Taxation and trusts update: SEISS, FCA findings and more

Taxation and trusts

• Practitioners warn banks against releasing large sums before grant of probate
• Self-Employed new parents will be able to claim the SEISS
• The equity release sales and advice process review: Key FCA findings
• Mini-bond promotions: FCA to make marketing ban permanent
• Judge waives forfeiture rule in recent case
• Alternative minimum tax

 

 

Practitioners warn banks against releasing large sums before grant of probate

(AF1, RO3)

A specialist group set up by solicitors to support the elderly and vulnerable, Solicitors for the Elderly (SFE) is concerned by the cash limit, which has risen steadily, being paid to relatives of bereaved families before probate.

In 2017, a process was put in place by UK Finance (formerly the British Bankers Association) and the Building Societies Association to help bereaved families dealing with the delays and expense of probate. Typically, up to £10,000 is released from estates to allow the families to pay for probate to allow the estate to be finalised. There was no standard amount agreed and different institutions still operate different practices.

The Building Societies Association has confirmed that members usually set a £15,000 limit for paying out funds without probate, although it admitted that the maximum amount ranges between £5,000 and £30,000, depending on the merits of each case.

However, banks and building societies have reviewed their bereavement processes since the coronavirus lockdown began, because the usual approach of a face-to-face discussion with a bereaved relative is not easily done at present. Some have raised the probate limits in certain circumstances.

SFE is now lobbying banks and building societies to create a universal policy on limits for releasing bank accounts after death.

Currently the system is open to abuse by people falsely claiming to be an executor or administrator, perhaps by producing an out-of-date Will that has since been superseded. This may end up with cash in the wrong hands and disputes arising.

Sources:

• SFE
• This is Money
• STEP News: Practitioners warn banks against releasing large sums before grant of probate – dated 15 June 2020

Self-Employed New Parents Will Be Able To Claim The SEISS

(AF1, AF2, AF3, AF4, ER1, FA2, FA4, FA5, FA7, JO2, JO3, JO5, LP2, RO2, RO3, RO4, RO5, RO7, RO8)

Following the recent extension of, and changes to, the Self-Employment Income Support Scheme (SEISS), the Government has now announced a change aimed at helping self-employed new parents who might not otherwise have been able to claim for a payment under the SEISS.

The SEISS requires claimants to have traded in 2018/19 with their profits making up at least half of their total income. They must also have submitted a self-assessment tax return on or before 23 April 2020 for the 2018/19 tax year.

This latest announcement will mean that parents, including mothers, fathers and those who have adopted, who took time out of trading to care for their children within the first 12 months of birth of the child, or within 12 months of an adoption placement, will now be able to use either their 2017/18 or both their 2016/17 and 2017/18 self-assessment returns as the basis for their eligibility for the SEISS.

They will, of course, also need to meet the other standard eligibility criteria for support under the SEISS.

Further details of this change for self-employed parents will be set out by the start of July in published guidance.  In the meantime, more information on the SEISS can be found here and here.

And the Government has also produced the following guide - Factsheet for SEISS and CJRS schemes.

Source: HM Treasury News Story: Self-employed new parents can claim support grant – published 17 June 2020.

The equity release sales and advice process review: Key FCA findings

(ER1)

A recent FCA review has found that firms must do more to ensure that they are always giving appropriate equity release advice.

The FCA’s review was undertaken as part of exploratory work on later life lending, where it considered the borrowing opportunities available to consumers aged 55 and over, some of whom may be more vulnerable.

Demand for later life lending has grown in recent years. With the option of no monthly payments, equity release is an attractive option for some - allowing consumers to benefit from the stability of a long-term fixed interest rate and unlock wealth from the value of their home which may be their main or only asset. 

Deciding to take out equity release is one of the most important and long-term financial decisions consumers make in later life. The consequences of their decision are likely to have a significant impact on their financial wellbeing for the rest of their life and some of the costs can be less obvious, but significant. 

For example, the costs of compounding interest over a long period of time can make equity release an expensive way to meet a short-term borrowing need, whilst the costs of ending these contracts, or repaying early, if personal circumstances change, can also be significant. 

The FCA’s advice for consumers is to think of equity release as a long-term transaction, as it can be expensive if they change their mind. It suggests that consumers consider whether it will be right for them, both now and in the future, as well as how much it will ultimately cost.

Whilst the FCA’s review found equity release to be working well for many consumers, it highlighted three significant areas of concern which, it says, increases the risk of harm to consumers:

1. Advice given by firms did not always sufficiently take into account consumers’ personal circumstances;

2. Consumers’ reasons for looking at equity release were not always challenged by firms;

3. Firms weren’t always able to evidence that their advice was suitable.

The FCA’s Executive Director of Supervision, Retail and Authorisations, Jonathan Davidson, commented:

“…It is clear from our review that advice being offered to such consumers, including some vulnerable consumers, is still not up to scratch. All firms offering these products should read our review and take action to make sure consumers are receiving advice tailored to their personal circumstances.”

The FCA has warned all firms to ensure that their advice processes, including how they record the suitability of advice, are sufficient. While MCOB sets out its expectations in detail, as a result of this work the FCA particularly noted the following to bring to firms’ attention:

• Firms need to ensure that they take reasonable steps to obtain sufficient information from customers to provide advice.

• When giving advice to enter into an equity release transaction (for the first or subsequent time, including making amendments to existing equity release products), firms should ensure the advice given is suitable.

• Firms should ensure that they collect and retain the necessary evidence to support that assessment of the suitability of advice and how it was determined.

The FCA says that it is addressing its findings with the firms in its sample. And, as part of its ongoing supervision of mortgage intermediaries, it will be undertaking further work to review the suitability of advice in the lifetime mortgage market.

The coronavirus pandemic has placed new pressures on people’s finances and, according to the FCA, there is anecdotal evidence of more interest in equity release.

Whatever the reason for considering equity release, customers should be aware of the potential pitfalls, and costs, involved. Advice reflecting the needs and circumstances of the individual is essential.

Source: FCA News: Firms must do more to ensure that they are always giving appropriate equity release advice, FCA review finds – dated 17 June 2020

Mini-bond promotions: FCA to make marketing ban permanent

(AF1, RO3)

The Financial Conduct Authority (FCA) introduced its original 12-month temporary marketing ban, without consultation, in January following concerns that speculative mini-bonds were being promoted to retail investors who neither understood the risks involved, nor could afford the potential financial losses.

To make this marketing ban permanent, the FCA has now published a consultation paper ‘High-risk investments: Marketing speculative illiquid securities (including speculative mini-bonds) to retail investors’.

In this consultation paper, the FCA is proposing a small number of changes and clarifications to the marketing ban introduced in January. This includes bringing within the scope of the ban listed bonds with similar features to speculative illiquid securities and which are not regularly traded.

Sheldon Mills, Interim Executive Director of Strategy and Competition at the FCA said:

“…Since we introduced the marketing ban we have seen evidence that firms are promoting other types of bonds which are not regularly traded to retail investors. We are very concerned about this and so we have proposed extending the scope of the ban.”

The term mini-bond refers to a range of investments. They have been at the heart of several scandals recently, the most notable being the demise of London Capital & Finance (LCF).

Persistent low interest rates since the financial crisis make the high rates of fixed return advertised by mini-bonds attractive to many retail investors, particularly those who typically keep most of their net wealth in deposits or low-risk bonds.

The FCA says that its ban will apply to the most complex and opaque arrangements where the funds raised are used to lend to a third party, or to buy or acquire investments, or to buy or fund the construction of property. There are various exemptions including for listed bonds which are regularly traded, companies which raise funds for their own commercial or industrial activities, and products which fund a single UK income-generating property investment.

The FCA’s consumer guide to mini-bonds can be found here. As the FCA notes in this consumer guide, there is no legal definition of a mini-bond. However, most have been illiquid debt securities, targeted at retail investors. They have often been associated with property lending and/or lending to small unquoted companies.

The FCA ban is intended to mean that products caught by the rules can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.

However, a business does not have to be FCA-regulated to issue mini-bonds and the FCA reminds us that it has limited powers over unauthorised issuers. As it says, issuers of speculative mini-bonds are usually unauthorised.

The FCA’s role has so far been to regulate the promotion of mini-bonds (which usually need to be approved by an FCA-authorised person) and when the mini-bonds form part of an investment service, e.g. a regulated firm recommends their purchase. The promotional aspect has created problems because retail investors have seen the letters ‘FCA’ in an advertisement and failed to appreciate its limited relevance.

The FCA’s consultation closes on 1 October, and the FCA will publish the rules in a Policy Statement before the end of 2020. Subject to any changes arising from consultation feedback, the FCA intends that the rules making the ban permanent will come into effect on 1 January 2021, so that the measures currently applying continue as permanent rules, along with the additional changes proposed.

Source: FCA News: FCA to make mini-bond marketing ban permanent – dated 18 June 2020.

Judge waives forfeiture rule in recent case

(AF1, RO3)

A woman who killed her husband due to reckless driving has successfully contested the forfeiture of her right to inherit his estate.

In the recent case of Amos v Mancini & Ors [2020] EWHC 1063 (Ch) (30 April 2020) a 74-year-old woman, whose careless driving caused the death of her husband has successfully contested the forfeiture of her right to inherit his estate.

The Forfeiture Act 1982 precludes a person who has unlawfully killed another person from inheriting any benefit from their estate in consequence of the killing. 

In the said case, the couple were travelling from their Welsh home to Canterbury to attend Mr Amos’s sister’s funeral in January 2019. However, on their way there they got lost, so decided to turn around and return home. Mrs Amos, who was driving, ran into the back of a queue of stationary vehicles. As a result, Mr Amos suffered traumatic injuries and died later that day in hospital.

Mrs Amos was charged with causing his death by careless driving under section 2B of the Road Traffic Act 1988, inserted by the Road Safety Act 2006. She pleaded guilty at the first opportunity and received a suspended prison sentence of 32 weeks and was disqualified from driving for 12 months.

Under the terms of her husband's Will, Mrs Amos was entitled to his residuary estate and, unless the forfeiture rule applied, she would have also inherited his share of their jointly owned property under the rules of survivorship. Mrs Amos was challenged by Mr Amos’ daughter by his first marriage, Beverly Mancini. Beverly and two other family members stood to inherit Mr. Amos' estate if Mrs Amos was disqualified from inheriting under the UK Forfeiture Act 1982. However, the Act provides the Courts with a discretion to waive forfeiture, and this is what the England and Wales High Court (EWHC) had to consider in this particular case.

When the rule was first applied by the Courts there were only two types of unlawful killing, murder and manslaughter. The offence of causing death by careless driving was not on the statute books until much later.

Mrs Amos's counsel admitted that her offence amounted to unlawful killing for the purposes of the Act, but argued that it should not attract the forfeiture rule and that the Court should apply its discretion under section 2 of the Act so as to allow her to inherit because she had not deliberately or intentionally killed Mr Amos.

Although the Judge considered there was no reason why Mrs Amos' offence should be treated any differently from manslaughter for forfeiture purposes, he did take into account the extent of her culpability, especially as she had had to drive for an unexpectedly long period. The Judge commented that depriving Mrs Amos of her inheritance would be 'significantly out of proportion' to her fault. He therefore found in her favour by exercising the discretion allowed in section 2 of the Act, which allowed her to take her husband's interest in the matrimonial home and inherit his residuary estate under the terms of his Will.

Sources:

• Bailii: Amos v Mancini & Ors [2020] EWHC 1063 (Ch) – published 30 April 2020. (https://www.bailii.org/ew/cases/EWHC/Ch/2020/1063.html)
• STEP News: Forfeiture waived for woman who accidentally killed husband in car accident – 7 May 2020.

Alternative minimum tax

(AF1, RO3)

Could one way to help pay the COVID-19 bill be to borrow the US practice of setting an Alternative Minimum Tax? A pair of academics specialising in tax and income distribution think so.

It is one of those ‘news stories’ which regularly pops up – the mega-rich company boss pays a lower overall rate of tax than their cleaner. Even Warren Buffet has noted the fact.

In the United States, since 1970 an Alternative Minimum Tax (AMT) has existed in various forms as a way to address this issue. AMT sets a floor for the tax that an individual with high income must pay, regardless of the level of allowances and reliefs they can muster. As a result, the incentive to minimise tax is reduced because, beyond a certain point, the AMT will bite.

Two academics, Arun Advani and Andy Summers, working in the field of tax design, have suggested in a new research paper that the UK should consider introducing its own version of AMT. It could be one way towards addressing the financial black hole created by COVID-19.

The paper’s main points are:

• Research using HMRC data from 2015/16 shows that the average effective rate of tax (including National Insurance contributions (NICs)) peaks at around £2m of income and then gradually drifts down. Somewhat disingenuously the authors compare this average effective rate to what they label the ‘headline rate’, by which they mean a marginal 47% (45% income tax and 2% NICs).

• If capital gains are added to income, which Messrs Advani and Summers define as producing ‘total remuneration’, the difference widens markedly. The peak average effective rate is reached at £250,000, with a rapid decline above £600,000. This is inevitable, given that the maximum rate of capital gains tax (CGT) is 28% and, in most instances, 20%. Earlier research by the same pair revealed that individuals in the top 1% of income (above £125,000) receive an average of £47,000 in gains in addition to their income.

• The largest gap between the ‘headline rate’ and ‘total remuneration’ occurs at £5m and above, but it is visible at less rarefied parts of the income distribution up to £1m, as the graph below shows.

• The averaged numbers hide important variations. For example, for those with more than £4m in income, the average effective tax rate was 39%, but within this group a quarter had an effective rate of 31% or less.

• Messrs Advani and Summers calculate a variety of options for a UK AMT based on both income and ‘total remuneration’, all with a starting point of £100,000. That covers about 1.1m income tax payers – the top 3.5%. At the lower end, an AMT rate of 30% on income only ‘could raise around £1bn’, increasing to £3bn if the rate is pitched at 35%

However, the option which the authors choose to put in bold is a 35% AMT rate applied to ‘total remuneration’, which they estimate could raise around £11bn – roughly equivalent to 2p on the basic rate of tax. According to an article in the Times, the 35% was chosen as being the average effective rate (tax and employee NICs) on £100,000 of earnings. However, that is a 2015/16 figure: for 2020/21 the corresponding effective rate is about 33.5% (thanks to the boost in the higher rate threshold).

An AMT could appeal to the Chancellor as a way of increasing tax take without explicitly increasing rates and breaking an Election pledge. It also has the indirect effect of at least partially meeting his goal of collecting more from the self-employed. 

Sources: CAGE Policy Briefing June 2020. https://warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/bn27.2020.pdf
The Times: Minimum tax on wealthy ‘would raise an extra £11bn’– 15 June 2020. https://www.thetimes.co.uk/article/d4a697ea-ae58-11ea-86d3-bc5eef90654f?utm_source=newsletter&utm_campaign=newsletter_103&utm_medium=email&utm_content=103_9663269&CMP=TNLEmail_118918_9663269_103