PFS What's new bulletin - June I

Foreign income and gains regime - HMRC update on income from trusts 

(AF1, RO3)

 

Material changes were made to the taxation of non-UK domiciled individuals on 6 April 2025.

 

The new rules replaced domicile with “long term residence” as the determinant of liability to tax in the UK of foreign income and gains and also in relation to liability to inheritance tax (IHT) on non-UK situs assets. Broadly speaking, there is now a four-year test for foreign income and gains (FIG) and, in relation to IHT, an individual is long-term resident (and in scope for IHT on their non-UK assets) when they have been resident in the UK for at least ten out of the last 20 tax years and then they remain in scope for between three and ten years after leaving the UK. 

 

A new page, RFIG45250, has been added to HMRC’s Residence and FIG Regime Manual, setting out what trust income can be relieved under the FIG regime.

 

Not all types of income that a beneficiary receives from a trust can be relieved under the FIG regime. Whether trust income qualifies for relief depends on the type of trust, the residence of the trust and the source of the income. The table below sets out the types of trust income that can and cannot be relieved.

 

An overseas entity such as an Anstalt, Stiftung or Foundation may be treated as one of the types of trust in the table below for UK tax purposes. If it is, then income from that entity will be treated in the same way under the FIG regime as income from that type of trust, as set out in the table.

 

For guidance on income arising under the settlements legislation, please see RFIG45300 and for income arising under the transfer of asset abroad provisions please see RFIG45400.

 

Type of trust (non-settlor interested)	Can trust income from a foreign source be relieved under the FIG regime?	Can trust income from a UK source be relieved under the FIG regime?
Foreign bare trust	Yes, but only where the income is ‘qualifying foreign income’ (please see RFIG45100) – the trust income retains its character in the hands of the beneficiary who is absolutely entitled to it	No – the underlying income to which the beneficiary is entitled is not qualifying foreign income
UK bare trust	Yes, but only where the income is qualifying foreign income - the trust income retains its character in the hands of the beneficiary who is absolutely entitled to it	No – the underlying income to which the beneficiary is entitled is not qualifying foreign income
Foreign discretionary trust – please see INTM339550	Yes – income not otherwise charged (Chapter 8 Part 5 ITTOIA 2005) is qualifying foreign income	Yes – income is deemed to be foreign source income even where there is an underlying UK situs trust asset, so it is qualifying foreign income
UK discretionary trust	No – a beneficiary of a discretionary UK trust is taxed in the UK according to income distributions received, even where there is an underlying foreign trust asset, so it is not qualifying foreign income	No - the income has a UK situs so it is not qualifying foreign income
Foreign Baker trust – please see TSEM10425	Yes, but only where the income is qualifying foreign income - the trust income retains its character in the hands of the beneficiary who is absolutely entitled to it	No – the underlying income to which the beneficiary is entitled is not qualifying foreign income
Foreign Garland trust – please see TSEM10430	Yes – income not otherwise charged (Chapter 8 Part 5 ITTOIA 2005) is qualifying foreign income	Yes – income is deemed to be foreign source income even where there is an underlying UK situs trust asset, so it is qualifying foreign income
UK interest in possession (IIP) trust	Yes, but only where the income is qualifying foreign income – the trust income retains its character in the hands of the beneficiary who is absolutely entitled to it	No – the underlying income to which the beneficiary is entitled is not qualifying foreign income

 

 

A foreign income claim must be made by the individual who is taxable on the income (please see RFIG42100). This means that where a beneficiary of a trust wants to make a claim in relation to income from the trust, they must make the claim on their own self-assessment tax return. The trustees cannot make a foreign income claim on a beneficiary’s behalf.

 

Where the trustees have paid tax for being in receipt of, or entitled to, the income, and the beneficiary would receive a credit for the tax paid by the trustees, if the beneficiary then makes a claim under the FIG regime there may be a repayment to the beneficiary in respect of the tax that has been paid by the trustees. Please see TSEM10405 onwards for guidance for beneficiaries on claiming credit for tax paid by trustees.

 

HMRC warns that, even if trustees are aware that a beneficiary will make a foreign income claim they must still fulfil their obligations to report income and pay tax where appropriate – please see TSEM3165 for further information.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impacts of the proposed changes to business property and agricultural property relief

(AF1, JO2, RO3)

 

Why more than 500 family businesses could face a significantly increased tax bill as a result of the proposed changes to business property and agricultural property relief

Reforms to business property relief (BPR) and agricultural property relief (APR) were announced in the 2024 Autumn Budget, the headline being that, 6 from April 2026, there will be new restrictions on the level of BPR and APR that can be claimed.

 

Presently, there is no limit on the amount of BPR/APR which can be obtained on qualifying assets. However, from 6 April 2026, a new £1 million allowance will apply to an individual’s combined qualifying agricultural and business assets – 100% relief will be available on qualifying assets within the £1 million allowance. However, the value of any qualifying assets held in excess of the £1million allowance will only be eligible for 50% relief and will be liable to inheritance tax (IHT) at 20%.

 

Wealth advisers, Saffery, have completed an analysis of data obtained via a freedom of information request which suggests that 530 estates valued at more than £1 million claimed an average of £3.735 million BPR during 2021/22. If the proposed changes proceed in April 2026, as anticipated, then, under the new regime, the average IHT liability for these estates will increase from £273,800 to £547,000 for farms claiming relief, according to Saffery.

HMRC estimates that approximately 2,000 estates will pay a higher amount of IHT as a result of the changes.

 

HMRC has confirmed that 1,730 estates claimed APR and 4,170 claimed BPR in tax year 2021/22, which cost the Government £600 million in APR and £1.1 billion in BPR, with the majority of the relief being claimed by assets worth over £1 million. 

 

Saffery have intimated that high property prices will result in a large number of family businesses being subject to an increased IHT liability as a result of the proposed £1 million limit on 100% BPR/APR. They will need to increase earnings to meet the cost of these increased IHT bills and, in all likelihood, these increased earnings will also be liable to some form of taxation. This increased IHT burden could mean that many successful farming businesses could face real financial problems in future. 

 

Press attention has mainly focused on the implications the changes will have on farmers. However, all businesses holding a significant level of property assets will be affected. 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

Latest property statistics

(AF4, FA7, LP2, RO2)

 

The latest UK property statistics provide residential and non-residential transactions estimates during the previous three years.

 

The provisional seasonally adjusted estimate of the number of UK residential transactions in April 2025 is 64,680, 28% lower than April 2024 and 64% lower than March 2025. The provisional non-seasonally adjusted number of UK residential transactions in April 2025 is 55,970, 28% lower than April 2024 and 66% lower than March 2025.

 

Non-seasonally adjusted and seasonally adjusted UK residential property transactions by month between April 2022 and April 2025:

 

The figures show that: 

 

·         provisional figures for April 2025 indicate that UK residential transactions decreased by 64% for seasonally adjusted transactions from March 2025;

·         non-seasonally adjusted transactions decreased by 66% in April 2025 relative to March 2025. 

 

In relation to non-residential transactions:

 

·         seasonally adjusted transactions for April 2025 decreased by 16% compared with March 2025;

·         non-seasonally adjusted transactions decreased by 21% in April 2025 relative to March 2025. 

PENSIONS

 

HMRC Pensions Scheme Newsletter 170 – June

(AF8, FA2, JO5, RO4)

 

Pension Scheme Newsletter 170 covers the following:

 

• Pension scheme return;
• Migrate your pension schemes;
• UK resident pension scheme administrators;
• Lifetime allowance;
• Relief at source;
• Qualifying recognised overseas pension schemes.

 

Areas of particular interest:

 

UK resident pension scheme administrators

 

In Pension Schemes Newsletter 164 — October 2024 HMRC confirmed that, with effect from 6 April 2026, all pension scheme administrators of a UK registered pension scheme will be required to be UK resident. This latest newsletter explains what this means for existing non-UK pension scheme administrators.

 

Lifetime allowance

 

Lifetime allowance abolition — lump sum reporting

 

In Pension schemes newsletter 167, HMRC provided details on how to report pension commencement excess lump sums and stand-alone lump sums, explaining the importance of reporting them under a different payroll record (payroll ID) to the one being used for any regular ongoing source of pension income.

 

HMRC says that it is aware that not all lump sums are being reported in this way and have been asked to provide guidance on how to correct the individual’s tax record.

 

Guidance on GOV.UK for correcting payroll errors has now been updated and gives instructions on the process to follow if anyone has incorrectly reported a lump sum on a regularly paid pension source. The guidance has also been updated to reflect what to do to correct a:

 

• flexibility payment;
• death benefit payment;
• pension commencement excess lump sums payment;
• stand-alone lump sums payment.

 

This applies where anyone has reported the wrong pay or deductions or needs to amend pay or deductions previously reported.

 

Authenticated look up service to confirm protections and enhancements ― how to help HMRC

 

In Lifetime allowance guidance newsletter — December 2023 HMRC said that, in 2025, it would be moving the lifetime allowance protection look-up service onto the Managing Pension Schemes service. It aims to do this by December 2025. This will allow HMRC to provide additional information to pension scheme administrators and pension scheme practitioners, about whether the protection that a member has informed them they are relying on, for a higher lump sum, is valid. HMRC will also update the service to include if a member holds an enhancement as well as protections.

 

Later this year, HMRC will be asking for help to develop this feature. 

 

To be involved, email pensionsuserresearchrecruitment@hmrc.gov.uk and put ‘look up service’ in the subject line.

 

Relief at source

 

Payments

 

HMRC says that it is working on improving the payment process for relief at source pension schemes. The aim is that, from April 2026, it will start to process forms APSS105 and APSS106 on the Managing Pension Schemes service. Payments will be received in the same way as now, but there will be a considerable reduction in the time between a claim being received and processed, and receiving a payment. There will be no change to the existing process for submitting claims and people will continue to send HMRC forms APSS105 and APSS106 as they do now.

 

To prepare for this, it will be necessary to migrate pension schemes to the Managing Pension Schemes service, if not already done. For any consolidated relief at source claims, where a single relief at source reference is used to claim relief at source for more than one pension scheme, each pension scheme will need to be registered under an individual relief at source reference. 

 

Annual return of information for 2024/25

 

HMRC is reminding everyone that the deadline for submitting the 2024/25 annual return of information is 5 July 2025. If it is not submitted this on time, it may delay:

 

• payment of interim claims for the tax month ending 5 July 2025;
• payment of any claims for subsequent months until HMRC receives the annual return of information.
•  

Qualifying recognised overseas pension schemes

 

APSS262 form

 

In section 9 of the Lifetime allowance guidance newsletter, published December 2023 HMRC said that, from April 2025 it was introducing a new feature that will allow people to submit the APSS262 form on the Managing Pension Schemes service.

User research on this feature is still taking place and HMRC now aims to release this later in the year. HMRC says that it will provide updates on progress in future newsletters.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pensions Scheme Bill

(AF8, FA2, JO5, RO4)

 

On Thursday 5 June, a week after the final report of the Pensions Investment Review was released (see below) the Government published the Pension Schemes Bill. While the Bill is what will eventually turn the report’s conclusions into law, in many respects, the extensive use of regulatory powers means it is less informative than the report.  

 

The Bill has eight main elements:

 

1. Local Government Pension Schemes (LGPS). The Bill gives a statutory definition to the asset pool companies which will form the basis for investment. The Secretary of State is given broad regulatory-making powers covering areas including:
    
• The conditions to be met by the asset pool companies.
• The requirement for the 86 LGPS administering authorities in England and Wales to have their investments manged by an asset pool company.
• The division of responsibility between the administering authorities and the asset pool companies.
• A duty for the administering authorities to work with strategic authorities (such as the Greater London Authority, combined, county and local authorities) to identify appropriate local opportunities for pensions investment.
   
2. Powers to pay surplus to employer. These provisions allow trustees of defined benefit (DB) schemes to modify scheme rules to share surplus funds with their sponsoring employer. Trustees are subject to their overarching duties, which require them to act in the interests of scheme beneficiaries. Section 37 of the Pensions Act 1995 will be amended to clarify this. Surplus sharing will remain subject to an amended version of s37 of the Pensions Act 1995 and strict funding safeguards. While the relevant funding threshold must await future post-consultation regulations, the present indication is that it will be weaker than today’s buyout threshold, meaning more schemes will have scope to pay out surplus.
    
3. Value for money (VFM). This section consists of ten lengthy clauses, nearly all of which are regulatory making powers. The aim of those eventual regulations is to allow a comparison of occupational pension schemes based on the value they provide rather than only their cost – a key issue because of the higher fees involved in private asset investment. Schemes or their managers will be required to assign VFM ratings (more regulations…) with those recording a ‘not delivering’ rating potentially forced to transfer to a better performer.
    
4. Small pots. Regulations under the Bill will allow creation of ‘multiple default consolidators’ to which fragmented pension pots can be transferred on a near automatic basis. The definition of a small pot will start off as one of up to £1,000 which has had no contributions or member-made investment changes for at least a year.
    
5. Scale and asset allocation. This is one of the more contentious parts of the Bill – again heavily regulation-making – that requires DC multi-employer schemes operating in the Automatic Enrolment market to have a minimum of £25bn under management in at least one main scale default arrangement (MSDA) by 2030, subject to a variety of exemptions, e.g. for funds of at least £10bn that have acceptable plans to reach the £25bn threshold. These ‘megafunds’ may be required by yet more regulations to hold a “prescribed percentage” (undefined, but likely to be 10% and not increasable after 2035) in “qualifying assets”, e.g. private equity, private debt, venture capital or interests in land. The subtext is that Government persuasion (please see the Mansion House Accord) will mean the regulations are not required.  
    
6. FCA-regulated pension schemes: contractual override. Pension providers will be able to transfer a saver’s pension contract to another arrangement internally or to another provider, or to vary contractual terms, without the individual member’s consent, provided that doing so is in the member’s best interest. In effect this is the consolidation outlined in 5. above for contract-based pensions without the £25bn figure.
    
7. Default pension benefit solutions. Trustees of DC occupational pension schemes will have to provide a “pension benefit solution” for making pension payments in respect of members’ accrued rights. The FCA will be required to impose a similar requirement on the pension providers that it regulates.
    
8. Superfunds. A superfund is effectively a DB scheme consolidator, operated by a third party. The concept that has been much discussed but has had a slow start in the UK, possibly because solvency is not the issue it once was. The Bill sets out the framework for regulated superfund authorisation regime to replace the current Pensions Regulator’s interim supervisory regime.
    

Comment

 

Like many of its predecessors, this Pension Schemes Bill will take five or more years to have full effect. Assuming no changes en route, the pensions landscape of the 2030s will be much less fragmented than today’s.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pensions investment review

(AF8, FA2, JO5, RO4)

 

HM Treasury has published the Government’s final policy positions following the pensions investment review launched on 20 July 2024, Pensions Investment Review: Final Report and consultation responses. Legislation to implement the reforms will form part of the forthcoming Pension Schemes Bill. The reforms include:

 

 

• Scale: Legislating (through the Pension Schemes Bill) for a larger, more consolidated system to facilitate benefits of scale, with lower costs, an ability to invest in a wider range of assets, and higher returns for savers.
• Consolidation: Reducing the overall number of default arrangements in the marketplace by legislating to prevent new default arrangements from being created and operated, except in certain circumstances with regulatory approval.
• Cost versus value: Switching the focus of the pensions system towards value and away from a narrow focus only on cost.
• Investment from defined contribution (DC) schemes: Including a reserve power in the Pension Schemes Bill which would, if necessary, enable the Government to set quantitative baseline targets for pension schemes to invest in a broader range of private assets (including in the UK).

 

The Government has decided not to further explore measures proposed to affect the role of employers or advisers in the DC workplace market, at this time and not to introduce reforms regarding differential pricing. The next phase of the Pensions Review is due to be launched in the coming months and will focus directly on the question of the adequacy of pension outcomes. The Government plans to announce the reviewers and terms of reference “in due course”. The Government also intends to publish a roadmap for the private pensions market in due course, which will set out how the pensions investment review reforms combine with wider changes and will include the broader suite and sequencing of those reforms.

 

The FCA has responded to the announcement of a survey on asset allocation as part of the pensions investment review, stating that it plans to contact relevant firms later this year. The FCA also notes that it is liaising with HM Treasury and the Pensions Regulator to make sure the proposals for the contract-based and trust-based sides of the pension market align wherever possible.