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My PFS - Technical news - 03/03/2015

Publication date:

25 February 2015

Last updated:

06 July 2018


Technical Connection

PFS news update from 11 February 2015 - 24 February 2015, covering taxation, investments, and retirement planning.

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Taxation and Trusts

Investment planning

Retirement planning

Taxation and trusts

Offshore accounts

(RO3, AF1)

Tax has recently again been front page news. Undisclosed Swiss bank accounts have attracted attention.

Let's make no mistake. The concern here is in relation to tax evasion (not avoidance) that could be associated with offshore accounts. Quite simply, not declaring income or gains to the UK HMRC that should be declared.

Advisers may need to make clear to their clients that merely owning an offshore account is not in any way criminal or offensive to HMRC. Having an offshore account may be perfectly justifiable on commercial or practical grounds. Say if a UK resident has foreign possessions (eg a property) to manage, or a business. As long as any income and gains associated with the account are declared - no problem.

Advisers may also need to reassure clients that offshore single premium bonds and offshore collective funds are also perfectly permissible; and the more "offshore" nature of them does not mean that legitimate and permissible tax planning with them cannot be carried out.

The UK tax legislation has specifically provided for how they are to be taxed.

Deeds of variation and tax avoidance

(RO3, AF1, JO2)

The Daily Mail recently carried the headline "RED ED THE TAX AVOIDER" (Daily Mail's caps not ours!).

The story (one of many on the continuing hot topic of tax avoidance) focused on a deed of variation executed following the death of the Labour leader's father in 1994.

It seems from the sketchy reporting that Ed's father left most of his estate to his widow. The deed of variation, it seems, transferred 40% of the value of a £300,000 property to Ed and David equally. The value transferred of £120,000 will have used the deceased's nil rate band - at the time £150,000. The transferrable nil rate band wasn't introduced until 2007.

All perfectly legitimate and specifically permitted by the legislation.

The story will have been seen and read by many and so it may pay advisers to inform and reassure clients that should the use of a deed of variation be necessary it will be perfectly acceptable (as the law stands) to use one.

Perhaps more relevant, though, is to encourage clients to regularly review their Wills to ensure that they reflect their current wishes.

One will then normally not need to rely on a deed of variation. Soon after the deceased's death is rarely a good time to discuss planning among beneficiaries and if it's not done then the two year deadline may just slip by.

Diverted Profits Tax

(AF1, RO3)

In the Autumn Statement, which was delivered on 3 December 2014, it was announced that a new tax to counter the use of aggressive tax planning techniques by multinational enterprises to divert profits from the UK will be introduced. From 1 April 2015 this new tax, the diverted profits tax (DPT), will be applied using a rate of 25%, and draft legislation and guidance was published on 10 December 2014.

However, the England and Wales Law Society has said that the introduction of the DPT should be delayed due to concerns that it is likely to apply much more widely than was intended: 'potentially to arrangements which are not contrived and do not constitute abusive or aggressive tax avoidance'.

The Law Society also stated that the DPT needs to be appropriately and narrowly framed so that it affects only its intended targets - essentially this includes multinational businesses that seek to divert profits away from the UK.

In addition, the OECD's Base Erosion and Profit Sharing (BEPS) project is still ongoing, so delaying the introduction of the DPT until after the outcomes of the BEPS project are known would enable the DPT to be aligned with those outcomes. This period could also be used to ensure that there is clear and targeted legislation, compliant with EU and international law - which would be in line with a more global approach. It is anticipated that final reporting on the action points of the BEPS project will take place by the end of 2015.

Whether the Government does in fact delay the introduction of this legislation and whether the draft legislation is, in fact, amended to be clearer and more narrowly framed only time will tell.

BPRA Schemes - Continued target by HMRC

(AF1, RO3)

Business Premises Renovation Allowance (BPRA) schemes are amongst HMRC's latest targets in the fight against tax avoidance.

It has been reported in the press that this fight continues and HMRC has now issued accelerated payment notices (APNs) to at least three partnerships that took advantage of the scheme demanding the repayment of the tax relief claimed on their investments.

Although the relief itself has been extended until 2017, last year HMRC added arrangements exploiting BPRA to its public "Spotlights" list of arrangements - so, in other words, warning UK taxpayers that they should be wary of using this type of scheme.

On a separate point, the press article also reported that a group of film scheme investors has challenged the issue of APNs by HMRC and the High Court has given permission for a judicial review to test the legality of some of the demands which were issued last year - it will be interesting to see the outcome of this review.

The Government publishes consultation on the implementation of the care costs cap

On 4 February 2015, the Department of Health published a consultation on draft regulations and guidance on the cap on care costs contained in the Care Act 2014.

The draft Care and Support (Cap on Care Costs, etc.) Regulations 2015 provide for a cap of £72,000 in respect of the costs that each individual is obliged to pay to meet their eligible support needs. When a resident reaches the £72,000 cap, the local authority becomes responsible for meeting the costs of the resident's eligible care and support needs. The resident will remain responsible for meeting their daily living costs (which will be set at a national, notional amount of £230 a week) and any additional amount they wish to spend on superior accommodation. Where the resident benefits from means-tested support, the contributions made by the local authority will also count towards the cap (meaning that people who benefit from means-tested support will pay less than £72,000 of their own money).

Those who develop eligible care and support needs under the age of 25 will have a zero cap for life.

Local authorities will set up care accounts to monitor residents' progress towards the cap. Before the cap comes into effect, local authorities will begin work to identify people who currently meet their own eligible needs to ensure they can begin progressing towards the cap when it comes into effect on 1 April 2016. Costs accrued before 1 April 2016 will not count towards the cap.

For each person with eligible needs, the local authority will provide either a personal budget (where the local authority is going to meet the person's needs) or an independent personal budget (where the person is meeting their own eligible needs), both of which will set out the costs of meeting the person's eligible needs that will count towards the cap. The local authority will also provide annual care account statements setting out progress towards the cap and other relevant information.

Only the cost, or in the case of self-funders what the cost would be, to the local authority to meet a person's eligible care and support needs will count towards the cap. This will be the cost specified in their personal budget (or independent personal budget).

The consultation seeks views on how local authorities should determine what the costs of self-funders' care would be to the local authority. It suggests that the fairest approach is for local authorities to set independent personal budgets by taking an average of the personal budgets the local authority has given people in that area with similar levels or types of need.

The consultation, which also seeks views on a new system for appeals against councils' decisions on funding a person's care, will be open for comment until 30 March 2015.

The cap on care costs is due to come into effect in April 2016 in conjunction with an extension to means-tested support (which will see the upper capital limit rise from £23,250 to £118,000) and a lifting of the restrictions that currently apply to self-funded top-ups. The draft guidance and regulations published alongside the consultation document set out how the reforms are intended to work in practice.

New accounting standard and historic cost accounting

(AF4, RO2, CF2)

It seems historic cost accounting for most single premium investment bonds is likely to end from 1 January 2016.

There have been important developments in corporate accounting standards that are likely to have an impact on the way gains made under UK and offshore single premium investment bonds are accounted for and taxed.

For many years the Financial Reporting Standard for Smaller Entities (FRSSE) has provided "small companies" with a simple, single code for all their accounting requirements.

As a result of changes in European law, in September 2014, the Financial Reporting Council (FRC) consulted on the future of the FRSSE. It proposed that the FRSSE be withdrawn and replaced with a small companies regime within FRS 102. In effect, small companies would adopt FRS 102 with certain reduced disclosures.

The UK is expected to implement the new EU Accounting Directive by July 2015, with the changes being effective by January 2016. The government has chosen to limit the disclosures that are permitted to be required for small entities, so the FRC has concluded that the FRSSE in its current form is unsuitable.As a consequence of these proposals, the FRSSE will cease to be available from 1 January 2016.Small entities will then follow FRS 102 for recognition and measurement purposes. Thus, the new FRSSE 2015 will shortly cease to be relevant and will only be adopted for a short period by companies.

Given the now "transient" nature of accounting under the FRSSE 2015, there is no real purpose in looking to the FRSSE 2015 for the on-going treatment of insurance investment bonds ( even those in force ahead of 1 January 2016) - essentially medium to long term investments. We therefore need to look at the treatment prescribed by FRS 102.

Section 11 of FRS 102 deals with BASIC financial instruments - which include bank loans, trade debtors and creditors, cash at bank, bank loans and other instruments - including bonds.

Note that debt instruments are only regarded as BASIC if they comply with the complex wording of para 11.9 (see "basic financial instruments" below)

A basic financial instrument is recorded on an amortised cost basis (ie carried at historic cost less repayment or impairment provisions) - thus there is no annual revaluation to fair value.

A debt instrument is only regarded as BASIC if it meets ALL the following conditions:

Condition 1 - Returns to the holder

The holder's return must be:

  • A fixed amount; OR
  • A fixed rate of return over the life of the instrument; OR
  • A variable rate of return - that, throughout the life of the instrument, is equal to a single referenced quoted or observable interest rate; OR
  • Some combination of fixed and variable rates (as above), provided they are both positive.

Condition 2 - Absence of potentially detrimental contractual provisions

There must be no contractual provision that could result in the holder losing their principal or any interest relating to the current or a previous period.

Condition 3 - Contractual provisions

Any contractual terms that enable the borrower (ie the issuer) to repay a debt instrument or enable the holder (the lender) to put it back to the issuer before maturity must not be contingent on future events (other than to protect the holder against future tax changes or a downgrade in the issuer's credit status).

Condition 4 - Extension of debt instrument

If the contract permits the term of the debt instrument to be extended, any return to the lender and any other contractual provisions which apply during the extended term must satisfy the conditions 1 to 3 above.

"Complex" financial instruments

If the debt instrument does not satisfy ALL the above conditions for a BASIC financial instrument, then it must be dealt with as a complex financial instrument and would be accounted for at fair value (with any annual revaluation being taxed under the loan relationship regime).

So is an insurance investment bond, which may be founded on collective investments invested in equities, stocks and shares, a "debt instrument" for the purposes of accessing the amortised cost (historic cost) basis of accounting?

It would seem that, as a pre-condition, all the four tests set out above would need to be satisfied. Of course, many bonds have different underlying investment characteristics and each would need to be judged based on its own facts. However, it is thought that the majority would probably fail to qualify as a BASIC financial instrument.

For example:

Condition 1 - any variable nature in the return needs to be tied to an observable interest rate. If the bond is supported by underlying debt securities this may be achievable, but not if the return also consists of equities. For example, an equity index is unlikely to be regarded as an interest rate.

We can largely ignore the FRSSE since it will cease to apply from 2016.

Companies can expect to account for single premium investment bonds under FRS 102 - and (based on the above) we believe that the majority of such investment bonds will be treated as "complex". This would mean that they would need to be accounted for yearly on a fair-value basis (and hence bring in unrealised losses and taxable profits).

Of course, if a single premium investment bond can be structured to fit within the four conditions, this can be accounted for on an amortised cost basis (ie no annual revaluation).

The marriage allowance

(AF1, RO3)

The ability to transfer part of the income tax personal allowance to a spouse/civil partner was announced in the 2013 Budget. Full details followed in the 2014 Budget. HMRC has now issued a briefing note which outlines more details of this measure, including how couples can register their interest and make a formal online application.

The marriage allowance (not to be confused with the married couple's allowance which only applies if at least one of the couple was born before 6 April 1935) applies from the 2015/16 tax year and will allow a spouse/civil partner born after 5 April 1935, who is not a higher or additional rate taxpayer, to transfer up to 10% (i.e. £1,060) of their personal allowance to their spouse/civil partner provided the recipient is not a higher or additional rate taxpayer. The tax saving could therefore be up to £212 where £1,060 is transferred - as the recipient would pay 20% less tax on the amount transferred.

HMRC has stated that around 4 million couples will be eligible for the marriage allowance and those that are eligible can register their interest in a matter of a few minutes by simply answering a few questions online.

Those who choose not to register their interest will still be able to make an application during the 2015/16 tax year and still receive the full allowance.

This measure is only likely to benefit a handful of people and will only be relevant where one partner has very low or little income and does not make full use of their personal allowance.


Investment planning

'Pensioner' Bonds

(AF4, RO2, CF2)

George Osborne has recently revealed that the Pensioner Bonds are expected to remain on offer until 15 May, with the total investment ceiling raised from £10bn to £15bn.

The Chancellor was immediately criticised for what looks like a blatantly political manoeuvre, including:

  • For all his comments about wanting to support savers, the Bonds remain only available to those aged 65 and over, not savers generally.
  • The new cut-off date is eight days after the general election, thereby ensuring no unwelcome headlines about pensioners being robbed of investment opportunities in the run up to polling day. Pensioners are the demographic most likely to vote.
  • The cost of government borrowing by this route is substantially higher than using the gilt-edged market:
    • 2% Treasury 2016 - a match for the one-year Bond - yields 0.43% to redemption against the 2.8% of the Pensioner Bond; and
    • 5% Treasury 2018 - a match for the three-year Bond - yields 0.81% to redemption against the 4.0% of the Pensioner Bond.

A rough calculation on a 50/50 split of sales by term is that, before the NS&I administration costs are added, the Treasury could have saved about £420m by using the gilts market to raise £15bn. In practice, the cost will be higher because the longer term Bond should be more popular given its higher rate.

The January inflation numbers

(AF4, RO2, CF2)

Inflation on the CPI measure dropped again between December and January, bringing the rate down to 0.3%, its lowest since the CPI was launched as an inflation measure in 1989. The January inflation numbers from the Office for National Statistics (ONS) were in line with market expectations. They also match the expectations of the Bank of England, as set out in Mark Carney's letter to the Chancellor issued on 12 February, explaining why inflation had fallen below target.

The CPI showed prices falling 0.9% over the month, whereas between December 2013 and January 2014 they dropped by 0.6%. Prices normally drop at the turn of the year as a result of the January sales.

The CPI/RPI gap narrowed this month, with the RPI dropping 0.5% on an annual basis to 1.1%. Over the month, the RPI fell by 0.8%.

The CPI annual rate fall from December to January was driven by a mix of factors according to the ONS:


  • Transport: Overall prices fell by 2.0% between December 2014 and January 2015 compared with a smaller fall of 0.6% between the same two months a year earlier. Predictably, the downward contribution came mainly from fuel prices falling at a quicker rate than a year ago. The ONS says that petrol is now at its lowest price since November 2009 and diesel since February 2010. Transport alone shaved 0.21% off the annual inflation number.
  • Food & non-alcoholic beverages: Overall prices fell by 0.7% between December 2014 and January 2015, compared with a rise of 0.2% between the same two months a year earlier.
  • Alcoholic beverages & tobacco: Overall prices increased by 1.4% between December 2014 and January 2015, compared with a larger rise of 3.1% between the same two months a year earlier. Most of the downward contribution came from price movements for alcohol - most notably beer, where prices usually rise in the New Year but fell this year.
  • Recreation & culture: Overall prices fell by 0.9% between December 2014 and January 2015 compared with a smaller fall of 0.5% between the same two months a year earlier.


Despite the low rate of inflation, there are still areas pushing up the CPI;

  • Clothing & footwear: Overall prices fell by 3.7% between December 2014 and January 2015, compared with a larger fall of 5.4% between the same two months a year ago. The ONS says the fall in clothing prices this winter was smaller than in recent years, with reports of better than expected sales.
  • Furniture, household equipment & routine maintenance: Overall prices fell by 2.5% between December 2014 and January 2015, compared with a larger fall of 3.1% between the same two months a year ago.

Although inflation is now almost zero, nine of the twelve components of the CPI index remain in positive territory. The low overall CPI number is down to Transport, (about 15% of the index) which shows a year-on-year fall of 2.8% and Food and Non-alcoholic drink (11% of the index) which shows an annual decline of 2.5%.

In his letter to the Chancellor, the Governor of the Bank of England said "…the MPC now judges it more likely than not that headline CPI inflation will turn negative at some point in the spring and will remain subdued for much of the rest of the year." He went on to say "In the absence of continuing falls in commodity prices, negative inflation rates are unlikely to endure for very long, however. On the assumption that energy and food prices stabilise, CPI inflation should pick up notably once earlier declines start to drop out of the annual comparison, towards the end of this year." As ever, it pays to remember that inflation numbers are a yearly comparison.

Tax revenue: The crunch January figures

(AF4, RO2, CF2)

The latest HMRC data on tax receipts for the current fiscal year to date have just been published, showing the impact of the all-important month of January. It looks as if the Chancellor will miss his Budget 2014/15 target for deficit reduction, despite the strong economy.

The Treasury's hope was that tax receipts would be boosted by balance payments stemming from income deferred to 2013/14 to benefit from the reduction in the additional rate of tax to 45%.

There was an indication very recently that things might not work out quite right when HMRC published revised statistics for the numbers of higher and additional rate taxpayers. These showed a drop from last April's 2014/15 projections of 2.9% increase in higher rate taxpayer numbers (to 4.48m) and 8.7% (to 313,000) in additional rate taxpayers. Significantly, there were similar drops for the 2013/14 estimates.

In the event, the numbers released by the Treasury show a £1.7bn increase in self-assessment income tax receipts compared with January 2014 (£12.3bn against £10.6bn). For January the Treasury recorded its usual surplus. At £8.8bn, this was the biggest for seven years and £2.3bn better than 2014.

With ten months of the fiscal year over, net borrowing is down £5.0bn on the corresponding period for 2013/14. That suggests that the figure for the 2014/15 fiscal year will come in close to the OBR's Autumn Statement projection of £91.3bn. As the OBR commented at the time "That would be the second smallest year-on-year reduction since its peak in 2009/10, despite this being the strongest year for GDP growth,"

After five years of "austerity" the deficit is still likely to come in at over £90bn - about 5% of GDP. That statistic is a reminder that for all the political promises we will hear over the next 10 weeks or so, the next government will have no leeway to increase spending without further tax increases. Indeed, post-election tax increases are likely just to keep bringing down the deficit.



State pensions forecasts to be revised

(AF3, RO4, CF4, JO5, FA2)

The state pension forecasts sent out to those who will retire under the new flat-rate system are to be replaced following a number of complaints. Those due to retire after 6 April 2016 have said that the forecasts are confusing due to the fact that they show figures for what they would receive under both the current and the new system.

Many recipients have telephoned the Department for Work and Pensions (DWP) to question the amounts and the DWP now says that it will revise the format of the letters with the new ones being available within weeks.

Pensions Minister Steve Webb is quoted in as saying: 'I have listened to the people who have received the first new state pension statements and, as a result, I am planning to introduce some changes that make the information in them clearer and easier to understand.'

Short service refunds

(AF3, RO4, CF4, JO5, FA2)

In October 2014 the Department for Work and Pensions announced that short service refunds would be abolished from October 2015. This change has now come into force.

The Pensions Act 2014 (Commencement No.4) Order (SI 2015/134) was made on Wednesday 4 February. This brings in to force various provisions of the Pensions Act 2014 and confirms that the Department for Work and Pensions (DWP) will be withdrawing the option for members to take Short Service Refunds after 30 days in the scheme, from 1st October 2015.

This will only affect new members of occupational Defined Contribution (DC) schemes.

TPR published DB to DC transfer guidance for Trustees

(AF3, RO4, CF4, JO5, FA2)

The Pensions Regulator (TPR) has published a consultation around its draft guidance for trustees on managing member requests for transfers from defined benefit to defined contribution arrangements.


TPR's intervention arises from an expectation that from 6 April more members of DB schemes may wish to transfer to DC arrangements in order to take advantage of the new freedom for DC members to take pension savings as cash lump sums or via drawdown. The guidance is also designed to reflect the fact that the Pension Schemes Act 2015, when enacted, will provide that where a member's cash equivalent transfer value is over £30,000, the member must take independent financial advice before transferring.

The aim of the guidance

TPR says that the guidance is intended to:

  • help trustees ensure they have appropriate processes in place to manage transfer requests;
  • prompt trustees to consider the impact of transfer values as part of an integrated approach to risk management of their scheme; and
  • require trustees to provide clear information for members so that they can get independent advice on the best option for them.

Scope of the guidance

The proposed guidance emphasises that for most members, it is highly likely in current conditions to be in their best financial interests to remain in their DB arrangement. However, there will be exceptions to this.

Much of the guidance focuses on the transfer process and the need for trustees to ensure that members have received appropriate financial advice before they make a transfer. However, the guidance says that the trustees are not 'responsible for checking what advice was given, what recommendation was made or to confirm whether the member is following that recommendation'.

The guidance also confirms that it 'is not the trustee's role to second-guess the member's individual circumstances… Nor is it their role to prevent a member from making decisions which the trustees might consider to be inappropriate to the member's circumstances'.

Trustees are reminded that the financial advice requirement is not a substitute for continuing to investigate the status of the proposed receiving scheme: 'We expect trustees to conduct proper due diligence on the receiving scheme to ensure that it is a legitimate arrangement'.

The guidance emphasises that trustees' powers and duties in relation to DB to DC transfers remain substantially as they were before the Budget announcements last year. However, trustees must monitor demand from members for transfers. In relation to funding, trustees might consider whether to commission a fresh actuarial assessment of their scheme in light of the number of transfers, and whether any reduction in transfer values is needed. The guidance does note that more members choosing to transfer closer to retirement could increase the scheme's liquidity requirements and hence have an impact on its investment strategy.

The draft guidance should be treated with some caution, not least because the detail of the legislation which it describes has not been finalised. However, it does look like the guidance will provide a useful summary of the numerous hoops that trustees and members will need to jump through in respect of the new financial advice requirement on DB to DC transfers.

Next steps

For its part, TPR says that the consultation, which closes on 17 March, is just the first part of a package of communications to help trustees prepare for 6 April. In particular, it will publish further guidance for occupational scheme trustees in early March, following publication of the relevant DWP regulations, on the new requirements for trustees to direct DC members approaching retirement to Pension Wise (the 'guidance guarantee' service). All of this means that a busy time for trustees is likely to get even busier over the coming weeks!

It is interesting the difference in approach as to the expectations TPR has over the requirements it places occupational pension scheme trustees and those of the FCA over the 'policing' liability it seems to want to impose of SIPPs when they receive a transfer in, or a members wishes to make an investment

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.


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