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My PFS - Technical news - 23/06/2015

Publication date:

22 June 2015

Last updated:

06 July 2018


Technical Connection

Personal Finance Society news update from 3 June 2015 -  16 June 2015 on taxation, retirement planning, and investments.

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Taxation and Trusts

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Retirement planning

Taxation and trusts

Court revokes transfer into trust which resulted in inheritance tax charges

(AF1, RO3, JO2, JO3)

In the recent case of Freedman v Freedman 2015 (EWHC 1457 Ch) the England and Wales High Court agreed to set aside a father's gift of a house into trust for his daughter after it triggered an unexpected inheritance tax (IHT) charge of £156,000.

The brief facts of the case were as follows:

In 2001, the father lent his daughter £279,950 to buy a property for her to live in with her child. In around 2004/2005, when her relationship with her then partner ended, her father agreed to forgo the loan and the charge was removed.

Then, in 2010, the daughter asked her father to lend her £530,000 to buy a house for her and her child to live in while she was selling her previous home. The loan was agreed by her father on the condition that it would be repaid.

At the time, her father suggested that both properties should be placed in trust to protect them from any claim from her previous partner (the father of her child) or any future partners . However, the father felt that giving money to his daughter directly was unfair to his other children, so he decided to appoint his other son and daughter as discretionary beneficiaries under the terms of the trust. The daughter, without taking any advice of her own, agreed to this and on this basis the trust was set up.

The father had, however, taken advice at the time, but the adviser, his solicitor, failed to realise that the rules introduced in Finance Act 2006 meant that the gift into trust would be a chargeable lifetime transfer for IHT purposes. On this basis, the transfer into trust triggered an immediate 20% entry charge and could also be subject to future exit and periodic charges which effectively meant that the daughter would not be able to repay the loan to her father.

When this came to light, the family sought to have the settlement revoked on the grounds of equitable mistake. HMRC opposed this and sought payment of the tax charge.

At the hearing both the family and HMRC based their cases on the Supreme Court's decision in Pitt v Holt and Futter v Futter (2013 UKSC 26).

In his judgment, Lord Walker observed that in Pitt v. Holt "a court might think it right to refuse relief in some cases of artificial tax avoidance, either because the claimants must be taken to have accepted the risk that the scheme would prove ineffective, or on the ground that discretionary relief should be refused on grounds of public policy."

Therefore, an important factor in this case was whether or not the trust had been set up to avoid IHT. The evidence given by the family members showed that the trust had not been set up for tax-planning purposes; instead it had been set up to protect the properties from any claims that might be made on them by the daughter's previous (or future) partner.

HMRC argued that the daughter's failure to check her father's legal advice implied that there had been no mistake in creating the trust. However, the High Court Judge disagreed on the basis that the daughter had read the legal advice and based on that advice she broadly understood that there would be no adverse tax consequences for her in entering into the settlement. Accordingly, it seemed his daughter made a distinct and serious mistake of the kind described by Lord Walker in the cases of Pitt & Futter.

The settlement was not created for tax avoidance reasons but to protect the interests of the beneficiaries. Taking the matter in the round and based on the facts in this case, it was therefore appropriate for the settlement to be set aside on the grounds of equitable mistake.

This recent case comes as good news as it shows that the Court is willing to set aside a trust in the event that the taxpayer can show that they have made a genuine mistake and/or has been incorrectly advised as to the tax and legal consequences of the transaction. It is, however, important to note that this is not the same as the situation where a taxpayer, who has entered into a tax avoidance scheme, suffers disappointment because the scheme fails to work as intended .

Class 4 National Insurance Contributions

(AF1, AF2, R03, JO3)

The Queen's Speech may have indicated that NIC rates were frozen, but the Treasury has its doubts...

In the recent Queen's Speech it was stated that "Legislation will be brought forward to ensure … there are no rises in Income Tax rates, Value Added Tax or National Insurance for the next 5 years". It has now emerged that this statement has the same robustness as George Bush's memorable line, "Read my lips, no new taxes".

We have been musing how no change in NIC rates would be squared with the announcement in the March Budget that "…the government will abolish Class 2 NICs in the next Parliament and will reform Class 4 to introduce a new contributory benefit test" . It now transpires that when questioned by BBC Radio 4 Moneybox, the Treasury was unable to confirm that Class 4 fell within the ambit of no increases to NICs legislation.

Class 2 is small beer in terms of what it brings to the Exchequer - about £420m a year - but every little helps when the target is a £12bn reduction in spending. To complicate matters further, there is the arrival of the single tier pension in 2016/17. This will mean increased state pension benefits for the self-employed, who are currently excluded from S2P.

So could Class 4 be due a hike from April 2016? HMRC's ready reckoner suggests an extra 1% on the main rate (currently 9%) would be worth £290m in 2016/17. Bringing Class 4 into line with the Class 1 Primary (employees) rate of 12% is an idea that is floating around and would benefit the Treasury to the tune of about £450m a year once Class 2 goes.

This will be an area to watch on 8 July. A NIC increase - and a seeming break of a promise - are both best done early in a new Parliament.

Platform trusts - Bonds are not the only investments that can be used in trust planning

(AF1, AF4, R03, R02, JO2, CF2, FA7)

Most investments made on a platform or wrap that are not wrapped in a pension or an ISA will be in the form of unwrapped collectives e.g. in a GIA.

This isn't to say that offshore and UK investment bonds have no place in modern financial planning, just that for a number of reasons it seems that far fewer are being deployed these days and, when they are, a fair proportion seem to be executed "off platform".

Undoubtedly, the greater prevalence of platforms as a central part of the financial planner's investment management proposition has meant that the extra steps (and thus degree of difficulty) that the use of a bond implies means that it will inevitably be used less and even be less front of mind than it used to be when designing the financial plan. There is also the fact that in a number of cases it may not be possible to access the chosen investments in the bond wrapper available - this challenge is more likely to be encountered with the UK bond where "open architecture" is rarely available.

Leaving aside the "rights and wrongs" of bond investment, the fact is the majority of non-pensions / non-ISA investment is in unwrapped collectives.

And, if that is the case, there must be a number of circumstances where inheritance tax and estate planning will be on the planning agenda of the investor. Fortunate then that the majority of platforms and wraps have a reasonably well developed range of trusts to work with their unwrapped investments. Yes, they take a bit more work in relation to managing the income tax and capital gains tax implications but this needn't be that onerous and is something that most financial planners can become proficient in.

Alternatively, trust tax management could offer an opportunity for collaboration with other professionals. Absolute, interest in possession and discretionary gift trusts are all available together with loan trusts. Discounted gift trusts provide a greater challenge but even these aren't impossible provided you are willing to modify/ restrict your portfolio choice.

Most of the platforms and wraps providing draft trusts will also provide detailed completion and technical notes and some will facilitate a referral to in- house or outsourced technical support. This will be in addition to (usually) detailed guidance notes and FAQs.

Defaulting to bonds in trust cases because they are "simpler to manage in trust situations" doesn't really hold water as it stands as a sole justification for selecting an investment bond . That's not to say that bonds can never be suitable investments for trusts - they may well be - it's just that the making of the adviser's life simpler as a reason on its own is unlikely to engender strong FCA approbation.

The European Parliament formally votes to adopt the EU's Fourth Money Laundering Directive

(AF1, R03)

The European Parliament has now formally voted to adopt the Fourth Money Laundering Directive, the agreed texts of which became available in January. This is the last stage of the Directive's progress through EU institutions, having been formally endorsed by the European Council in February, and member states will have two years (up until July 2017) to transpose the Directive into their national laws.

A major provision of the Directive is the compulsory introduction of registers of beneficial ownership in all EU countries. The registers will apply to both companies and trusts, although different rules will apply to each.


'Competent authorities', such as national tax authorities, law enforcement agencies and 'obliged entities' (such as banks conducting due diligence checks), will be granted unrestricted access to the registers.

In addition, those who can demonstrate a 'legitimate interest', such as investigative journalists and other 'concerned citizens', will also be granted conditional access. It should be noted that member states will only be able to prevent citizens' access to the registers 'on a case-by-case basis in exceptional circumstances'.


Information on trusts will be accessible only to the authorities and obliged entities. These registers will only list trusts that generate tax consequences, and will only contain information that is being made available to tax authorities as part of international initiatives for the automatic exchange of tax information.

Politically-exposed persons

The text also clarifies the rules on "politically-exposed persons", i.e. people at a higher than usual risk of corruption due to the political positions they hold, such as heads of state, members of government, supreme court judges and members of parliament, as well as their family members.

Financial institutions that have high-risk business relationships with such persons should consider putting additional measures in place, e.g. to establish the source of wealth and source of funds involved.

The new triple lock - The Queen's Speech confirmed a new 'triple lock' to taxes

(AF1, AF2, JO3, R03)

In the Queen's Speech we were told that "Legislation will be brought forward to ensure … there are no rises in Income Tax rates, Value Added Tax or National Insurance for the next 5 years". This law brings into being the Conservative's manifesto commitment, which arrived at the very end of the Parliament. A former Conservative Chancellor, Lord (Nigel) Lawson, was highly critical of the move, saying that the legislation was purely about politics. He noted that no Chancellor can know what economic conditions the next five years will bring and therefore should not tie their hands unnecessarily.

Ruling out rate increases in these three taxes means putting constraints on the three largest sources of government revenue, worth a total of nearly £400bn in 2015/16 - that is 64% of all tax receipts. The fourth biggest tax raiser - corporation tax - supplies only about 10% of what the top trio yield and the rate could hardly be a candidate for future increases, given that Mr Osborne has spent the last five years bringing the mainstream figure down from 28% to 20%. So where might Mr Osborne look if he has to raise taxes (alongside the inevitable benefit cuts)?

The first thing to note is that the pledge appears to be only about rates. As the Institute for Fiscal Studies (IFS) remarked in its review of the manifestos, the rate lock "...does not rule out raising revenue from these taxes in other ways". So we could see some manipulation of tax and NIC bands and even, in theory, a reduction in the starting point for additional rate tax. The Conservatives did pledge a £50,000 higher rate threshold in their manifesto, but this need not arrive until 2020/21. It is worth remembering too that for anyone in a contracted out defined benefit pension scheme, the promise of no increases to NICs will look rather odd from next tax year, when contracting out and the related NIC rebates disappear.

There is plenty of scope to reduce income tax reliefs - as has already been pencilled in with the manifesto's promise of the next reduction in the annual allowance for those with incomes above £150,000. We could also see an overhaul of the relief given on interest, which some economists believe has created dangerous distortions in company finances. The time to cut such relief is when rates are low - ie now. Buy-to-let investors and private equity firms could be in for a nasty surprise.

Capital gains tax was not within the triple lock and this could be another source of extra income, eg by tightening the rules for entrepreneurs' relief which has proved much more costly than expected.

Stamp duty is also an area where more revenue could be raised, perhaps with some justification for cooling the housing market. There could also be a rise in Council Tax, possibly through the creation of additional bands, thereby spiking any future mansion tax plans from the other political parties.

It will be interesting to see whether we get any clues to future rises on 8 July. The politics dictate that the medicine is dispensed as early as possible after the election (and as far as possible from the next trip to the polls).

Trustees seeking the Court's approval

(AF1, R03, JO2)

When trustees have difficulties reaching a decision they may apply to Court for directions or for a blessing. Two recent cases illustrate how this works: Cotton & Another v Brudenell- Bruce & Others [2014] EWCA Civ 1312, in which Lord Cardigan was challenging a previous High Court blessing, and Re Merchant Navy Ratings Pension Fund; Merchant Navy Ratings Pension Trustees Ltd v Stena Line Ltd and others  [2015] EWHC 448 (Ch), [2015] where the High Court approved a new deficit contribution regime for a large pension scheme.

Occasionally, trustees find themselves in a situation where they have difficulty in making a decision. Often this will be the case with trustees of discretionary trusts where they may have to weigh up conflicting beneficial interests or may be facing external pressures. There may be a fear of a challenge from a disgruntled beneficiary which trustees will be keen to avoid. In such circumstances both statute and common law principles allow a trustee to invoke the Court's supervisory jurisdiction of a trust by making administrative trust applications to seek the Court's approval.

The four categories of such applications were recited in the decision in Public Trustee vCooper [2001] WTLR 901 as follows:

  1. A construction application: is a particular action within the trustee's powers?
  2. A blessing sought for a particularly significant or momentous course of action: is a particular course of action a proper exercise of the trustee's powers?
  3. Trustee asking the Court to decide upon a course of action: these applications involve the Court taking a decision in place of the trustees because the trustees are genuinely conflicted; and
  4. Retrospective blessing sought for a particular action: were the trustees right to pursue a course of action?

In the above-mentioned Cotton case Lord Cardigan was challenging whether previous High Court judges were correct, in effect having approved the trustees' intended sale of the main trust asset, Tottenham House.

In summary, Lord Cardigan claimed that the expert advice which the trustees received raised a number of questions which ought to have prevented the Court from approving the intended sale; whereas the trustees' view was that they should not be required to second guess that advice.

The Court of Appeal agreed with the trustees. In the course of the judgment, the trustees' obligations to provide information to the Court was emphasised by Lord Justice Vos who said that "In order to succeed in such an application, the trustees must,… put the Court in possession of all relevant facts so that it may be satisfied that the decision of the trustees is proper and for the benefit of the beneficiaries. Moreover, it must be demonstrated that the exercise of their discretion is untainted by any collateral purpose".

Where the trustees have concerns about confidentiality obligations that they owe to beneficiaries, they may consider it appropriate for any confidential material to be disclosed only to the Court.

In MNRPF Trustees Ltd v Stena Line Ltd and others the High Court was asked by the trustee of the MNRPF to approve a proposed amendment to the rules governing the fund. The power to amend the rules was vested solely in the trustee. The amendment would introduce a new contribution regime under which all employers which had adhered to the fund since its inception in 1978 could be made liable to repair its current funding deficit estimated at £333m. Under the current regime only some 40% of employers were liable to restore the deficit.

Needless to say, the historic employers opposed the amendment. They argued that the trustees' decision to introduce the new regime was improper/irrational and failed to take account of relevant information, and/or was outside the trustees' powers because of its allegedly retrospective effect .

The trustees' application was also opposed by a representative beneficiary of the MNRPF. He argued, among other things, that the trustees had misdirected themselves in law by failing to recognise "a fiduciary duty to act in the best interests of members", and that the trustees had acted for an improper purpose for the benefit of current employers (said to be the alleged purpose of eradicating cross-subsidy among employers).

Nevertheless, the judge approved a new deficit contribution regime and determined a number of technical points on the employer debt legislation of the Pensions Act 1995, section 75 (PA 1995).

The judge also concluded that the trustees had applied the correct legal test as to their duties, that they had acted within the scope of their powers, and that they had made their decision properly and in a 'meticulous manner'.

It is evident that the above-mentioned remedy is used more frequently by professional trustees than by lay trustees. Such an application will involve a great deal of effort and costs. All the parties, as well as the Court, must be provided with the relevant information, otherwise the trustees may not get an indemnity in relation to the costs . In short, applications to the Court should be seen as a last resort, but the remedy is there if needed.

Charities defeat nephew's death bed gift claim

(AF1, AF2, JO2, JO3, R03)

A group of animal charities have succeeded in their appeal against the High Court decision in the case of King v Dubery and others (2014). The facts of the case were as follows:

Mrs Fairbrother executed a will in 1998 leaving modest legacies to various members of her family and naming several animal charities as the residuary beneficiaries of her estate.

Some nine years later, Mrs Fairbrother had become frail and her nephew, Kenneth King, moved in to care for her in return for free board and lodging. King lived with Mrs Fairbrother until the time of her death in 2011 and claimed that she had promised him the house would be his after her death, even handing him the deeds to the property.

However, no actual transfer of title took place and consequently the charitable beneficiaries of the 1998 will expected to receive their legacies following Mrs Fairbrother's death. King, who was still living in the property, applied for a court declaration that his aunt had already made him a gift of the house in anticipation of her death - a donatio mortis causa - thereby overriding the terms of the will.

The High Court, taking account of the physical evidence presented by King (which included a signed note from Mrs Fairbrother, witnessed by one friend, stating that in the event of her death she left her house and her property to her nephew 'in the hope that he will care for my animals until their death' as well as an unwitnessed standard form will on the same terms) found in his favour.

The charities accordingly appealed, submitting that Mrs Fairbrother did not have capacity to make the donatio mortis causa; or, if she did, then she had revoked it by her subsequent (though ineffective) will making.

The Court of Appeal considered the criteria for a valid donatio mortis causa and determined that these criteria had not been met. In particular, Mrs Fairbrother, while elderly and frail, was not suffering from any specific illness and so could not have been contemplating her impending death when she had the most crucial conversation with King. The appeal judges also took a completely different view of the physical evidence of Mrs Fairbrother's intentions as presented by King to the High Court, ruling that she could not have made a gift of the house at the alleged time, because she later attempted to make a will that disposed of it.

The appeal court accordingly reversed the High Court decision, nullifying the donatio mortis causa gift, although King did later succeed in his claim for reasonable financial provision under the 1975 Inheritance (Provision For Family And Dependants) Actand will consequently receive £75,000 from his aunt's estate (King v The Chiltern Dog Rescue & Anor, 2015 EWCA Civ 5).

A donatio mortis causa is a lifetime gift which is conditional on death. There are three main requirements that must be satisfied for a valid donatio mortis causa to be made:

  • The gift must be in contemplation of death (for example, where the testator is suffering from a serious illness or is about to have a risky operation); 
  • The gift must be conditional on death (that is, it will not take effect if the donor recovers from the contemplated cause of death); and
  • The donor must part with dominion of the property before death (that is, the subject matter of the gift or the means of obtaining it must be handed over to the done)

In the King case, the Court of Appeal questioned the usefulness of the doctrine of donatio mortis causa in modern times stating that it 'paves the way for all of the abuses which the Wills Act and the Law of Property Act are intended to prevent'.

No tax relief on a flat not 'exclusively' rented for work

(AF1, AF2, JO3, R03)

Tim Healy, the actor, who lives in Cheshire, decided to rent a flat in London while he was working in the West End for nine months during the 2005/06 tax year. He never intended to make London his home and the weekly cost of renting the flat was comparable to that of staying in a hotel or similar accommodation while giving him additional space for practice and coaching. He duly claimed the cost of the rental against his income for that year, as a necessary part of his expenses.

However, HMRC disallowed the claim on the basis that the rental represented a private living cost rather than a cost of doing business.

Healy first appealed to the First-tier Tax Tribunal (FTT) in April 2012, where he won. The Tribunal agreed that he had not moved house and so his expenses were wholly and exclusively work-related, in accordance with the Income Tax (Trading and Other Income) Act 2005, section 34(1)(a). Accordingly, he was granted relief on all his accommodation costs.

But, the case was sent back to the FTT for reconsideration on appeal by HMRC with the instruction that the actor's intentions at the time of entering into the tenancy agreement should be taken into account.

The FTT has now given its second judgment in the case, taking account of the fact that Healy admitted in his evidence that part of his reason for renting a flat was that he wanted space for guests. This, said the FTT, meant that the flat rental was not wholly and exclusively incurred for the purpose of his business. The fact that the flat cost no more than a hotel was irrelevant to this duality of purpose. Nor could the non-business use of the flat be apportioned. It thus ruled against him and disallowed the claim (Healy v HMRC, 2015 UKFTT 233 TC).

Although the decision is this case was undoubtedly disappointing for the taxpayer, it is highly significant for other self-employed taxpayers who go away on business in that it leaves room for similar claims to succeed in cases where such an admission is not made.

A deed of variation can be rectified to add a missing IHT statement

(AF1, AF2, R03, JO2)

In the latest in a wave of rectification cases, the High Court has held that a post-death variation that did not include a statement that the parties were claiming retrospective tax treatment for inheritance tax (IHT) purposes under section 142(1) of the Inheritance Tax Act 1984 could be rectified so as to insert the missing statement because, without it, it did not achieve what the parties had intended.

Evidence presented to the Court in the case of Vaughan-Jones and another v Vaughan-Jones and others [2015] EWHC 1086 (Ch), suggested that the solicitor, being under pressure to get the deed completed before the expiry of the two-year window, had used an out-of-date precedent that did not reflect the 2002 changes to the rules on deeds of variation which made it a condition that a statement claiming retrospective tax treatment must be included in the deed in order to achieve the desired IHT result.

The Court refused, however, to rectify the deed to include the corresponding statement required by section 62(7) of the Taxation of Chargeable Gains Act 1992 for retrospective capital gains tax treatment, as there was insufficient evidence to suggest that the parties had even considered the capital gains tax position when the instructions were given.

Prior to Finance Act 2002 an election, to be effective for IHT purposes, did not need to be contained within the deed of variation itself, but it had to be sent to the Capital Taxes Office within six months of the deed being executed.

This case highlights the importance of keeping abreast of changes in the law and ensuring that precedents are up to date so that client objectives can be properly achieved; and reiterates that a misunderstanding as to the tax consequences of executing a particular document will not in itself justify an order for its rectification - the specific intention of the parties is key.

Investment planning

Premium Bond investment limit rises

(R02, AF4, CF2, FA7)

The 2014 Budget gave a multi-stage fillip to National Savings & Investments Premium Bonds, with an increase in the maximum investment from £30,000 to £40,000 from 1 June 2014 and, two months later, a doubling of the number of £1m monthly prizes (to two!) together with a 0.05% increase in the payout rate.

1 June 2015 marked the final stage of the improvements, with the maximum investment rising to £50,000. There have been no further changes to the interest rate for the prize money, which remains at the 1.35% set in August 2014, because there is no revision to the pattern of prizes: the main reason for the extra 0.05% in 2014 was to avoid reducing the number of prizes to finance the extra £1m prize. Those tempted to add another £10,000 to their holding might like to contemplate the pattern of June's prize distribution, detailed below.


Prize fund rate (pa) 1.35%
Odds of monthly win 1 in 26,000
Minimum Prize £25
Monthly Prize Distribution* by Number of Prizes: £25 98.8670%
£50 0.8065%
£100 0.8065%
£500 0.1768%
£5,000 0.0589%
£1,000 0.0044%
£10,000 0.0021%
£25,000 0.0009%
£50,000 0.0004%
£100,000 0.0002%
£1,000,000 0.0001%
Number of £1m prizes 2
Number of Bonds in Draw 54,244,019,669

* To four decimal places.

Premium Bonds, with a 1.35% prize rate, continue to look attractive in a world where, according to Money facts, there are only three providers (West Brom, with limited access, BM Savings with a 1% one year bonus and Kent Reliance (branch only) ) offering a higher gross rate on instant access accounts. However, with average luck Premium Bonds willnotpay 1.35% because of the nature of the prize distribution.

China MSCIS out

(R02, AF4, CF2, FA7)

MSCI has decided that now is not the time to include China A Shares in its global equity indices.

Companies incorporated in China often have two classes of share:

  • A Shares are the main share category and are denominated in renminbi, the Chinese currency. They are listed on the Chinese stock exchanges, the main two of which (in Shanghai and Shenzhen) were established in December 1990. Until 2002, A shares could only be purchased by mainland China investors. 
  • H Shares are Hong Kong listed shares of Chinese incorporated companies. These first appeared in 1993 and are listed in Hong Kong dollars (which is pegged to the US dollar). H shares were traditionally the main route for foreign investors to gain access to Chinese companies.

China has gradually relaxed restrictions on the ownership of A shares, first through the Qualified Foreign Institutional Investor (QFII) scheme and then, in 2011, through the Renminbi Qualified Foreign Institutional Investor (RQFII) programme. The RQFII allowed the Hong Kong subsidiaries of Chinese fund management and securities companies to recycle offshore renminbi deposits into A shares. Last November a further relaxation took place with the launch of the Shanghai-Hong Kong Stock Connect program ("Stock Connect") which permits investors in Hong Kong to trade in A shares listed in Shanghai (and vice versa), albeit again subject to a quota.

The increasing international availability of A shares has posed problems for global equity index providers, such as FTSE Russell and MSCI: at what point did China's liberalisation of dealings mean that A shares were sufficiently available to include in market indices? FTSE Russell recently took a step towards welcoming China into the index world by creating the FTSE China A Inclusion Indexes, a suite of indexes which includes A Shares. However, there was no change to the standard FTSE Global Equity Index Series, so investors were effectively given a choice.

The big China index decision occurred on Tuesday, when MSCI announced the results of the 2015 Market Classification Review. There had been much speculation that MSCI would give the nod to including China A shares in its global indices. In anticipation, the two primary Chinese A share indices had risen over 150%, year on year. In the event, MSCI decided that the quota allocation process, capital controls and questions over beneficial ownership meant the answer was "no, not this year".

It is only a matter of time before A shares reach the major global indices. FTSE Russell reckons "It is increasingly likely that within two to three years China A shares will become eligible for inclusion", while MSCI says "China A shares will remain on the 2016 review list for potential inclusion into Emerging Markets" .


Tax trap for pension lump sums and how to reclaim it

(R04, AF3, CF4, JO5, FA2, R08)

If you are 55 or over with a money purchase pension fund (broadly, one that doesn't promise benefits linked to your service with, and salary from, your employer) then you can't have missed that from 6th April this year you can take your entire fund in cash - regardless of its value.

Next question - should you?

Well that all depends. For many and for many reasons it may be tempting....but maybe not advisable.

As with most big decisions there'll be many factors to take into account - and one of them has to be tax.

There is more than one way to take benefits from your pension fund but if you take all or a chunk of your pension fund in cash (known as an "uncrystallised funds pension lump sum" - UFPLS) then 25% of it will be tax free . The remainder will be taxable as income in the tax year you take it.

So if you take £60,000 from your fund as a UFPLS, £15,000 will be tax free and £45,000 will be taxable . Basically, the taxable part will be added to your other income in the tax year you take it to determine how much tax is payable . As a reminder, the first £10,600 of your income (in most cases) is tax-free as your personal allowance is tax free . The next £31,785 is taxed at 20% and taxable income between £31,785 and £150,000 is taxed at 40% .Anything over £150,000 is taxed at 45%.

Given all of this, you can easily see how substantial pension lump sums could be taxed at rates of 40% or even 45%.

Say if the £45,000 I refer to above sat on top of other taxable income of around £50,000, £18,000 would be lost in tax leaving a net £27,000.

But the immediate position, when you receive the benefit, could be worse. Why is this? Well because of the way the tax system operates in relation to "one-off payments".

The payer, (the pension company), has to deduct tax on the payment it makes under the PAYE system. But it won't know exactly how much tax to deduct because the payment will be made during a tax year and they won't know what your other income for the tax year will be . So what happens?

Well, it all depends on your circumstances. Unless you have a P45 from a previous source of income or employment that you received in the tax year in which you received the payment from your pension, then the pension company needs to operate the "Emergency code" on a so called "Month 1" basis.

Your personal allowance (and the "Emergency" basis) for the 2015/16 year is £10,600 . This will be divided into 12 to determine your "tax free" pay for the month - just over £833 . The crazy thing is, unless you can present the pension company with a P45 for the year of payment, in order to decide the rate of tax to apply to the payment, they have to assume that the amount of the payment you actually receive will be received for every month of the tax year . The rate deducted could thus easily be at 40% or even 45% . The amount of tax you should actually pay may well only be at 20%.

Say you received £24,000 from your pension fund in April and expected to have enough other income in the year to use up your tax free personal allowance of £10,600. The £18,000 taxable part (£6,000 would be tax free) of your lump sum should only bear tax at basic rate - 20% . But on the presumption that you would receive £216,000 in the year (12 x £18,000) the average rate of tax deducted will be around 36.4% . So over £6,500 will be deducted from the £18,000 instead of about £3,600 . So when added to your tax free cash you receive about £17,400 . You should receive about £20,400 . So you'll be owed £3,000 from HMRC . The numbers depend on your circumstances but many will have tax "over deducted".

How can you claim it back? Well, it all depends on the circumstances.

There are three main forms to use to get your over deducted tax back without having to wait until the end of the tax year.

  1. If you took your entire pension fund and have no other income in the year you need form P50Z.
  2. If you took your whole pension but have some other taxable income eg from work or benefits, you need form P53Z.
  3. If you have taken cash from your pension fund but not withdrawn the entire amount and are not making any other withdrawals in the same tax year then you need form P55.

In situations 1 and 2 the pension provider is likely to provide you with a form P45 to help with the claim.

The forms can be accessed on-line or at the Post Office and it is estimated that refunds will take up to 30 days.

If your circumstances don't match one of 1-3 above then it seems that you will have to wait until the end of the tax year to tidy up your affairs and get any tax back through the self-assessment system . HMRC will usually work out the over payment and repay it automatically.

Finally, it's worth noting that once you have taken more than just tax free cash from a pension fund you need to tell the providers of any other pension funds you are paying into as your annual contribution maximum will then fall from £40,000 to £10,000.

PO fines SSAS trustee for transfer delays

(R04, AF3, CF4, JO5, FA2, R08)

The trustee of a plumber's benefit plan, the TPR Executive Pension Scheme, a SSAS, has been fined £250 for not responding to pension transfer requests from a fellow trustee.

The Deputy Pensions Ombudsman, Jane Irvine, ordered that Robert Evans sign the transfer release forms within 21 days and pay the fine. Jane Irvine said: "In the circumstances, Mr Robert Evans has breached his duty as trustee and caused inconvenience to the applicant."

Summary of the Case

Robert Evans had ignored written requests and telephone calls from Peter Evans for about a year. The two men were the only trustees of the scheme and both their signatures were required to approve the transfer request.

Summary of the Ombudsman's determination and reasons

The complaint should be upheld against Robert Evans because:

  • the evidence supports the Applicant's contention that Robert Evans failed to sign the relevant documentation; and
  • the respondent has not provided any compelling reasons why, despite having been contacted on a number of occasions, he did not sign the transfer forms.

This demonstrates some of the potential problems with a SSAS when there is breakdown in the relationship between the member trustees. Even, as appears to be the case, when they are family members . A SSAS offers many benefits over a SIPP small business owners, but this case demonstrates the pitfalls of unanimous investment decisions and the requirement for the signature of all member trustees . Prior to A-Day a sponsoring employer could only ever have one SSAS. However, since April 2006, that requirement has fallen away. There is no reason why a company cannot have one SSAS for each director which may or may not also include their wider family members.

Advisers with clients with a SSAS should consider whether they should discuss this case as a salutary lesson as what can go wrong with a SSAS and if it may be appropriate to restructure the existing pension arrangement into more than one scheme. The occupational structure of a SSAS may still be appropriate for each director, but for those nearing retirement, a SIPP may be more appealing as they may be looking to sever their involvement in the company on retirement.

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


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