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My PFS - Technical news - 27/10/2015

Personal Finance Society news update from 07 October 2015 - 20 October 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

Record stamp duty land tax receipts

(AF1, RO3)

Stamp duty land tax (SDLT) has become a significant source of government revenue over the last decade. The latest statistics from HMRC, released at the end of September, show UK SDLT brought in £10.74bn in 2014/15, almost twice as much as capital gains tax and nearly triple the amount of IHT paid. £7.5bn of SDLT is attributable to residential property, with the balance from non-residential property (mainly commercial). SDLT is now about 2% of total tax income.

Residential properties valued at over £1m accounted for 29% of all residential SDLT, with a slightly smaller proportion attributable to the top ten local authorities (all of which were inLondon).

These 2014/15 figures are subject to two distorting factors:

  1. The basis of SDLT changed on 4 December 2014 when the Chancellor announced the abandonment of the 'slab' approach in his Autumn Statement. This prompted a rush of completions in December, with SDLT income for the month reaching £1.016bn.
  2. In the first quarter of 2015, the combination of the threat of a Labour victory and ensuing mansion tax, big sales brought forward into late 2014 and higher SDLT for £1m+ properties cooled the top end of the market.

The Office for Budget Responsibility (OBR) forecast in July that SDLT would bring in £11.5bn in 2015/16, rising to £17.3bn by 2019/20. However, the high-end Londonestate agents are warning that the 12% marginal SDLT rate, which now applies to the slice of residential value above £1.5m, is holding back sales. The effect has been compounded by the increased taxation (ATED and CGT) on non-resident purchasers. SDLT receipts in the first five months of 2015/16 were £4,305m, £378m (8%) down on the same period in 2014/15. It will be interesting to see whether the OBR revises its SDLT projections in November, when its Autumn Statement forecast emerges.

Last year's reform of SDLT was welcomed as a sensible move, but it is beginning to appear that the goal of maintaining a very similar tax income from the revised scale may not be achieved.

HMRC has published an updated version of Guidance Note: Residence, Domicile And The Remittance Basis (RDR1)

(AF1, RO3)

HMRC has published an updated version of RDR1. This guide is for residents and non-residents on the residence, domicile and remittance basis rules for tax years 2012/2013 onwards.

The main changes include an update for changes to the remittance basis introduced from 6 April 2015 and information about the capital gains tax extension to gains from sales and disposals ofUKresidential property by non-UK residents.

Changes to the remittance basis

In a nutshell, from 6 April 2015 there are now 3 levels of the remittance basis charge. These are as follows:

  • £30,000 if you have beenUKresident in at least 7 out of the preceding 9 tax years
  • £60,000 if you have beenUKresident in at least 12 out of the preceding 14  tax years
  • £90,000 if you have beenUKresident in at least 17 out of the preceding 20 tax years

The guide has essentially been updated to include detail of these charges and how they apply.

The disposal ofUKresidential property byUKresidents

From 6 April 2015 non-UK resident individuals, trusts, personal representatives and narrowly controlled companies are subject to CGT on gains accruing on the disposal ofUKresidential property. Non-resident individuals are subject to tax at the same rates asUKtaxpayers (18% and/or 28% on gains above the annual exempt amount). Non-resident companies are subject to tax at the same rate asUKcompanies (20%) and will have access to an indexation allowance. The guide has also been updated to include information about the capital gains tax extension in these cases.

Policy encashment: cluster policies best practice 

(AF1, RO3)

The ABI has issued a "Best Practice" note to member offices following the Joost Lobler case.

In earlier articles we have covered the problems that can arise in relation to large part encashments under investment bonds.

It is evident (and well known) that in some cases taking a large amount from an investment bond by a part encashment can trigger a chargeable event gain materially in excess of the economic gain resulting in a significant tax charge - as was the position in the Joost Lobler case with HMRC lost.

It may be that some change to the tax legislation on chargeable events, especially in relation to deficiency claims, may result.

In the meantime the ABI has issued a "Best Practice" guidance note to member offices.

A key statement in the Best Practice note is this:

'In simple terms, the provider needs to make sure that before a surrender or part surrender becomes irrevocable - i.e. is completed - the provider 'intervenes' to ensure the policyholder is put in a position to make an informed decision.'

The note provides further detail and guidance for member offices in relation to the possible nature and timing of the suggested intervention.

Flexible ISA consultation

(AF1, RO3)

It was announced in the 2015 March Budget that changes would be made to allow ISA savers to replace cash they have withdrawn from their ISA earlier in a tax year, without this replacement counting towards the annual ISA subscription limit for that tax year.

It would appear that this flexibility will be available in relation to both current year and earlier years' ISA savings where this is provided for in the terms and conditions of a 'flexible ISA'. This facility is not extended to Junior ISAs.

HMRC has published draft regulations, together with a draft explanatory memorandum and a Tax Information and Impact Note, for a period of technical consultation which will close on 8 November 2015.

Current rules

Under the current rules, in 2015/16 an individual has the ability to invest the maximum of £15,240 into an ISA (C). Instead they invest a smaller amount (A). They then take a withdrawal (B) but later wish to make further investments into the ISA in the same tax year. The maximum amount of the further investment that they could potentially make is restricted to C less A. Thus it is not possible to replace the cash that has been withdrawn from the ISA.

Therefore, under these rules individuals effectively lost the ability to shelter the amount withdrawn from tax in the future using the ISA wrapper.

An example may help:

The ISA allowance for the 2015/2016 tax year is £15,240 (C).

If you have invested £9,240 (A) in a cash ISA and you withdraw £2,000 (B), the value of your cash ISA would then be £7,240 ignoring any interest. While the withdrawal does not affect your overall subscription amount, you can only put another £6,000 into the ISA in this tax year (i.e C less A which is £15,240 - £9,240 = £6,000).

New rules

Under the new rules, in 2015/16 an individual has the ability to invest the maximum of £15,240 into an ISA (C). Instead they invest a smaller amount (A). They then take a withdrawal (B) but later wish to make further investments into the ISA in the same tax year. The maximum amount of the further investment that they could potentially make is only restricted to C less (A-B). This effectively means that investors will be able to replace the cash they have withdrawn without this replacement counting towards their annual ISA subscription limit.

Under these rules, if someone were to take money out of their ISA in the same tax year they would be able to continue to make contributions up to the full subscription amount ignoring the fact that they had made any previous withdrawals, therefore enabling them to replace the cash they have withdrawn from their ISA.


The ISA allowance for the 2015/16 tax year is £15,240(C).

If you have invested £9,240 (A) in a cash ISA and you withdraw £2,000 (B), again the value of the cash ISA would then be £7,240 ignoring any interest. However, in this case you can put in another £8,000 in this tax year (i.e C less (A-B) which is £15,240 less (£9,240-£2,000) = £8,000).

This particular change provides good news for investors who require funds immediately but were previously reluctant to draw upon their ISA given that they would have then been a restriction on the amount they could additionally save.

Investment planning

The September inflation numbers

(AF4, RO2, FA7, CF2)

September saw a return of deflation, albeit only just.  Annual inflation on the CPI measure turned negative again in September, with the rate falling from September's zero to -0.1%. The September inflation numbers from the Office for National Statistics (ONS) were marginally better than market expectations, which had been for a second nil reading. The ONS says that this is the first time that the CPI has fallen between August and September.

The CPI showed prices falling by 0.1% over the month, whereas they were flat between August and September 2014. The CPI/RPI gap narrowed by 0.2% this month, with the RPI falling by 0.3% to 0.8% on an annual basis. Over the month, the RPI fell by 0.1%, in line with the CPI.

The change in the CPI's annual rate was driven by three main downward factors, according to the ONS, which notes that "There were no notable upward contributions":


Clothing and footwear: Overall prices rose by 2.8% between August and September this year compared with a rise of 4.0% between the same two months a year ago. The ONS says that clothing prices always rise between August and September, but this year's increase was the weakest since 2008, with a higher proportion of clothing items on sale in September 2015 when compared with September last year. Taking the summer (May to September) as a whole, clothing and footwear prices increased by 0.4% compared with increases of 0.9% and 1.2% over the same period in 2013 and 2014 respectively.

Fuels and lubricants (part of the "transport" category):Overall prices fell by 2.9% between August and September this year compared with a smaller fall of 0.6% between the same two months a year ago. The largest downward contribution came from petrol, with prices falling by 3.7p per litre between August and September this year compared with a fall of 0.8p a year ago. Diesel prices are now at their lowest level since December 2009, standing at 110.2p per litre.

Year-on-year transport services prices are down by 2.6%, which is worth about a 0.4% decline in the overall CPI. However, this is a statistical trap. The ONS highlights that the decline in the transport services sector over 11 months is only 0.2%, and says that this is "a reminder that unless costs continue to fall, the disinflationary benefit of the fall in oil prices will soon fade."

Gas (part of the "housing and household services" category):Overall prices fell by 2.1% between August and September this year, compared with no change between the same two months a year ago, with price reductions from a major supplier (Centrica).

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was an annual 1.0%, unchanged from the previous month. Four of the twelve components of the CPI index are now in negative annual territory, one more (clothing and footwear) than last month.

The September inflation numbers have traditionally been the base for tax and benefit indexation increases. However, Mr Osborne's widespread benefit freezes/cuts and income tax band and allowance tweaks have left the September inflation figure much less significant.

Where September inflation does remain important is in terms of pensions. Private sector defined benefit schemes locked into the RPI will be increasing benefits by 0.8% from next April, while public sector schemes (linked to CPI) should leave levels unchanged. The basic state pension's 'triple lock' will mean an increase of around 3% from April, as the latest reported earnings growth was 2.9%, comfortably above the 2.5% floor. However, additional state pension (SERPS, S2P) are CPI-linked and so should be unmoved.


Consultation on provision of public financial guidance

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

The Financial Advice Market Review (FAMR), launched on 3 August 2015, has a wide scope and aims to look across the financial services market to understand the limitations on the availability of advice to consumers - particularly those who do not have significant wealth or income.

Alongside this review, the Government has published a consultation on publicly-funded

guidance - including Pension Wise, The Pension Advisory Service, and the Money Advice Service - to consider how the provision of free, impartial guidance should best be structured going forward to give consumers the information they need, either to make financial decisions directly or to seek the right additional advice to help them do so.

FAMR is the wider consultation - considering questions on the definition and scope of financial advice and guidance, and closing the advice gap, while the consultation will look at:

  • how much demand exists for the public provision of debt, pensions and general money guidance;
  • how the provision of public financial guidance should be structured and funded; and
  • how the government can make the provision of public financial guidance more effective for consumers

The government has three additional drivers for consulting now on the provision of public financial guidance. These are:

  • The need to identify a long term home for Pension Wise in light of the impending move of the service from HM Treasury to the Department for Work and Pensions in the short term;
  • The scope to consider a more joined-up relationship between Pension Wise and The Pensions Advisory Service; and
  • The need to conclude the independent review into the operations of the Money Advice Service, in line with the 2013 House of Commons Treasury Committee report

As part of the consultation process, the government will look at how advances in technology can be utilised to improve access to financial advice and will explore alternative advice models to eliminate the crossover in the provision of public financial guidance that currently exists. One such option might be a government-backed voucher scheme whereby a consumer would be provided with one or multiple vouchers for financial guidance sessions which could be redeemed with a range of accredited partners.

Treasury sources suggest partners could include private sector firms, Government organisations and charities, but add that no decisions have been made as yet.

This consultation is open until 22 December and the government will consider responses and report back ahead of Budget 2016, alongside the FAMR.

The review is timely given the implementation of the pension freedoms. Those approaching retirement now face the daunting prospect of a multitude of different options that previously weren't available to them and accessibility to advice will be vital for a much wider group of people going forward.

Pensions minister announced delay in implementing automatic transfers, defined ambition pensions and collective benefits

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

The Minister of State, Department for Work and Pensions (Baroness Altmann) has made the following Written Statement.

The new State Pension comes into payment from April 6 Next Year. This reform will bring much-needed clarity to a system that few people truly understand, and will reduce the need for pensioner means-testing. Alongside this, over 5.4 million employees have been enrolled into a workplace pension by around 60,000 employers, dramatically increasing the number of people saving for later life. However, they represent around only three per cent of employers as large and medium-sized firms were first to implement automatic enrolment.

The Government's priorities are to carry through those important reforms to ensure they are a success. This means new State Pension being delivered as smoothly as possible and small and micro employers getting the help and support they need as they meet their automatic enrolment duties.

Government and the pensions industry are also currently working through the changes following from the new pension flexibilities which allow scheme members to have more freedom and choice about how and when they withdraw their pension savings.

All these reforms will increase the number of people saving into workplace pensions, introduce new freedoms allowing savers to access their cash, and implement a new State Pension that will be far easier to understand in the future. However, we are conscious of the need to ensure Government, providers, employers and members are able to focus on these changes to ensure their success.

That is why we have decided that the time is not right to implement Defined Ambition, Collective Benefits and Automatic Transfers. The time is not right to ask the pensions industry to absorb the new swathe of regulation that would be needed to make such further reforms work effectively. The market needs time and space to adjust to the other reforms underway and these areas will be revisited once there has been an opportunity for that to happen.

This is perhaps a sensible move on the part of the government. The last 12 months has delivered huge changes in the retirement market, and providers and advisers alike have had to move with the times or be left behind. Indeed the changes are still being understood. Breathing space before the next round is to be welcomed.

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