PFS What's new bulletin - May I

TAXATION AND TRUSTS

 

A recent CGT case lost by HMRC

(AF1, RO3)

 

A case where the First-tier Tribunal (FTT) decided that tax was not due on a house sale, because the seller was not the beneficial owner of the property.

 

This case was Raveendran v HMRC, 2024 UKFTT 273 TC, in which the taxpayer, Rasiah Raveendran had bought a property in 2005 for £300,000 and sold it to his brother's wife in 2014 for £350,000. HMRC discovered the sale during an enquiry into Mr Raveendran’s 2014/15 tax return and decided that the property was sold at a considerable undervalue, the real value being £1.08 million. HMRC issued a discovery assessment of nearly £192,000 to Mr Raveendran.

 

He appealed against the assessment, claiming that he had originally bought the property on behalf of his brother, Mr Indraraj, who had provided the money for the purchase. Mr Indraraj had been unable to buy the property in his own name because he had been made bankrupt the previous year and could not obtain the necessary loan.

 

Mr Raveendran provided evidence to prove that his brother was the beneficial and legal owner by means of a resulting trust, including completion statements for the purchase showing cash transfers of £44,000 to the solicitors. Mr Raveendran said these transfers came from his brother, although the corresponding bank transfer records could not be traced as the purchase had occurred more than seven years previously. Third party documentation was also supplied showing various amounts paid by Mr Indraraj in connection with the property over the relevant period. However, although this evidence was not conclusive of ownership either way, as the majority was documentation that might be expected to go to the operator of the premises, rather than the freeholder, there was a sizeable bill in 2005 for renovations of £35,000 addressed to Mr Indraraj and showed as paid.

 

Mr Raveendran admitted that he had never told either the bank or the law firm acting for the purchase that he was not the beneficial owner of the property. And he also paid the mortgage instalments, although both he and his brother claimed the money came from Mr Indraraj.

 

Mr Raveendran confirmed that he had not contributed funds to the purchase, other than the loan he took out which was repaid when the property was sold to his sister in law. He said he had not made nor wanted to make a profit from the purchase. When asked why £350,000 was paid to him for a property he had acquired for £300,000, Mr Raveendran replied that he thought that the extra was to compensate for stamp duty. He explained that the loan in his name had been affecting his credit score and hence causing difficulties with his wife, and therefore he had requested that the ownership of the property was transferred and the loan repaid.

Mr Raveendran's position was that he was not the beneficial owner of the property as he had contributed no money to its purchase, and it was understood by him and his brother that he was holding the property on trust for his brother.

 

A constructive trust is a legal concept that arises by operation of law rather than by the express agreement of the parties. This trust arises where it would be unconscionable for a person who legally holds title of an asset to deny the beneficial interest of another person in that asset. It imposes equitable obligations on the legal owner of property to hold it for the benefit of another party, typically to prevent unjust enrichment or to fulfil the presumed intentions of the parties involved. The establishment of a constructive trust typically hinges on the following principles:

 

Contribution: One party may contribute to the acquisition, improvement, or maintenance of property without being recognized as a legal owner. In such cases, equity may dictate that the legal owner holds the property on trust for the contributing party.

 

Unjust Enrichment: Constructive trusts are often invoked to prevent one party from unjustly benefiting at the expense of another. Where one party has unfairly obtained property or assets, a constructive trust may be imposed to rectify the imbalance.

 

Intention: In situations where the parties’ intentions regarding property ownership are unclear or unexpressed, a constructive trust may be established to reflect the intentions of the parties, based on their conduct and contributions.

 

A common intention constructive trust is founded on the shared intentions of the parties regarding property ownership, even if those intentions were not formally documented. They are often established through evidence of joint contributions or agreements. For example, A and another person, B, share a common intention that B should have a beneficial interest in an asset, and B has acted to their detriment in reliance of that intention.

 

A resulting trust arises in two sets of circumstances:

 

1. Where A makes a voluntary payment to B or pays (wholly or in part) for the purchase of property which is vested either in B alone or in the joint names of A and B. There is a presumption that A did not intend to make a gift to B: the money or property is held on trust for A (if they are the sole provider of the money) or in the case of a joint purchase by A and B in shares proportionate to their contributions. It is important to stress that this is only a presumption, which presumption is easily rebutted either by the counter- presumption of advancement or by direct evidence of A's intention to make an outright transfer: please see Underhill and Hayton (supra) p. 317 et seq.; Vandervell v. I.R.C. [1967] 2 AC 291 at 312 et seq.; In re Vandervell (No. 2) [1974] Ch 269 at 288 et seq.2.
2. Where A transfers property to B on express trusts, but the trusts declared do not exhaust the whole beneficial interest: please see the previous reference and Barclays Bank v. Quistclose Investments Ltd. [1970] AC 567.

 

Both types of resulting trust are traditionally regarded as examples of trusts giving effect to the common intention of the parties. A resulting trust is not imposed by law against the intentions of the trustee (as is a constructive trust) but gives effect to their presumed intention. 

 

HMRC argued that Mr Raveendran’s claim should be dismissed, as there was no trust deed showing Mr Indraraj's beneficial ownership and insufficient evidence of either a resulting trust due to Mr Indraraj making a significant financial contribution to the property or a common intention constructive trust in which the beneficial owner acted to his detriment. It said that, as Mr Raveendran was the legal owner of the property, he should be assumed to be the beneficial owner of the property in the absence of evidence to the contrary.

 

However, the FTT disagreed. It decided that the consistent evidence of the two brothers, backed up by all the circumstantial evidence, pointed to all of the purchase price of the property having been funded by Mr Indraraj, either from direct contribution or from servicing the mortgage. It said that the fact that the bank did not hold records of the payment of the deposit should not be seen to be anything other than an absence of evidence, and “absence of evidence is not evidence of absence. There is no evidence, in our opinion, that points to the original transaction being anything other than a resulting trust.”

The FTT, therefore, allowed the appeal against the assessment on the basis of a resulting trust.

 

Total tax take almost doubles to £827bn from the 2010 figure

(AF1, RO3)

 

HMRC’s tax receipts and National Insurance contributions for the UK (annual bulletin) shows that total tax collected for 2023/24 amounted to £827bn, compared to £453bn in 2010, the first year of the Conservative led Coalition Government. The increase in receipts over the previous tax year, 2022/23, amounted to £40bn.

 

Income tax has also drastically increased by £120bn to £273bn in 2023. The last two years have both seen an increase of £30bn, the highest rise in the last decade. This is split between PAYE income tax (£235bn) and self-assessment (£42.6bn).

 

Corporation tax has also doubled over the last decade, to £86bn. The corporation tax rate was increased to 25% in 2023. As a result, HMRC took an additional £10bn in 2023/24.

 

In 2010, the capital gains tax take for the entire year was £3.6bn, increasing year on year to a total of £15.4bn 2023/24, although, this is down from £16.9bn in 2022/23.

 

NICs from employees and employers have increased by £80bn since 2010, but have not changed overall from the 2022/23 tax year. With employee NICs now being reduced to 8% in April 2024, it should begin to show the difference it will make from next month’s data. The 2p cut from January has brought the NICs’ take down by £300m when compared to March 2023.

 

Inheritance tax (IHT) has surpassed last year’s figure by just over £400m, increasing to £7.49bn. Ten years ago, IHT brought in £2.7bn. From 2021/22 to 2022/23 the total of IHT receipts rose by over £1bn, which is the largest rise, said to be due to a larger number of wealth transfers taking place during the pandemic.

 

 

 

 

IHT receipts were up overall for the year to March 2024

(AF1, JO2, RO3)

 

According to HMRC’s latest statistics, inheritance tax (IHT) receipts for March 2024 were £676 million, which is almost identical to the receipts for March 2023 of £679 million. Also, receipts for the 2023/24 tax year (April 2023 to March 2024) totalled just under £7.5 billion, which is more than £0.4 billion higher than in the same period a year earlier.

 

 

The above chart contains 12-month rolling receipts since March 2013. Receipts for the 12 months to March 2024 were £7.499 billion. And whilst that figure has not reached the Office for Budget Responsibility (OBR)’s estimate of £7.6 billion for the 2023/24 tax year, it is considerably higher than the equivalent figure for the 12 months to March 2023, which was £7.086 billion.

 

The OBR’s latest Economic and fiscal outlook – published on 6 March 2024 - forecast the following IHT receipts for the current tax year and future tax years: £7.6 billion for 2023/24; £7.5 billion for 2024/25; £7.7 billion for 2025/26; £8.2 billion for 2026/27; £9.0 billion for 2027/28; and £9.7 billion for the following year, 2028/29.

 

The current, and predicted future, high IHT receipts should serve as another reminder of the importance of IHT planning and of making full use of any IHT exemptions and reliefs available.

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

A new high for the FTSE 100

(AF4, FA7, LP2, RO2)

 

On 22 April, the FTSE 100 hit a new high of 8023.87. Why the new highs are not all they seem...

 

 

Despite Friday’s wobble on Wall Street which took the S&P 500 below the 5,000 threshold for the first time since mid-February, on Monday the FTSE 100 jumped 1.62%. That was enough to take the index beyond its previous peak, reached in February last year.

 

There was no great fanfare for the Footsie’s latest breach of the 8,000 level: it certainly does not mean the UK market is now overpriced. As the graph shows, over the last 20 years:

 

• The FTSE 100 has been hugely outperformed by the S&P 500 (orange line);
• Adjusted for the £/$ exchange rate (red line), the outperformance of the S&P 500 is even greater;
• Adjusted for CPI inflation (blue line), the FTSE 100 is less than 2% above the level of April 2004.

 

These figures take no account of dividend income, which has traditionally been a more important factor for the FTSE 100 than the S&P 500. Today the FTSE 100 yields 3.78% against the S&P 500’s 1.49%. However, that gap is nowhere near the difference in the capital returns of the two indices over the past 20 years. The FTSE 100’s 2.95% pa growth trails the S&P 500 by 4.89% (6.76% once currency adjusted).

 

The corollary of these miserable numbers is that the FTSE 100 can look a bargain relative to the S&P 500. The UK index has a price/earnings ratio of 11.45 against the S&P 500’s 27.19. That substantial difference needs to be treated with caution, as the S&P 500 has a 28.6% exposure to information technology companies (think Magnificent Seven) whereas the FTSE 100 boasts just 1%.

 

Comment

Those who remember the turn of the millennium may recall that on the last trading day of 1999 the FTSE 100 closed at 6,930. With hindsight – the best investment tool – the UK market was wildly overvalued: it was not until 2015 that the 20^th century peak was passed.      

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC Pension Scheme Newsletter 159 – April 2024

(AF8, FA2, JO5, RO4, AF7)

 

Pension scheme newsletter 159 covers the following:

 

• lifetime allowance abolition;
• pension flexibility statistics
• registration statistics
• relief at source
• managing pension schemes service
• public service pensions remedy

 

Areas of particular interest

 

Lifetime allowance abolition

 

Pensions Commencement Excess lump sums

The newsletter confirms that a pension commencement excess lump sum (PCELS) cannot be paid where another lump sum could be paid instead.  This applies even if the scheme rules do not permit the payment of a UFPLS. 

 

Scheme specific lump sums

HMRC have identified a further issue with the revised formula for calculating scheme specific lump sum protection.  What appeared to be a simplification of the formula will be corrected.   The revised formula would have been more favourable to those with higher protected lifetime allowance. However, HMRC have stated they will correct this “as soon as possible”.   As with the other errors we assume the revised formula will eventually work in exactly the same way as it did previously.

 

In the meantime, many providers will be delaying payments until they are certain the formula is correct.

 

Frequently asked questions

Alongside the newsletter HMRC also published a consolidates and updated list of lifetime abolition frequently asked questions cover all aspects of the change. 

 

Pension flexibility statistics

 

From 1 January 2024 to 31 March 2024, HMRC processed:

 

• P55 — 8,378 forms
• P53Z — 3,865 forms
• P50Z — 1,018 forms

 

The total value of tax repaid on the pension withdrawals is £42,003,943.

 

 

Public Service pensions remedy

 

Calculate your public service pension adjustment service

Due to technical issues this service is currently unavailable.

 

Members who need to make a submission to HMRC, can email publicservicepensionsremedy@hmrc.gov.uk and put ‘PSPR submission request’ in the subject line.

 

Alternatively, they can contact HMRC on 0300 123 1079 and select option 1.

 

Public service pensions remedy — tax treatment of interest

HMRC have update previous guidance published in newsletter 156 which stated that some interest applied on the payments that form part of the remedy process would be treated as unauthorised payments.   This has clearly been successfully challenged and HMRC now confirm they will be authorised payments as the interest is paid as required by the Employment Tribunal or HM Treasury directions in respect of late payment of a benefit that is an authorised payment.  

 

 

FCA: Retirement income market data 2022/23

(AF8, FA2, JO5, RO4)

 

The Financial Conduct Authority (FCA) has published its:

 

• Retirement income market data 2022/23
• Retirement income market interactive analysis 2022/23.

 

These set out a number of facts about peoples’ pensions:

 

• Overview of pension pots accessed for the first time.
• Pension plans accessed by pot size and age.
• Number of plans where the plan holder(s) made regular partial withdrawals by annual rate of withdrawal, pot size and age band.
• Use of advice and Pension Wise guidance when purchasing retirement products.
• Other metrics such as, the number of defined benefit (DB) to defined contribution (DC) pension transfers received, types of annuity options sold and sources of business for annuities and drawdown providers.

 

Some of the main findings include:

 

• The total number of pension pots accessed for the first time increased by around 5% in 2022/23, from 705,611 to 739,535.
• This comes after an 18% spike in the number of pots accessed for the first time in 2021/22.
• Drawdown remains by far the most common retirement income route for Brits, with 218,074 new drawdown policies entered into in 2022/23, a 6% increase year-on-year.
• By contrast, annuity sales dropped almost 14% over the same period, from 68,514 to 59,163, despite improvements in rates driven by rising gilt yields.
• Full cash withdrawals, meanwhile, increased by around 6%, from 395,235 to 420,727, with the ongoing cost-of-living crisis inevitably a factor.
• However, the vast majority of those full withdrawals (377,193 or around 90%) were of pension pots worth less than £30,000.

 

Commenting on the figures, LCP Partner Steve Webb said in their Press Release that: “These figures highlight the fact that hundreds of thousands of people reach retirement each year with very small pension pots. These pots would generate very little regular income if spread out over the decades of retirement. Instead, the majority of people still judge that the best thing to do is to cash out their pension and enjoy some additional cash at the start of their retirement. But with dwindling numbers of retirees having DB pensions to fall back on, we urgently need to boost pension pots to a size where it makes sense to keep them rather than cash them in. With every new set of figures, we see the consequences of the Government’s delay in expanding automatic enrolment and the need for urgent action to get Britain saving more for retirement.”

 

 

TPR publishes Annual Funding Statement for 2024

(AF8, FA2, JO5, RO4. AF7)

 

On 24 April 2024, The Pensions Regulator (TPR) published its Annual Funding Statement for 2024, which is relevant to trustees and sponsors of all private sector defined benefit (DB) pension schemes, but particularly applies to those undertaking an actuarial valuation with an effective date between 22 September 2023 and 21 September 2024 (referred to as ‘Tranche 19’ valuations) or reviewing funding and investment strategies.

 

As TPR reminds trustees and sponsors, the current funding regime applies until the new legislation and the revised DB funding code come into force for valuations with an effective date on or after 22 September 2024. TPR notes however that it would be good practice for trustees to consider the steps they can take now to align with the new funding code, to avoid having to make significant changes at their next valuation.

 

Context for the statement

TPR notes that the aggregate funding level across schemes with a Tranche 19 valuation is ahead of that expected three years ago, with TPR estimating that half of these schemes are expected to be funded to a level at which they could afford to secure all liabilities with an insurer through a buyout (although as some have previously noted, TPR’s assessment of the aggregate surplus across all DB schemes might be an overestimate). However, the position for individual schemes will vary greatly.

 

If a scheme’s funding level has improved significantly, trustees should review whether their funding and investment strategies are still appropriate. In particular, TPR suggests that trustees should consider whether continuing with their existing strategy is in members’ interests.

 

TPR acknowledges that trustees are increasingly facing calls from employers to reduce or suspend contributions and from members calling for discretionary increases. When considering any such requests, trustees should look at the scheme’s overall position, the resilience of the investment strategy and the level of covenant support.

 

TPR also highlights that economic uncertainty will continue to affect schemes and sponsors, including the future path of interest and inflation rates, geopolitical instability, and the potential effects of climate change and wider sustainability issues. TPR expects schemes to consider these factors when assessing and monitoring their funding and risk strategies, and their sponsor covenant.

 

Funding considerations

TPR continues to group schemes broadly into three categories depending on their funding level relative to both the cost of an insurance company buyout and the scheme’s technical provisions and provides specific guidance for each group. The key messages are:

 

• For schemes that are fully funded on a buyout basis, trustees should consider whether buying out or running on is the best option for members, taking into account the risks and benefits of each option, the scheme rules, and the trustee duties. TPR also notes that that the effect of a buyout on the possibility of future discretionary benefit increases may be a relevant consideration. Trustees should document their strategy and explain why it is in the best interest of members.
• For schemes that are funded to a level above technical provisions but below the cost of a buyout, trustees should review their long-term objective and the timescale for reaching it. Trustees should also review their plans for transitioning their investment strategy to align with their long-term objectives, taking into account how the funding position of the scheme has changed since the plans were originally set. Trustees should also consider the merits of running on the scheme versus aiming for buyout and explore the full range of options available to them, including emerging options such as commercial consolidators, capital-backed journey plans or the proposed consolidator that would be run by the Pension Protection Fund and underwritten by taxpayers (though key details of this are yet to be determined). TPR also suggests that schemes in this group may want to explore ways of achieving greater levels of governance and economies of scale and whether greater value can be delivered to members though increasing access to private market investments.
• For schemes that have a deficit on a technical provisions basis, trustees should focus on eliminating the funding deficit as soon as the employer can reasonably afford, and revisit the technical provisions to ensure they are consistent with the scheme’s long-term funding target. Trustees should also pay careful attention to the employer covenant and to be mindful of re-financing risks, covenant leakage and fair treatment.

 

 

 

 

 

 

 

 

 

 

 

 

 

Buy-in and buy-out volumes reach £28bn in second half of 2023

(AF8, FA2, JO5, RO4. AF7)

 

Hymans Robertson has published its Half Year Risk Transfer Report for H2 2023. According to a report from, the total value of buy-in and buy-out deals completed in the second half of 2023 was just under £28bn. This means that the total for the year to 31 December 2023 was £49.1bn, an all-time high for both the number and the value of transactions. Hymans Robertson said that during the second half of 2023, more than 60% of the bulk annuity market by value resulted from seven deals in excess of £1bn. In total, 226 transactions took place during 2023 with an average size of around £217m, and 130 deals transacted in the second half of the year.

 

Commenting on the report, James Mullins, Partner and Head of Risk Transfer Solutions at Hymans Robertson, said in their Press Release that: “Record transaction pipelines and activity are set to make 2024 yet another bumper year for the buy-in market ... Many defined benefit schemes have continued to use their improved funding levels to target whole-scheme buy-ins. As they did in 2023, our expectation is that large transactions are likely to continue to drive market volumes in 2024 and beyond. Over the next few months, we expect around 15 buy-in transactions in the range of £1bn–£2bn to come to market. This £30bn of transactions will join a material flow of sub-£1bn buy-ins and several-billion-pound mega transactions.”