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My PFS - Technical news - 23/01/18


Publication date:

17 January 2018

Last updated:

08 November 2018


Technical Connection

Personal Finance Society news update 5 December 2017 - 17 January 2018. Information on taxation and trusts, investments and pensions.

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Taxation and trusts




Spring Statement date announced

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

The Chancellor appeared before the Treasury Select Committee on Wednesday 6 December. During his presentation he said that the Spring Statement would be on Tuesday 13 March. It will not be a major fiscal event, according to Mr Hammond. Instead it will set out his response to the OBR’s revised forecast and some longer term thinking, ahead of the Autumn Budget.

Coincidentally, on the same day the Treasury published a policy paper on the new Budget timetable and tax policy making process. This expands on the paper issued in 2016, but adds little new. The new cycle will mean that “most policies will be announced at least 16 months before they come into effect at the start of the next tax year”, eg an initial policy announcement in the Autumn Budget 2018 will work its way through consultation to legislation in the Finance Bill 2019, published shortly after the Autumn Budget 2019, and then take effect from the start of the 2020/21 tax year.

As you might expect, there is an escape clause for this relaxed legislative approach. The paper states that ‘…there will be some exceptions to the policy of prior consultation. This includes measures needed to address clear avoidance or evasion where consultation would put revenue at risk.’

ISA tax advantages to be extended to deceased estates


The Individual Savings Account (Amendment No. 3) Regulations 2017 were made on 13 November 2017 and come into force from 6 April 2018.  The Regulations apply to ISAs held by an individual who dies on or after 6 April 2018 and make some changes to the taxation and subscriptions as follows:-

  1. Taxation in general

Currently, any interest, dividends or gains accruing on investments held within an ISA arise free of tax until the death of the ISA investor.  Such income and gains arising after the death of the investor cease to be exempt from tax and, instead, will be assessed to tax on the investor’s personal representatives until the administration of the estate is completed.

Under the Amendment No. 3 Regulations investments retained in an ISA after the death of the investor will be deemed to be ‘administration-period investments’ held in a ‘continuing account of a deceased investor’ until the earlier of:

  • the completion of the administration of the deceased’s estate;
  • the third anniversary of the account holder’s death; and
  • closure of the account on the withdrawal of all assets out of the ISA.

This means that personal representatives and beneficiaries or legatees should not face income tax or capital gains tax on the investments during this ‘administration period’. The Regulations confirm that no new subscriptions can be made to a continuing account of a deceased investor after the death of the investor, and the ISA cannot be transferred between ISA providers other than in specified circumstances.

  1. Capital gains tax

The Regulations amend the capital gains tax (CGT) rules when the personal representatives of a deceased ISA investor transfer administration-period investments (ie investments which have remained in the ISA following the investor’s death) to a legatee under the deceased’s estate.  In this situation the legatee will be treated as acquiring the investments at the market value at the date of transfer by the personal representatives.  This will ensure that all capital gains accrued to the date that the investments cease to be in an ISA are extinguished and set the base value for a future disposal of that investment by the legatee.

In contrast, when an investment is transferred which has ceased to be an administration-period investment, for example because administration of the deceased’s estate has been completed, personal representatives are deemed to have sold and reacquired the investments at the market value at the date the investment ceased to be an administration-period investment.  Therefore, any gain to the point when the ISA is treated as closing escapes CGT.

However, because the base cost for the legatee is not the value at the date of the transfer to the legatees by the personal representatives any capital gain accrued since the investment ceased to qualify as an administration - period investment will be assessed on the legatee for the future.


As a consequence of the changes in taxation described above, the No. 3 Amendment Regulations allow for the maximum additional permitted subscription available to the surviving spouse/civil partner of an ISA investor (who dies on or after 6 April 2018) to be the higher of the value of investments held in a deceased’s account at the date of the deceased’s death and the value of the continuing account of a deceased investor immediately before it ceases to be the continuing account of a deceased investor.

Before the change the maximum additional permitted subscription was the value of the investments in the ISA at the date of the deceased investor’s death.

Succession problems for sole shareholders 

(AF2, JO3)

Running a business via a limited company has its attractions and has been simplified since the introduction of sole-shareholder companies. As a result many individuals run their business as a sole director/shareholder. While this may provide a number of tax benefits it also has its risks, as illustrated in a recent case where the death of such a sole director/shareholder left the company in a vulnerable position and Court action was necessary to save the business. 

The case in question was Kings Court Trust Limited & Ors –v- Lancashire Cleaning Services Ltd [2017] EWHC 1096 (Ch).  Mr P was the sole director of Lancashire Cleaning Services Ltd.  Whilst he appointed executors to his estate in his Will, he did not update the company’s Articles of Association to allow the executors to make decisions on behalf of the company, such as appointing a new director. It should be noted that private companies, which have adopted the default Model Articles under the Companies Act 2006, will already have the necessary provisions to allow personal representatives to appoint directors.  However, the old Table A Articles from the Companies Act 1985 do not have such provisions. 

In the case in question, following Mr P’s death, the company’s assets were frozen by the bank and employees could not be paid as the executors were powerless to act. The executors had to apply to the Court to rectify the register of shareholders by removing the deceased’s name and replacing it with the names of the executors. Such an application was made under section 125 of the 2006 Act. In this case, given the urgency of the situation, the Court was very helpful and granted the application even before the executors obtained a grant of probate.

Advisers dealing with business protection, and in particular business succession, should be aware of the above-mentioned potential problems. Of course, in many cases the so-called “one-man” companies are run as a corporate vehicle merely for convenience and effectively amount to a sole trader or sole practitioner business which will die with the owner.  However, where, as in the above case, the business continues to trade, it is not often appreciated that having the old Companies Act Articles, which have not been updated, could cause serious difficulties.

Administration of the Scottish rate of income tax 2016/17

(AF1, RO3)

Scottish income tax continues to be administered and collected by HMRC as part of the UK tax system with the Scottish government paying the administration costs incurred by HMRC.

The National Audit Office has published a report on ‘The administration of the Scottish Rate of Income Tax 2016/17.’ The report highlights that maintaining accurate address records of the 2.6m Scottish taxpayers remains the biggest risk facing HMRC in ensuring that Scottish income tax is assessed and collected properly.

It would appear that HMRC has rectified issues that led to it not identifying 420,000 people as potential Scottish taxpayers in 2015, but maintaining accurate address records of Scottish taxpayers remains HMRC's biggest challenge. Neither taxpayers nor employers are legally required to tell HMRC of changes of address and around 80,000 people in the UK move into or out of Scotland each year.

For the 2016/17 tax year, the Scottish Parliament decided to effectively match the income tax rates in Scotland to those in the rest of the UK. HMRC estimates it will collect £4.6 billion attributable to the Scottish rate of income tax for 2016/17. The actual amount collected will not be known until July 2018.

For 2017/18, income tax rules in Scotland differ from the rest of the UK for the first time. Scottish taxpayers pay the higher rate of tax (40%) when they earn £43,000 – as opposed to £45,000 in the rest of the UK.  The Scottish government has announced income tax changes from 2018/19 that will see higher earners pay more tax than elsewhere in the UK and lower earners pay less.

Maintaining accurate records will be vital, especially given that Scottish high earners will pay more tax than others in the UK, otherwise HMRC could ‘lose out’ and not collect the correct amount of tax that is due.

Scottish land and buildings transaction tax

(AF1, RO3)

It was somewhat inevitable that once Philip Hammond had announced a first-time buyer SDLT incentive in his November Budget, the Scottish Budget would include something similar.

Derek Mackay, the Scottish Cabinet Secretary for Finance and the Constitution, duly announced a tweak to Land and Buildings Transaction Tax (LBTT) for Scottish first-time buyers but, as with his income tax measures, he was meaner than his English counterpart:

  • For first-time buyers, the 0% initial band for LBTT will be raised by £30,000 to £175,000. As the current rate of the first slice above the 0% band is 2%, this means the maximum saving will be £600 (against £5,000 on Mr Hammond’s version, which effectively gives a 0% band up to £300,000).
  • Unlike the Westminster version, it appears that there is no price cap on the Scottish reduction, so Scottish first-time buyers spending over £500,000 – a rare breed probably – will still benefit.
  • The incentive is scheduled to start in 2018/19, which could cause of few hiccups in the property market for houses in the affected price band.

To be fair to Mr Mackay, house prices are much lower in Scotland than in England. For Q3 2017 the average first-time buyer price in Scotland was £109,562, according to Nationwide, while the average overall price in Scotland was £146,022. That compares with a UK first-time buyer average of £181,325 and £413,189 for London.

The Scottish government was the first to propose a tiered policy for property transaction taxes, but it has since had to play catch up with UK Chancellors on three occasions.

ATED tax returns

(AF2, JO3)

The annual tax on enveloped dwellings (ATED) is a tax that can apply when a company (or other artificial person) owns a residential property that has a value of more than £500,000.  The tax charge will depend on the value of the property, as follows:-

Property value

Annual tax 2016-17

Annual tax 2017-18


£500,000 to £1,000,000



£1,000,001 to £2,000,000



£2,000,001 to £5,000,000



£5,000,001 to £10,000,000



£10,000,001 to £20,000,000



£20,000,001 and over



This valuation is made when the property is purchased and will apply for the next 5 years. For those properties owned before the start date of the tax on 1 April 2013, they will have been revalued on 1 April 2017 because the value at the start date was based on the value at 1 April 2012.

There are, however, exemptions.  In particular, if the property is let on market terms to a person who is not connected with the company, no tax charge will arise. However, this exemption must be claimed.

Many buy-to-let investors will now be buying buy-to-let properties via companies in order to obtain full tax relief for mortgage interest paid on loans used to purchase the property. 

It should be noted that if the value of the property for ATED returns purposes is £500,000 or more, an ATED tax return must be made and the exemption claimed. Otherwise penalties may be incurred.

The residence nil rate band

(AF1, RO3)

The IHT residence nil rate band (RNRB) is an important relief for people who die leaving a property that has been used as their residence to their children/grandchildren or other lineal descendants (or suitable trusts for them) on their death.

The relief applies to any property that the deceased used as a private residence during their lifetime. But where the deceased occupied more than one property or a residence, and leaves both on death to children/grandchildren, which property will qualify for the RNRB?

Well, in these circumstances the personal representatives will need to make an election within 2 years of death.  It is vital to remember that if no election is made no relief will be available.  There is no default provision.

Shareholder dispute over the valuation of minority holdings

(AF2, JO3)

A dispute between two director shareholders at Lush Cosmetics Ltd led to a Court determination on how the shares should be valued.

This case, Cosmetic Warriors Ltd & Lush Cosmetics Limited v Gerrie [2017] EWCA Civ 324  involved an argument over a share valuation following the departure of one of the directors, Mr Gerrie (needless to say the departure was not on an amicable basis).  Mr Gerrie sought to sell his and his wife’s shares in two companies connected with Lush Cosmetics.  The shareholders did not have a share purchase arrangement to cater for such a situation.  However, within the companies’ Articles of Association there were the usual pre-emption rights, namely that any shareholder wanting to sell their shares had to first offer them to existing shareholders at a price agreed between all parties.  The parties failed to agree on the valuation and, even after independent accountants stepped in, there was still a dispute as to whether it would be best to calculate the price pro-rata or as a share premium. 

Pro-rata and share premium are the two typical bases of valuation. In the pro-rata calculation, the value is based on the minority shareholding in the overall value of the company, which is likely to give rise to a higher valuation.  In the share premium basis, the calculation is based on assessing the minority shareholding individually at a discounted rate, which is likely to give rise to a lower valuation.

The dispute ended up in the Court of Appeal which examined the companies' Articles and noted that they directed the accountants to value the companies as a whole.  The Court looked at the relationship between the two companies involved as being one of a quasi-partnership and decided that the shares should be valued on the pro-rata basis.

Clearly, the bases of valuation are an essential part of any share purchase arrangement and, in most cases, the drafts provided by life offices (usually in the form of option agreements for sale/purchase) would include a provision that no discount should be applied in valuing a minority holding, ie. that the pro-rata valuation basis should be used.  This generally produces the fairest result for all concerned. However, clearly when assisting clients who are making arrangements for share purchase this is one of the topics that needs to be discussed to ensure that the parties' intentions are clearly addressed, that all of the parties are in agreement and there is no ambiguity in the way any terms are drafted.

Scotland revamps income tax

(AF1, RO3)

The Scottish government has been mulling over a change to the structure of income tax, at least as far as it can do so within the constraints of its devolved powers. On 14 December Derek Mackay, the Cabinet Secretary for Finance and the Constitution, revealed the outcome of the government’s review. He claimed his proposals “will make Scotland’s tax system fairer and more progressive”, words that could have come from his English Shadow Chancellor counterpart, John McDonnell.

Whether Mr Mackay is correct or not, he has certainly complicated the income tax system for Scotland, as his proposed 2018/19 tax bands show:

Taxable Income £

Band Name

Tax Rate %













Over 150,000*



*          Those earning more than £100,000 will see their personal allowance reduced by £1 for every £2 earned over £100,000.

When looking at this table, there are several factors to consider:

  • Westminster sets the personal allowance (£11,850 for 2018/19), which Scotland adds in when setting out its tax bands. Thus, the basic rate (20%) band ends at £24,000 in the Scottish tables, an amount which matches the projected median earnings figure for Scotland in the coming tax year.
  • The starting rate band provides just £20 of tax savings at most - £2,000 @ 1%. It hardly seems worth the effort, especially given the problems starting rate bands have caused in the past.
  • By keeping the basic rate at 20%, any worries that pension providers had about the operation of relief at source have disappeared. On the other hand, the corollary of the new 21% band is that Scottish intermediate rate taxpayers will have to reclaim an extra 1% relief on their pension contributions – if they can be bothered.
  • Nobody earning less than £33,000 will pay more income tax in 2018/19 than in 2017/18, according to the Cabinet Secretary. That covers 70% of Scottish taxpayers.
  • The Scottish higher rate (41%) threshold will be £44,273 (indexed up to the nearest £1 from last year’s frozen figure). The rest-of-the-UK (RoUK) figure is £46,350 for 2018/19 (with a 40% higher rate applying).
  • The gap between the Scottish and RoUK higher rate thresholds mean that the band in which full National Insurance contributions and Scottish higher rate is payable (with an effective total marginal rate of up to 53% [41% +12%]) has widened marginally to £2,077.
  • For somebody earning £50,000, the net result is that in 2018/19 their Scottish income tax bill will be £9,015 against £8,360 outside Scotland.
  • The Scottish National Party does not have a majority in the Scottish government, so the proposals could change. This happened last year, when the Greens forced a freezing of the higher rate threshold.

It is interesting to note that Mr Mackay said that were he to raise the top rate to 50% it would be “unlikely to raise any substantial funds for the Scottish Budget, and may in fact reduce revenues”.  Food for thought for Mr McDonnell.

Personal portfolio bonds: amending the property categories

(AF4, FA7, LP2, RO2)

A personal portfolio bond (PPB) is, broadly, a policy investing outside of permitted property that also allows the policyholder, directly or indirectly, control over the selection of property underlying the policy (the control test). Categories of permitted property are mainly the internal linked funds of an insurance company and collective investment schemes.

If a policy fails the control test and holds non-permitted property, and so is classified as a PPB, a penal annual tax charge on such policies is levied under the chargeable event rules.

The list of permitted property for personal portfolio bonds in section 520(2) Income Tax (Trading and Other Income) Act 2005 has been extended.

Regulations have now been made to add three property categories to the list of permitted property in Income Tax (Trading and Other Income) Act 2005 which can be held in a policy without it being a PPB. The changes apply in respect of policies issued from 1 January 2018.

  • Real estate investment trusts
  • Overseas equivalents of investment trust companies
  • Authorised contractual schemes

The regulations also remove category 7(a) in section 520(2) Income Tax (Trading and Other Income) Act 2005 [an interest in a collective investment scheme constituted by a company which is resident outside the United Kingdom (other than an open-ended investment company)]. The removal is necessary because no property is capable of qualifying for inclusion in category 7(a).

Rent-a-room relief review

(AF2, AF4, FA7, JO3, LP2, RO2)

The small print of the Autumn Budget’s Red Book included a statement that the government would issue ‘a call for evidence to establish how rent-a-room relief is used and ensure it is better targeted at longer-term lettings’. At the beginning of December, the relevant paper emerged to no great fanfare.

As the consultation points out, rent-a-room relief was launched in 1992 since when ‘the housing market has changed significantly’. 25 years ago, the relief was introduced with the aim of stimulating the supply of low cost rented accommodation – déjà vu anyone? There have only been two adjustments in the level of relief over its quarter of a century of existence. The first was a rise from the initial £3,250 to £4,250 in 1997 and the second, a jump to the current £7,500, no less than 19 years later – an indication of how the relief had been neglected. In 2016 the £7,500 rate exceeded the average room rental cost in every region of the UK, according to HMRC.

The latest published estimates of the relief’s cost, which are four years old, suggest it denies the Treasury a little over £100m a year. However, the new paper notes that as the relief absolves many people from making a tax return, ‘HMRC have incomplete data on users of the relief, what type of letting they are offering, or how much income is being relieved’. What HMRC does know is that the number of individuals who have to complete a self-assessment tax return and, in so doing, claim the relief rose by 38% between 2007/08 and 2014/15.

Although not mentioned in the paper, the raison d’être for the review can be summed up in one word: Airbnb. In 1992 the idea that rooms in private homes would be let regularly or continuously for brief periods seemed farcical: that was the job of the hotel industry. Thus, the legislation has no minimum period for letting. The £7,500 relief can cover a year’s worth of rental income from one residential tenant or two weeks from a series of holidaying renters during some major sporting event.

In the style of these types of Treasury paper, there are no explicit proposals, but plenty of leading questions. For example:

  • Do you have any evidence that suggests that there are increasing numbers of people letting out rooms in their main home? If so, do you have any evidence that suggests this relates specifically to holiday or guest accommodation rather than residential? Has there been a move towards one or the other over time?
  • Do you think that all types of letting activity, regardless of the purpose or length, should be able to benefit equally from Rent a Room relief?
  • Do you think the UK should look to restrict access to Rent a Room relief only to those homeowners letting out their rooms for residential purposes? What would be the pros and cons of such an approach?
  • To what extent do you think the existence of Rent a Room relief provides an incentive for those using the relief to let out rooms in their home / take on a lodger? If Rent a Room relief did not exist, and only the £1,000 property allowance were available to use against this income, would current users of the relief still take in a lodger?
  • Do you think that there should be differences in eligibility for Rent a Room relief according to type of letting activity, purpose or length? Do you think homeowners should only be eligible to claim Rent a Room relief where they are offering a room for let on a longer-term basis (e.g. 31 days or more)? What would be the pros and cons of such an approach?

The consultation runs to 23 February, which suggests we are unlikely hear its results in the Spring Statement. Next year’s Budget looks the more probable timing for an announcement of any change.

Slowly but surely the government is attempting to catch up with “digital disrupters”. 

Chargeable event gains – recalculating a wholly disproportionate gain

(AF1, RO3)

Last year HMRC consulted on the taxation treatment of chargeable event gains.  Following the consultation HMRC decided that policyholders with ‘wholly disproportionate’ gains could apply to HMRC for their gains to be recalculated on a ‘just and reasonable’ basis.  The purpose of the consultation was to find a way of removing wholly disproportionate gains from taxation without widescale change to the tax legislation.

The relevant legislation is contained in sections 507A and 512A of the Income Tax (Trading and Other Income) Act 2005.

HMRC has now updated its Insurance Policyholder Taxation Manual (Reference IPTM 3596) setting out how individuals who are in this position can make an application to HMRC to consider their case. The guidance sets out what needs to be included in the application, for example, a copy of the chargeable event certificate, a copy of the withdrawal request, relevant correspondence between the interested person (this is the person who would be liable for all or part of the tax on the gain arising on a part surrender or part assignment) and their insurer, and an explanation why cash was taken from the policy in the way it was.

When deciding whether the gain is wholly disproportionate the HMRC officer will consider factors such as:

  • the economic gain on the rights surrendered or assigned,
  • the amount of the premiums paid under the policy or contract,
  • the amount of tax that would be chargeable if the gain were not recalculated.

A wholly disproportionate gain is recalculated by the HMRC officer on a ‘just and reasonable’ basis which is normally determined by the underlying economic gain of the policy at the time of the part surrender or part assignment. In the HMRC manual at IPTM 3596, the CGT part disposal rule is applied as a way of calculating the economic gain but the HMRC officer is not bound to use this method of calculation.  The overarching aim of such a calculation is that it is clear, simple and fair.

It is, however, important to note that there is no statutory right of appeal against a decision under s507A and s512A, although if the policyholder is the interested person and he/she is unhappy with the decision made they can ask HMRC to review the case. If the policyholder is unhappy with the outcome of the review, they can make a complaint. If the policyholder is still unhappy after their complaint has been reviewed, they can ask for a different adviser to take a fresh look at the complaint.  If, following this review, the policyholder is still unhappy they can ask the Adjudicator to look into the complaint. If, after this review, the policyholder is still unhappy they can ask a Member of Parliament to refer the complaint to the Parliamentary and Health Service Ombudsman.

DOTAS and inheritance tax

(AF1, RO3)

The Disclosure of Tax Avoidance Schemes (DOTAS) Regulations are an important weapon available to HMRC in its fight against tax avoidance schemes.  In essence, if a scheme satisfies certain conditions, any person involved in the promotion of the scheme must disclose details of the scheme to HMRC.  If they do not comply with this requirement, they risk suffering substantial penalties.

Revised DOTAS Regulations have been published in relation to schemes established to avoid inheritance tax.  These Regulations are set out in Statutory Instrument 2017 No. 1172 entitled ‘The Inheritance Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2017’.  The rules come into force on 1 April 2018.

Under the revised rules, a scheme will be notifiable for IHT purposes if it falls within the description in Regulation 4.  An arrangement will be covered by Regulation 4 ‘if it would be reasonable to expect an informed observer (having studied the arrangements and having regard to all relevant circumstances) to conclude that conditions 1 and 2 are met’.

In this respect:

Condition 1 is that the main purpose, or one of the main purposes, of the arrangement is to enable a person to obtain one or more of the following IHT advantages:

  • the avoidance or reduction of an entry charge on a relevant property trust
  • the avoidance or a reduction in specified IHT charges under certain sections of the IHT Act 1984 (mainly relating to relevant property trusts)
  • the avoidance or a reduction in an IHT charge under the gift with reservation rules (in cases where the POAT charge does not apply)
  • a reduction in a person’s taxable estate with no corresponding lifetime transfer.

Condition 2 is that the arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.

It is important to note that certain arrangements are excepted from the new provisions.  Most notably if they:

  • implement a proposal which has been implemented by related arrangements; and
  • are substantially the same as the related arrangements

In this requirement “related arrangements” are defined as arrangements which

  • were entered into before 1 April 2018; and
  • at the time they were entered into, accorded with established practice of which HMRC had indicated its acceptance.

These new Regulations adopt a much broader approach to what was previously proposed.  In particular, there is now no specific exclusion from the DOTAS Regulations for loan trusts, discounted gift trusts and reversionary interest trusts.

However, it is probably reasonable to take the view that all of these 3 types of scheme are examples of arrangements that were generally acceptable before 1 April 2018 and would have been acceptable under established HMRC practice.

This would be on the basis that HMRC is aware of these arrangements and, indeed, in the case of discounted gift trusts, has issued tables of discounted values.

It is hoped that the precise position will be clarified with HMRC in the near future.

The registration of clients’ trusts or estates

(AF1, JO2, RO3)

HMRC has updated its guidance on how to register a trust. The guidance also explains more about classes of beneficiaries and states that you need an agent services account before being able to register.

Clients who have trusts with a new tax liability must register by 5 October of the tax year after either:

  • the trust has been set up
  • when it starts to make income and gains, if this is later.

Where the trust was set up between 6 April 2016 and 5 April 2017 it must be registered by 5 January 2018.

The guidance outlines the information that is required to register a trust.  For example, the name of the trust, the date it was set up, where it is resident, information on the assets held within the trust etc...and it also includes information on the process to follow. Once the trust has been registered, a unique self-assessment taxpayer reference will be issued which can then be used to complete any returns.

With regard to beneficiaries, it is possible to use classes of beneficiary, provided they have not received any financial benefit from the trust, rather than naming them individually. However, once they receive a financial benefit they must be individually named.

HMRC has also updated it guidance in relation to the registration of estates, which is broadly similar and can be found here.

Trusts, shams and attempts to avoid creditors

(AF1, JO2, RO3)

The recent decision in JSC Mezhdunarodniy Promyshlenniy Bank and another v Pugachev and others [2017] EWHC 2426 (Ch) shows the willingness of the Courts to strike down sham trusts 

It is well known that for a trust to be legally effective the settlor must divest himself of the beneficial ownership of the trust property. This is especially important where the settlor is one of the trust beneficiaries or has reserved extensive powers for himself. If the trustees do not assume proper control over the trust property and simply follow the settlor’s instructions, the chances are the trust will be declared to be a sham or a mere illusion (there is only a subtle difference in law between the two). There have been a number of cases where a trust has been declared to be a sham and therefore not valid.  As for trying to avoid creditors, even if a trust is not a sham, there are provisions in the Insolvency Act 1986 which allow a trust to be set aside if created with the intention to defraud creditors (regardless of when it was set up).

The Pugachev decision is interesting as it comes soon after the Panama Papers and Paradise Papers and the considerable publicity given recently to tax avoidance involving hiding assets offshore. It is also interesting because the claimants based their case on three separate arguments so as to cover all angles. In the event they won on all three counts.

The facts

The facts of the case were as follows:

Mr Sergei Pugachev, a Russian national, founded Mezhprom Bank in Russia in 1992. Following the 2008 financial crisis the bank suffered losses and was ultimately declared insolvent in 2010. The Russian state agency, Deposit Insurance Agency (DIA), was appointed as liquidator.

Between 2011 and 2013, Mr Pugachev settled over US $95 million of his assets in five New Zealand discretionary trusts.

Although the majority of the assets had notionally been settled on trust by Mr Pugachev’s son, Viktor, the assets originated from Mr Pugachev (indeed the judge decided that Mr Pugachev should be treated as the settlor of the trusts as Viktor was in effect acting as his nominee).

The trusts held assets largely for the benefit of Mr Pugachev, his partner and their minor children.

The trusts were governed by New Zealand law and were set up with the assistance of a New Zealand solicitor. The solicitor and his wife were directors of the companies that acted as trustees.

Mr Pugachev was the protector of each of the trusts, with Viktor named as successor protector. The trust deeds provided that Mr Pugachev’s protectorship would automatically terminate in circumstances where he was “under a disability”, a term which included when Mr Pugachev was subject to the claims of creditors. The protector’s powers were unusually extensive and included powers to:

  • veto the distribution of income or capital from the trusts;
  • veto the investment of the trust funds;
  • veto the removal of beneficiaries;
  • veto any variation to the trust deeds;
  • veto the release or revocation of any power granted to the trustees;
  • veto the early termination of the trust period;
  • appoint and remove trustees, with or without cause;
  • add further beneficiaries; and
  • veto an amendment to the trusts by the trustees.

Back in Russia the DIA alleged that Mr Pugachev had misappropriated Mezhprom Bank assets prior to the liquidation and in 2015 the Russian Court gave judgment against Mr Pugachev in the sum of approximately US $1 billion. Mr Pugachev fled Russia and moved to England. (Hence the case was heard in the English Court).

The DIA began enforcement proceedings in England and obtained a GBP £1.1 billion worldwide freezing order against Mr Pugachev's assets. He was also sentenced to two years' imprisonment for contempt of Court which he has not served as he fled to France.

The argument

Mezhprom Bank and the DIA (the claimants), sought to "bust the trusts" and enforce the judgement against the assets of the trusts on three separate bases:

  1. The trusts were illusory and of no substance because the trust deeds, properly construed, did not divest Mr Pugachev of his beneficial ownership in the trust property;
  1. Alternatively, the trusts were shams and of no effect because the common intention was that the assets would continue to belong to Mr Pugachev; and
  1. In the alternative to the first two claims, if the trusts were effective and divested Mr Pugachev of ownership of assets, they should be set aside under section 423 of the Insolvency Act 1986 because the intention was to prejudice the interests of Mr Pugachev's creditors.

The judgment

As indicated above the High Court agreed with all three arguments.

Re: Illusory trusts

The Court concluded that these were bare "illusory" trusts. Mr Pugachev was the settlor, discretionary beneficiary and protector of the trusts. He retained extensive control because he could dismiss the trustees and veto how they exercised their powers, and consequently retained beneficial ownership of the assets he put into the trust.

Re: Sham

The Court decided that it was a sophisticated and subtle form of sham. The intention was for Mr Pugachev to retain ultimate control, but to hide this control from third parties by giving a false impression that he had only limited powers as protector. The second protector, Viktor, acted on his father's instructions and whilst the other beneficiaries (his children) would benefit from the trust, they only did so through the decisions of Mr Pugachev. In addition, the New Zealand solicitor who acted as director of each of the trustee companies had no independent will from that of Mr Pugachev.

Re: Section 423

The Court found that if the trust deeds did divest Mr Pugachev of his beneficial interests in the assets, then it was with the purpose of hiding his control of the assets in the trusts from his creditors and so should be set aside.

Given especially the extensive powers that Mr Pugachev reserved for himself it is not really surprising that the Court found against him, especially given the specific facts and circumstances, which are probably not that common. However, there are some important lessons here for all  potential settlors, namely that the  retention of excessive control over a trust arrangement may lead to successful claims by third parties that the settlor has never successfully divested himself of the beneficial ownership of  the relevant assets.

Review of charity taxation

(AF4, FA7, LP2, RO2)

Changes have been proposed to the rules on the Gift Aid donor benefits while a special Commission on charity taxation has been set up to undertake a full review of the charity tax system.

Last November the National Council for Voluntary Organisations, a body representing charities and other non-profit bodies, set up a commission to review the charity tax system. It aims to develop recommendations to government on the effectiveness of existing charitable reliefs, reporting within 18 months. The Treasury and HMRC will join the commission as observers.

Sir Nicholas Montagu, chair of the Charity Tax commission, said:

“The government’s last comprehensive review of the charity tax system was in 1997. Since then, the charity sector and the environment in which it operates have evolved dramatically. Charities have come to play a much bigger role, for example in public service delivery, and they operate on new and different business models.

My aspiration is for the commission’s proposals to inform future changes to the tax system such that it can continue to support charities’ work as effectively as possible. I look forward to drawing up pragmatic proposals that will appropriately balance the need for a fair and efficient tax system with the important role that we want charities to continue to play in society.”

Separately, following an announcement in the November Budget (and following the consultation that has been taking place since 2016) the Government has announced that it will simplify the donor benefit rules for charities that claim Gift Aid tax relief on donations.          

Current system

The current donor benefit limits (the relevant value test) is a set of monetary thresholds that determines the value of benefits that charities may give to donors as a consequence of a donation and still claim Gift Aid on that donation. These are:

  • For donations up to £100, the value of the benefit can equate to a total of 25% of the donation.
  • For donations between £100 and £1,000, the value of benefits is capped at £25.
  • For donations over £1,000, the value of the benefit can equate to a total of 5% of the donation, up to a maximum annual benefit value of £2,500.

New system to be introduced

Under the new limits, the benefit threshold for the first £100 of the donation will remain at 25% of the amount of the donation. For larger donations, charities can offer an additional benefit to donors, up to 5% of the amount of the donation that exceeds £100.  The total value of the benefit that a donor can receive remains at £2,500.

It is intended that donors should be no worse off in terms of the benefits that the charities can offer the donor (or persons connected with the donor).

In addition, the government has also announced that it will bring into legislation the four extra statutory concessions that currently operate in relation to the donor benefit rules.

Legislation to make all the changes will be introduced in Finance Bill 2018-2019 and will come into effect from 6 April 2019. Draft legislation will be published in 2018.

At Technical Connection we receive an increasing number of enquiries related to philanthropy. Often this relates to a charity being set up by a wealthy individual and some of the questions relate to what benefits, if any, the donor (or persons connected with the donor) can receive from their charity.

There are rules on "tainted donations" (previously the ‘substantial donor rules’). The tainted charity donation rules are aimed at assessing whether a financial advantage has been obtained by the donor, or someone connected to them, as a consequence of donation arrangements. A donor may lose all available tax reliefs if a donation they make is connected to arrangements between the donor and the charity the main purpose of which is to procure a financial advantage to the donor.
It is essential to remember that all charities have to demonstrate that they are acting for the public benefit which means for a sufficient section of the public. Clearly that cannot be for the benefit of the family of the donors. This is particularly relevant where a private charitable trust is contemplated.

Intergenerational inheritance

(AF1, RO3)

Financial advisers with an eye to maintaining and building the long-term value in their businesses will be very clear about the age of their current client base and will have a strategy for maintaining , protecting and increasing the advice fee flow and assets under management/influence that their current clients generate.  But they will also have an eye to the future.  People (especially richer people – sounds harsh, but generally it’s true) are living longer and will need advice for longer. Good news for both of the stated commercial objectives. And the decisions that have to be made related to the increasing number of choices that exist in relation to their finances are increasing. 

All of the above augurs well for the long-term future need for informed financial advice for existing clients.  Life is getting more complicated and so should the value attributed to good advice.  The positive difference in the client’s net return after advice costs represents the “advice alpha”.  This “alpha” will stem from the better decisions and greater engagement with finances that having a good adviser relationship delivers. Positive engagement and making the right choices. Win/win.

Aside from these “positives” most agree that being able to clearly prove value will be even more important in the new MiFID II world.

But there are also some risks for advisers with older/ageing client bases. Longevity is one thing but, ultimately, we are all going to die. Clients are not excluded from this inevitability. So, for a business that is not going to gradually go out of existence with its existing client base, a strategy for attracting new, ideally younger, clients will be important to complement the retention and servicing of existing clients. But the way in which younger clients can be best engaged needs a bit of thinking about. For a number of advisers, perhaps the most obvious category of “younger client” is made up of the children and grandchildren of existing clients.

Much has been, and will continue to be, written about the “preferences of millennials” in relation to the engagement with and management of their finances.  Some form of on line or “robo” strategy would seem to be important as a means of initial engagement that speaks in the way in which younger people, generally speaking, prefer to be informed/make decisions/transact.

Without some form of appropriate and relevant relationship at a relatively early stage the delivery of face-to-face/more traditional advice when it is needed is much less likely.  A number of traditional advice and wealth management businesses appear to be recognising this in their acquisition and capability-development strategies.

With these components in place, or being developed, businesses may then be well placed to capitalise on what may be a flow of funds to invest through inheritance.

A recent study published by the Resolution Foundation found that the amount of money passed on through inheritance each year has doubled over the past two decades, and will more than double again over the next 20 years as wealthy baby boomers pass away. Interestingly, though, the estimate – based on the age and life expectancy of their parents – is that the average age to inherit will be 61. And, of course, there is also the “cost of care” factor to take account of as a risk to this projection of increased inheritance.

Subject to this risk, though, property and pensions seem to be the main drivers of this expected inheritance flow.  According to Resolution, home ownership rates increased rapidly for people born before, during and after the Second World War, peaking at around 75 per cent among baby boomers born between 1946 and 1965 – who were also the main beneficiaries of generous defined benefit pension schemes.  This group now holds more than half of all the wealth in Britain…and this has (and continues to be) a key target group for financial advisers.

Each successive generation following those born in 1955 has, however, accumulated less wealth by a given age than their predecessors did at the same age. Many of you reading this will associate with this stat….either positively or negatively.

According to a separate Resolution report, less than a third of millennials owned their own home at the age of 30, compared with around 55 per cent of baby boomers at the same age.  Many of you with grown-up children will associate with this – and the associated trend of parental provision of deposit and/or help with paying or guaranteeing a mortgage for their kids.

However, the children of baby boomers appear to be more likely to benefit from an inheritance than their predecessors, and that inheritance is likely to be larger.  If that turns out to be true, having a prior relationship with these inheritors will be pretty essential I’d say.

The position on the death of the sole owner of a capital redemption policy

(AF1, AF4, FA7, LP2, RO2, RO3)

We were recently asked to comment on the tax position where the sole owner of an offshore capital redemption policy dies and the proceeds pass to a beneficiary under the terms of the deceased owner’s Will.

The question:

The sole owner of an offshore capital redemption bond (CRB) recently died testate.  The executors of the estate wish to understand the income tax implications if they encash the CRB and pass the proceeds to the beneficiary entitled to the residue of the estate under the Will.

Our response:

If at the time of surrender the administration of the estate has not yet been completed (the solicitors dealing with the estate will confirm or otherwise) the executors hold the rights in the CRB.

On encashment of an offshore CRB by the executors the chargeable event gain would be subject to a 20% income tax charge on the executors. This is because in the case of an offshore CRB the gain is treated as income of the executors and therefore taxed at the 20% basic rate. 

On distribution of the proceeds to the beneficiary, the chargeable event gain would be treated as estate income in the hands of the beneficiary because the income of executors forms part of the aggregate income of the estate.  The executors should provide the beneficiary with a R185 (Estate Income) form which sets out the source of the income and confirms the amount of tax paid on it by the executors.  This will mean the chargeable event gain will be taxed at 40%/45% if the beneficiary is a higher/additional rate taxpayer and HMRC will allow the beneficiary a 20% tax credit for the tax suffered by the executors.  As the gain is treated as estate income, top-slicing relief would not be available. 

For completeness, the value of the bond would have been an asset of the deceased so would form part of their estate for inheritance tax purposes. In addition, a better tax outcome may have been possible had the executors vested the CRB in the beneficiary.  Had this been done any future chargeable event gain(s) would be assessed to tax on the beneficiary in their personal capacity and with the benefit of top-slicing relief (if relevant).

National Insurance fund running out of money?

(AF1, RO3)

Recent press reports have suggested that the National Insurance Fund will run out of money by 2032. The truth is rather less straightforward.

Talk of the National Insurance Fund (NIF) running out of cash is nothing new. On this occasion what seems to have prompted the doom-mongering is a blog from the Government Actuary’s Department (GAD) on the NIF’s future issued in December. This in turn was based on the Government Actuary’s Quinquennial Review of the National Insurance Fund as at April 2015, which emerged last October.

Let us begin by making clear what the NIF is not. It is not a fund designed to finance benefits over the long term from contributions and investment returns in the way that a typical final salary pension scheme fund operates. When it started life in 1948 it was such a real fund, but these days it is best described as an accounting element in the Treasury’s balance sheet.

The following formula broadly explains how the NIF changes throughout a financial year:


NIF at start of year


NICs received during year


NIC allocation to NHS funding


Interest earned during year on NIF brought forward


Treasury Grant


State pension and other benefit payments* during year


NIF carried forward to next year

* The main benefits are: Incapacity Benefit/Employment and Support Allowance (contributory only), Bereavement Benefits, Jobseeker’s Allowance             (contributory only) and Maternity Allowance,

In practice, the cash inflows of NICs and outflows of benefit payments and NHS allocation mean the NIF is more a conduit for money in transit than an accumulating fund. HMRC data shows in 2016/17 for Great Britain there were inflows (after the NHS allocation) of £98.3bn and outflows of £99.5bn, producing a net reduction of £1.2bn in the NIF to £21.9bn. The NIF has been trending downwards for some while: at the beginning of 2010/11 it was £48.8bn.

The NIF’s decline in 2016/17 was somewhat illusory. In 2015/16 there was a Treasury Grant of £9.6bn paid into the NIF, but in the following year there was none. The Treasury Grant is a variable top-up payment from general taxation and is limited by the Social Security Act 1993 to 17% of total benefits payable. In parallel the GAD recommends that the minimum size of the NIF should be 1/6th (16.7%) of annual payments to provide a reserve for short-term fluctuations, eg arising from a recession.

The decline in the Treasury Grant to nil in 2016/17 was down mainly to a jump in Class 1 National Insurance contributions following the end of defined contribution contracting out and the related NIC rebates. The phasing in of increased State Pension Age (SPA) for women also helped to lower the overall increase in pension payments (92% of all outflows in the year). The windfall from the demise of contracting out and increasing SPA (including the move to a common SPA of 66 by the end of 2020) mean that the GAD projects a rise in the NIF to over £45bn by 2024/25, assuming the Treasury Grant remains at zero. Thereafter a decline sets in which is only marginally slowed by the SPA increase to 67 between 2026 and 2028. On the GAD’s calculations, the NIF will be exhausted by 2032.  

To keep the GAD’s 1/6th reserve will therefore need the Treasury Grant to be reinstated. However, even that will not be enough to keep the NIF in the black by 2040, once the next SPA rise to 68 (2037-2039) is over unless the 17% statutory ceiling on the Treasury Grant is changed. At this point the question of whether NICs should be raised enters the GAD considerations. Any increase is focused on Class 1 NICs, which accounted for over 96% of all NIC income to the NIF in 2016/17. 

The current Class 1 total rate is 25.8%, of which 3.95% is allocated to NHS Funding, leaving 21.85% to enter the NIF. The GAD calculates that “Assuming no other financing was provided, at the end of the projection period [2080], the Class 1 NIC rate that would be required to cover benefit expenditure is projected to be around 28%.” This was translated in the GAD blog to “around 5% higher than the current rates”.

As ever with long-term projections, there are considerable uncertainties. The fact that the crunch is some years off may encourage political procrastination, particularly when the inter-related issue of NHS funding is more pressing. The ‘obvious’ solution of raising NICs would exacerbate intergenerational inequity. The time may be nearing (post-election, naturally) when NIC and income tax is combined and applied to all income, not just earnings.


The November inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for November showed an annual rate of 3.1%, up 0.1% on the previous month and its highest level since March 2012. Across the month prices rose by 0.3% against 0.2% between October 2016 and November 2016. The market consensus had been for a 3.0% annual rate, the same as in September and October. The extra 0.1% was enough to force an exchange of letters between the Governor/Chancellor letter, although at the time of writing no correspondence had appeared on either the Bank’s or the Treasury’s websites. The CPI/RPI gap narrowed by 0.2% to 0.8%, with the RPI annual rate dropping from 4.0% to 3.9%. Over the month, the RPI was up 0.2%.

The ONS’s favoured CPIH index was flat, staying at 2.8% for the third successive month. The fact that on an annual basis the RPI went down, the CPIH remained unchanged and the CPI rose reflects the different nature of the three indices (and the different calculation basis for RPI from the CPI variants). The ONS notes the following significant factors across the month:

Transport:  Overall this category supplied the largest upward contribution to the headline rate with prices rising by 0.1% between October and November this year compared with a fall of 0.3% between the same two months a year ago. The main effect came from air fares, which fell by 10.4% this year compared with 13.4% a year ago. This probably reflects the demise of Monarch and Ryanair’s rota problems.

Recreational and culture: There was a smaller upward effect which came from recreation and culture, with prices of games, toys and hobbies rising between October

and November this year by more than a year ago. Within the broader recreation and culture category, there was a small offsetting downward effect from data processing equipment, with prices falling this year but rising in 2016, particularly for PC peripherals.

Miscellaneous goods and services: The main upward contributions were partially offset by a downward effect from miscellaneous goods and services, where prices fell by 0.1% this year compared with a rise of 0.2% a year ago. The overall contribution comprised a range of small effects coming from areas such as other personal effects, other financial services and jewellery, clocks and watches.

The disparity between the CPIH at 2.8% and CPI at 3.1% is largely down to the “H”. Owner occupiers housing costs (the “H”) are over a sixth of the CPIH and have seen a falling level of annual inflation in recent months, now down to 1.5%.

In seven of the twelve broad CPI categories, annual inflation increased, while four categories posted a decline. Two categories – alcoholic drinks and beverages and transport – now have an annual inflation rate of 4.5%, while food and non-alcoholic beverages inflation is running at 4.1%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was unchanged for the fourth month at 2.7%. Goods inflation was also flat at 3.3%, while services inflation edged up 0.1% to 2.8%.

Producer price inflation (PPI) numbers were up, which reflects rising fuel and material costs. The input PPI figure was 2.5% higher than October at 7.3%. Output price (aka factory gate price) inflation also increased, by 0.2% to 3.0%.

Last month there had been a general belief that inflation had peaked and a gentle downward move would begin. This scenario is probably still the case, however significant that 0.1% may be for the Bank of England. Even so, the uptick in services inflation might be a sign that the drift down will be too gentle for the Bank, which could consider interest rate increases earlier than the end of 2018 date previously assumed by the market.

Government borrowing lower than expected in November

(AF4, FA7, LP2, RO2)

The government borrowing figures for November were recently released, giving us a view of the UK’s finances two thirds of the way through the current financial year. As might be expected, the picture that emerges is pretty much in line with the OBR’s projections issued alongside the Autumn Budget. 

The statistics for the month of November alone revealed a deficit of £8.7bn against £8.9bn for last year and market expectations of around £9bn. That £8.7bn figure marked the sixth month in 2017/18 that borrowing was below the 2016/17 level. It was also the lowest borrowing for November since 2007. 

For the first eight months of 2017/18 PSNB amounted to £48.1bn, down £3.1bn on 2016/17, and the lowest year-to-date sum at this stage since 2007. Income and capital gains tax receipts were up 6.2% over November 2016, VAT payments up 3.1% and NIC inflows up 3.6%. On the expenditure side, government interest payments amounted to £4.6bn, 12.5% higher than a year ago. The OBR attributes the increase, which was less than last month’s 25%, to the impact of RPI inflation on interest accrual under index-linked gilts.

If the borrowing pattern were to follow the 2016/17 experience, the November figures would suggest an outturn for 2017/18 about £2.8bn below the 2016/17 total. However, in 2016/17 the final four months produced a net inflow to the Treasury of £5.6bn, primarily due to a bumper January number stemming from tax on dividends brought forward into 2015/16 to avoid higher tax rates.  The OBR expects self assessment receipts to be £3.1bn lower this year without that behavioural effect. Thus, its November Budget estimate of a deficit of £49.9bn for 2017/18 (up £4.4bn on the revised 2016/17 number) looks relatively easily achievable. 

The calculation of this month’s borrowing numbers has, as usual, been subject to several statistical rejigs. On this occasion, there was one major change: the reclassification of English housing associations from the public to the private sector. That may sound arcane, but it removed £65.5bn of debt from the Treasury’s balance sheet. Only another £1,547.5bn to go…

A poor year for UK shares – in relative terms

(AF4, FA7, LP2, RO2)

The FTSE 100 ended 2017 over 7% up from where it started as this year’s rather late Christmas rally gave a terminal boost to what would have been a lacklustre performance. It would have been a brave investor who forecast such a result at the beginning of the year in the wake of the Brexit vote or even in early June, after the surprise General Election result.

In 2017 the Footsie underperformed its less well known All-Share counterpart. Whereas in 2016 the FTSE 100’s bias towards large multinational companies helped its performance as foreign earnings became more valuable in sterling terms, the reverse has happened this year as sterling has strengthened against the dollar. This shows up when other UK market indices are examined, as the table below shows.


2017 Change


FTSE 100


Oil & gas and utilities hold Index back

FTSE 250


UK focused cos outperform Footsie for once

FTSE Small Cap


Small caps outperform mid cap and big-cap

FTSE 350 Higher Yield


Value-investing went out of favour

FTSE 350 Lower Yield


Investors were anxious to find growth

FTSE All-Share


Outperformed Footsie due to mid/small caps

FTSE Basic Materials


Top sector: Continued commodity price recovery

FTSE Utilities


Bottom sector: Political woes from all sides

Over the year, the dividend yield on the FTSE All-Share rose from 3.48% to 3.59%, implying dividend growth of 12.8%. However, this figure needs to be treated with caution once again. As the Capita quarterly dividend numbers have shown, in the first part of the year the dividend rise (in sterling terms) was down to the weakness of the pound against the dollar and euro. That is now unwinding: by the end of the year sterling had risen by 10.6% against the dollar and fallen only 3.4% against the euro, having rallied from a gradual summer decline. 

The rise in the equity dividend yield contrasted with no change in 10 year gilt yields which ended 2017 offering the same 1.24% with which they started the year. Two-year gilt yields, more sensitive to base rate prospects than their longer brethren, rose from 0.11% to 0.49%.

The performance of the UK equity market was well below the global average. In sterling terms, the MSCI World Index was up 20.1%. That was not simply the buoyant USA market (just over half the World Index by weight and up 19.4%, as measured by the S&P 500): the MSCI World ex USA was up 21.0%.

In the emerging markets, returns of around 20% were also the order of the day. The MSCI Emerging Markets Index was up 22.72% in sterling terms. The Shanghai Composite ended up 6.6% over the year, one of the poorest performances.

The Footsie closed 2017 at an all-time high of 7687.77, having not closed below 7,100 all year. Whether 2018 can be as quiet is hard to tell: the absence of volatility is an increasing concern for some market watchers.

A dull year for bonds

(AF4, FA7, LP2, RO2)

UK shares had a reasonable year, but bonds offered relatively unexciting returns, particularly at the short end of the market.

2016 was a good year for UK fixed interest investment, with sector average total returns for the IA’s main bond categories around 10% and the IA index-linked sector returning over 25%. 2017 presented a rather different picture as yields changed little, meaning that interest income, rather than capital gain, formed the bulk of returns.








2 year benchmark gilt




5 year benchmark gilt




10 year benchmark gilt




30 year benchmark gilt




1.875% Treas index-link 2022*




1.25% Treas index-link 2055*




Markit gilts 10 year +




Markit AA 10 year +




Markit BBB 10 year +




Markit Corporates 10 year +




* Real yields

The table highlights three factors which were themes of the year:

  • Short-term bond yields increased in response to the Bank of England’s first moves toward bringing rates back to “normal”, whatever that might mean these days. The market had generally not expected a base rate rise in 2017 and at one point a further cut seemed possible.
  • A corollary of rising short-term yields and relatively static long-term yields is that the yield curve has flattened, a pattern more apparent in the USA during 2017. In the past flattening yield curves have been precursors of recession.
  • The spread between differently rated bonds has narrowed, as illustrated by the Markit indices. This is the result of the continued hunt for yield which has seen investors take on higher risk to obtain better yields.

The performance of the various IA sterling fixed interest sectors over 2017 echoes these factors:

IMA Sector

2017 Total Return

Sterling High Yield


Sterling Strategic Bond


Sterling Corporate Bond


UK Index-linked Gilts


UK Gilts


Source: Trustnet

The UK was not alone in experiencing a year of rising short-term yields. In the Eurozone many government bond yields remained in negative territory, forced down by the European Central Bank’s bond-buying activities. However, the Bank’s spending will ease off in 2018 and across the board yields are no longer as negative or miniscule as they were a year ago. For instance, the German 5-year bond started the year with a yield of -0.30% but ended it at -0.10%, while the 10 year bond’s yield has moved out from +0.09% to +0.42%.  US yields rose at short durations in response to the Federal Reserve’s three rate rises, with the possibility of another trio to come in 2018. The 2-year Treasury benchmark rose from 1.17% to 1.90% over the year, but the 10-year bond yield was down 0.02% at 2.43%, producing the flattening yield curve mentioned earlier.

The 30 year plus bull market in bonds has just about survived another year. How many more it has left is as imponderable as it was 12 months ago – but the end must, by definition, be nearer.

An interesting insight into VCT investors

(AF4, FA7, LP2, RO2)

In the days before Christmas, HMRC issued some interesting statistics showing the distribution of investment levels in VCTs over recent years. They do not quite comply with the 80/20 principle, but the numbers are not far off for 2015/16, as the table below shows:


Size of investment

Upper Limit £



Amount of




% of


Sum £m

% of























































































* Numbers rounded

Working backwards, 80% of the total raised by VCTs came from just under one-third of the investors – those investing more than £25,000. The biggest investors, those investing between £150,000 - £200,000, on average invested £195,800 and accounted over a quarter of total funds raised.

As with other income tax statistics, the numbers are skewed towards a very small top end group.


April changes

(AF3, FA2, JO5, RO4, RO8)

Ros Altman explained at last year’s Technical Connection Conference, the reason for moving the auto-enrolment contribution increases from October to the following April was to tie in with tax and NIC changes. The hope was that the usual indexation process for the personal allowance, income tax and NIC bands would ease the pain of higher contributions (or at least muddy the waters). And you thought it was just George Osborne scrimping a little saving on the cost of pension contribution tax relief…

The press is now latching onto the forthcoming rise in the employee contribution rate from 1% to 3% (assuming the employer pays the minimum required). However, once you add in the tax and NIC changes announced in the Budget, the picture is rather more nuanced than the headlines suggest. Here are three (non-Scottish) examples that make the point.

Employee earning £26,000 a year




Basic rate

(£26,000 - £11,500) @ 20% =             £2,900.00

(£26,000 - £11,850) @ 20% =             £2,830.00

NICs 12%

(£26,000-£8,164) @ 12% = £2,140.32

(£26,000-£8,424) @ 12% = £2,109.12

AE (20% relief)

(£26,000-£8,164) @ 0.8%  = £142.69

(£26000-£8424) @ 2.4% =  £421.82

Total deductions



Change in net pay


-£177.93 (-£3.42 pw)

Employee earning £46,350 a year




Basic rate

(£45,000 - £11,500) @ 20% =             £6,700.00

(£46,350 - £11,850) @ 20% =             £6,900.00

Higher rate

(£46,350 - £45,000) @ 40% =  £540.00


NICs 12%

(£45,000-£8,164) @ 12% = £4,420.32

(£46,350-£8,424) @ 12% = £4,551.12

NICs 2%

(£46,350 - £45,000) @ 2% =  £27.00


AE (net of tax relief )

(£45,000-£8,164) @ 0.6%  = £221.02

(£46,350-£8,424) @ 2.4%  = £910.22

Total deductions



Change in net pay


-£453.00 (-£8.71 pw)

Employee earning £50,000 a year




Basic rate

(£45,000 - £11,500) @ 20% =             £6,700.00

(£46,350 - £11,850) @ 20% =             £6,900.00

Higher rate

(£50,000 - £45,000) @ 40% =  £2,000.00

(£50,000 - £46,350) @ 40% =  £1,460.00

NICs 12%

(£45,000-£8,164) @ 12% = £4,420.32

(£46,350-£8,424) @ 12% = £4,551.12

NICs 2%

(£50,000 - £45,000) @ 2% =  £100.00

(£50,000 - £46,350) @ 2% =  £73.00

AE (net of 40% tax relief )

(£45,000-£8,164) @ 0.6%  = £221.02

(£46,350-£8,424) @ 1.8%  = £682.67

Total deductions



Change in net pay


-£225.45 (-£4.34 pw)

The individual earning £46,350 suffers the biggest loss because:

  • Their gross contribution rate triples;
  • They lose higher rate tax relief on all their pension contributions because they cease (just) to be higher rate taxpayers;
  • They are caught by the full increase in the AE contribution upper limit of £1,350; and
  • They suffer the same £1,350 increase in the upper earnings limit for full rate (12%) NICs.

Those further up the earnings scale do not suffer as much because of the benefit of higher rate relief on contributions.

Cp18/1 - aligning the financial services compensation scheme levy time period

(AF3, FA2, JO5, RO4, RO8)

Following consultation, including with the Financial Services Compensation Scheme (FSCS), the FCA recently made changes to the FSCS funding arrangements as part of a broader review of FSCS funding.

One of the changes was to align the FSCS compensation levy year with the financial year. The FCA have since become aware that a practical implication of this change is a different allocation of costs to the life and pensions intermediation class which was not intended. They have therefore decided to consult on transitional provisions which delay the effect of this.

The provisions will ensure that the life and pensions intermediation class will continue to benefit from support from the retail pool over the next few months, consistent with the FSCS’s public messaging on this.

The consultation includes transitional provisions to:

  • allow the 2017/18 compensation levy year to run to its original time frame;
  • require the FSCS to run a nine-month compensation levy year for the period 1 July 2018 to 31 March 2019 with pro-rated class thresholds; and
  • delay the introduction of arrangements for firms who pay fees on account by one year until 1 April 2019.

In addition the consultation includes minor clarifications to the new rule about levy paying arrangements for firms who pay fees on account.

QROPS legislation update

(AF3, FA2, JO5, RO4, RO8)

The Registered Pension Schemes and Overseas Pension Schemes (miscellaneous amendments) Regulations 2018 have been laid.

The Regulations make changes to the information which a scheme administrator of a registered pension scheme is required to report to HMRC as a consequence of the reduced level of the money purchase annual allowance (“MPAA”) from £10,000 to £4,000 with effect from the tax year 2017-18. The changes, in line with UK schemes, are also reflected in the information that the scheme must give to the member when the MPAA has been triggered.

It also introduces a new reportable event where a scheme ceases to be or becomes a Master Trust scheme.


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.