PFS What's new bulletin - January

UPDATE from 13 January 2023 to 26 January 2023

TAXATION AND TRUSTS 

How to leave a legacy to a disabled person on benefits

(AF1, JO2, RO3) 

In a recent decision the English Court of Protection refused to approve transfer of an outright legacy left to a disabled man in receipt of means tested benefits into a trust, holding that deprivation of assets was a significant purpose for creating the trust. 

The case in question was F v R [2022] EWCOP 49 (case of F and R). 

This concerned a 30-year-old man with severe disabilities who was in receipt of several benefits for his care and support amounting in total to just over £60,000 per year, of which about £52,000 was means tested. R’s cousin left a third of his estate, valued at somewhere between £400,000 and £600,000, to R. R’s father (acting as Rs deputy) asked the Court of Protection to allow the money to be put into trust to save R’s means tested benefits and care provision. R’s father claimed that the cousin’s intention was to leave the money on trust but that was not supported by evidence. Although the terms of the proposed trust were not fully disclosed there was some concern on the part of the judge that there was insufficient mechanism to ensure that sums would actually be applied for R, as opposed, for example, to accruing for ultimate beneficiaries.

The judge concluded that if the proposed settlement was authorised by the Court, the relevant authorities would take the view that preservation of means-tested benefits was a significant operative purpose.” Frankly, (the judge said) I cannot see how any other interpretation can be sustained”. 

The above case can be contrasted with the decision in Re LMS [2020] EWCOP 52 where the Court authorised a transfer of a legacy of £170,000 from a grandfather to a trust for the benefit of a 21 year old with significant autism and some learning disability and who lacked the capacity to manage her own finances. In that case the Court decided that while the Court of Protection did not have jurisdiction to determine whether LMS would be entitled to means tested benefits and funding, the judge believed that the significant operative purpose of the trust was not to allow LMS to receive means tested benefits but rather to better effect the intention of her grandfather. 

In another case in Northern Ireland, in Re The Will trusts of Sarah McCullogh [2018] NICh 15 a variation to Will Trust was allowed to protect means tested benefits of the deceased’s son, the Court deciding that that the significant operative purpose was to give a better effect to Sarah McCullogh’s intention that her son should benefit from his inheritance. The Court did not believe that amounted to deprivation. (Note that neither of these two cases are binding on the Court of Protection). 

Comment 

On the rules on what amounts to deliberate deprivation, in particular on the meaning of “the significant operative purpose” please see our earlier articles on Gifting assets and local authority assessment and Deliberate deprivation of capital - new ombudsman guidance. 

Clearly, each case as always will depend on its own facts. However, what is clear is that if you intend to leave assets in your will to someone who might be receiving means tested benefits and you are concerned about the potential loss of those benefits then you should not leave an outright legacy, rather create an appropriate trust in your will. Of course, similar consideration will apply to any gifts made during lifetime. 

On the other hand, there is always another argument that if someone acquires substantial means, in whatever manner, then it’s only fair that they should lose their means tested state benefits. As the judge in FvR pointed out, “means tested benefits are by definition not a universal entitlement, rather they are a safety net. Parliament has decided that they are payable only to those whose other means fall below a certain threshold”. 

Transfer of assets abroad - new guidance

(AF1, RO3) 

HMRC has published new guidance on the transfer of assets abroad legislation. This provides a useful opportunity to publish a reminder about its interaction with investment bond taxation. 

The new guidance is in HMRC’s International Manual INTM600000 onwards. 

The transfer of assets abroad legislation can be found in sections 714 to 751 of the Income Tax Act 2007. It is a wide-ranging anti-avoidance provision which renders UK-resident individuals liable to income tax where they seek to avoid an income tax liability. This is done by transferring assets to a person abroad while still being able to benefit from the income that the assets generate. 

Extensive draft guidance was published as part of a consultation exercise in July 2013. The guidance being published now is a rewrite of this, taking on board stakeholders’ comments. It also includes additional guidance following the changes that were made to the legislation in 2017 and 2018 following the introduction of the deemed domiciled rules. 

This new guidance replaces the existing guidance, which is at INTM600000 of the International Manual and provides far greater detail regarding the application of this legislation. 

This provides a useful opportunity to publish a reminder about the interaction of investment bond taxation with the legislation on the transfer of assets abroad (section 731 ITA 2007). Please see iii. below. 

HMRC’s manual at INTM601220 says “If a profit is made on a disposal by a person abroad of an insurance policy or contract, the profit arising will be regarded as income becoming payable to a person abroad for the purposes of the transfer of assets provisions.”

Under a life policy/investment bond subject to a non-bare (non-charitable) trust, with the trust having been created by an individual, chargeable event gains are assessed to tax on the following persons: 

1. On the happening of the chargeable event, if the person who created the trust ("the settlor/creator") is UK resident and alive, chargeable event gains will be assessed to tax on the settlor – but please see also (ii) below. For this purpose, "settlor" has an extended meaning to include any person who adds property to a trust whether directly or indirectly (i.e. settlor means all people who have contributed to the trust). So, for instance, where a person pays sums to the trustees to use as current or future premiums for a policy held in the trust, that person is a creator of the trust. 

1. Where the policy is held under trust and immediately before the chargeable event in question occurs the settlor is not resident in the UK or is dead, chargeable event gains will be assessed on the trustees at the rate of 45% if they are resident in the UK for income tax purposes at that time. For a UK policy, where the trustees are resident in the UK, they would be entitled to a credit for basic rate (20%) tax. This will reduce their liability to 25% of the gain. 

Where a chargeable event gain is assessed to tax on trustees who are resident in the UK the 45%/25% trust rate will not apply to the first £1,000 of gross income in a tax year. This £1,000 band is known as the “standard rate” band and income which falls within the band is taxed at 10% or 20% depending on the nature of the trust income. For a trust whose sole asset is a life assurance policy the first £1,000 of chargeable event gain in a tax year will be free of tax for a UK policy and taxed at 20% for a non-UK policy. 

Despite the words in the legislation "immediately before the chargeable event in question occurs", it is the HMRC view that in cases where the settlor has died whilst UK resident, the trustees will only be assessed if the settlor died in a previous tax year. Chargeable event gains arising in the year of the settlor's death will therefore still be taxed on the settlor. 

1. In the circumstances in (ii) above where the trustees are non-UK resident for income tax purposes, any gains will be treated as income of the trustees for the tax year in which the chargeable event occurs for the purposes of section 731 ITA 2007 (the legislation on the transfer of assets abroad). The effect of this is that the gains are added to the pool of trust income available for distribution and attribution to UK resident beneficiaries who receive payments out of the trust. This means that, to the extent there is undistributed income in the trust, such payments would be treated as income and assessed to tax on the beneficiary in the tax year of receipt. Note that such payments are not taxed as chargeable event gains and cannot benefit from top-slicing relief. 

The "matching rules" that link the benefit received with the income of the person abroad (in this case, the non-UK resident trust) are in sections 733 to 735A ITA 2007. For some time, commentators have suggested it would be beneficial to have greater certainty on how benefits are matched to relevant income, particularly in circumstances where there is more than one beneficiary within the scope of a section 731 charge. A July 2012 consultation established that more certain rules would be welcome, and draft legislation published for consultation in December 2012 included proposals for new matching rules. The proposed rules were based on the approach taken by the capital gains matching rules, and were designed with the aim of providing more certainty for taxpayers while not providing an opportunity for manipulation of ordering or timing so that benefits received by UK resident individuals fall out of charge. Although commentators were broadly in favour of the clearer, more certain rules there were concerns that the rules did not give an equitable outcome in some circumstances. As a result, the Government announced that the changes to the rules to determine the amount of the section 731 benefit charge would be deferred to allow for further consideration and consultation with interested parties. Some guidance is given at the new INTM602480. 

INVESTMENT PLANNING

 2022 inflation numbers

(AF4, FA7, LP2, RO2)

Inflation hit the highest level in 40 years in 2022, but what actually drove up the rate and can it come down? 

The CPI annual inflation reading for December 2022 was 10.5%, 0.6% below the 11.1% peak it hit in October and the fourth consecutive month in double digits. What was behind the change from 5.4%, twelve months previously and will the Prime Minister’s recent pledge to halve inflation by the end of 2023 be met? 

One way to gain an insight is to look at how much contribution each of the twelve groups in the CPI shopping basket made to the final figure. This involves considering two aspects: 

• The weighting for the group in the index. For example, the largest group is Transport, which accounts for 13.9% of the basket. The smallest is Health, which counts for just 2.5%.

• The inflation rate for each group. In 2022 that ranged from 26.6% for Housing, water, electricity, gas and other fuels to just 2.0% for Communications. 

Multiply each group’s weighting by its inflation rate and the product is the contribution to overall inflation. In graphical from, the result is shown in the pie chart above. In tabular form, it looks like this: 

Group	Weight%	Inflation %	Contribution %
Transport	139	6.5	0.90%
Housing, water, electricity, gas and other fuels	138	26.6	3.67%
Recreation and culture	134	4.9	0.66%
Food and non-alcoholic beverages	116	16.8	1.95%
Restaurants and hotels	114	11.3	1.29%
Miscellaneous goods and services	94	5.4	0.51%
Furniture, household equipment and maintenance	76	9.8	0.74%
Clothing and footwear	60	6.5	0.39%
Alcoholic beverages and tobacco	50	3.7	0.19%
Education	33	3.2	0.11%
Communication	25	2.0	0.05%
Health	21	5.1	0.11%
TOTAL			10.56%

What stands out in both chart and table is the contribution of the Housing, water, electricity, gas and other fuels group. It represents 13.8% of the shopping basket but accounts for just over a third of CPI inflation. The main culprits within the group are the predictable pair: 

• Gas, with annual inflation of 128.9% and a 1.4% weighting in the overall index; and 

• Electricity, with annual inflation of 65.4% and a 2.0% weighting in the overall index. 

Air travel also recorded a 44.1% annual increase, but only accounts for 0.2% of the overall index while liquid fuels (primarily heating oil) rose 47.1%, with a weighting of 0.1%.   

The major contribution from domestic energy bills is one reason why Mr Sunak’s pledge is in reality no more than a statement of the current economic consensus. Wholesale gas prices are now falling and there are predictions that by October 2023 the Ofgem price cap will be about £2,700, ie less than the post-April £3,000 Energy Price Guarantee announced in the Autumn Statement. Even if electricity and gas inflation were 20% in 2023, that would make a contribution to the overall CPI of 0.6% rather than last year’s 3.1%. The result is 2.5% off the overall CPI rate, despite a significant price rise. 

A similar argument applies to other areas with sensitivity to energy costs, such as transport. Provided that price rises in 2023 are not as fierce as in 2022, then year on year inflation will fall. A good current example of thee effect is the fuel and lubricants sub-category of transport, which reacts quicker to energy costs than do utility bills. The annual fuel and lubricants inflation was 43.7% in July 2022, but it ended the year at 11.5%.   

Comment 

Gas prices were the driver of 2022’s inflation, both as an energy source (it effectively sets the marginal cost for electricity) and as a chemical feedstock, e.g. in fertilisers. Bar another Ukraine-level shock, gas will not be a repeat problem of the same scale in 2023. The issue for the Bank of England, with its 2% inflation target, changes in 2023 from something it cannot control – energy prices – to something in theory it has some power over – wages. The risk of a wage/price spiral, with earnings currently growing by 7.2% a year in the private sector, is clear. Core CPI inflation (CPI excluding energy, food and alcohol) is 6.3% and the Bank may feel it has little option but to engineer a recession to drive that figure down. 

NS&I raises rates again

(AF4, FA7, LP2, RO2) 

National Savings & Investments (NS&I) last announced an interest rate increase on most of its variable rate investments in mid-December at a time when the Bank (Base) Rate was 3.0%. Now, just over a week before the Bank of England is expected to raise the Bank Rate to 3.75% or 4.0%, NS&I has announced another round of rate rises, covering both most of its variable rate products and Premium Bonds: 

Product	Old rate	Rate from 24/1/23
Direct Saver	2.30% gross/AER	2.60% gross/AER
Income Bonds	2.30% gross/2.32% AER	2.60% gross/2.63% AER
Direct ISA	1.75% AER	2.15% AER
Junior ISA	2.70% AER	3.40% AER

For Premium Bonds, the prize rate will rise from 3.0% to 3.15% from 1 February 2023. The odds of winning will again remain at 24,000:1, meaning that, from next month, the once ubiquitous £25 will be less than half of all prizes: 

	Jan-23	Feb-23
Odds of monthly win:	1:24,000	1:24,000
Prize rate	3.00%	3.15%
£1,000,000	0.000040%	0.000040%
£100,000	0.001123%	0.001182%
£50,000	0.002226%	0.002345%
£25,000	0.004492%	0.004730%
£10,000	0.011210%	0.011824%
£5,000	0.022380%	0.023589%
£1,000	0.239998%	0.251982%
£500	0.719994%	0.755945%
£100	23.250458%	25.663293%
£50	23.250458%	25.663293%
£25	52.497621%	47.621778%

 

Comment 

The Premium Bond increases mean the product remains an attractive near instant access option, particularly for the ever-growing band of higher rate taxpayers. NS&I’s latest moves on its other variable rate products make them more competitive, but still short of the market leaders, where the top rates on instant access money are about 0.3% higher. 

PENSIONS 

National Insurance Contributions and Value For Money
(AF8, AF7, FA2, JO5, RO4) 

The Pensions Policy Institute has looked at the NI contributions versus receipts balance for various income and employment profiles. 

Although something called the National Insurance Fund (NIF) exists, it is not a government run fund designed to finance long term benefits from contributions and investment returns. When it was launched in 1948 the NIF was indeed such an entity, but these days it is better described as an accounting exercise on the Treasury’s balance sheet. For proof, look at the latest set of NIF accounts which show £125.6bn of inflow (98% of which is NICs) in 2021/22 and £111.2bn outflow (98% of which is benefit payments). The idea that many people have that their NICs are ‘buying’ their state pension is incorrect. In the UK’s pay-as-you-go state pension system, today’s NICs pay today’s pensions. 

This fact does not invalidate  the reasonable question about the value of NICs paid against pension received that is asked in a recent paper from the Pension Policy Institute (PPI). What sounds like a simple question rapidly becomes complex once the assumptions involved are considered. For the PPI’s work, these included: 

• All money is in 2022 earnings terms, then aggregated so that the results can be compared consistently.
• The numbers are based on individual employee NI contributions only.
• Economic assumptions are in line with OBR financial assumptions;
• State pension will continue to benefit from the triple lock;
• Age and gender specific earnings profiles are derived from the Labour Force Survey;
• NIC contributions rates continue at current levels. Past contributions are based on historic numbers.
• Life expectancy uses the ONS 2020 based principal projection. However, the ONS published life expectancy number reduced by three years for the 10th percentile earner (ie lowest earners), and increased by three years for the 90th percentile earner. 

The PPI looked at the proportion of state pension received that was represented by NICs paid for men and women currently aged 20, 40 and 60 with earnings in the 10^th, 50^th and 90^th deciles. A figure of less than 100% thus meant there was more money coming back in pension than went out in NICs. 

A summary of the results is given in the table below. 

	Men			Women
Income percentile	10th	50th	90th	10th	50th	90th
Age 20	28%	56%	86%	18%	39%	71%
Age 40	31%	65%	101%	20%	43%	81%
Age 60	36%	60%	79%	22%	42%	68%

 A few points to note: 

• The 20-year-olds will be in the news state pension scheme from the start, whereas the 40- and 60-year-olds started working life under a previous state pension regime and moved across to the current system in April 2016.
• Men tend to have paid NICs for a higher proportion of the State Pension they receive in NICs than women earning at the same percentile point because of:
• differences in the gender specific earnings distributions and;
• lower life expectancies for the same income percentile.
• National insurance rates have generally increased over time, particularly for high earners who paid nothing above the upper earnings limit until 2003/04.
• These figures are for employees. The self-employed get a better deal because of lower individual contribution rates. For example, the PPI calculates that a 40-year-old self-employed male the percentage of his state pension covered by NICs would be 49% rather than 65% for his employee counterpart. 

Comment

The PPI figures illustrate what was to be expected: the lower the income and the fairer the sex, the better the deal NICs are in terms of state pension received.  

Resolution Foundation: The Living Standards Outlook 2023
(AF8, RO4, JO5)

 

The Resolution Foundation has published its annual Living Standards Outlook 2023. Last year was by any measure difficult. As inflation reached its highest level in 41 years, the Government responded with household cost of living support of £58 billion in 2022-23. Facing a tight labour market, employers raised nominal pay by its fastest rate since 1991. But real pay still shrunk, and government support was not enough to prevent median household incomes from falling by 3% in 2022-23.

 The main findings of survey include: 

• Three-quarters of UK adults reported in November that they were trying to cut back on overall spending. 

• 45% of respondents, or 24 million people, are quite worried or very worried about their energy bills over the winter months, but this rises to 63% of workers in the bottom income quintile, and 62% of those paying their energy bills using a pre-payment meter (PPM) (compared with 43% of people who pay energy bills using direct debit). 

• Almost one-in-five (19%) of people in our survey – or 10 million – are not confident about their finances as a whole over the next few months, but for workers in the bottom income quintile, this rises to 32%, and to 43% for those not working and on benefits. 

• Families are taking actions to cope with higher costs today which will worsen their future financial resilience. In November 2022, 27% of adults report using their savings for daily living expenses in the previous four weeks up, from one-in-five (20%) in June. In the four weeks preceding the survey, 12% of workers in the lowest income quintile report selling or pawning possessions they would have preferred to keep, 7% have cancelled or not renewed their insurance, and 7% say they have stopped or reduced pension contributions to save money. 

Whilst the report did not specifically address pension savings, reading it makes it clear people will be looking to cut what they see as unnecessary outgoings and for many stopping pension contributions may seem more attractive then cutting out a “Sky package” or something similar. 

LGA publishes response to public service pensions remedy consultation
(AF8, FA2, RO4, JO5) 

The Local Government Association (LGA) has published its response to the consultation on the draft Public Service Pension Schemes (Rectification of Unlawful Discrimination) (Tax) Regulations 2023. 

In the response, the LGA highlighted that there are two important areas the Regulations do not address, namely the members of the Teachers’ Pension Scheme who will be rolled back into the Local Government Pension Scheme (LGPS) as part of the McCloud remedy and some small pot payments. 

The LGA also commented on the timing of the consultation, stating: “Whilst we welcome sight of the draft regulations and guidance, we understand the lateness in providing these materials has caused a subsequent delay to [Department for Levelling Up, Housing and Communities] drafting and consulting on its secondary McCloud legislation. This presents a significant risk to LGPS administering authorities being able to implement the McCloud remedy on time, particularly as the LGPS is locally administered.” 

Loan by pension scheme was unauthorised employer payment
(AF8, FA2, JO5, RO4) 

The case of Nilebond Ltd v HMRC (PENSIONS - scheme sanction charge - whether loan made by pension scheme was "unauthorised employer payment") [2023] UKFTT 14 (TC) demonstrates the dangers of administering a SSAS without a professional trustee ensuring full compliance with all of HMRC’s requirements. The First-tier Tribunal found that a loan by a pension scheme to its sponsoring employer was an unauthorised employer payment liable to the scheme-sanction charge because the floating charge over the loan had not been registered at Companies House, as required under section 859A (1) of Companies Act 2006; nor did retrospective registration remedy the situation. 

Background

The appellant company, ‘Nilebond’, was the administrator of a SSAS (NDRA). In 2017, the NDRA made a loan, secured by a floating charge over the employer’s assets, of £37,500 to its sponsoring employer. The employer failed to register the charge at Companies House. After the loan was repaid, the charge was retrospectively registered; as permitted under section 859F of Companies Act 2006. 

HMRC assessed Nilebond, as administrator, to the scheme-sanction charge under section 239 of FA 2004, on the grounds that the loan was an ‘unauthorised employer payment’ and hence a ‘scheme chargeable payment’ liable to the charge. 

An ‘unauthorised employer payment’ is defined by FA 2004, s. 160(4) as, inter alia, a payment by a registered pension scheme to its sponsoring employer that is not an ‘authorised employer payment’ within FA 2004, s. 175. A loan to a sponsoring employer may be an authorised employer payment if it is an ‘authorised employer loan’ within FA 2004, s. 179. One of the conditions for a loan to be such is that it be secured by a charge that is of adequate value (FA 2004, s. 179(1)(b)). For a charge to be of adequate value, it must meet three conditions (A, B and C) set out in FA 2004, Sch. 30, para. 1. Condition C is that the charge must take priority over any other charge over the assets. 

It was HMRC’s view that by failing to register the charge with Companies House, the charge was not of adequate value, since it did not have priority but would have ranked pari passu with other unsecured creditors’ claims in the event of an insolvency, even though it had been repaid in full and during the period the loan was outstanding, there were no other charges over the sponsoring employer’s assets. Companies Act 2006, s. 859H(3) provides that an unregistered charge is void against liquidators, administrators and creditors of the company. This meant that the loan was not secured at all. 

The Tribunal agreed. 

As to retrospective registration, the Tribunal also agreed with HMRC that, although the Order issued under Companies Act 2006, s. 859F deemed there to have been no failure to deliver particulars of the charge, it also provided that it was without prejudice to the rights of any person acquired during the period beginning with the creation of the charge and ending with its registration. The situation existing during the period of the loan was therefore unchanged.

 

FCA to launch review of retirement income advice

(AF8, AF7, FA2, JO5, RO4) 

In a Press Release, the FCA has announced that it will be undertaking a thematic review, work on which was halted by the COVID pandemic, assessing the advice consumers are receiving on meeting their income needs in retirement. The FCA is to start contacting firms and trade bodies shortly as part of the review, which will also look at how firms are responding to changing consumer needs as a result of the rising cost of living. The findings, which are expected to be published at the end of this year, will be used to inform future strategy and to identify how firms are implementing the consumer duty.

 The FCA said: “The introduction of the Government’s pension freedom reforms has changed the way consumers access their retirement savings. Given the wider range of retirement options available, it is vital that consumers get good advice at the point they first access their pension savings and, where relevant, on an ongoing basis.” 

Will this end in a similar manner to their reviews into the DB transfer market? 

TPR: Trustees urged to support DC savers amid economic challenges

(AF8, AF7, FA2, JO5, RO4) 

The Pensions Regulator (TPR) has issued a Guidance Statement: Supporting defined contribution savers in the current economic climate. In this TPR has highlighted the importance of supporting savers amid economic volatility and concerns that the value of some DC pots has fallen. The statement outlines how trustees should communicate with savers to aid them in understanding what a fall in their DC pension could mean and how they can avoid making decisions that could lead to risks such as being scammed. It also explains how trustees can strengthen the governance and oversight of their DC schemes and ensure investment strategies support stronger saver outcomes. 

David Fairs, Executive Director of Regulatory Policy, Analysis and Advice at TPR, commented: “There is no one-size-fits-all answer in these difficult times, and scheme specific circumstances are important. However, we expect all trustees to consider the issues raised in this statement and take appropriate action as part of their ongoing governance responsibilities... We are speaking to trustees and their advisers about how schemes are responding to current market volatility, as well as industry representative bodies, including how they can support savers through this period.”