FTSE 350 Higher Yield	3555.19	3606.84	1.45%
FTSE 350 Lower Yield	4249.48	4521.44	6.40%
FTSE All-Share	4075.13	4232.01	3.85%
S&P 500	3822.23	4769.83	24.79%
Euro Stoxx 50 (€)	3793.62	4521.65	19.19%
Nikkei 225	26094.5	33390	27.96%
Shanghai Composite	3089.26	2974.93	-3.70%
MSCI Em Markets (£)	1487.567	1502.535	1.01%
UK Bank (Base) rate	3.50%	5.25%
US Fed funds rate	4.25%-4.50%	5.25%-5.50%
ECB refinance rate	2.50%	4.50%
Two-yr UK Gilt Yield	3.58%	4.00%
Ten-yr UK Gilt Yield	3.70%	3.56%
Two-yr US T-Bond Yield	4.43%	4.25%
Ten-yr US T-Bond Yield	3.88%	3.87%
Two-yr German Bund Yield	2.74%	2.39%
Ten-yr German Bund Yield	2.56%	2.02%
£/$	1.2029	1.2748	5.98%
£/€	1.1271	1.154	2.39%
£/¥	158.7175	179.7026	13.22%
Brent Crude ($)	84.27	77.1	-8.51%
Gold ($)	1813.75	2078.4	14.59%
Iron Ore ($)	115.11	136.16	18.29%
Copper ($)	8397.5	8562.5	1.96%

In 2022, the FTSE 100 ended the year up just 0.9%. That it was in positive territory was an achievement, given the year that the UK had experienced – three Prime Ministers, four Chancellors, the mini-Budget, etc. The outturn was all the more remarkable because it meant the UK market beat the USA, Eurozone, Japan and China. In 2023, the picture almost flipped with the UK well adrift of the USA, Eurozone and Japan and only marginally ahead of China. Let’s look at some more detail:

The UK shows a marginally better return if you look at the FTSE 250 or FTSE All-Share. That can be blamed in part on the Footsie’s having less than half the weighting of the FTSE All-Share in Financial Services, which had a good year.

In 2022, the response of commodity prices to the Ukraine war helped the holes-in-the-ground nature of the UK indices come to the fore. However, the Basic Resources supersector, which makes up about 8% of the FTSE 100, was down about 13% in 2023.

This year the FTSE 100’s performance was similar to the other main market UK equity indices, with the FTSE Higher Yield being held back by the mining companies (which cut their dividends significantly). Away from the main exchange, the FTSE AIM All-Share had another miserable year, although not as bad as in 2022. This time it posted a drop of 8.2%. Over the two years the decline has been just short of 40%, a reminder that it is not only via business relief that AIM shares can reduce inheritance tax (IHT) liability.

The FTSE 100 ended 2023 at 2.5% above the level that it started 2020. We remarked at the start of 2023 that a volatile three-year period had ‘seen the index go nowhere’. That now should read ‘volatile four-year period’. Over the same period the S&P 500 is up 47.6%, helped by a rise of almost a quarter in 2023.

The last two years provides a different transatlantic contrast: the FTSE 100 is up 4.7% against a 0.1% fall for the S&P 500. Adjust for currencies (the dollar wins) and dividends (UK wins) and in terms of total returns to a sterling investor, the Footsie is still about 3% ahead.

The importance of dividends should not be ignored when looking at the FTSE 100’s flatlining. Last year, the total return on the FTSE 100 was 7.93% and over the four years since the start of the decade the total return figure was 18.4%. The FTSE 100 ended the year with a yield of 3.86%, 0.3% higher than the ten-year gilt yield.

While the relative performance of the UK equity market looks poor for 2023, it improves slightly when currency is allowed for. The pound had a decent year, rising 6.0% against the US dollar, 2.4% against the Euro, and 13.2% against the Yen, which was held down by a still sub-zero bank rate. In sterling terms, the MSCI ACWI was up 13.3%, for which Wall Street (now 62.72% of the index after the USA’s strong year) can take a good slice of the credit.

Comment

The best performing developed market in 2023 was Italy, which benefited from Georgia Meloni being not as frightening as she first seemed when she became Prime Minister in October 2022. The best performing emerging market by just 0.5%, according to MSCI, was Hungary (with Greece in an honourable second place).

Gilts in 2023

(AF4, FA4, FA7, LP2, RO2)

2023 was a better year for gilts, helped by a sharp decline in yields from mid-October

If 2022 marked the end of a 40-year bull market in bonds, just viewed from starting and end points (the solid and dashed lines) some stability returned in 2023. However, as the dotted lines showing the end of September curves indicate, en route, there was plenty of volatility.

The UK began the year with a CPI inflation reading (for November 2022) of 10.7% and ended with the rate (for November 2023) having more than halved to 3.9% - a near mirror image of 2022. In an effort to quell inflation, the Bank of England increased the Bank (Base) Rate fives times in 2023, taking it from 3.50% to 5.25% in August, at which point it has since paused. The gilt market’s reaction to the combination of Bank Rate hikes and inflation was to ramp yields up, with the ten-year bond going from 3.7% at the beginning of the year to 4.75% by mid-August. Thereafter yields were relatively stable until mid-October, at which point the market started to think that all the higher-for-longer talk had run its course. Thus the ten-year yield ended at just under 3.6%, marginally below its January start point.

There was a similar picture for index-linked gilts. The FTSE Index-Linked All-Stocks Index ended the year with a real yield of +0.73%; a year ago it was at +0.43%, having reached +1.52% in mid-October.

The IA bond fund indices broadly follow the picture outlined above for gilts and show how other fixed interest securities fared better than gilts, as the odds on a serious recession faded, and with the accompanying risk of insolvencies,:

IA sector	2023 total return
UK index-linked gilts	1.7%
UK gilts	4.5%
Sterling Corporate Bond	9.7%
Sterling Strategic Bond	8.0%
Sterling High Yield	11.1%

Source: Trustnet

The US Federal Reserve raised the Fed Funds rate four times in 2023, taking it from 4.25%-4.50% to 5.25%-5.50% The movement of US Treasury bond yields (blue lines on the graph) was similar to the UK’s, with rates peaking in mid October before dropping sharply, helped by December’s dot plot. As in the UK, corporate bonds outperformed their Government counterparts, with the best returns from high yield.

Comment

The performance of bonds in 2023 was rescued by the final quarter, thanks to falling inflation and soothing words from the Federal Reserve. ‘Bonds are back’ is the phrase of the moment, but after the last three months there are a few commentators suggesting that bonds are also priced for perfection.

PENSIONS

HMRC lifetime allowance guidance newsletter - December 2023

(AF8, FA2, JO5, RO4, AF7)

The lifetime allowance (LTA) guidance newsletter has articles on:

pension commencement lump sums (PCLS);
taxable lump sums and PAYE for employers payroll reporting;
dependants’ or nominees’ flexi-access drawdown pension or annuity (BCE 5C and BCE 5D);
enhancement factors;
LTA protections and enhancements — application deadlines;
scheme administrator reporting;
lump sum death benefits;
lump sum death benefits from before 6 April 2024 crystallised funds;
international — overseas transfer allowance;
international — member payment charges;
transitional arrangements;
protection look-up service.

Areas of interest

Pension commencement lump sums (PCLS)

HMRC confirm the legislation aims to maintain the current treatment for PCLS, that it is limited to the lower of 25% of the member’s benefits crystallising, or so much of the member’s lump sum allowance (LSA) or lump sum and death benefit allowance (LSDBA) available when the member becomes entitled to the lump sum.

The PCLS will remain free of tax.

Pension commencement excess lump sums (PCELS)

There is a new authorised lump sum payment – a PCELS. A PCELS allows members to take a lump sum in excess of their LSA when they take their pension, and the scheme rules permit the payment. This is primarily aimed at public sector schemes that have an automatic right to a lump sum of three times their pension.

A PCELS is only available where the individual has used up all of their LSA and the total of capital value of the member’s scheme pension exceeds their LSDBA. A PCELS will be subject to income tax at the member’s marginal rates.

Dependants’ or nominees’ flexi-access drawdown pension or annuity (BCE 5C and BCE 5D)

HMRC confirm that death benefits payable as flexi-access drawdown or annuity remain free of tax where the member dies under the age of 75, regardless of the value, i.e. no LSDBA applies to payments made in this way.

Enhancement factors

Finance Bill 2023/24 confirms that LSA and LSDBA enhancements will be available where an individual:

holds primary protection (primary protection factor);
has acquired rights before 6 April 2006 under a registered pension scheme by virtue of becoming entitled to a pension credit (pre-commencement pension credit factor);
has acquired rights under a registered pension scheme by virtue of becoming entitled to a pension credit (pension credit factor);
has been a relevant overseas individual whilst an active member of an arrangement under a registered pension scheme (non-residence factor);
has transferred rights from a recognised overseas scheme to a registered pension scheme (recognised overseas scheme transfer factor).

The LSDBA will be increased for all the above but only those with primary protection and pre-commencement pension credits will have an enhancement to their LSA. This is in line with the current position. The level of increase to an individual’s LSA and LSDBA will be capped at the entitlement they had built under the LTA.

LTA protections and enhancements — application deadlines

The application deadline for both fixed protection 2016 and individual protection 2016 is 5 April 2025.

International enhancements and pension credit enhancements

The deadline to apply for either of these enhancements where eligible is 5 April 2025.

Lump sum death benefits

Where a member dies under the age of 75 and some or all of the lump sum death benefits are taxable, i.e. the benefit exceeds the LSDBA, the payments will continue to be paid out by the scheme without a tax deduction.

The responsibility for identifying a chargeable amount and reporting this to HMRC will rest with the personal representatives. The process currently applies to defined benefit lump sums and uncrystallised funds lump sum death benefits. It will also be extended to the following payments:

pension protection;
annuity protection;
drawdown pension fund;
flexi-access drawdown.

The new rules bring drawdown funds into scope in terms of testing against the LSDBA, whereas previously they would not have been tested against the LTA.

However, HMRC also confirm that any drawdown payments that were crystallised before 6 April 2024 will not be included in the limit on tax-free lump sum death benefit payments.

Transitional arrangements.

The transitional arrangement rules explain how to account for benefits taken before 6 April 2024 under the new regime.

Individual’s LSA

An individual’s LSA is calculated by deducting 25% of the amount of the individual’s LTA previously used as of 6 April 2024.

Where the individual has used up all of their LTA, their LSA will be set to zero.

Individual’s LSDBA

An individual’s LSDBA will also be reduced by 25% of the amount of the LTA previously used, except where they have received a serious ill health lump sum before 6 April 2024. In the case of serious ill health lump sums, the amount is reduced by 100% of the LTA previously used.

As with the LSA, where the individual has used up all of their LSDBA their LSA will be set to zero.

Transitional tax-free amount certificates

Those with complete and accurate records of the tax-free cash amounts they have previously received may ask the scheme to use this evidence instead of the calculations set out above.

This is aimed at those who have previously taken benefits but not taken their full tax-free cash entitlement – primarily this will be those in defined benefit schemes.

Any updated tax-free amounts will replace the 25% or 100% figures in the above calculations.

PPF confirms 2024/25 levy halved to £100m

(AF8, FA2, JO5, RO4)

The Pension Protection Fund (PPF) has published its Levy Policy Statement: Levy rules 2024/25 following on from its consultation in September. The PPF expects to collect £100 million, half of that estimated for 2023/24, with almost all (99%) levy payers expected to see a levy reduction. This is despite many respondents to the consultation questioning whether the levy needed be so large in light of the continuing and increasing PPF surplus.

The policy statement sets out the PPF’s views as to why it remains wedded to collecting £100 million, including shortcomings with their modelling – such as funding data being, usually, updated by schemes only once every three years. In light of this, the PPF concludes that it is “not prepared to take a potentially irreversible decision now that severely inhibits or entirely removes [its] ability to respond to risks that may develop in future”.

The PPF states that it is working with the Department for Work and Pensions to amend legislation that currently limits the amount by which the PPF can increase the levy from one year to the next (to 25%). Although it accepts that the Secretary of State has the power to increase the 25% restriction, it “believe[s] that this power does not offer [it] the flexibility [it] need[s] if a funding issue develops in future – and [it] need[s] to ensure [it has] the ability to operate independently and to respond promptly to any such funding risks”.

If the primary legislation is amended, it could enable the PPF to set a much lower or even zero levy. Before schemes and sponsors get too excited, this will be “as soon as Parliamentary time allows” – so don’t “hold your breath”!

Main features for 2024/25 include:

Collect £100 million total levy (as proposed).

Increase the Levy Scaling Factor (LSF) to 0.40 from 0.37 (as proposed) – in order to ensure that the £100 million is raised.

Reduce the scheme-based levy (SBL) multiplier to 0.0015% from 0.0019% (as proposed), reducing SBLs by over 20% compared with 2023-24, in order to ensure the SBL is no more than 20% of the total levy – as required by (current) legislation.

Continue to use A10 s179 assumptions (as proposed) rather than moving to A11; which would otherwise reduce the levy by around £20 million and reduce the pool of levy payers by around 20% absent any other changes.

The risk-based levy cap will remain at 0.25% of protected liabilities (as proposed). Due to the overall reduction in RBLs, the PPF expects that no schemes will need to have this cap applied in 2024-25.

No changes to asset stresses (following some significant changes last year), but the PPF will continue to monitor volatility. However, the PPF has worked with The Pensions Regulator to improve Exchange help files to clarify how assets should be reported and expects these to be published in January 2024.

Reduce the three credit rating agencies (S&P, Fitch and Moody’s) to two, retaining S&P and Fitch. The PPF will write to all schemes that have a Moody’s rated entity, but expects most entities to remain in the same levy band.

A simplification in the processes required for Special Category employers (those who are part of government, the Crown or established by legislation, and present a low risk to the PPF).

A clarification of the treatment of Asset Backed Contributions on termination/surrender.

The policy statement sets out the changes to the Determination and relevant parts of the PPF’s additional guidance. It also notes that updated guidance for s179 (PPF) valuations, G10, will be published shortly.

David Taylor, PPF Executive Director and General Counsel, said in their Press Release that: “Next year’s target collection of £100m will be the lowest levy we’ve ever charged. As a result, almost all schemes will see a fall in their levy. The possibility of zero levy in future has come closer into sight. To further reduce the levy in future, we need legislative change; I’m grateful that DWP are considering this.”

TPO publishes annual report and accounts for 2022/23

(AF8, FA2, JO5, RO4)

The Pensions Ombudsman (TPO) and PPF Ombudsman have published their Annual Report and Accounts for 2022/23. The report highlights the continuing increase in demand for its services, with the number of complaints it received increasing by 17% from 6,216 in 2021/22 to 7,280 in 2022/23. The report additionally confirms that TPO also increased the number of pension complaint closures by 49% compared to the previous year.

In summary TPO:

Received 9,841 contacts by phone, LiveChat, email and post from people seeking help with pension issues.
Generated 8,592 new general enquiries.
Received 7,280 new pension complaints, representing an 17% increase on the previous year.
Found the three most common topics of closed pensions complaints were: contributions, administration and pension transfers.

A summary of TPO’s performance over the year would include that they:

Resolved 8,619 general enquiries (71 were carried forward from 2021/22).
Closed 7,784 overall pension complaints, representing a 49% increase on the previous year.
Closed 5,438 pension complaints at the application and assessment stages.
Resolved 1,572 pension complaints informally through our Early Resolution Service
Resolved 774 pension complaints through our Adjudication teams
4.2% (326) of closed pension complaints, were through formal Determinations by the Pensions Ombudsman and Deputy Pensions Ombudsman.
Around 51.2% of Determinations by the Pensions Ombudsman were upheld, at least in part.

ABI: Consumer Research on Personalised Guidance

(AF8, FA2, JO5, RO4)

The Association of British Insurers (ABI) has published the results of research testing whether “personalised guidance” can lead to more effective financial decision-making.

The ABI and Thinks Insight and Strategy’s Behavioural Team asked participants to choose how much to withdraw from a hypothetical pension pot. According to the findings:

14% of participants were able to make a decision that would leave them better off when given generic guidance on income tax implications.
76% of participants were able to make a decision that would leave them better off when given personalised guidance highlighting a specific withdrawal amount based on the customer’s circumstances.

TPR says it will take action to ensure savers' interests are considered in M&A transactions

(AF8, FA2, JO5, RO4)

The Pensions Regulator (TPR) has issued the text of a speech given by Nausicaa Delfas, TPR’s Chief Executive at the UK Finance Corporate Finance Committee dinner. The key messages included:

TPR’s priorities are to protect, enhance and innovate in savers’ interests.
TPR’s focus on defined benefit (DB) schemes is on making sure they pay their promised benefit.
TPT is not here to prevent mergers and acquisitions (M&A) transactions, but are here to make sure savers’ interests are protected.
Pension schemes should be treated equitably alongside other creditors.
Early engagement between the corporates and the trustees and regulators can make sure that transactions proceed smoothly.

She went on to highlight that, as of September, over 80% of schemes are in surplus on their technical provisions, compared to around 50% at the start of 2022. Saying that: “With corporates/employers on the hook for these schemes, this improved funding position of pensions may make businesses more attractive to M&A activity. As a regulator, when it comes to M&A activity, we are not here to prevent transactions; we are here to make sure savers’ interests are protected. For example, ensuring that the pension scheme is treated equitably alongside other creditors.”

However, she warned that TPR will intervene if retirement incomes are threatened, adding: “First through supervision, where we will look to resolve risks consensually without the use of powers. But if agreement can’t be reached, then escalating that engagement to an enforcement case. Using our powers is a last resort. Our goal is always to try and reach constructive solutions with both the trustee and the corporate.”

PFS What's new bulletin

FTT decides shares gifted to a charity by a taxpayer were overvalued

(AF1, RO3)

A FTT case, where it was decided that the valuation of shares donated to charity should be based on all available information, not just the AIM quoted share price, particularly in cases where the shares are relatively illiquid.

The FTSE 100, which ended the year up 3.8%, significantly lagging most developed market indices.

2023 was a better year for gilts, helped by a sharp decline in yields from mid-October

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