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My PFS Technical news 30/10/2018

Publication date:

27 October 2017

Last updated:

31 October 2018


Technical Connection

Personal Finance Society news update from the 11th October to 25th October 2018.

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Taxation and trusts




A problem with tax penalties issued electronically

(AF1, AF2, JO3, RO3)

In this case the taxpayer ceased self-employment in January 2016 on becoming an employee. Her profit in her final period of self-employment was less than her personal allowance, so she assumed, wrongly, that she didn’t need to submit a tax return for the tax year 2015/2016 or notify HMRC of a nil liability.

HMRC’s records indicated that a notice to make and deliver a tax return for the tax year 2015/2016 was issued on 6 April 2016 by electronic communication to a secure mailbox on the self-assessment online account of the taxpayer. That notice required her to deliver the return by 31 October 2016, if filed in paper form, or by 31 January 2017 if filed electronically.

On 7 February 2017 a penalty of £100 had been assessed for her failure to file the return by the due date and HMRC issued a notice by electronic communication to a secure mailbox on her self-assessment online account.

On 11 August 2017 HMRC assessed a penalty of £900 for her failure to file the return by a date three months after the due date, and a penalty of £300 for her failure to file the return by a date six months after the due date.

The return was eventually filed electronically on 13 December 2017.

On 21 December 2017 the taxpayer appealed to HMRC against the two penalties totalling £1,200 (ie. excluding the initial penalty of £100). HMRC told her that the appeals were out of time, but that she had the right to seek permission from the First-tier Tribunal (FTT) to require HMRC to accept them. So, she notified her appeals to the FTT.

The taxpayer argued that she had been unaware that there were important electronic messages in her secure mailbox set up by HMRC, and said she was only informed when the penalties reached £1,200.

The judge allowed her late appeal, saying that her delay in appealing was serious and significant, but “not at the upper end of such delays”. He added “The explanation for the delay is clearly plausible, and in my view a good reason. It is also a reason given in the appeal against the penalties.”

The use of electronic communications by HMRC
HMRC is allowed to send statutory notices to taxpayers via a secure inbox, and, as long as the following conditions are satisfied, they will be treated as if they had been validly delivered by post if:

  • The taxpayer has consented to receive the information via the self-assessment online service;
  • HMRC has sent an email to their last known email address (or a text to their contact number) informing them that information has been delivered to their secure inbox; and
  • The despatch of that email has been recorded by HMRC, and that record shows that the email was not “bounced”.

The taxpayer in this case had signed up to the Self-Assessment online service, and based on the terms and conditions in force at the time of the hearing, the judge determined that someone who is not a tax expert would:

“…realise from reading those terms and conditions that they would get a notice to file a return sent to their secure mailbox, replacing the paper notices to file, that they would get reminders that returns and payments of tax are becoming due and that they would get statements of their tax position from time to time, that is things that they have been getting hitherto, and if they are experienced filers of returns, things they may already know well. What they would not necessarily realise is that if they came to be in the small minority of late filers, that not only would HMRC send any penalty notices to the secure inbox, but also that any email they sent to alert a person to that notice of penalty would be as bland and uninformative as the emails that the appellant has put in evidence…”

HMRC’s messages only included phrases like:

“You’ve got a new message from HMRC”


“You have a new message from HMRC about Self-Assessment. To view it, sign into your HMRC online account. For security reasons, we have not included a link with this email.” 

These messages gave no indication that they referred to anything so important and urgent as a statutory penalty.

The judge therefore concluded that – if consent is taken to mean informed consent – although the taxpayer had consented to receive notices to file tax returns, she had not consented to receive penalty notices electronically.

He, therefore, found that the issue of penalty notices to the taxpayer’s inbox was not valid, and ruled that – regardless of the consent issue – the penalties should be cancelled.

With Making Tax Digital just around the corner it’s somewhat concerning that something as well established as paperless self-assessment still isn’t working as well as it should. It could be argued that someone who is experienced in submitting a tax return each year, should know the consequences of not submitting a return or not taking any other action to notify HMRC, after having received a notice to deliver a return. However, the judge in the case has highlighted a serious failure in HMRC’s communications, which it will need to strongly consider rectifying.

Source: Finance and Tax decisions tribunal: Hannah Armstrong and The Commissioners for her Majesty’s Revenue & Customs

Income paid on collective investments

(AF4, FA7, LP2, RO2)

Income that arises from a collective investment will, typically, be classified as dividend income or an interest distribution. 

Broadly, where at least 40% of the underlying income arises from dividends, all of the income will be taxed as dividend income. Where more than 60% of the underlying income arises from interest, all the income will be taxed as interest distribution. The tax consequences for the individual and trustees (irrespective of whether income is distributed or accumulated) are different. 

For example, the individual will be entitled to a £2,000 dividend allowance with dividends then being taxed at 7.5% (basic rate taxpayer), 32.5% (higher rate taxpayer) and/or 38.1% (additional rate taxpayer).

Interest distributions are, on the other hand, taxed as savings income and may, as such, be entitled to the PSA of £1,000 (basic rate taxpayer) or £500 (higher rate taxpayer). Also, if the taxpayer’s other income (excluding dividends) is low enough, a £5,000 zero savings rate band may apply. Subject to that, income will be taxed at 20% (basic rate taxpayer), 40% (higher rate taxpayer) and/or 45% (additional rate taxpayer).

HMRC has flagged that there was a mismatch between the SA950 Trusts and Estates Tax Return Guide and the SA900 2017/18 Trusts and Estates Tax Return. The original guidance notes indicated, on page 13, that untaxed interest arising from an interest distribution made by, for example, an OEIC could be declared at boxes 9.2 to 9.4 of the tax return when, in fact, if box 9.3 (the box for entering tax taken off), is populated with “0”, automatic capture of the return will fail.

To avoid a rejection of the trust tax return and a manual correction being applied, HMRC is now advising customers to declare all types of untaxed interest at box 9.1 instead.

Source: HMRC: Trust and Estate Tax Return Guide 2018

High Income Child Benefit Charge – updated guidance

(AF1, RO3)

In Klein [2017] TC 06108, the First-tier Tribunal partly allowed a taxpayer’s appeal against various late filing penalties. The initial penalty was cancelled because the taxpayer had a reasonable excuse; the daily penalties were cancelled because HMRC had not notified the taxpayer of the date when the penalties were due to start; and the six month penalty was reduced because HMRCʼs lack of contact amounted to special circumstances.

In the case in question, Ms Klein (the appellant) submitted her 2011/12 tax return more than six months late. Accordingly, HMRC charged an initial £100 late filing penalty, daily penalties of £900 and a six month late filing penalty of £300.

In respect of the appeal against the daily penalties HMRC wrote to the appellant in November 2013 saying that her appeal could not be finalised because of the Donaldson case and that a decision would be made once the outcome of the appeal to the Upper Tribunal (UT) was known. The UT released its decision in December 2014 (Donaldson v R & C Commrs [2016] BTC 28), but HMRC did not contact the appellant until March 2017, at which time the appellantʼs appeal against the daily penalties was refused.

Regarding the initial penalty, the First-tier Tribunal (FTT) found that the appellant had two reasonable excuses for failing to submit her tax return by the 31 January 2013 filing date:

  • the appellant had been told by HMRC that her filing date had been ‘deferred’ until 27 February 2013 because she was waiting for an activation code; and
  • the appellant did not have access to the paperwork she required to complete her tax return because she had moved.

The FTT concluded that there was no reasonable excuse for the appellant not having remedied the situation as soon as reasonably practical after these reasonable excuses ended. Therefore, although the appellant had a reasonable excuse in relation to the initial penalty, she did not have one in relation to the daily and six month penalties.

However, regarding the daily penalties, HMRC had not produced an ‘SA reminder’ or ‘SA326D’ showing that the appellant had been notified of the date from which daily penalties would become payable so the FTT therefore cancelled the daily penalties.

With regard to the six month penalty HMRC said that it had taken into account that the appellant had thought that lack of correspondence from HMRC for over three years meant the appeal had been accepted. The FTTʼs view was that HMRC gave no reasons why that obviously uncommon and out of the ordinary happening was not a special circumstance. The FTT decided to reduce the penalty from £300 to £100 because of HMRCʼs lack of contact with the appellant.


The Green Budget

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

Each year, shortly before the Budget, the Institute for Fiscal Studies publishes a Green Budget examining the economic and fiscal background to the Chancellor’s announcements. The latest edition was published this week and runs to 10 chapters over 350 pages, with contributions from the IFS, Citi (the US banking group) and the Institute of Chartered Accountants in England and Wales (ICAEW). The IFS website has links to the various presentations which accompanied the launch of this year’s Green Budget. For financial advisers, the two chapters of most interest are probably

With Brexit uncertainty reinforced on the day before the Green Budget’s publication, the IFS’s work needs to be treated with more caution than normal this year – as will the OBR’s projections when they emerge on 29 October. The IFS assumes that “the UK and the EU agree on a transition period [lasting beyond 2020] preserving essentially the same relationship they have today”. With that large proviso in mind, the Green Budget’s main points are:

  • Government borrowing numbers are looking better The IFS says that government borrowing “has now returned to pre-crisis levels, and is lower than successive post-referendum forecasts”. It also expects the 2018/19 deficit to be about £5bn lower than the OBR’s March forecast of £37bn, a shortfall it expects to reach £6bn by 2022/23.
  • Ending austerity Theresa May’s Conference speech this month was notable for her statement that “Austerity is being brought to an end”. This surprised many, including her Chancellor, if reports are to be believed. The IFS is in the non-believers’ camp: “Without much higher growth than forecast or substantial tax rises, ‘ending austerity’ is not compatible with [Mr Hammond’s goal of] eliminating the deficit by the mid-2020s”. The IFS calculations are that “On the narrowest possible definition, ‘ending austerity’…would require the Chancellor to find £19bn of additional public service spending relative to current plans by 2022/23”. Even that would still leave £7bn of further cuts to social security in place (cue Universal Credit problems climbing up the Government agenda).
  • Debt, not deficit, remains an issue While yearly borrowing (the ‘deficit’) has been declining, the fact remains that total government ‘debt’ (£1.8trn at March 2018) still shows the scars of the financial crisis: UK debt is higher by 50% of GDP (more than £1trn) now than it was pre-crisis. Current levels of deficit, that would not have been a concern pre-2008, now threaten to add to the overall debt as a proportion of GDP because they exceed economic growth (eg a projected 1.8% of GDP deficit in 2018/19 against GDP growth of perhaps 1.5%). The IFS also notes that the debt figure benefits from some dubious accounting of student loans. If debt remains high – as seems likely – then rising interest rates will increase the cost of servicing it. So too will any unwinding of the £435bn of QE – at present the Bank of England holds 24% of government debt on which the interest rate is just 0.75% as coupons flow back to the Treasury and the Bank effectively receives base rate.
  • A difficult Spending Review It is hardly news that the Spending Review, probably published next March, will be difficult. Current commitments to the NHS (£12bn between 2019/20-2022/23), defence and overseas aid (plus a likely continued £0.3bn a year to Northern Ireland funding) imply that Mr Hammond has to make “cuts to other areas of day-to-day spending amounting to £14.8bn by 2022/23 if the provisional spending totals from the Spring Statement are kept to.” As the IFS says – and presumably Mrs May would agree – “After eight years of cuts to spending on public services, making more would be extremely difficult”.
  • A 1% tax rise? If Mr Hammond wants to answer his boss’s promise to end austerity, then, as outlined above, he needs to find £19bn a year by 2022/23. The IFS calculates that increasing tax by 1% of GDP would yield sufficient to cover the NHS pledge. However, it would put the UK tax burden at around the highest level seen in the post-war era, bringing tax receipts to around 35% of GDP. Such a number would still leave the UK’s tax burden ranked near the middle of OECD countries, but does not sit well with promises of a low tax post-Brexit economy.
  • 1% on everything? Putting an extra 1% on all rates of income tax, VAT and NICs (which account for about 60% of all revenue) would raise similar amounts from each (between £5.4bn and £6.2bn). The IFS reckons that Labour’s proposals for higher income tax on those with incomes of over £80,000 would make little impact in comparison – about £2.5bn.
  • Other tax increases The IFS revisits several familiar options for extracting more revenue from the wealthier parts of the population:
  • As an alternative to a mansion tax, doubling council tax on the top four bands would raise over £8bn a year and would produce a more equitable system in terms of tax rate per £ of property value.
  • Capital gains tax could be charged at death and entrepreneurs’ relief abolished or watered down.
  • The planned cut to 17% in corporation tax from 2020/21 could be abandoned, initially generating an extra £5bn a year.
  • The current IHT-free treatment of pension pots could be scrapped. The IFS says this is “indefensibly generous’ and the longer it remains, the more difficult it will be to cull.
  • Charge NICs on earnings for those over state pension age, which could raise about £1bn a year. The IFS also notes that if NICs were applied to pension income, albeit at a lower than earnings rate, each 1% of pensioner NIC would raise about £650m a year.

Realistically the Chancellor would be most unlikely to attempt the introduction of any of these measures in the current febrile political situation, but they remain in a post-election armoury for future Chancellors.

The IFS report does not make happy reading for either of the residents of 11 Downing Street. Unless there is a sudden spurt in economic growth, the only way both No 10 and No 11 can achieve their goals of an end to austerity and the disappearance of Budget deficits is through a range of substantial tax increases that would be political suicide.   

Source: IFS Green Budget: October 2018

Penalties for enablers of abusive tax arrangements

(AF1, RO3)

The General Anti-Abuse Rule (GAAR) applies to tax avoidance arrangements entered into on or after 17 July 2013. (For National Insurance contributions, the GAAR applies to arrangements entered into on or after 13 March 2014).

HMRC has recently published a new factsheet about who is classed as a tax avoidance enabler and the penalties HMRC may charge.

An enabler
If a taxpayer used abusive tax arrangements that were later defeated, any person who enabled that use (and did so during the course of a business carried on by them) is an enabler. And a person who has enabled abusive tax arrangements is defined as a person who:

is a designer of arrangements;

However, when an employee enables the use of abusive tax arrangements as part of the duties of their employment, they are excluded from being an enabler. This is because they are not enabling in the course of a business carried on by them. In these circumstances, the enabler is the employer.

The definition of when tax arrangements are abusive is based upon the double reasonableness test in the GAAR. This requires HMRC to be able to show that the arrangements entered into ‘cannot reasonably be regarded as a reasonable course of action.’.

As well as being abusive, a tax arrangement must have been defeated for penalties to apply to an enabler. This means either:

  • The tax advantage originally claimed in a return or other document has been ‘counteracted’; or
  • HMRC has made an assessment that counteracts the expected tax advantage from the arrangements.

A tax advantage is counteracted where adjustments are made to the taxpayer’s position, either by HMRC or the taxpayer, to eliminate or reduce a tax advantage, or HMRC makes an assessment on the basis that the tax advantage does not arise, either in part or in whole.


HMRC can normally only issue a penalty within 12 months after the latest of the following three dates:

  1. the date on which the arrangements enabled were defeated;
  2. the date on which the GAAR Advisory Panel (an independent panel which provides opinions on cases where HMRC considers the GAAR may apply) gave their opinion about the arrangements enabled;
  3. where the GAAR Advisory Panel has given one or more opinions about equivalent arrangements - the end of the time allowed (normally 21 days, but this can be extended) for the enabler to make representations that the arrangements they enabled are not equivalent to those arrangements.

However, special rules apply where a proposal for arrangements is implemented more than once by a number of arrangements that are substantially the same as each other – known as related arrangements.

In those circumstances, HMRC can’t normally give a notice of penalty assessment to any enabler of the arrangements until it has defeated more than 50% of the related arrangements that they know about, at which point it normally has 12 months to do so. If a taxpayer has used the arrangements more than once, HMRC will count each use separately.

Where a penalty applies, it will be equal to the total amount, or value, (net of VAT), of the enabler’s fee, commission or other consideration for enabling the arrangements. There will be no deduction for any costs incurred in enabling the arrangements. In working out the penalty, HMRC will include any consideration received or receivable by the enabler for anything they have done which enabled the arrangements - even if it’s not paid directly to the enabler.

The enabler will have 30 days to pay the penalty. However, if they appeal against the penalty, they won’t have to pay until the appeal is settled.

Naming and shaming

 If HMRC has charged an enabler 50 or more enabler penalties, or one or more enabler penalties totalling more than £25,000, it is allowed to publish their details to identify them as an enabler of abusive tax arrangements.

Although HMRC will tell the enabler if it’s considering publishing their details, and will give them an opportunity to make representations, if HMRC decides to publish, the enabler doesn’t have any right to appeal against that decision.

Source: HMRC - Compliance checks: penalties for enablers of defeated tax avoidance - CC/FS43


FCA regulation of open-ended funds holding illiquid assets

(AF4, FA7, LP2, RO2)

It seems a long time ago now, but one of the first consequences of the Brexit referendum in June 2016 was a run on UK property funds. Many of the leading property funds pre-empted the outcome of the vote by switching from an offer valuation basis to a bid valuation basis, wiping 5% (or thereabouts) off the fund prices instantly. When that did not stem the flow of redemption requests, there were further cuts to fund prices followed by a round of suspensions. Not all funds suspended dealings – Aberdeen chose to reduce property valuations by 26% to reflect what it said was the discount on pre-Brexit valuations it would have to accept for ‘fire sales’.

By the end of 2016 everything had calmed down and all funds had reopened. However, it was not the first time that the gates had slammed shut on property funds – the same happened at the depths of the financial crisis in 2008. There had been similar experiences elsewhere, notably in 2012 in Germany.

The 2016 experience once again raised the question of whether open-ended collective funds were an appropriate investment vehicle for illiquid assets. Property investment companies continued to trade during these difficult periods, but their price discounts widened in response to investor concerns. It remains the case today that while authorised property funds are priced at net asset value, many real estate investment trusts (REITs) trade at significant discounts. For example, Land Securities, until recently the largest UK REIT, currently trades at a discount to net asset value of around 40%.

The FCA’s initial response in 2016 was to issue guidance on dealing with fund suspensions and investor communications. In February 2017, the regulator issued a discussion paper on “Illiquid assets and open-ended investment funds”. Following feedback on the paper and ‘further supervisory work’, the FCA has now published a consultation paper (CP18/27). The main proposals in the paper are:

  1. A new rule would require an authorised fund manager to temporarily suspend dealing in units of a non-UCITS retail scheme (NURS) where the independent valuer “has expressed material uncertainty about immovables that account for the value of at least 20% of the scheme property”. However, fund managers and depositaries would not have to wait until the 20% threshold is reached before temporarily suspending dealing, if the existing test for action being taken in the interest of all unitholders (COLL 7.2.1R) is met.
  1. The FCA wants to create a new rule to require managers of funds investing in inherently illiquid assets (FIIAs) to draw up and maintain contingency plans for exceptional circumstances. An FIIA would be defined as a NURS which has invested at least 50% of the value of its scheme property in inherently illiquid assets for at least three continuous months in the last twelve months, whether or not they have disclosed to investors their intention to do so.

The contingency plans would have to:

  • Describe how the fund manager will respond to a liquidity risk crystallising;
  • Set out the range of liquidity tools and arrangements which they may deploy in such exceptional circumstances, any operational challenges associated with the use of such tools and the consequences for investors;
  • Include communication arrangements for internal and external concerned parties and explain how the fund manager will work with the depositary, intermediate unitholders, third party administrators and others as necessary to implement the contingency plan.
  1. The FCA also wants to see increased disclosure to alert investors to illiquidity risk. The requirements proposed by the FCA are:
  • Managers of funds that invest mainly in illiquid assets will have to add an ‘identifier’ to the name of any relevant fund – a label, that will draw attention to the nature of the fund. The FCA gives the example of a fund named ‘The Blue Fund’ being labelled as ‘The Blue Fund – a fund investing in inherently illiquid assets’.
  • Disclose in the fund prospectus the details of their liquidity risk management strategies, including the tools they will use and the potential impact on investors.
  • A standard risk warning to be given in financial promotions relating to such funds to retail clients. This will apply to all firms communicating a financial promotion, not just the fund manager.

Consultation on the proposals ends on 25 January 2019, with a Policy Statement due in 2019 and changes coming into force a year later.

These proposals would mean more funds suspending dealings in difficult market conditions rather than slashing prices. The suspension approach is more logical, as valuation of illiquid assets such as property is virtually impossible when the market freezes.

Source: FCA - CP 18/27: Consultation on illiquid assets and open-ended funds and feedback to Discussion Paper 17/1

That was the week that was

(AF4, FA7, LP2, RO2)

The graph tells the story of mid-October for the FTSE 100. By the close on Wednesday 10th it was already down 2.4% on the week, dragged down by the US market’s opening volatility on that day. By the end of Wednesday’s trading in the US, the S&P 500 had dropped 3.3% on the day, guaranteeing the Footsie a bad start to Thursday. On Thursday 11th the S&P 500 edged up and on Friday eventually added 1.4% in another seesaw day of trading. However, Wall Street was in downward mode in early Friday trading, so the FTSE 100 ended the week below 7,000 for the first time since late March.

So just how bad was the week? On one yardstick, $2.6trn was wiped off shares, according to Reuters. We thought we would reproduce our usually quarterly summary, just for the past five days, to see

A few points to note from this table are:

  • Over the week a fall of 4%-5% was common in developed markets.
  • Emerging markets, which had been suffering from rising US rates and the China-USA trade war rumblings, enjoyed a spell of out-performance – but still declined.
  • As the end 2017 indices indicate, equity markets are now down over the year, with the exception of the US, which remains in 3.5% positive territory.
  • US Treasury Bond yields, which had been rising since the start of the year stabilised. However, many pundits have some of the blame for the market falls on the earlier yield rises.

Source: Reuters - Take Five: World markets themes for the week ahead


Lifetime allowance

(AF3, FA2, JO5, RO4, RO8)

Based on the Annual CPI to September 2018 of 2.4% the Lifetime Allowance for 2019-20 will be £1,054,800.

Regulations state that the previous Lifetime Allowance will be

  • increased by the percentage increase in the index, and
  • if the result is not a multiple of £100, rounded up to the nearest amount which is such a multiple.

The index referred to above is CPI.

The above figure is expected to be confirmed as part of the Budget and a statutory instrument passed to bring it into force.

Source: – Finance Act 2016

PPF - Court of Justice of the European Union judgement - update

(AF3, FA2, JO5, RO4, RO8)

Following the judgment of the Court of Justice of the European Union (CJEU) the PPF have started to write to capped members who they believe are affected by the ruling.

The PPF have stated that they will be writing in tranches to capped members to confirm the details held to ensure the PPF have all the data required to calculate any increases applicable. The PPF state that because they are not writing to all those impacted immediately there in no need to contact them if the member doesn’t receive a letter immediately. 

The PPF state:

“We continue to work closely with the Department for Work and Pensions (DWP) to make sure our approach is likely to be consistent with the necessary future changes to legislation. In advance of legislation, we are putting in place an interim process to uplift payments now:

  • We will value the benefits that the eligible PPF member expected to receive from their scheme at the point of their PPF assessment date. We will value the member’s PPF compensation from the same date.
  • Where we find the PPF compensation is less than 50%, we will increase the headline level of our compensation payments until the total value is at least equal to 50% of their expected pension. Existing PPF indexation/revaluation rules will apply to this increased headline amount. We anticipate that this will be a one-off change needing no further adjustment.
  • We are the scheme manager for FAS on behalf of DWP and administer according to their instructions. Where we find FAS assisance is less than 50 per cent we will increase standard assistance. For the time being, the process will only capture members of FAS insolvent schemes.”

Source: InfoCuria – Case-law of the Court of Justice – Case C-17/17

FCA publishes CP18-31

(AF3, FA2, JO5, RO4, RO8)

The FCA and FOS have published a consultation CP18-31 Increasing the award limit for the Financial Ombudsman Service.

The consultation paper explains the FCA proposals to increase the award limit for the Financial Ombudsman Service’s Compulsory Jurisdiction. Their proposals aim to ensure more complainants receive fair compensation when the ombudsman service upholds their complaint against a financial services firm.

The ombudsman service proposes to mirror their proposed changes to the Compulsory Jurisdiction in the Voluntary Jurisdiction, which it oversees. As such, this consultation is issued jointly by the FCA and the ombudsman service.

The FCA have considered various issues when proposing the changes, including their estimate that approximately 2,000 complaints upheld by the ombudsman service each year involve fair compensation recommendations above £150,000. The new limit will aim to include the majority of these.


The proposals are that, on 1 April 2019, the ombudsman service’s £150,000 award limit should change to:

  • £350,000 for complaints about acts or omissions by firms on or after 1 April 2019.
  • £160,000 for complaints about acts or omissions by firms before 1 April 2019, and which are referred to the ombudsman service after that date. This is so that the limit for these complaints reflects changes in inflation, as measured by the Consumer Prices Index (CPI), since the £150,000 limit was put in place in 2012.

The proposals include that, from 1 April 2020 onwards, both award limits should be automatically adjusted on 1 April, using the CPI for the preceding January. The inflation‑adjusted limit would be rounded down to the nearest £5,000. We explain how this will work in Chapter 3.

For any complaints referred to the ombudsman service before 1 April 2019 the limit will remain at £150,000.

Source: FCA - Increasing the award limit for the Financial Ombudsman Service

IHT on pension transfers by people in serious ill health - an update

(AF3, FA2, JO5, RO4, RO8)

In the case of Mrs Staveley deceased, Mrs Staveley owned a section 32 pension plan which, in October 2006, she transferred into an AXA personal pension plan.

Unfortunately, the transfer took place at a time when Mrs Staveley knew she was in serious ill health and she died two months later.

HMRC’s view is that during a transfer process, the right to decide who receives death benefits comes back into the estate and that is what is being given away. In good health, the death benefits have no value, so there is nothing to give away in terms of value for inheritance tax (IHT) purposes. However, in serious ill health, there could be a transfer of value for IHT purposes, depending on the intent of the transfer and the member’s awareness of their ill health.

In this case HMRC claimed IHT on the basis that there had been:

  1. a transfer of value which reduced Mrs Staveley’s taxable estate at the time of transfer - section 3(1) IHT Act 1984; and
  2. there had been an omission to exercise a right with the intention of deliberately increasing the estate of another which led to a lifetime transfer of value immediately before death - section 3(3) IHT Act 1984.

This is on the basis that Mrs Staveley could have taken retirement benefits but chose not to. (Note that since Finance Act 2011, the omission to exercise a right rule is no longer relevant to registered pension plans.)

The beneficiaries under Mrs Staveley’s Will were her two sons. They were also the nominated beneficiaries who received the death benefits under the AXA pension plan on her death.

The case was unusual in its facts because it was clear that Mrs Staveley’s prime reason for making the transfer was to prevent her ex-husband directly or indirectly getting any benefit at all from her pension plans on her death. She understood that a surplus in the pension fund under her section 32 policy could potentially pass back to the company she had previously built up with her former husband, allowing him to benefit from it.

HMRC lost on the first issue at both the First-tier Tribunal (FTT) and the Upper-tier Tax Tribunal (UTT), and on the second issue at the UTT. However, all three Court of Appeal judges, Lord Justice Newey, Lady Arden of Heswall and Mr Justice Birss, have now decided in favour of HMRC on both issues.

The two issues:

1. Transfer of value

HMRCs general stance in these cases is that a pension transfer will not generally give rise to a transfer of value because the value of the gifted (death) benefits is negligible. But, if it is made at a time when the planholder is in serious ill health and knows that, and dies within two years, then a lifetime transfer of value can arise.

The estate claimed that no transfer of value should arise because there was “no intention to confer a gratuitous benefit” - section 10 IHT Act 1984.

Section 10 gives exemption for a transfer that was not intended to confer a gratuitous benefit. The argument here was that the transfer was made only to prevent Mrs Staveley’s ex-husband from benefitting from her pension plan. This was indirectly possibly under the section 32 plan but not possible under the personal pension plan.

The First-tier Tribunal (FTT) and the Upper-tier Tax Tribunal (UTT) took different interpretations of the meaning of law on the section 10 exemption. Nevertheless, they both agreed that no transfer of value should arise, because Mrs Staveley had no intention to confer a gratuitous benefit when she made the transfer. Her sole intention in making the transfer was to avoid her husband benefitting from the pension proceeds on her death.

In summary the UTT said:

“Agreeing with the FTT, therefore, we find that it has been shown that the disposition by the transfer of funds to the AXA PPP was not intended, and was not made in a transaction intended to confer gratuitous benefit on any person, and that it was made in a transaction at arm’s length between persons not connected with each other. The transfer was accordingly, by virtue of s 10 IHTA, not a transfer of value for the purpose of s 3 IHTA 1984.”

Both the FTT and the UTT concluded that the transfer and the omission were unconnected, and not part of any scheme to confer benefit on Mrs Staveley's two sons, and so the transfer was not an associated operation with the omission.

Crucially, however, the Court of Appeal judges took a different view of the application of the associated operations rules to this case and decided that the "associated operations" provision entitled HMRC to succeed on Issue 1.

Lord Justice Newey argued, and Mr Justice Birss agreed, that the failure to take pension benefits and the transfer to the PPP was itself part of a scheme intended to confer gratuitous benefits. As such the section 10 IHT exemption couldn’t apply. Here’s the reasons given:

  • i) The FTT found as a fact that "conferring on her sons a greater benefit than otherwise was one of the factors in her decision not to access her pension fund" (paragraph 149 of the decision). That, moreover, was her intention at the time of the transfer to the PPP. The FTT said in paragraph 167 of its decision:

"As at 30 October 2006, when [Mrs Staveley] applied to transfer the s 32 policy to the PPP, her intention in respect of the omission, we must presume, would have been the same as at June 2006 and that intention was … in part to confer gratuitous benefit";

ii) Mrs Staveley's failure to take pension benefits must thus have been both an "operation" within the meaning of section 268 IHTA (since "operation" "includes an omission") and one "intended … to confer a gratuitous benefit";

iii) The failure to take pension benefits and the transfer to the PPP will, on the face of it, have been "operations which affect the same property" within the meaning of section 268(1);

iv) The fact that the transfer to the PPP was not intended of itself to confer a gratuitous benefit (because Mrs Staveley was not intending to improve her sons' position by it) cannot without more prevent it from having been a relevant "associated operation". There is, I think, no question of each individual operation and/or transaction in "associated operations" having to have been intended itself to confer a gratuitous benefit.

As Lord Jauncey indicated in Macpherson, an operation need not "necessarily per se confer a benefit" but may "form part of and contribute to a scheme which does confer such a benefit". It is good enough, therefore, that a scheme of which an operation forms part is intended to confer a gratuitous benefit. As the FTT noted, "the combination of operations must have been intended to confer a gratuitous benefit";

v) The FTT was, in my view, mistaken in considering that there was "no intent linking [the omission to take pension benefits and the transfer to the PPP]". It follows from the FTT's findings, as it seems to me, that the omission and transfer were both motivated by a desire on Mrs Staveley's part that her sons should have the death benefits that would be payable if she did not draw a pension in her lifetime.

During the currency of the section 32 policy, Mrs Staveley envisaged that her sons would receive such benefits via her will. When she withdrew the funds from the section 32 policy, she put in place a different mechanism. To ensure that the benefits would go to her sons, she stated in her application for the PPP that she wished death benefits to be paid to them.

While, therefore, Mrs Staveley did not see the transfer to the PPP as improving her sons' position and she made the transfer out of a desire to sever ties with Morayford [the company she had built up with her former husband], the only reasonable conclusion, as it seems to me, is that she also intended the PPP to be a means by which the death benefits could be passed to her sons;

vi) This conclusion is, I think, consistent with the views expressed by Lady Arden in paragraph 36 above. As she explains, it is implicit in its decision (especially at paragraphs 16 and 50) that the FTT (unsurprisingly) considered that Mrs Staveley intended her sons to benefit from the PPP;

vii) It cannot possibly matter that Mrs Staveley's death was not a "transaction" or an "operation" but rather the point at which the right to draw lifetime benefits was lost;

viii) In all the circumstances, the failure to take pension benefits and the transfer to the PPP are, to my mind, each properly to be seen as "form[ing] part of and contribut[ing] to a scheme" intended to confer gratuitous benefits.”

Lady Arden, also decided for HMRC on Issue 1, both in relation to the question of whether a gratuitous benefit was conferred and in relation to the question of whether there was an associated operation forming an integral part of the transfer in the shape of the omission to draw the income under the PPP. However, her argument on whether a gratuitous benefit was conferred centred around:

  • the improvement in the rights which the sons enjoyed following the transfer to the PPP compared to those they had previously had as residuary beneficiaries under Mrs Staveley's Will;
  • and the burden of proof, taking the view that the FTT "did not … find that [Mrs Staveley] did not intend to give [her sons] any more than was in her Will.”

2. Omission to exercise a right

This is the IHT on the residual fund available to the pension scheme member that is not deemed to be part of the transfer of value that takes place on the pension transfer.

On the question of an omission to exercise a right, although HMRC had previously won the case in front of the FTT, the UTT overturned this decision. 

For IHT to apply the omission must be deliberate and lead to an increase in the estate of another person – those persons being Mrs Staveley’s sons in this case.

The UTT said:

“In our judgment, the proximate cause of the increase in the estates of the two sons was the exercise of the discretion of the Scheme Administrator. Their estates were increased “by” the exercise of that discretion, and not by the omission of Mrs Staveley to exercise her right to take lifetime benefits.

There would have been no increase in the value of the son’s estates but for the omission to take those benefits, but the test is not a “but for” test and it was not the omission which had the effect of increasing the sons’ estates; it was the exercise of the Scheme Administrator’s discretion.

It follows, therefore, that the conditions of s 3(3) are not satisfied with respect to Mrs Staveley’s omission, and that omission cannot be treated as a disposition or as a transfer of value within s 3(1).”

However, dismissing the UTT argument, all three judges agreed both that the value of Mrs Staveley's estate was diminished, and the sons' estates were increased, by the omission by Mrs Staveley to take the income benefits, following the transfer to the PPP and up to the last moment before her death. Further, the respondents no longer disputed that Mrs Staveley's omission to exercise pension rights was deliberate. So, HMRC succeeded on Issue 2 as well.

To a degree this part of the judgement is academic because provisions included in the Finance Act 2011 mean that the section 3(3) omission to exercise a right rule no longer applies to registered pension plans. It is only relevant to deaths that occur before 6 April 2011.

This case is of considerable importance in determining the future IHT treatment of pension scheme transfers, in that it appears that pension transfers made by people in seriously ill health could now be considered a chargeable lifetime transfer for IHT purposes, whatever the intent of the transfer.

There are a number of situations where pensions can be subject to IHT, notably: contributions, assignments of the death benefits and transfers between schemes.

If any of those occur when the death benefits have a value - usually when the member is in serious ill health - then there can be an IHT issue if the member is aware that they’re in serious ill health, and their death occurs within two years. And bear in mind that the two-year rule is just an arbitrary cut-off. Deaths after more than two years can also be looked at.

Key points to take out of this Court of Appeal decision are:

  • Although Mrs Staveley’s prime intention of transferring her pension rights was to prevent her ex-husband benefitting from the pension plan, this was not the sole intention. The subsidiary intention of benefitting her sons was sufficient to trigger a section 3(1) disposition.
  • Currently HMRC take the view that a transfer of value will normally only occur if the transferor died within two years and he/she was in serious ill health when he/she made the transfer. There are three implications to this:
  • If the individual dies within two years of the transfer, the transfer is notifiable on IHT 409. If such an individual was in serious ill health at the time, a transfer of value can arise under section 3(1). Based on the Court of Appeal judgement, it would seem that it will be impossible to make out a section 10 defence.
  • In calculating the transfer of value, the deceased member’s pension rights before the transfer needs to be taken into account. For people who transfer at age 55 or over into a flexible pension plan, the value of these rights can be significant and could considerably reduce the transfer of value.
  • Indeed, for people who had a (provable) expectation of life of more than three years, the next transfer of value can be significantly reduced as a result of actuarial calculations.

It’s vital that anyone involved in advising on pension planning with a client in serious ill health fully documents all the reasons for any action taken. It’s likely the legal personal representatives may well need strong evidence should they find themselves having to argue with HMRC, if they try to contend an IHT charge is payable.

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.