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My PFS - Technical news - 13/09/16

Publication date:

14 September 2016

Last updated:

22 September 2017


Technical Connection

Personal Finance Society news update from 31 August to 13 September 2016 on taxation, retirement planning and investments.

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Finance Bill 2016 - Royal Assent delayed

(AF1, AF2, AF3, AF4, JO2, JO3, JO5, RO2, RO3, RO4, RO8)

Royal Assent to the Finance Bill would typically be expected in July just before Parliament's summer break.  This has been delayed until the autumn due to the referendum.  It has been suggested that Royal Assent will be granted in October although we have no fixed date as yet.

Autumn Statement date announced

(AF1, AF2, AF3, AF4, JO2, JO3, JO5, RO2, RO3, RO4, RO8)

The Chancellor of the Exchequer, Philip Hammond, has announced that he will present his first Autumn Statement since becoming Chancellor on Wednesday 23 November 2016. 

Tax avoidance - The latest discussion document

(AF1, RO3)

The latest tax avoidance discussion document was published on 17 August with the closing date for comments fixed at 12 October.  In our view, it is not as wide ranging (for financial planners) as some have indicated.

In the entitled discussion document "Strengthening Tax Avoidance Sanctions and Deterrents", the stakes are proposed to be raised for those who design, market or facilitate the use of tax avoidance schemes ("enablers") by introducing strengthened sanctions (in line with HMRC's penalty principles) on them when the avoidance they have enabled is defeated by HMRC.

There have been, in our view, some sensationalist comments and observations in the press.

At this point it's important to remember that this is a discussion document we are talking about - not law. But given this undeniable fact, it's important to look at the key definitions for key terms that are given in the document in order to get an idea of the scope of arrangements that HMRC has in mind

First, what sort of arrangements are likely to be caught?

Well, only those where the desired tax advantage has not been secured due to "defeat" by HMRC. So, self-evidently, the arrangement would first need to be challenged by HMRC through the tribunals/courts. Otherwise, it can't be "defeated". This means that most ordinary financial planning strategies (eg involving pensions, ISAs, VCT, EIS, BPR schemes, collectives, bonds etc) just won't be in scope. They are contemplated (encouraged even) by legislation and in ordinary use do not defeat the intention of parliament.

So, having cleared that up, who is "an enabler of tax avoidance"?

HMRC states in the discussion document that 'the word "enabler" encompasses more than those who design, promote and market avoidance. It includes anyone in the supply chain who benefits from an end user implementing tax avoidance arrangements and without whom the arrangements, as designed, could not be implemented.

To ensure that the sanctions proposed operate effectively, the government says that it needs to define an "avoidance enabler" clearly and to provide safeguards for those who are within that definition but were unaware that the services they provided were connected to wider tax avoidance arrangements. A tax agent who does no more than prepare a client's tax return for submission to HMRC is not the focus of this measure.'

The focus of the proposals is stated to be 'on those who benefit financially from enabling others to implement tax avoidance arrangements. This includes but isn't limited to:

  • those who develop, or advise/assist those developing, such arrangements and schemes;
  • Independent Financial Advisers, accountants and others who earn fees and commissions in connection with marketing such arrangements, whether or not their activities amount to the promotion of arrangements; and
  • company formation agents, banks, trustees, accountants, lawyers and others who are intrinsic in, and necessary to, the machinery or implementation of, the avoidance.

Many enablers of tax avoidance do not, at present, according to HMRC, 'feel affected by the suite of sanctions and deterrents designed to influence avoider behaviour. Indeed, some judge that the business and reputational risks associated with HMRC defeating avoidance arrangements they have helped enable are outweighed by the financial rewards to them. There can be few downsides to their continued involvement with such arrangements, notwithstanding the hardship which may be faced by their clients.'

With this in mind, HMRC proposes 'developing a definition of "enabler" based on the broad criteria used for the offshore evasion measure but specifically tailored to the avoidance supply chain and ensuring that appropriate safeguards are included to exclude those who are unwittingly party to enabling the avoidance in question.'

The discussion document also asks what "safeguards" there should be so that the wrong people are not adversely affected by these proposed provisions.

On this subject, the document states that:

'The penalty proposed should benefit from the same types of safeguard as penalties under Schedule 24 of the Finance Act 2007 - for instance:

  • An enabler would be able to appeal against a decision that a penalty is payable, its amount, or issues relating to a decision about suspension of a penalty. Alternatively, or in addition to appealing, the enabler could request a review or accept HMRC's offer to review the issue before the appeal is referred to the tribunal
  • The amount of a penalty could be reduced depending on the nature, timing and quality of any disclosures made by the enabler about their enabling of the defeated avoidance
  • Where there would be an interaction with other penalties, such as the new penalty for enabling offshore evasion, the rules would describe how the different provisions interact and what, in those circumstances is the maximum aggregate amount of penalties'

It is also proposed that 'it will be necessary to exclude from the wide definition of enabler those who are unwittingly party to enabling the avoidance in question. DOTAS takes a similar approach by defining a promoter widely but then excluding certain persons from that definition:

  • Employees of a promoter are generally excluded from being promoters in their own right. However, where there is no other UK-resident promoter that exclusion may not apply.
  • The "benign" test excludes a person from being a promoter if, in the course of providing tax (or National Insurance contributions) advice, the person is not responsible for the design of any element of the arrangement or proposal. For example, a promoter may seek advice from an accounting or law firm on whether two companies are "connected" for any purpose of the Taxes Acts. Provided the advice goes no further than explaining the interpretation of words used in tax legislation, the person would be within this exemption. However, if the advice contributed to the tax (or National Insurance contributions) advantage element of the arrangements they would not.
  • The "non-adviser" test excludes a person who, although involved in the design of a tax avoidance scheme, does not contribute any tax advice. An example is where a promoter consults a law firm (which has a business that includes giving tax advice) in relation to company law. The law firm will not become a promoter as long as it provides no tax advice (other than benign advice) in the course of carrying out its responsibilities.
  • The "ignorance" test excludes a person who could not reasonably be expected to have either sufficient information to enable them to know whether or not the arrangements are notifiable, or to enable them to comply with the duties imposed by DOTAS. An example is where a person has insufficient knowledge of the overall arrangements to know whether the "benign" or "non-adviser" tests are failed; or has only a partial understanding of the scheme so that they would be unable to comply with the disclosure requirements.

The approach taken in DOTAS could provide a model for ensuring that the new penalty applies only in appropriate cases. For example, an agent who provides general accounting and taxation services may submit a return for a client, which is later found to be incorrect as a result of avoidance arrangements being defeated.

If the agent could show that they had advised their client not to implement the arrangements, or that their client had not discussed the issue with them before implementing the arrangements, HMRC would not want a penalty as long as they could also show that all appropriate disclosures were made when that return was submitted.'

So how much will the sanctions be?

Clearly they need to be meaningful to have any chance of being effective.

Looking at the sanctions for evasion as some indication of what these new proposed sanctions could look like, Finance Bill 2016 provides for a penalty of the higher of 100% of the tax evaded and £3,000 for those who know their actions will, or are likely to, enable a person to carry out offshore evasion or non-compliance (where the evader is charged with a penalty or is criminally prosecuted).

That seems to be the model that resonates most with HMRC in relation to these new proposed provisions affecting enablers.

But how would it be applied?

In the discussion document HMRC, in response to this, states 'for example, if a promoter designs a scheme, engages an Independent Financial Adviser to market the scheme for them, and engages the services of lawyers and bankers to facilitate the actual implementation of the scheme, then each of those persons in the supply chain would be subject to a penalty in relation to each person they enabled to implement the defeated arrangements. For the promoter this would be every user but for others it could be a subset of that population because different users may be advised or enabled by different persons in different parts of the supply chain.

An alternative would be to base a penalty on the amount of tax understated by the user to whom the enabler has provided those services, whether directly or indirectly, as a result of the avoidance being defeated. So, if a person has enabled 10 people to implement arrangements which are defeated, and each of those users has understated, say, £1,000, that enabler would be subject to 10 penalties, the starting point for which would be a percentage of the £1,000 each user has understated, i.e. £10,000 in total. If another person in the supply chain enabled only 6 of those users, with a third enabler providing services to the other 4, then the starting point for those enablers of avoidance would, in aggregate, be based on £6,000 and £4,000 respectively.' 

And finally, when is a scheme "defeated" for the purposes of the provisions?

The proposals for the application of sanctions depend on a definition of what constitutes the "defeat of tax avoidance arrangements".  HMRC states as follows:-

'The meaning of "arrangements" is included in many parts of the tax legislation which deal with avoidance and a common meaning is that the arrangement includes, "any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable)". It is proposed that this wide definition of arrangement is adopted for the proposals in this consultation.

The July 2015 consultation, "Strengthening Sanctions for Tax Avoidance - A Consultation on Detailed Proposals", considered how to define defeated arrangements. That led to the creation for the Promoters of Tax Avoidance Schemes (POTAS) regime of the concept of a "relevant defeat" of arrangements to identify those to which the new provisions apply.

The draft legislation in Finance Bill 2016 defines a relevant defeat as 'arrangements in relation to which there is a final determination of a tribunal orcourt that the arrangements do not achieve their purported tax advantage, or, inthe absence of such a decision there is agreement between the taxpayer andHMRC that the arrangements do not work'. -our italics

A relevant defeat can arise in respect of arrangements, which:

  • have been counteracted by the General Anti-Abuse Rule in Finance Act 2013;
  • have been given a Follower Notice under Part 4 of Finance Act 2014;
  • are notifiable under the Disclosure of Tax Avoidance Schemes or the VAT Disclosure Regimes; or
  • have been the subject of a targeted avoidance-related rule or unallowable purpose test contained within a specific piece of legislation or regime.'

The government proposes following the same approach to define defeated arrangements in relation to these new provisions.

This means that HMRC has tightened the screws in its campaign to stamp out tax avoidance.

A tax service for the 21st century

(AF1, AF2, RO3, JO3)

On 5 September the Financial Secretary to the Treasury, Jane Ellison, addressed the HMRC Annual Conference with a speech on a tax service for the 21st century.

Following the recent decision for the UK to leave the EU there has been a lot of uncertainty which is likely to continue for some time. However, following this decision the government has had a lot to get on with and is still focused on delivering a tax system which is working at its best.

In summary, in her speech the Financial Secretary said that "the government's work must go on and at the heart of that is our tax policy where we've made promises to deliver a fairer, efficient and competitive tax system."

The aim is to have a tax system which ensures that tax due is paid and collected, those advising on avoidance should be fined and making sure that our taxes "are supporting our businesses".

A couple of weeks ago, HMRC launched a series of 7 consultation documents which support these priorities and show that progress is being made by the government to work through its promises. 

If you are interested in reading the full speech it can be found here.

Tax avoidance - "Apple Tax" and a summary of the facts and the possible implications

(AF1, RO3)

The European Commission (EC) has ordered Apple Inc. to pay Ireland unpaid taxes of up to 13 billion euros ($14.5 billion) on the basis of its determination that Apple had received illegal state aid.

The EU allegation

The European Union's (EU) executive arm has ruled that Ireland made a deal with Apple that had no basis in tax law. The EC said this involved cutting Apple's tax bill to almost zero, in return for Apple building factories and meaningfully employing in Ireland.

The EC says that is unfair and that Apple must pay Ireland the tax it would have paid if normal tax rules were applied.

Why is the EU interested in this case?

The EU believes that so -called "sweetheart" tax deals help divert investment and jobs away from countries where it would normally go. Also, the tens of billions of dollars in profits which Apple enjoys tax free in Ireland each year are generated almost exclusively outside Ireland. Hence, Ireland's deal deprives other EU countries of tax revenue they might otherwise earn.

The EU allegation is that profits should be taxed in the jurisdiction (s) in which the activity that generates the profit takes place.

Is Ireland about to land a windfall?

Not anytime soon. Ireland's finance minister said he plans to appeal the ruling in Europe's highest court. That will likely take two years or more and Apple may make legal challenges and is also likely to be able to fight any demands from Ireland's Revenue Commissioners in Irish courts, tax lawyers say.

Might Apple settle?

It is believed that it can certainly afford to, with more than $200 billion in cash or readily marketable securities. But since $14.5 billion is not a major sum for Apple, investors won't be too worried about the uncertainty it faces and consequently it won't be under pressure from shareholders to settle. The company has been aggressive in defending its tax practices, with CEO Tim Cook testifying to Congress on the issue.

What does the U.S. government think?

The U.S. Treasury and lawmakers have criticized the EU approach of using competition law to challenge tax rulings. They say the approach is targeting US companies and deviates from accepted international practice and threatens US investment in Europe.

A US Treasury Department White Paper last week stated 'it continues to consider potential responses should the Commission continue its present course'. US law allows the President to double taxes on citizens and companies from countries which apply "discriminatory or extraterritorial taxes" on US firms.

If the EC prevails, does this means that multinationals won't be able to avoid tax in the EU?  No, not necessarily. The EC's case against Ireland was helped by its ability to secure access to documents in which Irish officials were apparently unusually frank about the agreement they made with Apple.

The EU's principal legal adviser on tax, Richard Lyal, wrote in a legal journal last year that 'It is likely to be only in extreme cases that one can with confidence say that a particular decision reflects a misapplication of the chosen method'.  Without evidence of an "extreme" deviance from accepted norms, the EC would likely be reluctant to initiate a tax case.

Speaking ahead of the G20 summit in China, Juncker confirmed the EC's investigations had mainly targeted European companies and had not singled out the tech giant.

The remarks were, it seems, aimed at reassuring US lawmakers following the EC's ruling on 30 September that tax arrangements between Ireland and the US firm broke EU laws on state aid.

Analysts are now warning of transatlantic discord, with US lawmakers concerned the result represents a European encroachment on the US potential tax base.

Speaking recently, the director of the OECD Center for Tax Policy and Administration, Pascal Saint-Amans, called Apple's tax planning "outrageous" but confirmed the ruling was in line with current regulations.  However, Saint-Amans said he believed it would be unlikely to serve as a precedent for enforcement on future income earned by multinationals.

Both Ireland's finance minister and Apple have said they intend to appeal the EU's ruling.

Tim Cook, Apple's chief executive, described the ruling as "total political crap", but France and Germany backed Brussels' decision.

Margrethe Vestager, the European Commissioner for competition, said the sweetheart deal had enabled Apple to pay substantially less tax than other businesses over many years.

She said: "This selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014."

The tax penalty, the largest ever to be handed out, is the latest in a string of high-profile tax crackdowns on multinationals, spearheaded by the Paris-based Organization for Economic Cooperation and Development (OECD).

Online giant Amazon and fast-food chain McDonald's face similar EC probes over taxes they pay in Luxembourg, while coffee chain Starbucks has been ordered to pay up to €30m to the Dutch state.

What does it all mean (if anything) to UK financial planners?

Given that most UK financial planners do not deal with global multinational companies the attack on Apple and Ireland is unlikely to have any direct effect.  However, it will reinforce the message that aggressive avoidance will be targeted and attacked.  This will help to further build the appeal of tried and tested tax effective planning (eg via registered pensions) that is specifically contemplated and effectively encouraged by the legislation.

It will also be worth advisers remembering that the UK has already legislated in an attempt to discourage so-called "profit shifting".  Since 2015 the UK has had the Diverted Profits Tax (DPT) and it seems that many more companies than might have been anticipated could be affected by these new rules.  

The DPT is charged at 25% on profits that are considered to be artificially diverted from the UK.  The legislation is very complex; there are two sets of conditions where DPT would be applicable, and often both will apply to the same fact pattern. 

In summary, the DPT might apply to:

  • a company which has UK sales being made by a related non-UK company or Permanent Establishment ("PE"); and/or
  • a UK company/PE which has a significant transaction with a related company

and, in either case, where any related income ends up in a related company with a low tax rate/concessionary tax treatment. 

The government publishes draft legislation to introduce the Lifetime ISA

(AF4, RO2, FA7, FA5)

The Lifetime ISA (LISA) was announced in the March 2016 Budget as a new form of ISA which would allow individuals to save for a first home and/or for retirement.

The government has published a Bill which sets out the legal framework for the payment of the government bonus in relation to LISAs.

From 6 April 2017, those aged between 18 and 40 will be able to open a LISA with an approved account provider.

In summary, the product's key features will be as follows:

  • Individuals will be able to contribute up to £4,000 in each tax year.
  • At the end of each tax year, the government will then provide a 25% bonus on LISA contributions in respect of savers below age 50. This means that those saving the maximum annual amount into a LISA stand to receive a £1,000 government bonus each year.
  • An individual who dishonestly obtains a bonus to which they are not entitled, or assists someone else in doing so, will be liable to a penalty not exceeding the greater of £3,000 and the amount of the bonus.
  • Contributions to the LISA will sit within the overall £20,000 ISA limit for the 2017/18 tax year.
  • Proceeds can be taken tax free either,

    - to purchase a first home worth up to £450,000, or

    - after age 60, or

    - if the individual is terminally ill, or

    - on death.

    Note that 'a 25% government charge will be applied to the amount of withdrawal.  This returns the government bonus element (including any interest or growth on that bonus) to the government with a small additional charge applied.'

This mean that while the publication of the Bill provides more information on how the LISA will operate, full details will not be published until the Bill reaches the Committee stage in Parliament.

And, it is worth noting that those who hold a Help-To-Buy ISA will be able to transfer it into a LISA when the LISA is launched next April.


2015/16 ISA statistic

(AF4, RO2, FA7)

HMRC has just updated its ISA statistics to include data for the last tax year. It is worth remembering that the ISA landscape has been changed by the introduction of the personal savings allowance (announced in March 2015) and the dividend allowance (announced in July 2015). Both took effect from the start of 2016/17 and both have reduced the relative importance of the ISA wrapper.

This main highlights from the latest data include:

  • The number of ISA subscriptions fell by 2.6% in 2015/16, continuing a trend of recent years. There were 15.246m subscriptions in 2010/11 against 12.657m in 2015/16 - a 17% fall.  Both cash and stocks and shares components subscription numbers declined, but cash subscriptions continued to outnumber stocks and shares by 4:1.
  • In terms ofamountssubscribed, it was a different picture. The total amount subscribed rose to £80.2bn, but within that the cash component fell by 3.6% to £58.8bn while the stocks and shares component rose by 20% to £21.4bn.
  • Average cash component subscriptions dropped 2% to £5,810 while the average for stocks and shares rose by 28% to £8,443.
  • Junior ISAs continued to see increased business, with a 45% rise to 738,000 in account subscriptions and a 58% increase in the amount subscribed to £921m. The majority of accounts (67%) and amounts (57%) were cash component.
  • In terms of total investment (outside JISAs), £250.7bn was held in cash and £267.1bn in stocks and shares (including money on deposit) as at April 2016. However, if you adjust for the £13.8bn of money on deposit in stocks and shares ISAs, cash becomes the overall winner.  
  • JISAs accounted for £2.76bn, of which 64% was held in cash. 

This means that in a world of ultra-low interest rates, the amount of money still sitting and being placed in cash ISAs is surprising. For many cash ISA-investors, the personal savings allowance now renders their ISA redundant - the more so after the latest rate cuts.  

July IA statistics

(AF4, RO2, FA7)

The latest Investment Association (IA) statistics show a net retail outflow in July 2016 of £1.0bn, as the impact of the Brexit vote eased.

The IA has recently published its monthly statistics for July 2016, the first full month's post referendum numbers. While they are better than June's horrid figures, they still show a £1.039bn net retail outflow in the month. The IA has now reported three successive months of net outflows, meaning that 2016 has so far produced an overall net retail outflow of close to £4bn. The same seven months of 2015 (which included a period of General Election uncertainty) produced a net retailinflow of nearly £4.5bn.

This month's highlights include:

  • Net retail redemptions for the month were £1.039bn, while the June figure was revised upwards slightly to £3.525bn. Gross retail sales were marginally higher than June's figure, at £16.139bn, but there were £17.178bn of redemptions. Net institutional sales were positive at £553m - not enough to counter the retail outflow. 
  • In spite of the overall outflow, total funds under management rose across the month of July by £40bn to a record high of £989bn. The continuing post-Brexit market rallies helped - there was little change in the value of sterling over July to act as an extra boost.
  • Equity funds saw a net retail outflow of £2.237bn. Five equity fund sectors enjoyed an inflow - China/Greater China, the three Global sectors and the old stalwart of UK Equity Income (but only to the tune of a net £25m). The biggest outflow, from the largest sector, was £917m from UK All Companies.
  • The net retail outflow from the property sector in July was £792.2m, just over 3% of the sector by value. The drop helps explain why the gates that were applied post-Brexit remain shut, with some suggestions they will not reopen this year.
  • The most popular sector in terms of net retail sales was, as last month, Targeted Absolute Return, which has been the league topper for five months in 2016. This sales success has occurred even though almost half of the sector funds have failed to achieve a year-to-date positive return, according to  Fixed income funds filled three of the top five sectors for July retail inflows, with short-term money market making up the quintet.
  • The total value of tracker funds increased by £6.85bn (5.5%), meaning that they now account for 12.1% of the industry total. The corresponding figure from July 2015 was 10.5%. 

which would seem to suggest that the collective funds market, like other sectors of the economy, have recovered somewhat from the June Brexit shock.


FOS orders compensation for pension transfer

(AF3, RO4, JO5, FA2, RO8)

In a recent decision (DRN1238268) the Financial Ombudsman Service has ruled that TenetConnect Ltd must compensate a customer who was advised to transfer his pension from Standard Life into high risk Arch Cru funds that were later suspended.

In 2006 TenetConnect advised Mr R to transfer his personal pension from Standard Life to Transact. The underlying investments in the Transact pension were the Arch cru Investment Portfolio Fund and the Arch cru Specialist Portfolio Fund. Both of the Arch cru funds were suspended in 2009, and the value of Mr R's investment has fallen considerably. 

The client was advised to transfer into two funds, one that was low to medium risk and one that was high risk but overall the funds were deemed to be a medium risk.

In her final decision, Ombudsman Caroline Stirling said: "TenetConnect described the combination of investments in the two funds as being medium risk and Mr R invested on the basis that it was. Rather than being a medium risk investment I am satisfied it was high risk. I am not persuaded the advice to invest in the Arch Cru funds was suitable. I am satisfied TenetConnect should compensate Mr R for the loss on the whole of his investment."

What does it all mean (if anything) to UK financial planners?

It's well worth reading FOS' decision and reasoning to see why they deemed the investment unsuitable and not in made in accordance with the fact find.

The Pensions Regulator revised automatic enrolment guidance for employer who are required to choose a pension scheme

(AF3, RO4, JO5, FA2, RO8)

The Pensions Regulator (TPR) has revised their web content on choosing a pension scheme to make the information more accessible to small and micro employers for their automatic enrolment duties.

TPR's research shows that a major concern for small and, especially, micro employers, is making the right choice of pension for their staff. So TPR has redesigned its web pages in the online step by step guide to automatic enrolment, to help small and micro employers quickly navigate to the key information that they need.

The key elements of the revised design are as follows.

On the main Choose a Pension Scheme page:

  • Reducing the volume of content to allow better navigation - most supporting content is now on the 'what to look for in a scheme' child page
  • Highlighting some key considerations - including tax relief, but signposting to content on the child page that supports this
  • Clearly signposting those pension providers that have said they are open to all employers, including GPPs and Master Trusts. This list will continue to grow as more providers ask to be included/gain master trust assurance, and will be regularly randomised.

On the page What to look for in a scheme:

  • Content is presented in a more sequential manner - to give more guidance on key considerations
  • Tax relief content is simplified - including a table to show which pension schemes offer which type of tax relief
  • Revised content on costs and charges.

What does it all mean (if anything) to UK financial planners?

It's essential if you are advising employers on their auto enrolment duties that you are familiar with the latest guidance and available help.

IHT liability on death within two years to a pension switch/transfer

(AF3, RO4, JO5, FA2, RO8)

HMRC take the view that if the member of a pension scheme (knowing he/she is in ill health), makes a pension transfer and dies within 2 years of the transfer, a chargeable lifetime transfer can arise. 

This can give rise to an IHT liability and if nobody else will pay the IHT and the transfer was to a SIPP, in certain cases, the SIPP may be liable for the IHT. Given this situation, the scheme administrators of SIPPS will no doubt be interested in ways in which they can avoid any potential risks they may be exposed to when a client in ill health makes a transfer and dies within 2 years of the transfer.  This potential liability could be reduced in a number of ways:

Seek a declaration from the adviser that they have considered the IHT implications of the transfer (particularly if the client knows they are in ill health), get the adviser to accept responsibility for this and confirm that if a chargeable transfer is treated as arising, the client's estate would have funds to meet any IHT liability.

Seek a declaration from the prospective transferor that they are not aware of any condition that has been diagnosed that could cause their death within two years. If it transpires that the member dies within two years of the transfer and the death certificate indicated the cause of death was such it was likely the individual was suffering from the illness that caused the death and he/she were likely to have known about it, at the time of the transfer, the scheme administrator might decide to pay all death benefits into the deceased's estate. However, that could leave them open to challenge from the beneficiaries that the trustees were not discharging their duties with due diligence.

Scheme administrators should ensure their literature clearly signposts the potential for IHT both on pension transfers when the individual is in poor health and doesn't survive two years, but also in respect of large pension contributions paid when the member is in poor health and then dies within two years.

For larger transfer values, it may be appropriate to request that advisers obtain a PMAR for all potential transferors and this is provided to the scheme administrator. That should satisfy the scheme administrator (and if necessary, HMRC) that the individual was not knowingly in poor health at the time of the transfer.

Based upon the HMRC approach in the recent case, there could well be later similar cases, where HMRC look to a scheme administrator to pay the IHT.  This course of action may be triggered by HMRC seeing the cause of death on the deceased's death certificate.  They may decide they need more time to look into matters, but it is important to remember there is still the requirement for death benefits from uncrystallised funds, on death prior to age 75, to be paid out within "the relevant two-year period" to avoid them becoming subject to income tax.  This may curtail their ability to clarify matters.

In such circumstances, the Scheme Administrators could consider either one or both of the following:

Before paying out or applying any death benefits, they should seek assurance from the deceased's personal representatives that they do not know of any outstanding IHT liabilities (including the deemed CLT on the pension transfer) that they are unable to settle.

Before paying any death benefits, ask the beneficiary to confirm in writing that he/she will meet any IHT that may result from a previous pension transfer.

For financial advisers, it is important they understand the potential for IHT on pension plans and the circumstances when it can occur.

They should clearly document the risks to clients as a part of the switch/transfer recommendation and they must have an open and frank discussion with clients about their health.

There is nothing wrong with a transfer when an individual is in poor health, however, there is equally nothing wrong in circumstances where health is an issue asking the client to obtain a written prognosis from their medical team as to their life expectancy. At least that will mean it will be easy to prove the facts after the event if necessary.

What happens with transfers for an individual who is aware they are in poor health and are unlikely to survive the requisite two years? For example, people may be in a position where they have to transfer to be able to access their (or their beneficiaries) benefits flexibly.  In such cases what options are open to them?

Remember, that many schemes will offer 100% commutation, on the grounds of serious ill-health, pre age 75 i.e. a life expectancy of less than 12 months. If someone is so seriously ill, then commuting the benefits so they are in the estate, means they can be passed on to the surviving spouse/civil partner free of tax.

One other school of thought would be for an individual, who is transferring to access pension flexibilities, to crystallise benefits as soon as they attain age 55. Should the individual die within 2 years, reliance could then be placed on the defence on section 10 IHTA 1984 - "no intention to confer a gratuitous benefit". When we asked HMRC about this, their response was as set out in the following two comments:

"Section 10 IHTA 1984 applies to a transfer if it is shown that the transfer was not intended to confer any gratuitous benefit on any person. This places the burden of proof on the taxpayer (usually the personal representatives following a death) to show that the transferor had no gratuitous intent when the transfer took place. Making a transfer between pension schemes solely to achieve a better rate of annuity for the benefit of the individual, would normally satisfy this provision. But any element of gratuitous intent would mean that section 10 could not apply."

"If the sole intention was for the individual to be able to take greater benefits out of the pension and that is what he actually did, section 10 would prevent this being a transfer of value. If he died before being able to crystallise, but there is clear documentary evidence that the individual's sole intention was to take the enhanced benefits himself, section 10 can still apply. However, if a factor in making the transfer was, for example, that greater death benefits were payable that would be paid outside of the individual's estate, or that under pension flexibility rules the individual could leave funds within the pension scheme that could be inherited without being subject to inheritance tax on his death (and funds were left in that way), section 10 could not be in point and a possible chargeable transfer of value could arise under section 3(1) IHTA."

The problem here is that many individuals will transfer not just so that they can access their benefits flexibly, but also so that in the event of their death, their beneficiaries also have the same options. HMRC's response also conflicts with the Governments comments on IHT and pension schemes in published by HM Treasury on 29 September 2014.

There has been more than sufficient coverage in the press and with court cases over the last 10 years or so, for there being no excuse for financial advisers knowing there is the potential for IHT on pension transfers when an individual undertakes a pension transfer when they are knowingly in poor health and the individual then dies within two years.

If an IHT liability results, or the transfer causes the member's nil rate band to not be available or fully available on their death, there seems little point in blaming the pension scheme administrator. The fault must rest with the adviser. Should a complaint be made in circumstances such as these, it will be interesting as to how the outcome will be determined.

What does it all mean (if anything) to UK financial planners?

There has been more than sufficient coverage in the press and with court cases over the last 10 years or so, for there being no excuse for financial advisers knowing there is the potential for IHT on pension transfers when an individual undertakes a pension transfer when they are knowingly in poor health and the individual then dies within two years.

If an IHT liability results, or the transfer causes the member's nil rate band to not be available or fully available on their death, there seems little point in blaming the pension scheme administrator. The fault must rest with the adviser. Should a complaint be made in circumstances such as these, it will be interesting as to how the outcome will be determined.

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.