PFS What's new bulletin - May II

TAXATION AND TRUSTS

 

New late payment interest and penalties - new consultation

(AF1, RO3)

 

A new points-based penalty regime for regular tax return submission obligations will replace existing penalties for income tax self-assessment.

 

Penalty reform began for VAT taxpayers from 1 January 2023, and from April 2024 for income tax self-assessment taxpayers who chose to volunteer to test the Making Tax Digital service (MTD for ITSA). For all other income tax self-assessment taxpayers, penalty reform will commence as Making Tax Digital is rolled out, from 6 April 2026 onwards. 

 

Currently, the legislation allows HMRC to assess a second late payment penalty once, when the amount of outstanding tax is paid in full, within a two-year assessment time limit.

 

HMRC has now published draft regulations, which make provision, under Schedule 26 to the Finance Act 2021, for the assessment of penalties for failure to pay tax (late payment penalties).

That Schedule provides for a two-penalty model for late payment penalties. These draft regulations concern the second late payment penalty and will allow HMRC to assess and charge the second late payment penalty once, where the outstanding tax has not been paid in full, towards the end of the two-year time limit, and there is no time to pay agreement in effect. HMRC says that this legislative change will mean that taxpayers will not be able to intentionally avoid a second late payment penalty by not paying their tax before the end of the two-year time limit.  

 

Consultation on these draft regulations closes at 11:59pm on 10 June 2024.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust law reform in Scotland - an update

(AF1, JO2, RO3)

 

The Trusts and Succession (Scotland) Bill was introduced in the Scottish Parliament on 22 November 2022. After consultation, and a small number of amendments, on 20 December 2023 SMPs voted unanimously to pass it. The new legislation was to be known as The Trusts and Succession (Scotland) Act 2023, but it is now known as The Trusts and Succession (Scotland) Act 2024. And, although it received Royal Assent on 31 January 2024, most of its provisions are yet to fully come into effect.

 

The Act repealed in its entirety the Trusts (Scotland) Act 1921 and the Powers of Appointment At 1874 as well as large parts of a myriad of other Acts dealing with trusts and succession in Scotland.

 

As previously indicated, the Act makes comprehensive provisions in relation to the appointment, assumption, resignation, removal and discharge of trustees, decision-making by trustees, powers and duties of trustees, duration of trust, private purpose trusts, protectors, and powers of the court. Most of the provisions apply by default, i.e. “Except in so far as the trust deed, expressly or by implication, provides otherwise (or, in a case where there is no trust deed, the context requires or implies otherwise)” - the quoted words are used at the beginning of most sections of the Act.

 

For trust practitioners, the most important is the abolition of the restrictions on accumulations (currently generally limited to 21 years) and on creation of future interests (section 41 of the Act) and the new statutory powers of advancement (section 20) which so far have been missing from Scottish trust legislation, as well as the new powers for majority of trustees to remove a trustee in certain circumstances. It will also be easier for practitioners drafting “standard” discretionary trusts that offer a choice of law, as there will no longer be a need to have special Scottish definitions of accumulation periods, etc.

 

In relation to succession there are two important provisions: first, that where a person dies without a valid will and leaves a spouse but no issue, the surviving spouse will be entitled to the whole of the net estate; and, second, by extending the time limit within which a surviving cohabitant can apply for a share of the deceased’s estate from six to 12 months.

 

While the above are of key importance to practitioners, what has received most publicity in the press is the removal of the “killer executor”. The Act closes this loophole, allowing a court to remove someone convicted of murder or culpable homicide from a previously nominated role of executor. This change in the law follows the murder of Carol Taggart by her son, who was also her executor, the issue having been raised by Carol’s friends and family.

Comment

 

Scottish Minister for Victims and Community Safety Siobhian Brown welcomed the Scottish Parliament’s backing for the new law that will prevent killers from acting as an executor on their victim’s estate and she thanked Carol’s friends and family for raising this issue. It is therefore an example of legislative change driven by public opinion.

 

Now that Scotland has updated and modernised its trust law, let us hope that England will follow suit. The English Trustee Act 1925 is long overdue for an update (not to mention several other even older pieces of legislation starting with the Wills Act 1837, although changes to this one are at least presently being consulted on).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CGT on a property disposal following the discharge of a bankruptcy - an interesting point

(AF1, RO3)

 

Consideration of how ownership of a property is treated differently for legal purposes than it is for capital gains tax (CGT) purposes following the discharge of a bankruptcy, as highlighted by a recent First-tier Tribunal (FTT) case.

 

The case of Edward Newfield (TC09058) highlights how, although ownership of an asset can be legal or beneficial, capital gains tax liability principally follows the beneficial ownership, rather than legal ownership, of the disposed asset.

 

In July 1997, Mr Newfield inherited a London property from his mother. In 2000, he was made bankrupt and beneficial ownership of the property vested in a partner of Grant Thornton UK LLP as his trustee in bankruptcy. Mr Newfield was discharged from bankruptcy in 2003 and subsequently reacquired beneficial ownership of the property from the trustee in bankruptcy on 7 November 2016. Later that month, Mr Newfield sold the property for £215,000.

 

However, Mr Newfield did not declare any capital gain in respect of his disposal of the property in his 2016/17 tax return, because he thought there had been no capital gains tax liability on disposal, as the property did not increase in value between the time when he reacquired beneficial ownership of the property following his bankruptcy (which he argued was only shortly before the date of disposal) and the date of the disposal.

 

In April 2019, HMRC opened an enquiry into the return and extensive correspondence followed between Mr Newfield and HMRC. And, in July 2019, the Valuations Office Agency issued a decision valuing the property as having a market value on 31 July 1997 of £55,000. (Mr Newfield did not dispute this figure.)

 

HMRC argued that section 66 TCGA 1992 applied, which in Mr Newfield’s case had the effect of disregarding changes in beneficial ownership resulting from his bankruptcy. Effectively, HMRC’s position was that Mr Newfield had remained the beneficial owner of the property throughout the period from July 1997 until its disposal in November 2016.

 

In October 2020, HMRC issued Mr Newfield a discovery assessment, assessing him to £26,305.50 in capital gains tax on the disposal of the property. HMRC’s view was that the chargeable gain arising in respect of the disposal of the property was £156,130 made up of consideration of £215,000 minus allowable expenditure of £58,870 (£55,000 plus sale costs of £3,870). They also deducted the capital gains tax annual exemption for the relevant tax year of £11,100.

 

Mr Newfield appealed, saying the property was not vested in him until 7 November 2016, the value of the property was calculated from May 2016 as there was an option for the eventual buyers to buy the property in May 2016, and there was no increase in the value of the property from May 2016 until November 2016. He believed that there was, in fact, a loss arising on the disposal as a result of estate agents’ fees and other disbursements.  

 

The FTT agreed that, as a matter of general law, Mr Newfield’s bankruptcy would have resulted in the automatic loss his beneficial ownership of his assets, including the property, by virtue of section 306 of the Insolvency Act 1986. Those assets became part of the bankruptcy estate automatically, so that the trustee in bankruptcy would be able to deal with the assets freely in the course of the bankruptcy.

 

The fact that Mr Newfield was discharged from bankruptcy in 2003 also did not, in and of itself, re-vest in him beneficial ownership of the property as a matter of general law. The property would have remained part of the bankruptcy estate and, as such, it would have required an act of the trustee in bankruptcy to re-vest the beneficial ownership of the property in Mr Newfield (which the FTT was satisfied had occurred at some point prior to the property’s sale).

 

However, this was the position from a general law perspective. When considering matters from a taxation perspective, the FTT noted that section 66 TCGA 1992 operated on the basis of the statutory fiction that, when a person becomes bankrupt and their assets are vested in the trustee in bankruptcy, those assets are to be treated for the purposes of capital gains tax as continuing to be owned by the bankrupt.

 

As a result, the disposal of the assets by Mr Newfield to the trustee in bankruptcy and the acquisition by the trustee in bankruptcy of the assets from Mr Newfield were disregarded for capital gains tax purposes. This meant that, for capital gains tax purposes Mr Newfield was to be treated as having held the property throughout the period from his acquisition of the property in July 1997 until its disposal in November 2016 and his capital gains tax liability was to be calculated by reference to the market value of the property in July 1997, when he acquired it through inheritance.

 

HMRC’s assessment was upheld, and the appeal dismissed.

 

Comment

This case highlights how important it can be to bear in mind that different rules can apply to different aspects of the law, as well as how important it is for individuals to seek advice. In this case, the taxpayer represented himself in court.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consultation on umbrella companies - an update

(AF2, JO3)

 

The Government's latest update regarding its earlier consultation on potential options to improve regulation of umbrella companies. This goes back to November 2021, when the Treasury launched a call for evidence on the umbrella company market. Last summer, over 15 months after that consultation closed and 400 plus responses later, the Treasury issued a summary of the evidence it received together with another consultation document ‘Tackling non-compliance in the umbrella company market’.

 

In April, the Government published its Spring 2024 Tax administration and maintenance summary, which included a statement that simply reiterated its ongoing "concern" about non-compliance in the umbrella market and its detrimental impact on workers, taxpayers and the labour market. 

 

The Government mentioned publishing a response to last summer's consultation "in due course" and releasing new guidance for workers “later this year”. And it said that guidance would include “an online pay checking tool to help umbrella company workers to check whether the correct deductions are being made from their pay”.

 

Perhaps most substantively, the Government stated that it is "minded to introduce a due diligence requirement to drive out bad actors from labour supply chains” and that it plans to engage further with stakeholders on the details to “ensure it has the best understanding of the impacts that this could have on reducing non-compliance”. 

 

Comment

 

The umbrella industry’s reaction to this update has been deep disappointment, to say the very least. Many will no doubt be feeling that comprehensive reform appears to have been kicked into the long grass, with no decisive action in sight to deal with abuse of tax laws by unscrupulous, non-compliant, umbrella companies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INVESTMENT PLANNING

 

Quarterly Stamp Duty Land Tax statistics - Q1 2024

(AF4, FA7, LP2, RO2)

The latest HMRC statistics on residential and non-residential stamp duty land tax (SDLT) transactions valued at £40,000 or above are now available.

 

The statistics are based on the whole of the UK up to April 2015; England, Wales, and Northern Ireland from April 2015 up to April 2018; and England and Northern Ireland from April 2018 onwards.

 

The figures show that:

• residential property transactions in Q1 2024 were 19% lower than in the previous quarter, and 8% lower than in Q1 2023;

 

• non-residential property transactions in Q1 2024 were 12% lower than in the previous quarter, and decreased by 1% compared to Q1 2023;

 

• residential property receipts in Q1 2024 were 27% lower than in the previous quarter, and 13% lower than Q1 2023;

 

• non-residential property receipts in Q1 2024 were 14% lower than in the previous quarter, and 4% higher than Q1 2023;

 

• the number of first time buyers’ relief claims decreased by 19% between Q4 2023 and Q1 2024 from 31,100 to 25,300;

 

• 43,800 transactions were liable to higher rate for additional dwellings (HRAD) in Q1 2024, with the 3% element generating £343 million in receipts (net of refunds). This is a decrease of 26% from the previous quarter, and a decrease of 12% compared to Q1 2023;

 

• the percentage of residential receipts from HRAD transactions decreased by 1 percentage point from 49% in Q4 2023 to 48% in Q1 2024.

 

 

 

 

 

 

 

 

 

 

 

 

PENSIONS

 

HMRC online tool to check National Insurance shortfalls

(AF8, FA2, JO5, RO4)

 

As is well known, anyone with gaps in their National Insurance (NI) record can make payments dating back to 2006. They will be able to check online using a new His Majesty’s Revenue and Customs (HMRC) tool to see if they need to make additional contributions as explained in this Press Release from HMRC and the Department for Work and Pensions (DWP).

 

The new Check your State Pension forecast online tool is now live and is a joint service run by HMRC and the DWP. The handy tool calculates whether any outstanding contributions are needed to ensure the individual receives the full State Pension when they retire.

 

The State Pension Age (SPA) is set to rise to 67 years between 2026 and 2028 for those born from 1 April 1960, and to 68 years between 2044 and 2046.  

 

The tool shows taxpayers how much their State Pension could increase and details of the voluntary NI contributions they would need to pay to achieve this.

 

It allows most people under SPA to view gaps in their NI record and pay voluntary contributions to fill those gaps if it will benefit them.

 

Users of the new digital service can choose which years they would like to pay to fill. They can then pay securely through the service and will receive confirmation that their payment has been received and that their NI record will be updated.

 

Last year, the government extended the deadline to pay voluntary NI contributions to 5 April 2025 for those affected by new state pension transitional arrangements. This covers tax years from 6 April 2006 to 5 April 2018.

 

From 6 April 2025, people will only be able to pay voluntary contributions for the previous six tax years, in line with normal time limits.

 

HMRC warned that ‘paying voluntary contributions will not always increase their state pension but everyone can use the new service to check whether they could be better off in retirement before making any voluntary NI payments’.

 

Taxpayers will need to login to the new digital service using their Personal Tax Account login details or through the HMRC app. Those without an online HMRC account can register on gov.uk.

 

Nigel Huddleston, financial secretary to the Treasury, said: ‘Having peace of mind when planning for retirement is crucial to ensure people can enjoy later life. That’s why HMRC has launched this new online service, making a real difference for thousands of pensioners in their retirement while providing certainty to those in their middle years and those still planning ahead.’

 

 

• It would seem the tool only works for people who, both have gaps in the NI record, and
• Who would not achieve the full State Pension by working through to their SPA.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TPR: Supporting innovation in savers’ interests: new DB models must offer both clear benefits and proper protections

(AF8, FA2, JO5, RO4, AF7)

 

The Pensions Regulator (TPR) has published a blog entitled: Supporting innovation in savers’ interests: new DB models must offer both clear benefits and proper protections that urges new DB models to offer savers clear benefits and proper protections. In the blog, TPR Interim Director of Supervision — Market Oversight David Walmsley points out that innovation is “fundamental to delivering better outcomes for savers”, but that any new market propositions should “provide both a clear benefit to savers, and also have the right protections around them”.

 

Mr Walmsley urges caution towards a possible new offering to pay DB pensions to DC savers who transfer into it, saying that: “Savers need new products to sit within appropriate regulatory and supervisory frameworks, and our priority is to make sure protection is balanced with innovation in (savers') interests. We, other regulators and Government are continuing to consider whether a solution like this one could be supported, and we would not expect the market to develop further until this question has been resolved.”

 

In addition, Mr Walmsley said TPR will be developing its regulatory approach to DB alternative arrangements and publishing new guidance on these arrangements to help trustees navigate them. TPR will also publish its approach to the profit release mechanism in superfunds to provide the right balance between commercial incentives and saver protection.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TPR publishes Corporate Plan for 2024 to 2027

(AF8, FA2, JO5, RO4. AF7)

 

The Pensions Regulator (TPR) has published its Corporate Plan for 2024 to 2027, which outlines how the Regulator will protect savers' money, enhance the pension system and innovate in savers' interests over the next three years. One of the key challenges identified by TPR in 2024/25 will be embedding the new DB funding code, which is due to come into effect this autumn. Other challenges include ensuring that schemes deliver value for money, raising standards of trusteeship and driving trustees to prepare for pensions dashboards. Years two and three of its plan will see TPR concentrate on the delivery of the DC value for money framework, tackle the issue of deferred small pots and work with the industry to develop solutions to help savers into retirement.

 

TPR Chief Executive Nausicaa Delfas commented in their Press Release that: “This plan signals that the market should expect us to engage differently with it in the future. Our focus is not just on the fundamentals of driving high levels of compliance, but also working together to enhance the system and support innovation in savers’ interests. Internally, this will involve investing in our people, developing our digital, data and technology capabilities and embedding our new structure, which aligns with our strategic priorities.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HMRC wrongly refund voluntary Class 2 National Insurance contribution payments

(AF8, FA2, JO5, RO4)

 

Background

 

Class 2 National Insurance (NI) contributions are important as they give self-employed individuals entitlement towards contribution based state benefits such as the State Pension, Maternity Allowance and Employment and Support Allowance.

 

As of April 2024 the position has changed but for 2022/23, liability to Class 2 NI depended on the age of the taxpayer and their self-employment profits. This meant that only those under the State Pension age as of 6 April 2022 were potentially liable.

 

• Those with a profit over £11,908 (£12,570 for 2023/24) were liable to pay Class 2 NI.
• Those with a profit between £6,725 and £11,908 (£12,570 for 2023/24) were not liable to pay Class 2 NI, but the year would still count for future State Pension entitlement.

 

However, the problem seems to have arisen for those with a profit under £6,725 who could pay Class 2 voluntarily so that the year would still count for the purpose of their State Pension.

 

Collecting Class 2 NI

 

Class 2 NI is collected via Self-Assessment (SA) and the payment needs to be transferred to the individual’s NI record. Each year, this is done automatically by HMRC.

 

However, for voluntary Class 2 payments to be accepted via SA, they must be paid by 31 January. For 2024, it appears as though the process which moves the payment from the SA computers to the NI records was run late. This resulted in some taxpayers who had paid their tax (including voluntary Class 2) by 31 January 2024 being told that their Class 2 element was paid late and therefore can not be accepted. These individuals have been issued with a revised income summary and tax calculation (SA302) rejecting the Class 2 payment and refunding the £163.80 due.

 

Correcting the error

 

If the individual still wishes to pay their Class 2 and obtain a credit for 2022/23 towards their State Pension, further action is now required. Individuals will need to call the NI Contributions office on 0300 200 3500 to obtain a payment reference and then make a payment directly to them. It is not possible to pay the amount back onto the SA account.

 

HM Revenue and Customs have informed people that they are currently looking into the issue and in the meantime individuals / advisers may wish to check that any voluntary Class 2 payments made have not been incorrectly returned.