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My PFS - Technical news - 01/03/16

Publication date:

02 March 2016

Last updated:

22 September 2017


Technical Connection

Personal Finance Society news update from 17 February to 1 March 2016 on taxation, retirement planning, and investments.

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Draft guidance published on tax exemptions for trivial benefits

On 9 December 2015 the government published draft legislation introducing a new income tax exemption for trivial benefits for inclusion in Finance Bill 2016 together with a technical note setting out how the exemption would work in practice. Draft regulations were also published to extend the exemption to trivial benefits provided to former employees and to give effect to a matching disregard for National Insurance contributions (NICs).

HMRC has now produced draft guidance that sets out its interpretation of the new legislation.  Both exemptions will apply from the 2016/2017 tax year.

In broad terms, the new section 323A ITEPA 2003 provides that any benefit provided by an employer to its employees will be exempt from tax as employment income if all of the following conditions are satisfied:

  • the cost of providing the benefit does not exceed £50 (or an average cost of £50 per employee where the benefit is provided to a group of employees);
  • the benefit is not cash or a cash voucher;
  • the employee is not entitled to the benefit as part of any contractual obligation (including under salary sacrifice arrangements); and
  • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

The exemption applies equally to benefits provided to the employee or to a member of the employee's family or household as well as where the trivial benefit is provided on behalf of the employer by a third party and is capped at a total cost of £300 in the tax year where the employer is a close company and the benefit is provided to an individual who is a director or other office holder of the company (or a member of their family or household).

If any of these conditions are not satisfied then the benefit is taxed in the normal way, subject to any other exemptions or allowable deductions.

The draft guidance explains, with examples, how HMRC will seek to apply the new legislation and will be reflected in HMRCs Employment Income Manual once the legislation comes into force. Comment is invited on this draft guidance and the final text will take account of comments received and any changes to the draft legislation.

At present, unless a benefit is subject to a specific exemption, it is taxable. Although HMRC can agree that certain trivial benefits fall outside the tax net, this has to be on the application of the employer. Where employers have not obtained this agreement, HMRC may seek to recover tax and NICs on the benefit. The introduction of a new statutory exemption for trivial benefits will considerably reduce the administrative burden on employers who provide such benefits to their employees.

A corresponding disregard for NICs will be introduced by regulations once Finance Bill 2016 has received Royal Assent.  The existing Employer-Financed Retirement Benefits (Excluded Benefits for Tax Purposes) Regulations 2007 will be amended to extend the exemption to trivial benefits provided to former employees, backdated to the start of the 2016/17 tax year.

The official rate of interest

"The official rate of interest" that applies to employment-related loans will be held at 3.0% for the tax year 2016/17.

If an employer makes a cheap loan to a higher paid employee (one earning £8,500 a year or more) or a director or a relative then the official rate is used to measure the benefit to the employee which is subject to tax as a benefit in kind.  The benefit is the difference between the interest (if any) paid by the employee and interest at the official rate.  An employer will pay Class 1A National Insurance contributions on any taxable benefit.

There is a de minimis provision which operates so that if the loan or total loans for an individual at no time in the tax year exceeds £5,000, no tax charge is made.

European Court Of Justice to determine legality of exit charges on trust migration

The First-tier Tribunal has referred a case to the European Court of Justice (ECJ) for a preliminary ruling on whether the exit charge on trust migration under section 80 of the Taxation of Chargeable Gains Act (TCGA) 1992 is compatible with the freedom of establishment, freedom to provide services and free movement of capital under Articles 49, 56 and 63 respectively of the Treaty on the Functioning of the European Union (Trustees of the P Panayi Accumulation & Maintenance Settlements v HMRC (Case C-646/15) (OJ 2016 C 48/22)).

Section 80 TCGA 1992 is an anti-avoidance measure that imposes a capital gains tax charge on unrealised gains if the trustees of a settlement become non-UK resident. The occasion of charge occurs immediately before the trustees cease to be resident at which point the trustees are deemed to have disposed of, and immediately reacquired, the chargeable assets of the settlement at the market value at that time. However, an earlier ECJ decision (National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond/kantoor Rotterdam (Case C-371/10)) indicates that while a Member State can charge tax on unrealised gains accrued during periods of residence, it cannot recover the tax at the time of migration unless an option to defer payment is offered.

An ECJ finding that section 80 of TCGA 1992 has infringed EU law could have wider implications in relation to other occasions of CGT charge that occur on individuals becoming non-resident. For example, the clawback of CGT hold-over relief when the transferee ceases to be UK resident within six tax years following the tax year of disposal while still holding the assets; and the clawback of CGT deferred under the Enterprise Investment Scheme (EIS) where an investor in EIS shares ceases to be UK resident while holding the shares.

Glasgow Rangers EBT and salary sacrifice

Salary sacrifice is an area under the government's spotlight.  Salary sacrifice arrangements, for example, using child care and pension plans come with a significant cost to the UK government.  Given the government's need to plug the tax gap, salary sacrifice is thought to be an area where the government could take future action to save revenue.  Many believe that this could be part of a more general review of pensions tax relief - as sacrifice into pensions.

Whilst an announcement on salary sacrifice is anticipated in the 2016 Budget, it may well be that the recent Court decision in the Court of Session in the Glasgow Rangers case (the Advocate General for Scotland v Murray Group Holdings Ltd (2015) CS1H 77) may well offer another challenge to the efficiency of salary sacrifice arrangements.

This case concerned employee benefit trusts (EBTs).  The Court found that the arrangements to "pay" players by way of loans did not work to avoid income tax. However, HMRC also raised the issue of the tax implications which involved a "redirection of earnings" which the Court of Session accepted.  The Court held that the contributions to the EBT by Rangers FC were taxable as earnings.  They should therefore be subject to PAYE at the point of payment to the EBT because HMRC considered that they were merely a redirection of the earnings made with the employee player's agreement.

Whilst this decision is now subject to an appeal, it has raised a concern that if an employee has a flexible benefit arrangement and waives an amount of salary in return for benefits or indicates a preference as to how any non-contractual discretionary bonus might be "paid", this could be regarded as a "reduction of earnings".  If so, this may mean that employers would need to apply PAYE/NIC on the salary or bonus that would have been paid to the employee in the absence of the flexible benefit arrangement - regardless of the benefit provided.

Whilst an appeal is pending, HMRC is unlikely to make any comment on the wider implications of the Rangers decision.

However, we understand that HMRC has told the Chartered Institute of Taxation that the decision in the Rangers decision would represent a significant change of HMRC policy and, if such a policy change took place, it would only have prospective effect from the date of announcement of the charge.

It is reassuring that HMRC would not apply such a charge with retrospective effect.  So, at least for the time being, current salary sacrifice still survives.

However, future salary sacrifice is undoubtedly under attack on two fronts:-

  • a possible change in law announced in the forthcoming Budget; and
  • a possible change in tax law as a result of the Supreme Court's decision in the Rangers case.

Dividends and tax codes

It is the time of the season when HMRC issues PAYE codes for the forthcoming tax year. These are generally based on the most recently received self assessment return, eg the 2014/15 return will provide data on which HMRC will attempt to set 2016/17 codes.

Reports are coming in that HMRC is allowing for the revised tax treatment of revised dividends tax in the codes now being sent out. This has a number of consequences:

  • Basic rate taxpayers, who are within self assessment and had dividend income of over £5,000 in 2014/15, could find themselves with a line in their coding which states "dividend tax". The accompanying note states 'This is to collect the basic rate of tax due on your dividend income,' although it is unlikely that many recipients will realise that 'basic rate' in this instance means 7.5%.
  • The code adjustment figure is calculated to produce the appropriate amount of tax by reducing personal and other allowances and will not look anything like the actual dividend income received. For example, a basic rate taxpaying company director who had £25,000 of dividend income in 2014/15 will in 2016/17 be presumed to have a dividend tax liability of £1,500 ([£25,000 - £5,000] @ 7.5%), assuming their personal allowance is fully covered by other income. To collect this HMRC would apply a dividend tax adjustment of £7,500 as this would yield tax of £1,500 (£7,500 @ 20%). For a higher rate taxpayer, the corresponding tax bill would be £6,500 ([£25,000 - £5,000] @ 32.5%) and the dividend tax adjustment £16,250 - probably enough to produce a K code, ie a negative tax code.
  • Basic rate taxpayers outside the self assessment system slip through the net for now, as HMRC will not have details of their 2014/15 dividend income. However, they will be caught for 2018/19 because of the need to complete a self assessment return for 2016/17 if they have a dividend tax liability. In those circumstances the need to file a return and the 2016/17 balance payment due on 31 January 2018 could both come as unwelcome surprises.
  • The taxpayer can appeal against the coding using this form, which amounts almost to a mini-tax return based on expected 2016/17 income.

Tax returns allow taxpayers who put an X in the box to request that HMRC doesnotcollect tax due for the current tax year on dividends and other sundry income via a 'coding out' - the default is HMRC will grab the amount due as soon as it can. However, some accountants are reporting HMRC has ignored the all-important X, while others are now suggesting HMRC will want conformation of no coding out each year, outside of the tax return.

There is a case for saying that PAYE codes are not worth arguing about, especially given HMRC's miserable response times. However, while the numbers should all balance in the end, some people will want to defer as much tax as possible for as long as possible, while for others a monthly tax collection - even in advance - is a sensible way of budgeting.

Interest and tax codes

In the preceding article we have noted that HMRC are now taking account of next year's dividend tax changes in the PAYE codes it is issuing. However, it is not only dividend tax which changes on 6 April 2016. From that date the personal savings allowance comes into being and at the same time banks and building societies will start to pay interest gross, as will NS&I on products where it currently deducts tax from interest.

The changes appear to be causing some difficulties for HMRC:

  • Anyone who has not put an X in the box to stop HMRC collecting in-year tax on interest should find that if their interest income exceeds their personal savings allowance, then an adjustment to their tax code is made to take account of the new regime. As with the dividend adjustment, the HMRC calculation is based on the taxpayer's interest income in 2014/15 (ie on the latest tax return).

For example, a higher rate taxpayer who received £600 ofnetinterest in 2014/15 will be assumed to earn £750grossinterest in 2016/17. £500 of this could be set against  their personal savings allowance, leaving £250 taxable at 40% (£100). To collect this tax, the coding would have a £250 reduction.

  • In practice, this adjustment does not always seem to be made correctly. There are reports of HMRC ignoring the personal savings allowance and making an adjustment equal to the full 2014/15 reported interest (grossed up, if necessary). In the example this would mean an (incorrect) code adjustment of £750.
  • As has happened with dividends, HMRC also appears to not always take account of taxpayers who state they do not want in-year collection of tax. This might be the hand of the Treasury, ever anxious about cash flow.
  • Basic rate taxpayers outside the self assessment system will slip through the net for now, as HMRC will not have tax return details of their 2014/15 interest income. However, those with interest income over £1,000 (not many, in practice) will be caught for 2018/19 because of the need to complete a self assessment return for 2016/17. As we remarked in considering the dividend tax changes, the requirement to file a return and the 2016/17 balance payment due on 31 January 2018 could both come as unwelcome surprises.
  • Using 2014/15 interest data may well produce an inflated interest figure as although base rate has not moved since then, many deposit takers have cut interest on both variable and fixed rate offerings.
  • The taxpayer can appeal against the coding using this form, which amounts almost to a mini-tax return based on expected 2016/17 income.

The problems here help to explain the Treasury's enthusiasm for 'digital tax', which is likely to mean the option to stop in-year collection (ie put X in the relevant box) disappears. The end result will be another subtle one-off increase in revenue for the Exchequer (and vice versa for the taxpayer).


The January inflation numbers

Annual inflation on the CPI measure rose marginally in January, with the rate reaching +0.3%, the highest for a year. Market expectations were that the January inflation numbers would show a small rise, moving the CPI further out of the 0% ±0.1% band it had been wedged in from February to November 2015.

The CPI showed pricesdown0.8% over the month, whereas between December and January 2015 they fell 0.9%. The CPI/RPI gap remained unaltered this month at 1%, with the RPI also rising by 0.1% on an annual basis (to 1.3%). Over the month, the RPI fell by 0.7%.

The rise in the CPI annual rate was due to four "upward contributions", offset by just one "substantial downward contribution", according to the ONS:


Motor fuels and lubricants: Prices overall decreased by 2.6%, compared with a larger fall of 6.8% a year ago. The largest upward contribution to the change in the 12-month rate came from prices for petrol, which dropped by 1.9%, against 7.3% between the same two months a year ago. A similar, though less pronounced, effect was seen for diesel.

Food and non-alcoholic beverages: An upward contribution came from food prices which, overall, fell by 0.6% between December 2015 and January 2016, compared with a 1.0% drop between the same two months a year ago.

Alcoholic beverages and tobacco: An upward contribution came from prices for alcoholic beverages which increased by 5.2% between December 2015 and January 2016, compared with a rise of 3.2% between the same two months a year ago. Beer and spirits were the main contributors to the rise.

Clothing and footwear: An upward contribution came mainly from prices for clothing which decreased by 3.4% overall, compared with a fall of 3.9% between the same two months a year ago. The overall upward contribution resulted from smaller upward pressures for a variety of items of clothing.


Air fares: Overall prices fell by 35.8% compared with a smaller fall of 17.1% a year ago. This downward contribution to the change in the 12-month rate was greater than the upward contribution from motor fuels (see above), which resulted in a downward contribution from the transport sector in total. Air fare prices are highly volatile and typically drop in January following pre-Christmas increases. The rise in December 2015 was the largest December rise since 2002.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell 0.2%, reversing December's rise, to an annual 1.2%, underlining the part which the more volatile components of the index had on pushing up the headline rate. The slight rise in CPI inflation reduced to four out of twelve the number of index components in negative annual territory, one less than last month.

These numbers, partly driven by the prices of more volatile components not fallingas fastas 12 months ago, underlined that inflation remains a non-issue in the near term.


Pension schemes and the requirement for a legal entity identifier

With effect from 1 January 2017, "non-natural legal entities" investing in financial markets will be required to obtain a Legal Entity Identifier (LEI) before they can trade in financial markets. This can have an impact if any of your pension schemes invest in direct equities, Gilts or corporate loan notes, investment trusts and ETFs etc.. It does not apply where investing in collectives, such as investment bonds, unit trusts or OEICs.

This bulletin will focus on implications for SIPPS and SSAS arrangements, which will generally be established under a trust and will also include many of the platform-based pensions.

LEIs issued by the London Stock Exchange (LSE) will be known as International Entity Identifiers (IEIs). In the UK, acquiring an IEI will involve paying a fee of £115 plus VAT (renewable annually at a cost of around £70 per year) to the LSE.

Considerations for Advisers

Consider any of your clients who are deemed to be "non-natural legal entities" or who have some of their assets held in such a manner:

  • Where you use a SIPP operator that has a single registered pension scheme for all of their SIPP members, then one would assume they will be aware of the need to obtain an IEI. However, it would still be worth checking this is on their radar.
  • Where you use a SSAS, (and with some SIPPs) these are established as a separate registered pension scheme and as such a separate trust. Therefore each pension scheme will have to obtain its own IEI. This will need to be put in hand and will add to the costs of running the schemes.
  • Is it still appropriate to use continuing using ETFs, or would it perhaps me better to consider tracker funds for some portfolios?
  • Are the benefits of using investment trusts outweighed by the additional costs of the IEI or do the additional charges mean an OIEC would be more appropriate.

Interim elections for FP16 and IP16

HMRC has recently issued Pension Schemes Newsletter #76. The main content of this are details of how individuals can make an interim election for fixed and or individual protection 2016 (FP16) and/or (IP16) without having to wait for July and the Finance Bill receiving Royal Assent.

Interim Application Process

  • Written applications can be made between 6 April 2016 and the date in July which the normal process goes live. HMRC have produced a template.
  • Applications must be made in writing to; HMRC, Pension Schemes Services, Fitzroy House, Castle Meadow Road, Nottingham, NG2 1BD.
  • Application will not be accepted prior to 6 April 2016. Applications received prior to this date will not be actioned and a new application will need to be made.

Individuals who make an interim application must make a full online application from July 2016 and receive a permanent reference number to ensure their pension savings continue to be protected from the lifetime allowance tax charge.

Individuals who are not planning to take benefits between 6 April 2016 and July 2016 should wait and apply for protection using the online digital service which will be available in July 2016.

Detail to make an Interim Application for FP16

The following must be provided to HMRC using the template included with newsletter #76.

  • Full name
  • National Insurance Number
  • Date of birth
  • Confirmation that as at 5 April 2016 the individual did not hold any of the following protections:
    • primary protection
    • enhanced protection
    • fixed protection
    • fixed protection 2014

Detail to make an Interim Application for IP16

The following must be provided to HMRC using the template included with newsletter #76.

  • Full name
  • National Insurance Number
  • Date of birth
  • Confirmation that as at 5 April 2016 the individual did not hold any of the following protections:
    • primary protection
    • individual protection 2014
  • The application will need to provide HMRC with details of their total relevant amount amounts, made up of the sum of amounts A through to D. These amount are:
    • Amount A  - The amount of pensions in payment before 6 April 2006, valued at 5 April 2016.
    • Amount B  - The amount of benefits crystallised between 6 April 2006 and 5 April 2016, valued at 5 April 2016.
    • Amount C  - The amount of uncrystallised pension savings in UK registered pension schemes valued at 5 April 2016.
    • Amount D  - The amount of uncrystallised pension savings in relieved non-UK pension schemes valued at 5 April 2016.

Following a Successful Interim Application

Scheme administrators should note that temporary reference numbers provided through the interim application process will be in the following format:

For FP2016 this will be AJ followed by 4 digits - for example AJ1234.

For IP2016 this will be 4 digits followed by AJ - for example 1234AJ.

The reference numbers provided by the online application process will be very different from the temporary reference numbers provided through the interim process. This makes it easy for HMRC, scheme administrators and members to identify whether protection is temporary and needs to be followed up with an online application.


When considering an election for FP16 it is important to remember the following:

With the CPI for September 2015 being -0.1%, it means it is not possible for an individual to remain an active member of a DB scheme from 6 April 2016 and retain a valid election for FP16, more detail can be found in PTM093400.

In the case of DC pension arrangements, no contributions must be made on behalf of the individual on or after 6 April 2016. In the case of workplace pensions, contributions collected for March are often not paid over until the middle of April. Therefore, is an individual is option out of a DC scheme, they need to make sure their employer know that any contributions must be paid to the scheme administrator on or before 5 April 2016.

Joining a new pension scheme on or after 6 April 2016 invalidates FP16, unless it was to accept a recognised transfer. So and individual joining a Group DIS would invalidate their FP16. More details can be found in PTM093400.

Make sure their employer is aware of their election for FP16, so that they are not auto enrolled in the future.


The interim application process is to be welcomed. However, it is important that advisers remind their clients where applicable to remember to make the full on-line application once this process opens in July.

Dependant child's pension and the age 23 dilemma

This is an issue that has been rumbling on for over a year now, caused partially by HMRC mislaying our query part way though.


The legislation makes the following points clear:

  • A pension paid to a dependant child must cease on their attaining age 23, unless they a still deemed to be dependant due to a physical or mental impairment; paragraph 15(2), Schedule 28 of Finance Act 2004.
  • The definition of "dependant child" of the member is slightly different to the other definitions, as it doesn't include the phrase "at the date of the member's death"; paragraph 15(2)(a), Schedule 28 of Finance Act 2004.
  • A nominee cannot be a dependant; paragraph 27A, Schedule 28 of Finance Act 2004.
  • A nominee's flexi-access drawdown pension cannot have previously been designated for to provide benefits for a dependant or successor; paragraph 27E(2), Schedule 28 of Finance Act 2004.
  • The "relevant two-year period" is defined as "the period of two years beginning with the earlier of the day on which the scheme administrator of the scheme first knew of the individual's death and the day on which the scheme administrator could first reasonably have been expected to have known of it"; paragraph 14B, Schedule 32 of Finance Act 2004.


The following example will help to demonstrate the practical implications of this legislation:

David died age 53. He was a widower and he left an uncrystallised fund of £800,000 in a SIPP. Following his expression of wishes, the scheme administrator designated the funds as beneficiary's flexi-access drawdown as follows:

  • £300,000 to his son Andrew; aged 24,
  • £300,000 to his son Brian; aged 20, and
  • £200,000 to his niece Clare; aged 19.

Andrew and Clare can continue to enjoy tax-free income from their drawdown funds for the rest of their lives, for as long as the funds remain.

Brian, can enjoy tax-free income only until the day immediately prior to his 23rd birthday. As which time the benefits must cease. This means in practical purposes, Brian would need to withdraw the entire fund prior to attaining age 23.


There are a number of ways to solve this issue:

  • Do not designate all of Brian's income immediately, but only designate sufficient income to last until they attain age 23. Place the balance of the funds into a discretionary trust. However, the trust's income and gains will, the extent they exceed the trusts basic rate band, be taxed at the rate applicable to trusts.
  • Do not designate all of Brian's income immediately, but only designate sufficient income to last until they attain age 23. Once Brian has attained age 23, the balance of his £300,000 can be designated as a nominee's flexi-access drawdown as he is no longer falls within the definition of a dependant child. Brian's age is such that the relevant two-year period would have elapsed by the time he attains age 23, meaning the nominee's flexi-access drawdown income would be taxed under PAYE. However, that may still be an acceptable solution, depending upon the likely rate of PAYE going forward, as this will probably less than the RAT.
  • Do not designate all of Brian's income immediately, but only designate sufficient income to last until they attain age 23. Once Brian has attained age 23, the balance of his £300,000 can be designated as a nominee's flexi-access drawdown as he is no longer falls within the definition of a dependant child. So long as the nominee's flexi-access drawdown is designated within the "relevant two-year period" it will not suffer PAYE on the income withdrawals.


The Relevant Two-Year Period

We have recently written to HMRC asking a question relating to what they interpret is meant by when a scheme administrator "could first reasonably have been expected to have known of" the member's death?

We gave them an example, which we specifically made extreme to emphasise the point:

Member dies on 1 April 2013. No contact is made with the scheme administrator in the early stages of the administration of the deceased's affairs. There were no regular contributions being made, whereby the scheme might have queried why they had ceased and the funds were uncrystallised so no benefits had yet come into payment. Annual member statements had not been returned to the scheme administrator. However, on 10 January 2016 the deceased's widow contacted the scheme asking for benefits to be paid out. When would the relevant two-year period expire? Would it be:

  • 9 January 2018; or
  • an earlier date, based upon when it would have been reasonable for the executors to have realised the member had a pension scheme and notified the scheme administrator of the member's death?

If it is the latter how is the date decided upon? Would it reflect the time scale in which the executors would be required to make an IHT return, e.g. 31 March 2016?

We are aware of scheme administrators who take the "relevant two-year period" as starting from when they were first notified of the death, irrespective of the time that has elapsed.

We are also aware, that there have been cases in the past where the scheme administrator was part of a group of companies and one of the other companies paid out on an insurance policy and that part of the organisation didn't liaise with the pension scheme administrator, but HMRC stated that the relevant two-year period started from the date the insurance policy was notified of the death.

It seems ridiculous that an individual can leave death benefits to a child who is not a dependant and they can benefit from the tax shelter for the rest of their life, but if it is the deceased's own child, and the income starts prior to age 23, it must cease on attaining age 23.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.