What's new bulletin November 12-25 2021

TAXATION AND TRUSTS

The Government has issued an update to its paper on health and social care and further funding information

(AF1, ER1, RO3)

The original ‘Build Back Better: Our Plan for Health and Social Care’ has been updated and more detail supplied

When the Government launched its long-awaited paper on health and social care in England we, along with many others, had questions about the detail. The original Build Back Better: Our Plan for Health and Social Care Command Paper had just two examples of how the new funding regime would work, both of which were as much PR puff as basic information.

On 17 November, an alleged update to the paper was issued. We say alleged because it appears to be almost completely unchanged. For example, references remain to the Spending Review which was announced last month and the new national insurance (NIC) thresholds for 2022/23, set out in the Autumn Budget have been ignored. The examples are unchanged. However, alongside the main paper there was also a new document, ‘Adult social care charging reform: further details’.

This document contains significant new information, so much so that some commentators have suggested the timing of its publication was chosen to deliberately avoid attention – it emerged while the focus was on the sleaze debate in the House of Commons. The main points are:

• The Government “will introduce an amendment to the Care Act 2014 to the way that people within the means test progress towards the cap”. The change, which will need Parliamentary approval, is subtle, but has significant financial consequences:

• Under section 15 of the Care Act as it currently exists, a local authority must not charge for care ‘if the total of the costs accrued in meeting the adult's eligible needs …. exceeds the cap on care costs’. The implication of that, as confirmed in the original explanatory notes, is that the cap was based on the total costs the local authority paid or would have to pay were it not for individual funding.

• The change proposed ‘will ensure that only the amount that the individual contributes towards [care] costs will count towards the cap on care costs’. In other words, the cap will represent the same £86,000 personal outlay for everyone. In the Government’s words, the reform will mean ‘…people do not reach the cap at an artificially faster rate than what they contribute’.

The impact of the change can be seen if you consider someone entering nursing care with the care cost element at say £800 a week (£41,600 a year). Ignoring inflation and the indexation of the cap, a wealthy individual with over £186,000 would reach the cap after just over two years. Someone with assets of less than £106,000 would be required to keep contributing, firstly fully (if they have more than £100,000) and then on the 20% (ish) tariff basis (please see below) for as long as it takes to reach the £20,000 lower capital level. That would be over five years. This extended liability for the less wealthy has already attracted criticism from the likes of the Resolution Foundation. The Dilnot Review, which was the precursor of the Care Act, considered the approach unfair.

• Daily living costs (DLCs), which are not part of the care cap calculation and must generally be met by the individual, will initially be set at ‘a national, notional £200 a week’. This is lower than the ceiling proposed for the Care Act, but not created, as the necessary regulations never arrived. 

• The contribution made towards care that counts for the payment cap will not take account of any top ups which the individual (or a relative) chooses to make.

• The ‘tariff contribution' has been confirmed as £1 a week for each £250 of capital, which equates to 20.8%.

• The social care allowances – minimum income limits when in care – will increase in line with inflation from April 2022. They have been frozen since 2015.

• In the statement Mr Johnson made in September he said “…from October 2023 no-one starting care [our italics] will pay more than £86,000 over their lifetime”. The new paper says ‘From October 2023, anyone assessed by a local authority as having eligible care and support needs, either new entrants or existing social care users [our italics], will begin to progress towards the cap’. This implied inclusion of existing claimants is further supported by the paper’s statement that ‘Costs accrued before October 2023 will not count towards the cap.’

If, as we read this, the existing uncapped rules and £14,000/£23,250 capital limits regime will drop away entirely from October 2023, that is a welcome change over what had been expected.

According to the latest document, we are now at the start of ‘a period of co-production of the statutory guidance with the sector, building on draft regulations and guidance published in 2015. A public consultation will be issued ‘in the new year’ with regulations and final guidance due in spring 2022.

Health and Social Care Levy - more information

(AF1, ER1, RO3)

HMRC’s latest Employer Bulletin includes further information on how the 1.25% increase will work

As a reminder, National Insurance contributions will increase by 1.25% for one year only for employees, employers and the self employed from 6 April 2022. This will cover both Class 1, (employee and employer), Class 1A and 1B and Class 4 (self employed) National Insurance contributions.

From 6 April 2023, a new ring-fenced Health and Social Care Levy of 1.25% will be introduced which will apply to those who pay Class 1 (employee and employer), Class 1A and 1B and Class 4 (self employed) National Insurance contributions and will also be extended to those over State Pension age who are in work. When the new Levy comes into effect, National Insurance rates will revert back to current levels.

The Levy will apply to individuals above State Pension age with employment income or profits from self employment above the Primary National Insurance threshold, currently £9,568 and rising to £9,880 for 2022/23. The Levy will not be charged on pension income, and those over State Pension age who are neither in work nor self employed. The Levy will be administered by HMRC and collected through the current reporting and collection procedures for National Insurance contributions, PAYE and income tax self-assessment.

These charges are intended to fund £12 billion a year to be spent on the NHS and social care across the UK. Like National Insurance, the Levy contributions will apply UK-wide. However, as Scotland, Wales and Northern Ireland have their own care funding systems, this National Insurance increase/the new Levy will be returned to the devolved nations via the usual allocation formulae.

From 2023/24, Levy contributions will appear as a separate item on payslips. A generic message will also appear on some payslips in the next tax year (2022/23).

Impact on the self employed

For those self employed individuals who pay National Insurance contributions through the annual self-assessment process, the rate increase will first be reported through the 2022/23 tax return in January 2024. The new Levy will first be reported through the 2023/24 tax return in January 2025.

Impact on employers

The Levy will also apply to secondary Class 1 National Insurance contributions. Existing National Insurance contributions reliefs and allowances will apply to the Levy. So, the £4,000 annual Employment Allowance for National Insurance, where available, can be used against the new Levy as well as National Insurance liabilities.

Dividend recipients

The rates of income tax which are paid by people that receive dividend income from shares will also increase by 1.25% from 6 April 2022, to 8.75% (basic), 33.75% (higher) and 39.35% (additional). The tax rate for discretionary and accumulation and maintenance trusts receiving dividend income will increase to 39.35% (8.75% for dividends falling into the trust’s standard rate tax band). 

Those with dividend income will report through PAYE or the annual self-assessment process.

Equity release sales surge

(ER1, LP2, RO7)

According to the Financial Times, a surge in homeowners looking to free up cash from their properties propelled the figure for equity release to £1.05bn in the three months to the end of September, driven by high house prices, gifts to family members and uncertainty induced by the coronavirus pandemic. The value of equity released jumped by nearly one-fifth from £884m in the third quarter of 2020.

While the number of loans taken out was slightly down year on year, the average amount of housing wealth freed up was 23% higher, at £101,593 per borrower.

Data published by equity release provider Key suggested many borrowers were taking advantage of recent house price gains to help family members climb the housing ladder. “Big-ticket items” such as debt management and gifting were behind nearly two-thirds of the equity released in the third quarter, Key said. More than two-fifths (42%) of the cash given to family and friends was used for house deposits.

For homeowners over the age of 55, equity release offers a way of unlocking the value of their properties, whether for home improvements, paying off other debts or to help family members. Interest on the loan is paid through the sale of the house at the end of the term, so unlike a conventional mortgage a borrower is not required to demonstrate a minimum level of income to qualify. Interest rates are higher for these “lifetime mortgages” than for most mainstream mortgages. Key said rates on equity release were still “significantly under those recorded historically” but had crept up from a low of 2.8% in the last quarter of 2020 to 3.16% in the latest three-month period.

Key’s research found 49% of borrowers in the latest quarter were aged between 65 and 74.

And equity release broker Responsible Life said it found the average home value for equity release borrowers in October was 18.5% higher than in October 2020 — and 31% higher than October 2019 — a difference that could not be explained purely by rising house prices. Steve Wilkie, Responsible Life executive chair, said the gap between what retirees need in retirement and what their savings will afford them “is not just a problem for the least well off…amid a worsening cost of living crisis, lifetime mortgages are finding a firm foothold with aspirational retirees, who are looking to find ways to close the affordability gap on the lifestyle they want to continue enjoying in later life.”

The coronavirus pandemic has placed new pressures on people’s finances, and there have been a number of reports about increased interest in equity release, for example, as mentioned in last year’s FCA review.

Whatever the reason for considering equity release, clients should be aware of the potential pitfalls and costs involved. Advice reflecting the needs and circumstances of the individual is essential.

Tax evasion: joint and several liability for company taxation

(AF1, RO3)

HMRC has issued new guidance (JAS/FS1) on what action to take if a taxpayer has been sent a notice stating that they may be jointly and severally liable for the relevant tax liability of a company that has been involved in tax avoidance or evasion.

Legislation introduced in Finance Act 2020 aims to deter the use of tax avoidance and tax evasion; and influencing the behaviour of those who see insolvency as a way of avoiding their tax or penalty liabilities relating to tax avoidance or tax evasion; and repeatedly fail to meet their tax liabilities through insolvency.

The purpose of joint and several liability is to make directors of companies jointly and severally liable for the company’s tax liability in certain circumstances.

This includes where repeated insolvency proceedings are used to avoid the payment of relevant company liabilities.

Where this happens, HMRC may issue a joint liability notice to the individuals that benefited from the tax evasion and avoidance.

A joint liability notice tells the individual that they are jointly and severally liable with a company, and with anyone else that’s been given a joint liability notice, for the relevant tax liability.

Where a joint liability notice for tax avoidance and evasion is issued, the relevant tax liability is the amount of additional tax, penalties and interest due as a result of the company:

• entering into tax avoidance arrangements; or
• engaging in tax evasive conduct.

Each person receiving a notice is jointly responsible for paying the entire amount due. The amount will be reduced if certain penalties have been paid.

If the company that has been involved with the tax avoidance or evasion no longer exists, when someone is jointly and severally liable with the company, this means the individual is:

• solely liable for the relevant tax liability where no other individual has been given a joint liability notice for that liability; or
• jointly and severally liable with anyone else that has been given a joint liability notice for the relevant tax liability.

It is possible to request a review of any decision within 30 days of receipt of notification of a penalty charge.

An HMRC officer not previously involved in the matter will carry out the review. If the taxpayer disagrees with the outcome of the review, they can still appeal to the tax tribunal.

IHT receipts rise again

(AF1, RO3)

According to HMRC’s latest statistics, inheritance tax (IHT) receipts for April to October 2021 are just over £3.6 billion, which is £0.6 billion higher than in the same period a year earlier.

Monthly receipts:

The above chart contains the monthly receipts patterns in each tax year since 2017/18.

Back in March, the Office for Budget Responsibility (OBR) projected 2021/22 IHT receipts to reach £6 billion. The OBR’s 27 October forecast (published alongside the Autumn Budget) kept the 2021/22 IHT receipts at this £6 billion figure, but posted the following increased forecasts for future years: £6.4 billion for 2022/23; £6.5 billion for 2023/24; £6.8 billion for 2024/25; £7.2 billion for 2025/26; and £7.6 billion for the following year, 2026/27.

However, with the IHT take for the first seven months of this tax year already at £3.6 billion, it’s possible that the final total for 2021/22 could be well above the OBR’s £6 billion estimate. Both July and August’s IHT receipts were already the highest monthly amounts received from the tax, at £571 million and £576 million respectively.

According to HMRC, higher receipts in October 2020, November 2020, and March to August 2021 are expected to be due to higher volumes of wealth transfers that took place during the COVID-19 pandemic, though HMRC says that it cannot verify this until full administrative data becomes available

INVESTMENT PLANNING

Review of the UK funds regime: an update

(AF4, FA7, LP2, RO2)

At Budget 2020, the Government announced that it would carry out a review of the UK funds regime, covering tax and relevant areas of regulation, and, as part of this review, it is now introducing a regime for the taxation of qualifying asset holding companies (QAHCs) and certain payments that QAHCs may make.

The measure forms part of a wider review of the UK funds regime to consider reforms which hold the potential to have positive outcomes for the financial sector and enhance the UK’s competitiveness as a location for asset management and for investment funds.

The new QAHC regime is intended to make the UK more competitive as a holding company jurisdiction.

A QAHC must be at least 70% owned by diversely-owned funds, or certain institutional investors, and mainly carry out investment activity with no more than insubstantial ancillary trading.

The aim is to recognise circumstances where intermediate holding companies are used to facilitate the flow of capital, income and gains between investors and underlying investments, so that investors are taxed broadly as if they invested in the underlying assets and the intermediate holding companies pay no more tax than is proportionate to the activities they perform.

The regime is intended to only be available to prescribed investment arrangements involving diversified investment funds, charities, long-term insurance business, sovereign immune entities and certain pension schemes and public bodies. The regime is not intended to affect the taxation of profits from trading activities, UK land or intangibles.

Legislation will be introduced in Finance Bill 2021-22 to establish a new tax regime for QAHCs and some of the payments they make. Taxation in the new regime is based on existing tax rules, but with some modifications set out in a schedule to the Finance Bill.

The regime for QAHCs will include;

• exempting gains on disposals of certain shares and overseas property by QAHCs;
• exempting profits of an overseas property business of a QAHC, where those profits are subject to tax in an overseas jurisdiction, and also exempting the associated profits that arise from loan relationships and derivative contracts;
• allowing deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrids rules);
• switching off the late paid interest rules so that, in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis;
• switching off the deeply discounted securities rules for corporates so that, in certain situations, the discount arising on any such security issued by the QAHC is relieved on the accruals basis rather than the paid basis;
• disapplying the obligation to deduct a sum representing income tax at the basic rate on payments of interest;
• switching off the transfer pricing exemption for small and medium-sized enterprises and adjusting the participation condition to ensure the transfer pricing rules apply appropriately in relation to a QAHC;
• allowing premiums paid, when a QAHC repurchases its share capital from an individual, to be treated as capital rather than income distributions;
• allowing certain amounts paid to qualifying remittance basis users by a QAHC to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains;
• exempting repurchases by a QAHC of share and loan capital which it previously issued from Stamp Duty and Stamp Duty Reserve Tax (SDRT);
• entry and exit provisions, including the rebasing of certain assets and the creation of a new accounting period when a company enters and exits the regime.

The regime will also include administrative provisions and provisions to guard against potential for abuse or avoidance.

According to HMRC, the measure is expected to have an impact on individuals who invest in structures that use QAHCs. Individuals investing directly in a QAHC may benefit. For instance, they may be able to receive returns from that QAHC that are taxed as capital gains.

The QAHC regime will be introduced from April 2022. The start date will be 1 April 2022 for corporation tax, Stamp Duty and SDRT and will be 6 April 2022 for income tax and capital gains tax.

PENSIONS

NHS Pensions – BMA push for an unregistered pension scheme

(AF3, FA2, JO5, RO4, RO8)

Understandably, doctors and their representatives have been relatively quiet over the last 18 months or so in regards to their disgruntlement about their pension scheme. Some could believe that the significant increase in the tapering income limits from April 2020 had largely solved the issues that featured so prominently in the news in 2019. 

Of course, it is more likely that most have had their attention firmly focused elsewhere in dealing both with the direct and wider indirect impact of Covid on medical services. 

There are now signs that the British Medical Association (BMA) are regrouping, and no doubt the freezing of the lifetime allowance (LTA) will have added extra impetus to their campaign to improve the pensions outcomes for medical professionals.

A BMA survey earlier in the year, following the announcement of the freeze in the LTA, suggested that 72% of respondents would retire earlier, 61% stated they would reduce their hours and 40% would give up additional roles. 

The BMA are now embarking on a new campaign to highlight the pension taxation issues facing doctors. Their proposed solution is for the Government to introduce a tax unregistered top up pension scheme, similar to the one being introduced for judges from April 2022.

They argue that the same situation applies for doctors as for judges, i.e. there is a serious recruitment and retention problem in the medical profession. 

With an unregistered pension scheme the members would not receive any tax relief on the contributions. The BMA argue that doctors effectively don’t receive any tax relief currently on the basis that high earners pay considerably higher contributions into the scheme, currently topping out at 14.5%. In comparison, in the new judges’ scheme members pay just 4.26%.

The clear advantage for members is that the contributions/pension inputs to an unregistered scheme would not be tested against the annual allowance and the benefits would not be tested against the LTA.

There are, of course, many more doctors than there are judges, meaning the cost of introducing any similar scheme would be considerably higher. It seems unlikely that there is currently enough pressure on the Government to consider implementing an unregistered pension scheme for the NHS. However, things can change, and, if anything like the percentages highlighted in the BMA survey do act in accordance with their stated intentions, the pressure to offer something could once again become impossible to ignore. However, if so, a reversal in the freeze in the LTA would probably be a less costly and more likely option.  

Pension Minister wants people to talk pensions down the pub

(AF3, FA2, JO5, RO4, RO8)

The Work and Pensions Committee (WPC) questioned Minister for Pensions and Financial Inclusion Guy Opperman and Economic Secretary to the Treasury John Glen as part of the access to pension savings inquiry.

Minister for Pensions and Financial Inclusion Guy Opperman has confirmed that the DWP will launch a call for evidence on the potential for trust-based schemes to have investment pathways and protections in place, similar to contract-based schemes. Mr Opperman said: “This is something we're considering, clearly the trust pensions market is different from the contract-based market and the expectations and needs of members of a trust-based scheme are different to those who pay into a contract-based scheme. However, our proposal in the next year is to call for evidence on this particular issue. We accept that we've got to lead on it, and I suspect TPR's David Fairs was allowing us to make the case for this, because it is ultimately a Government decision.” Mr Opperman estimated that the call for evidence will be in “spring/April time”. DWP Director of Private Pensions and Arm's-Length Bodies Pete Searle added: “The call for evidence is not just about investment pathways, that’s part of it, but it is asking what would members and schemes feel they want in this territory in a trust-based environment.”

Mr Opperman acknowledged the controversy around his idea of a pension statements season but said it will give savers a better understanding of their savings. Mr Opperman said: “My idea is that we should do what we already do with tax, exams, A-levels, university and what we do with a whole bunch of strategic decisions that occur in our lives. We should have an annual period of time, and there is an argument over how long it should be as it has to be a month or so, when you receive your [pension] statement... I would like it to be the case where we actually have a situation where people would meet in a pub or another sort of establishment and go ‘I got my statement, do you understand yours?’, then they actually have a discussion about this and this becomes a thing.”

GMB and BMA seek Judicial Review over plans to use public sector pensions to fund age discrimination costs

(AF3, FA2, JO5, RO4, RO8)

In a Press Release, the GMB Union has confirmed it has launched a judicial review against the Treasury over £2.4bn that has been taken from public sector pension pots. Unions, including the GMB, negotiated a deal under which the estimated £2.4bn would be paid back to public sector workers by reducing their future pension contributions and/or improving benefits. However, the Government has since passed legislation which enables them to instead use the surplus cash to pay the age discrimination costs arising from the McCloud judgment. GMB National Pensions Organiser George Georgiou commented: “We have no course of action other than to challenge the Government’s intention via judicial review. It is utterly shameless of them to plunder the pension pots of hard-working public sector workers to pay the costs of a case they clearly lost by not carrying out their responsibilities lawfully.”

The British Medical Association (BMA) has, according to their Press Release also sent a pre-action letter to the Treasury and Department of Health and Social Care challenging the Government’s plans to unlawfully use the 'surplus' arising from the 2016 valuation of the NHS pension scheme to finance the cost of the McCloud remedy. The pre-action letter is a formal step taken before requesting a judicial review at the High Court, an action which the Fire Brigades Union has also taken BMA Pensions Committee Chair Vishal Sharma said: “It is entirely wrong in principle that the Government is passing the costs of remedying age discrimination, for which it and it alone was responsible, on to NHS Pension Scheme members... The Government’s actions are manifestly unfair. It has tried to remedy one injustice — an unlawful act of age discrimination — with another, which has no reasonable basis. We will take the strongest possible action to resist it.”

TISA: Decumulation proposals

(AF3, FA2, JO5, RO4, RO8)

The Investing and Saving Alliance (TISA) has published a paper which calls for the Government and regulators to update four “archaic” aspects of pension decumulation policy. The four aspect of pension decumulations it calls to be changed are:

Aspect	Proposals
Wake-up packs	Extend the age-related wake-up pack requirement to Trust Based DC pension schemes. Include a life expectancy summary section based on outputs from the ONS calculator, specific to the individual.
MPAA	The money purchase annual allowance (MPAA) limit needs to be levelled up to the previous limit of £10,000.This is required due to the changes since 2017 in respect of working/retirement patterns, contribution increases, the impact of Covid on withdrawal behaviour and reflects the Government expectation of a rising economic backdrop.Additional safeguards could be put in place to ensure that recycling abuse does not occur.
Operation of PAYE	HMRC should update the PAYE process for pension withdrawals using dynamic coding to ensure accurate tax deductions are made and large-scale overpayments are not made. This should form part of their 10-year administration strategy and will bring pensions into the objective of operating ‘a trusted and modern tax system’.
Block transfer rules	The Block Transfer rules need to be abolished or at the very least, the relaxations which will apply to the new protected retirement age of 55 need to be extended to cover this group. Anyone with a protected retirement age or scheme specific protected cash should be able to benefit in full, from the pension flexibility introduced to improve retirement planning and outcomes. This will also enable larger scale full consolidation exercises designed to improve value for money to proceed without adverse impact to those who hold a protection.

TISA Head of Retirement Renny Biggins commented: “Unlike accumulation where the main beneficial objective is to create a pension pot as large as possible, decumulation is a much more personalised journey specific to individual circumstances. We are not calling on widescale reform with this particular set of proposals but would like some enhancements made to the existing framework.”