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My PFS - Technical news - 24/10/16

Publication date:

31 October 2016

Last updated:

22 September 2017


Technical Connection

Personal Finance Society news update from 11 October to 24 October 2016 on taxation, retirement planning and investments.

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A reasonable provision claim has been denied where unemployment was a 'lifestyle choice'

(AF1, RO3, JO2)

A woman's reasonable provision claim on her father's estate has been dismissed because, among other reasons, she was capable of working and her lack of employment was a 'lifestyle choice'.

In the latest in a growing trend of reasonable provision cases, the Central London County Court has dismissed a daughter's claim on her father's estate, concluding that her lack of employment, being a lifestyle choice, was sufficient to defeat her claim.

Like so many of the reasonable provision claims brought under the Inheritance (Provision for Family and Dependants) Act 1975 (the 1975 Act), Danielle Ames' claim on her late father's estate was borne out of the fact that he died leaving his entire estate to a second wife, Elaine (who was not the claimant's mother).

Danielle, aged 41, and her two teenage children are dependent on her long-term cohabitant as she has no paid work. Her claim for reasonable provision under the 1975 Act was based on the assertion that the family had become reliant on funds provided by Danielle's father on an ad-hoc basis - by way of gift and payment for working in his business - to bridge the deficit between their income and their outgoings.

However, taking account of all the factors set out in section 3 of the 1975 Act, including 'the financial resources and financial needs which the applicant, and any beneficiary of the estate of the deceased, has or is likely to have in the foreseeable future' (which was particularly relevant because the size of the estate was not felt to be large enough to support both Elaine and Danielle), the judge rejected Danielle's claim saying that while Elaine was ill and over the age of 60 with no substantial surplus of income over expenditure, Danielle, as an adult fully capable of working, had not discharged the burden of proving either her current and future needs and resources or any continuing obligation or responsibility on her father's part which survived his death.

He therefore rejected Danielle's claim and Elaine Ames will now inherit the entire estate as set out in her husband's Will (Ames v Jones, 2016 EW Misc B67 CC).

The decision in this case reiterates the fact that, in practice, an adult child is unlikely to succeed in a reasonable provision claim unless they can demonstrate that the balance comes down in their favour after considering all the factors in section 3 of the 1975 Act.

Danielle's unemployment was deemed to be a 'lifestyle choice' as she had failed to show that she was unable to obtain work and this, in itself, was considered sufficient to defeat her claim. This is, however, in stark contrast to the 2013 Court of Appeal decision in Ilott v Mitson in which the claimant's 'obviously constrained and needy financial circumstances' weighed heavily in the outcome (although there were other factors at play).

The Ilott case is not yet fully decided - the UK Supreme Court is due to hear it on 12 December - and it is hoped that the final outcome will provide some clarityof the extent to which the Courts are able to interfere with testamentary freedom. Watch this space.

'Making Tax Digital' will cost businesses £3.25bn

(AF1, AF2, JO3)

As part of the Making Tax Digital initiative all businesses with a turnover of more than £10,000 will be required to update tax information on a quarterly basis online. While the Government states that the move will save HMRC £400 million in administration costs Graham Lamont, chief executive of a leading accountancy practice based in Cumbria, says that it will also lead to increased accountancy fees and software costs for the majority of the 2.6 million small businesses in the UK - and, with the average cost of transition estimated at £1,250, the total cost to industry could be in the region of £3.25bn.

Urging stakeholders to take action against the proposals, he says "Having assessed these documents it has become clear that these new policies will place a significant financial and administrative burden on the majority of small businesses, many of whom represent the backbone of the British economy".

The Making Tax Digital programme was published in broad outline last year and in August 2016 HMRC published a series of consultations on specific aspects of the proposed system. The consultation process runs until 7 November. It is not easy at this stage to determine the extent to which the initiative will benefit the UK economy as a whole.

Industry bodies call for changes to simplify the making of tax policy

(AF1, AF2, RO3, JO3)

Three industry bodies have joined together to urge the Chancellor to overhaul the way tax policy is made in the UK. The changes proposed include returning to a single annual fiscal event to stop Autumn Statements (the next one is due on 23 November) becoming second Budgets.

The Institute for Government (IFG), the Institute for Fiscal Studies (IFS) and the Chartered Institute of Taxation (CIOT) have written a joint letter urging the Chancellor, Philip Hammond, to use his first Autumn Statement and Budget to lay the ground for a raft of changes that they believe will improve and simplify the making of tax policy in the UK.

In particular, the Chancellor is encouraged to:

  • Consider returning to a single annual fiscal event, to stop Autumn Statements morphing into second Budget announcements, which the authors state leads to 'a proliferation of measures and very long finance bills';
  • Start the consultation process for tax changes at an earlier stage to avoid unforeseen consequences being raised by outsiders after the Government is already committed to a course of action;
  • Set out, in the Autumn Statement, clear guiding principles and priorities for the tax system as a whole;
  • Extend the roadmap approach - used by the last Parliament in relation to corporate tax in 2010 - more widely to areas where taxpayers need to plan and make long-term decisions, such as pensions and savings; and
  • Prepare the ground for future policy changes through external reviews to open up public debate about the tax system.

The open letter (the full text of which can be accessed from the CIOT website here) reflects initial findings from a project being carried out by the IFG, IFS & CIOT looking at how to improve Budgets and tax. A full report will be published later in the year.

Chancellors have been required to deliver two economic updates a year since 1976. Over the years, the Autumn Statement morphed into the Summer Statement before Gordon Brown introduced the Pre-Budget Report - a decision reversed by George Osborne. Philip Hammond is due to deliver his first Autumn Statement on 23 November and it will be interesting to see the extent, if any, to which he has had regard to the suggestions made above.  Most would agree that this is an area which is begging for change.

Reasonable provision claims on the increase

(AF1, RO3, JO2)

The number of claims for reasonable provision under the Inheritance (Provision for Family and Dependants) Act 1975 (the Act) has increased eight-fold since 2005. Experts attribute the rise to a range of factors including increasingly complex family structures.

Latest figures show that the number of disputes between family members taken to the High Court under the Act has reached a record high. In 2005 just 15 such cases were heard compared to 116 in 2015.

A number of factors can be attributed to this boom:

  • People are more likely now than ever to cohabit outside of marriage and if no Will is made a cohabitant will receive nothing - in such cases, a claim under the Act may be the only way forward;
  • Second or multiple marriages are also increasingly common but this can lead to discord if children from one marriage appear to receive more than those from another;
  • A gradual rise i property prices may make a challenge seem more worthwhile financially;
  • High profile cases, such as Illott v Mitson, have led to enhanced knowledge amongst the general public of the possibility of making claims under the Act; and
  • Widely publicised victories may be incentivising other disinherited adult children to contest their deceased parents' wishes.

Family or reasonable provision claims can be brought under the Act in cases where a claimant, who falls into one of six specified categories, asserts that the deceased's Will or intestacy failed to make reasonable provision for the claimant. Until the intestacy laws are updated to reflect modern family life, it is likely that the upward trend in claims under the Act will continue.

Rooney could face a large bill for alleged tax avoidance

(AF1, RO3)

According to a press article, footballer Wayne Rooney could face up to a £5 million charge as a result of a film investment scheme. The article indicated that HMRC has told him that it believes he is liable for the sum.  However, it appears that he has not yet received a formal tax demand.

The scheme in question involved Invicta 43, a film investment partnership that generated tax relief for its investors to shelter £12.5 million from tax.

According to the article Rooney was put in the scheme by the now defunct Financial Management Group (FMG), described by the paper as a wealth management group, at one time chaired by the former Liverpool manager Kenny Dalglish. 

It said Invicta is thought to have paid a commission, possibly 2% of Rooney's £12.5 million total investment, to FMG.

The article stated that 225 Invicta investors collectively bought the rights to two Hollywood films, Fred Claus and 10,000 BC.

The scheme is complex but, broadly, worked by allowing partners in the scheme to claim tax relief on the cost of purchasing the films. Partners were expected to pay the tax in later years as income was generated from leasing the movies back to the studios - thereby allowing for tax deferral. In light of this, HMRC argued that Invicta structured the scheme in breach of its guidance and questioned why investors were able to delay repaying most of the tax until 2023. 

Rooney's spokesman would not comment on this but said: "Wayne's tax affairs have always been conducted in full compliance with the law."

Fellow footballer investors include former Manchester United defender Wes Brown, and the Senegalese former player Abdoulaye Faye, of Newcastle United and Stoke City.

The article stated that there is no suggestion that any named investor has behaved illegally or will not be able to pay.

According to the article,HMRC contacted investors to inform them of its objections to Invicta and following this it issued some of them with partner payment notices (PPNs), asking for an upfront tax payment.  Under the PPN rules, recipients have 90 days to hand over the disputed tax and can get it back only if the scheme is upheld in Court.

IHT windfall to follow rise in millionaire numbers

(AF1, AF2, RO3, JO3)

According to recent research carried out by financial services company NFU Mutual there could be a rise to almost 500,000 millionaires in the UK this year meaning the growth in wealth will push more people into the inheritance tax net - especially given that the nil rate band remains frozen at £325,000 until 2021.

By analysing HMRC's UK Personal Wealth Statistics, NFU Mutual found the number of millionaires in the UK rose 27 per cent to 409,000 between 2008 and 2013.

The company has predicted the number of millionaires in the UK could reach 495,000 this year and 585,000 by 2020, based on the rate of previous wealth increases.

It is inevitable that as a result more and more people are likely to want to consider inheritance tax planning providing advisers with an opportunity to contact clients to ensure the necessary action is taken. Clients ought to be reminded that making use of exemptions is just the starting point and that there are other tried and tested schemes, such as loan trusts and discounted gift trusts, which can be used to provide an inheritance tax reduction with continued access for the settlor (donor).

The Autumn Statement

(AF1, AF2, AF4, RO3, RO5, RO7, RO8, JO2, JO3, JO5)

The FT reported on 24 October that the Chancellor is considering ditching the annual Autumn Statement as he seeks to rein back the role of the Treasury and focus its tax and spending decisions on the spring Budget.

Philip Hammond has told colleagues he wants to move away from "gimmicks" and micromanagement, and is looking at the possibility that the Autumn Statement would - in future years - return to its original function of fiscal forecasting and not represent what is, in effect, just another Budget rammed full of taxation provisions.

But fear not ... this year's Autumn Statement will go ahead as planned on November 23 and most expect it to be a pretty big occasion. It is Mr Hammond's first chance to map out the Government's new economic and fiscal policy following June's Brexit vote.

Among issues relatively widely expected to be covered is tax relief on pensions. There have been no official statements on this but the cost of tax relief is high (over £30bn) and the Government is avowedly "inclusive". Shifting to a flat rate of relief, that gives more to basic rate taxpayers and less to higher rate taxpayers, would be aligned with this "mantra" - albeit not saving much, if anything, in the long term.

The FT published what, in effect, amounted to a useful "history of the Autumn Statement".

It seems that the Treasury has been a slave to "two fiscal events" since the 1975 Industry Act compelled the government to publish at least two economic forecasts "with the aid of [an economic model]" which is "maintained on a computer".

In the Callaghan and Thatcher governments, a Spring Budget that focused on taxation was augmented by an Autumn Statement setting out the government's spending plans for the next year.

Ken Clarke overturned that system in 1993 with a unified tax-and-spending statement in an Autumn Budget, with a short Summer economic forecast to update the figures.

But this single event lasted only until Gordon Brown reintroduced the Spring Budget and added an Autumn or Winter pre-Budget Report (PBR) in 1998.

Initially the PBR was billed as a short consultative document in the Autumn without any tax measures, to improve the discussion of tax proposals, but it soon morphed into a second annual Budget.

Although Mr Osborne returned to the name of the Autumn Statement, the format was identical to Labour's second Budget and it often contained more tax measures than in the Spring Budget.

Most commentators, it seems, support the return to one Budget to deal with taxation with a possible Autumn Statement focused entirely on forecasting.

Treasury to ease on non-dom crackdown

(AF1, RO3)

According to the Financial Times, the Treasury is considering altering the way it taxes offshore trusts on fears its proposals could force out wealthy foreigners.

Despite a number of changes being announced in the Budget last year involving reforms to the tax treatment of non-domiciled individuals, non-domiciled trusts initially escaped the crackdown after the Treasury said it wanted to spare wealthy families who had set up an offshore trust before the new rules were introduced.

'[They] would find it very punitive and administratively burdensome to have to recreate sufficient history of the transactions that may have taken place in the trust,' the Treasury said at the time. 

However, in August this year the Government toughened its stance, unveiling proposals to remove the tax-exempt status of offshore trusts if any benefits are paid out.

Criticising George Osborne's planned crackdown on "fundamental unfairness" in the tax regime for residents whose permanent home is outside Britain, the Institute of Chartered Accountants in England and Wales warned that "the potential damage to the UK economy could outweigh any anticipated exchequer gain".

In addition, a group of professional bodies - including the Institute of Chartered Accountants, Chartered Institute of Taxation, Law Society and Society of Trust and Estate Practitioners - said it would be better to reform and simplify the existing system of taxation of offshore structures. They said the Treasury's plans would create particular difficulties when it came to taxing "dry" structures (those that did not create income or gains), such as those holding residential property and art.

Following such criticism, the Treasury is now looking at a different approach - we could see the removal of taxation on all future payout gains,with those gains only subject to capital gains tax when the payment is made to a UK resident - only time will tell.


Government borrowing figures: A half-term report

(RO2, AF4, FA7, LP2)

The September borrowing figures were much worse than expected and not what the Chancellor wants to see ahead of his Autumn Statement.

The Office for National Statistics has just released the Public Sector Finance data for September 2016, ie half way through the 2016/17 financial year and roughly three months either side of the Brexit vote. The numbers have further reduced the wriggle room available to the Chancellor in next month's Autumn Statement:

  • Borrowing in the month came in at £10.6bn, £1.3bn more than in 2015/16 and about £2bn above market expectations.
  • After half of 2016/17, borrowing has totalled £45.5bn, just £2.3bn lower than for the same period last year.
  • To be on track for the OBR's March Budget projection of £55.5bn for 2016/17, the Government should have borrowed about £35bn, £10.5bn less than the actual outcome.
  • In theory, to hit the year-end target the Government will have to borrow only a net £10bn over the next six months. As the OBR says, its "March forecast is very unlikely to be met." In 2015/16 second half net borrowing was £28.3bn, despite a bumper £12.3bn surplus in January 2016.

This coming January the OBR reckons dividend tax changes are due to deliver a £2.5bn self-assessment boost. Even so, the eventual outturn for this financial year looks likely to be around £70bn of borrowing against £76.0bn for 2015/16.

The OBR notes that there was weakness in income tax and NIC receipts which "could reflect uncertainty in the run-up to and aftermath of the referendum." It also examines three possible indicators of Brexit effects:

  • SDLT receipts in the July-to-September post-referendum period were up 0.4%, whereas the OBR forecast in March was for 19% growth over the year as a whole. The OBR observed "falls in receipts from top-end residential and commercial transactions, particularly in London";
  • Debt interest payments were higher this September than last year. However, the OBR says this does not yet fully reflect recent increases in RPI inflation because of the lag in the way interest is calculated on index-linked gilts. The OBR goes on to comment that "To the extent that the drop in the value of the pound … pushes up RPI inflation …, that will raise spending associated with index-linked gilts" further over time. While ordinary gilt yields have also risen, this will take much longer to show through in debt interest payments because of the long-average maturity of the outstanding stock;
  • Corporation tax receipts were weak - down 0.2% year-on-year in September - which the OBR believes "partly reflect [large companies'] expectations of profits for the whole financial year.

The next set of ONS data arrives on 22 November, which is too late for the OBR's Autumn Statement Economic and Financial Outlook. Thus the OBR's Autumn Statement projections will be based on the September 2016 data discussed above, together with whatever updated information can be gleaned from "administrative sources".


Enhanced and primary protection without any PCLS protection

(AF3, RO4, RO8, JO5, FA2)

Individuals who have either enhanced protection and/or primary protection, but no form of lump sum protection are currently being penalised in respect of their PCLS entitlement. The issue has arisen alongside the reduction in the lifetime allowance (LTA) from £1.25m to £1m on 6 April 2016. Legislation (see below) was put in place to protect these individuals when the LTA reduced from £1.5m to £1.25m on 6 April 2014. However, as we will see below, this wording didn't envisage a further reduction in the LTA. This means this wording no longer works as intended and needs to be altered.  HMRC are aware of the issue and it is to be hoped legislation will be included in the Finance Bill 2017, but there is of course a risk that it may not be deemed important to be included.

Government Intention

The Government's intention was explained in the old Pension Schemes Manual pages RPSM09104541 and RPSM09104541, but not in the replacement Pensions Tax Manual. The wording stated that the purpose of this clause was to ensure "Individuals with existing A-day primary or enhanced protection but who do not have lump sum protection will retain a right to a tax free lump sum of up to 25 per cent of £1.5 million when the standard allowance is reduced to £1.25 million. This change ensures that individuals in this position do not have a reduced tax free lump sum when the lifetime allowance is reduced."

There was also a similar wording in Pension Schemes Newsletter 57.

Legislative Background

The problem lies in the Finance Act 2013 wording. Those individuals with enhanced protection and/or primary protection but with no lump sum protection were protected from having their maximum PCLS cap potentially further eroded by the fall in the SLA to £1.25m. This applied in respect of BCEs taking place on or after 6 April 2014. However, because of the further reduction in the SLA on 6 April 2016, the legislation is no longer effective.

The maximum PCLS is ultimately limited by the upper cap of 'the available portion of the lump sum allowance' (para 2(6) of Finance Act 2004). From 6 April 2014, this is now for those with enhanced protection and/or primary Protection and no form of lump sum protection '£1.5m - AAC / 4', with 'AAC' being previous crystallisations. This is through Paragraph 8 of Schedule 22 to Finance Act 2013 (which introduces new clauses to Paragraph 2 of Schedule 29 of Finance Act 2004 replacing "CSLA" with £1.5m in Paragraph 2(6) of Schedule 29 to Finance Act 2014).

Unintended Consequences of the Current Legislation

Depending on fund size, the provision only works fully if the individual crystallises all sufficient benefits, at the same time, on or after 6 April 2014 to fully utilise their PCLS entitlement of £375,000. If they phase, or have more than one uncrystallised arrangement, on or after 6 April 2014, they will not be able to take PCLS up to the full 25% of £1.5m i.e. the £375,000.

The issue is that for those protected individuals caught, the new clauses index up all past crystallisations (within 'AAC') by '£1.5m / PSLA' ('PSLA' being the SLA at the previous crystallisation). Now this seems reasonable for any previous BCEs that occurred before 6 April 2014, as the SLA at that time would have been £1.5m or higher. But the indexation applies to all previous BCEs to the current one, even if those earlier BCEs occurs on or after 6 April 2014 when the LTA will be £1.25m (PSLA in the indexation). This unfairly uplifts its value within AAC by 20% (£1.5m / £1.25m) without any rise in the SLA or their starting entitlement.

The following example will help to demonstrate the potential issue:

Mavis has enhanced protection but no lump sum protection. She has two separate pension schemes:

Arrangement A, and

Arrangement B.

During 2014/15 she fully crystallises Arrangement A when it was valued at £1,250,000. She took her maximum PCLS entitlement of £312,500.

She then crystallises Arrangement B during 2016/17. AAC needs to be revalued by dividing £1.5m by the current Standard LTA of £1,000,000. This means the PCLS taken in 2014/15 will be treated as being not the £312,500 actually taken but as if it were £468,750 meaning that no further PCLS is available.

The member therefore has no benefit of the transitional provision, being effectively capped at the £312,500 original payment even though they the intention was to allow them to benefit from PCLS of £375,000.

Maxis would have had a similar problem, even if she has crystallised the two arrangements at the same time. As far as HMRC is concerned, on crystallisation takes place before the other, and the second has to undertake the AAC revaluation in respect of the first crystallisation.

However, in circumstances where an individual has two or more arrangements, and they are intending to crystallise at least £1.5m, then if two arrangements are merged to allow the £1.5m to be crystallised from within the same arrangement then the full £375,000 could be paid out.

We understand that HMRC Pensions Policy are aware of the issue. We also understand that this is also due to put on the agenda of an upcoming meeting with HMRC in relation to pension matters.

Financial planners should take into account the current flaw in the legislation in calculating PCLS for those with  enhanced or primary protection and appreciate that there may not be a quick fix to this problem.

FCA publishes thematic review of annuity sales practices

(AF3, RO4, RO8, JO5, FA2)

The Financial Conduct Authority (FCA) has recently published the findings of its thematic review of non-advised annuity sales practices.

The FCA wanted to establish whether firms provided customers with sufficient information about enhanced annuities. The FCA looked at whether firms made customers aware of their potential eligibility for enhanced annuities and whether they encouraged them to shop around in order to potentially get a higher income from another provider.

The FCA reviewed non-advised sales of annuities made by pension providers to their customers between May 2008 and April 2015. The FCA looked at the information provided in respect of enhanced (sometimes called impaired life) annuities.

The FCA review looked at more than 1,200 non-advised sales at seven firms which between them account for approximately two-thirds of the annuity market.

The FCA found no evidence of an industry-wide or systemic failure to provide customers with sufficient information about enhanced annuities through non-advised sales. The FCA found many of the firms provided clear and comprehensive information to customers with written communication tending to meet the standards required.

At a small number of firms, the FCA did have concerns when significant communications took place orally, normally over the phone, which was likely to have caused some customers to purchase a standard annuity when they may have been eligible for an enhanced product.

These failings were of sufficient concern at a small number of firms that they are now being asked by the FCA to review all non-advised sales from July 2008 and, where appropriate, provide redress; these firms are also being investigated by the FCA's Enforcement Division to determine whether further action is necessary.

Megan Butler, director of supervision - investment, wholesale and specialist at the FCA said: "Annuities play an important role in providing an income for retirement. It is important that consumers get the right information at the right time in order to make the right decision for their retirement.

While we have found particularly poor behaviour at a small number of firms, there is no evidence that firms have systemically failed to provide customers with the information required by our rules. Firms, particularly those outside our sample, should look at the report we have published today and consider whether they can make improvements."

As part of the paper published by the FCA it has highlighted a number of areas of concern found as part of its review. These include:

  • call handlers sometimes being heavily reliant on call scripts, which meant that they were often unable to respond to the clients' needs or clarify areas of misunderstanding;
  • customers were not always made aware that they could obtain a higher income by shopping around, even when enhanced annuities were discussed;
  • clear messages about enhanced annuities were sometimes undermined by subsequent comments which included call handlers under-playing the level of increase which a consumer may obtain by shopping around;
  • where firms do not sell enhanced annuities, they did not always inform customers of this or may not even mention enhanced annuities at all when speaking to customers.

In the report, the FCA encourages all firms to consider how their communications and sales process may be strengthened to ensure consumers are getting all the information they require at the time they require it. The FCA also encourages any customers who have already taken out an annuity, but feel they may have been given insufficient information about enhanced annuities, to raise this directly with their annuity provider.

Approximately a third of the sector falls outside the FCA's sample. In order to take a rigorous and comprehensive approach the FCA will also be asking a small number of the largest firms not involved in the original sample to carry out a review to ensure they do not have any concerns about their non-advised annuity sales. This review will be overseen by the FCA.

Planners should be aware of the review and keep up to date with any developments.

Secondary annuity market scrapped

(AF3, RO4, RO8, JO5, FA2)

The government has confirmed that it is scrapping its plans to create a secondary annuity market because the consumer protections required will undermine the market development.

The government has been consulting with the industry and regulators over the recent months and have concluded that a 'vibrant and competitive market with multiple buyers and sellers of annuities, could not be balanced with sufficient consumer protections.

The estimated take up of the secondary annuity market reforms is 5% of annuity holders which reinforces the government's stance that an annuity is usually the best means of providing a guaranteed income stream in retirement.

Planners may need to contact their clients who were waiting for the annuity market to be established and review their financial position. 

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.