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My PFS - Technical news - 28/11/17

Personal Finance Society news update from the 7th November to 20th November 2017.

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Taxation and trusts

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Pensions

TAXATION AND TRUSTS

Finance (no. 2) act 2017 given royal assent

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

The Finance (No. 2) Act 2017 was given Royal Assent on 16 November 2017 and can be found here.

IHT business property relief   - two recent interesting decisions

(AF1, AF2, JO3, RO3)

Two recent First-tier Tax Tribunal decisions, with somewhat contradictory outcomes, have addressed the question of whether a business is classified as an investment business (which doesn't qualify for 100% IHT relief) as opposed to a trading business which can attract full relief.

The first case - Executors of the Estate of M Ross (deceased) v HMRC [2017] UKFTT 507 (Ross v HMRC) - concerned a furnished holiday let (FHL) business. Eight holiday cottages in Cornwall were let as self-catering units. They were adjacent to a hotel which the deceased had previously owned. The guests from these units were allowed to take advantage of some of the hotel's amenities, for instance they could order bar snacks and take breakfast there. Various other additional services were offered, such as a mid-week clean and change of bed linen. It was argued that the provision of all these extras changed the character of the business from being one which was mainly an investment in land to one of providing a holiday experience and that the investment in land was a subordinate part and therefore the business qualified for BPR.

However, the Tribunal did not agree. Whilst they accepted that the level of services was more extensive than those provided in other FHL businesses where BPR was denied, they ultimately concluded that the essence of the activity remained the exploitation of land in return for rent.

The second decision - The Personal Representatives of the Estate of Maureen W Vigne v HMRC [2017] UKFTT 632 (Vigne v HMRC) - concerned a livery stable business on a large (30 acres) piece of land. The personal representatives (PRs) of Mrs Vigne argued that her business was significantly more than merely letting or licensing the land for use by the horse owners as she also provided valuable additional services, such as health checks of the horses, providing them with hay, providing worming products and removing manure from the fields. In this case the Tribunal accepted the argument and concluded that "no properly informed observer could have said that the deceased was in the business of just holding investments". It should be added that the PRs alternatively claimed agricultural property relief (APR) on the basis that the asset constituted 'agricultural property'. However, this claim was rejected.

As always, each case was decided on its particular facts. However, there was one interesting point made by the Tribunal in the Vigne case. Notably, it concluded that rather than starting with the idea that a business based on a holding of property is one of making or holding investments, and working out whether any factors have changed that view, the correct approach is to make no assumption but establish the facts and then determine whether they indicate that the business is wholly or mainly one of holding investments.

The cases remind us of the importance of BPR as one of two (with APR) extremely valuable reliefs available in IHT planning.  It will also be interesting to see whether the approach suggested by the Tribunal in the Vigne case will be followed in future cases.

Scotland has a rethink on income tax

(AF1, RO3)

The Scottish Government has issued a paper examining its options for reforming income tax. It has some interesting content which may become relevant to taxpayers south of the border after the next election.

From April 2017 the devolved Scottish Government gained limited powers over the structure of income tax in the country. For non-savings, non-dividend income – largely earned income – the Scottish administration can set both tax bands and rates. However, it has no control over

  • The income tax bands and rates for savings and dividend income;
  • Personal allowances;
  • The creation of new tax reliefs and allowances;
  • Capital gains tax; and
  • National Insurance contributions (NICs).

For 2017/18 the minority Scottish Government struggled to agree a Budget, so its original proposals (issued in December 2016) were revised in a political horse-trading. The 2017/18 result was a mess:

  • The higher rate tax threshold was frozen at the UK’s 2016/17 level of £43,000. As the UK-wide personal allowance was increased by £500, the net result was a £500 cut in the basic rate band in Scotland.
  •  The UK ex-Scotland higher rate threshold of £45,000 for 2017/18 still applies to savings and dividend income, so some Scottish residents have to juggle with being higher rate taxpayers on their earnings, but basic rate taxpayers on their investment income (which is generally regarded as the top slice of income).
  •  The Upper Earnings Limit for NICs is driven by the UK-ex-Scotland higher rate threshold, meaning that in this tax year some Scottish employees face a combined income tax and NIC marginal rate of 52% on earnings between £43,000 and £45,000.
  •  CGT rates are based on the UK-ex Scotland higher rate threshold, creating another anomaly.

Bad enough? It could be worse next tax year as the Scottish Government has just published a paper examining the options for changing tax rates as well as creating new bands in 2018/19. The SNP Government feels it needs extra tax income to counter ‘the UK Government’s apparent determination to continue with austerity’. The paper sets out the 2016 manifesto tax proposals of each party in the Scottish Parliament (from the Conservatives adopt-the-UK approach to the Scottish Green’s 4-band, 60% top rate scheme), and then details ‘four alternative approaches’ of its own (which turn out to be contained in five tables). These are summarised below and assume an £11,850 personal allowance for 2018/19 and a theoretical higher rate threshold of £44,290 (ie both 3% CPI indexed):

APPROACH 1

APPROACH 2A

APPROACH 2B

Band

Rate

Band

Rate

Band

Rate

£11,850 to £44,290

20%

£11,850 to £24,000

20%

£11,850 to £24,000

20%

£44,291 to £150,000

41%

£24,001 to £44,290

21%

£24,001 to £44,290

21%

£150,000+

46%

£44,291 to £150,000

41%

£44,291 to £150,000

41%

 

 

£150,000+

48%

£150,000+

50%

 

APPROACH 3

APPROACH 4

Band

Rate

Band

Rate

£11,850 to £24,000

20%

£11,850 to £15,000

19%

£24,001 to £44,290

21%

£15,001 to £24,000

20%

£44,291 to £75,000

41%

£24,001 to £44,290

21%

£75,001 to £150,000

42%

£44,291 to £75,000

41%

£150,000+

50%

£75,001 to £150,000

42%

 

 

£150,000+

50%

A few points to note about the above tables are:

  • Scotland has 2.5m taxpayers of whom 2.2m currently pay basic rate, 346,000 higher rate and just 20,000 additional rate. 2m Scottish adults pay no income tax.
  •  The median Scottish income for 2018/19 is estimated to be £24,000, hence that figure’s appearance in the tax tables as a break point. The UK 2017/18 median is £24,700.
  •  The top 10% of Scottish taxpayers have an income of £53,000, while for the top 5% that figure is £70,000 (UK 2017/18: £55,700 and £77,300).
  •  Higher and additional rate taxpayers account for 60% of all income tax paid. For the UK, the corresponding proportion in 2017/18 was 66.1%.

The paper goes into some detail on the impact of behavioural responses to changes in tax rates, probably because of the relatively low number of high earners and their opportunity to move to a less taxing England. For example, the paper suggests that if 5p is added to the additional rate, then this is reckoned to raise £150m with no behavioural response, £53m with a low behavioural response, but create a revenue reduction of £24bn with a high behavioural response.

Approach 3 is estimated to produce the largest increase in tax take, ranging from £430m (no behavioural response) to £217m (high behavioural response). The behavioural response mid-point is £255m, equating to about a 2.5% increase in income tax revenue. Tellingly, the paper calculates that a simple 1% rise in basic rate would yield about £100m more.

It is unlikely Mr Hammond will be paying much attention to the Scottish paper, but the Shadow Chancellor may be more interested. The 2017 Labour Manifesto suggested bringing the starting point of additional rate tax down to £75,000 and beginning a 50% rate at the point that the personal allowance was phased out (£123,000 in 2017/18).

The paradise papers

(AF1, RO3)

The latest (apparently extensive) set of papers leaked to the press on how the mega rich and famous hold and invest vast sums “offshore” have been called “The Paradise Papers”.

As with last year's Panama Papers leak, the documents were obtained by the German newspaper Süddeutsche Zeitung, which called in the International Consortium of Investigative Journalists (ICIJ) to oversee the investigation. The Guardian is also among the organisations investigating the documents.

The tax treatment of termination payments

(AF1, RO3)

Some changes to the tax treatment of termination payments, contained in Finance (No.2) Act 2017 which was given Royal Assent on 16 November 2017, take effect from 6 April 2018.

The main changes are as follows:

  1. Income tax and employer’s NIC are to be aligned. Employers will have to pay Class 1 NIC on any part of a termination payment that exceeds £30,000. However, it was announced on 2 November that the National Insurance Contributions Bill will be introduced in 2018 with the result that employer NIC on payments in excess of £30,000 will not begin until 6 April 2019. This will be collected in ‘real-time’, as part of the employer’s standard payroll run. However, termination payments will remain exempt from employee’s NIC without limit.
  2.  All payments in lieu of notice (PILONs) will be both taxable and subject to Class 1 NIC. This complicated legislation requires the employer to identify the notional amount of basic pay that the employee would have received had they worked their notice period. That amount will be treated as earnings without exemption. All other termination payments will be included within the £30,000 termination payments exemption.
  3.  The foreign service relief is to be removed except for Seamen.
  4.  The unlimited exemption for injury has now been more closely defined and will not apply in cases of injured feelings (unless these lead to a medical condition that qualifies in its own right).

New disguised remuneration provisions in finance (no.2) act 2017

(AF1, RO3)

Disguised remuneration – the 2019 loan charge

The broad rule is that all loans from employee benefit trusts (EBTs) and other third parties made to employees or directors on or after 6 April 1999, and which remain outstanding at 5 April 2019, will attract a PAYE and NIC charge following that date.

The amount subject to PAYE and NIC will be the outstanding loan amount on that date. Loan amounts repaid before that date will not be subject to the loan charge, subject to certain anti-avoidance provisions which are designed to ensure that a genuine repayment has been made. 

There are a number of, mostly narrowly drawn, exclusions from the loan charge which mirror the loan exclusions currently found in the disguised remuneration rules (e.g. on commercial loans and loans used to fund the exercise price of share options).

 Disguised remuneration – trading income provided through third parties

This change introduces provisions mirroring the existing disguised remuneration rules but targeted at the ‘avoidance of income tax and National Insurance Contributions (NICs) by the self-employed.’ 

Broadly speaking, it introduces a charge to income tax on trading profits disguised as other receipts – this measure is to curtail any future use of such arrangements.

And to counter past use of such arrangements, the change introduces a 2019 loan charge similar to that being introduced for disguised remuneration purposes.

The changes are due to take effect retrospectively from 6 April 2017.

INVESTMENT PLANNING

Enterprise investment schemes - sales exceeded £1.85bn in 2015/16

(AF4, FA7, LP2, RO2)

As pre-Budget EIS/SEIS sales flourish, HMRC has just issued its latest set of EIS/SEIS statistics. These show that in 2015/16 sales of EISs amounted to £1,887.6m, a decrease of 2.1% over 2014/15. For SEISs the corresponding figures were £180.1m and +0.3%. 2015/16 was the second best year ever for EIS sales and compares with £445m raised by VCTs in the same tax year.

The statistics show that 3,470 companies raised EIS funds and 2,360 raised SEIS funds, both figures very similar to the previous years. The number of EIS subscriptions was 176,210 (+14%) while for SEIS the corresponding figure was 30,460 (-9%).

Not all EIS investors qualify for income tax relief and the statistics show that 32,770 individual claims for income tax relief in 2015/16, covering 75% of the funds raised in that year. However, the capital raised and the amount tax relieved are not directly comparable as some investment made in 2015/16 may have been backdated to 2014/15 for tax relief purposes.

Whatever the impact of the timing, these numbers underline an oft forgotten fact that EISs cost the Treasury considerably more in upfront tax relief (both income tax and CGT deferral) than their VCT counterparts, which offer only initial income tax relief. As we have remarked earlier the Summer consultation paper from the Treasury on “patient capital” registered unhappiness about the asset-backed nature of many EISs. To quote the paper, ‘Industry estimates suggest that the majority of EIS funds ….had a capital preservation objective in tax year 2015/16’.

The 2016/17 increase of over a quarter in VCT sales may well be reflected in EIS/SEIS sales when the figures are released. Watch for this month’s Budget to make 2017/18 a peak year…

National savings interest rates

(AF4, FA7, LP2, RO2)

Following on from the recent increase in Base Rate, National Savings & Investments (NS&I) have announced increases to their variable rate accounts, all of which will take effect from 1 December. The new rates are:

Product

Current rate

New rate from 1/12/2017

Direct ISA

0.75% tax-free/AER

1.00% tax-free/AER

Direct Saver

0.70% gross/AER

0.95% gross/AER

Income Bonds

0.75% gross/AER

1.00% gross/AER

Investment A/C

0.45% gross/AER

0.70% gross/AER

Junior ISA

2.00% gross/AER

2.25% gross/AER

Premium Bonds

1.15%

30,000:1 monthly odds

1.40%

24,500:1 monthly odds

The best instant access rate at present is 1.30%, according to Moneyfacts, a rate that has not (so far) changed with the Base Rate increase. Unsurprisingly, to date banks have been more anxious to pass on the rate rise to borrowers rather than savers.

For premium bonds, the increase in the interest rate has not been accompanied by any reshuffling of the prize distribution split, but only a shortening of the odds. 95% of the prize fund (representing 99.77% of all winning draws) will be for prizes of £100 or less, with 98.20% of all prizes the £25 minimum.

It remains the case that NS&I represents a relatively expensive way for the Treasury to raise cash. On the day that NS&I made its rate announcement, the Treasury’s Debt Management Office issued a press notice revealing that it had sold £2.75bn of 0.75% Treasury Gilt 2023 at an average yield of just 0.831%.

It is slightly surprising to see NS&I being so quick to raise rates. However, its capital raising target in 2017/18 was set at £10bn-£16bn and in its first quarter to the end of June it reported a net inflow of just £1.6bn, so perhaps there is some catching up to be done.

The October inflation numbers

(AF4, FA7, LP2, RO2)

The CPI for October showed an annual rate of 3.0% and prices rising 0.1% over the month, the same rate as between September 2016 and October 2016. The market consensus had been for a 3.1% annual rate, which would have forced a Governor/Chancellor letter. The CPI/RPI gap widened by 0.1% to 1.0%, with the RPI annual rate hitting 4.0%. Over the month, the RPI was up 0.1%.

The ONS’s favoured CPIH index was flat, staying at 2.8% for the year. The ONS puts the unchanged inflation figure down to five competing factors:

Food and non-alcoholic beverages: Overall, food prices made the largest upward contribution to the inflation rate between September and October 2017, increasing by 0.4%, having fallen by 0.5% a year ago. The upward effect came from a broad range of food products and, to a lesser extent, soft drinks. Food price inflation alone is now running at 4.2%.

Recreational and culture: There was a smaller upward effect from recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier. This was due to prices for various recreational goods rising by more than they did a year ago, along with prices for package holidays, which rose by 0.4% between September 2017 and October 2017, having fallen by 0.4% in the same period last year.

Transport: Overall this category supplied the largest downward contribution to the headline rate. The main downward effect came from motor fuels with prices falling by 0.4% between September and October 2017, having risen by 2.3% a year earlier. This downward effect was partially offset by prices for vehicles, which rose by more than they did a year ago, along with air fares, which fell by less than they did last year.

Housing and household services: Owner occupiers’ housing costs (part of the CPIH, but not CPI) had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago. This was partially offset by electricity prices rising by 2.2% between September 2017 and October 2017, having been unchanged last year.

Furniture and household goods: In this category a downward effect came mainly from furniture and furnishings. Prices for these goods tend to fall in October, with the fall in 2017 being more pronounced than in 2016. Overall in 2017, furniture prices have seen relatively large increases compared with recent years, and the fall in October 2017 only partially offset these. Furniture and furnishings inflation is running at 4.6%, probably due to the weakness of sterling.

In six of the twelve broad CPI categories, annual inflation dropped, but this was not enough to counter the four categories which rose. Three categories – food and non-alcoholic drinks, alcoholic drinks and beverages and transport – now have an annual inflation rate starting with a 4.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was unchanged at 2.7%. Goods inflation rose 0.1% to 3.3%, while services inflation was flat at 2.7%.

Producer price inflation (PPI) numbers were down, which reflects the continued unwinding of Summer 2016’s Brexit-induced decline in sterling. The input PPI figure was 3.5% lower than September at 4.6%. That figure is no less than 15.3% below the January 2017 peak. The ONS notes that sterling’s effective exchange rate index is now showing a 3.5% increase year-on-year, which is significant given that imported materials and fuels represent roughly two-thirds of overall input prices in terms of index weight. Output price (aka factory gate price) inflation fell 0.5% to 2.8%.

The fact that CPI inflation did not cross the 3% threshold means that the Chancellor will not receive a letter from the Governor of the Bank of England explaining why the Bank of England’s inflation target had been missed. Mr Carney said at the Quarterly Inflation Report meeting earlier this month “CPI inflation was 3% in September and it’s expected to have risen a little further in October”, so his letter may have already been drafted. The Bank is expecting inflation to start falling – albeit very gently – from now on, so Mr Carney may never need to exercise his correspondence skills.

PENSIONS

HMRC newsletter 92

(AF3, FA2, JO5, RO4, RO8)

HMRC has recently published Newsletter 92 which covers:

  • Pension flexibility statistics
  • Registration statistics
  • Relief at source for Scottish Income Tax
  • Drawdown pension tables
  • New pensions online service
  • Paying tax to HMRC
  • Lifetime allowance service

Of notable interest –

Pension flexibility statistics

From 1 July to 30 September 2017 HMRC processed the following forms to repay income tax paid in pension income:

  • P55 = 8,489 forms
  • P53Z = 5,944 forms
  • P50Z = 1,735 forms

Total value repaid: £36,875,395

New Pensions Online service

 In Pension Schemes Newsletter 90 HMRC explained that they were bringing forward transferring existing scheme administrator data onto the new Pensions Online Digital Service to April 2018. They explained that this was to allow existing pension scheme administrators to register new schemes on the new service.

Scheme administrators were asked to log into Pension Schemes Online and check that their details are complete and up to date.

It has been noted that there are still a lot of scheme administrators who have not logged onto the current online service since April 2015. HMRC urge those that have not logged in to do so to update their details because if the information is insufficient they may have to register as a new user on the new service from April 2018.

Accounting for Tax Return – paying tax to HMRC

HMRC note that in some cases where tax is paid to HMRC the relevant charge reference has been missing, which has resulted in additional charges because the payments are unable to be matched up.

HMRC reminds those making payments that “The charge reference is provided on screen once you have successfully submitted an Accounting for Tax Return. It is also available on the scheme summary page 24 hours later. If any interest has accrued, we will issue a letter containing a separate charge reference for the interest.”

Lifetime allowance service

HMRC remind people that it is only possible to apply for IP16 and FP16 through the appropriate links and not directly through their personal tax account. Those who have applied will be able to see their reference numbers on their personal tax account even though the application was made separately.

Draft NEST order published

(AF3, FA2, JO5, RO4, RO8)

DWP publishes consultation on the Draft National Employment Savings Trust (Amendment) Order 2018.

The consultation seeks views on proposals to improve the National Employment Savings Trust (NEST) pension scheme for the benefit of employers and members.

The proposed changes will:

  • allow participating employers to contractually enrol their employees in the National Employment Savings Trust (NEST) pension scheme
  • clarify that individuals may join NEST in the event of a ‘bulk transfer with consent’ and require that any amount must be applied to a member’s account as a result of a bulk transfer
  • give NEST Corporation the ability to close members’ pension accounts that have zero funds if certain conditions are met
  • require NEST Corporation to carry out research with scheme members and participating employers and their representatives, in connection with the operation, development or amendment of the scheme

The intention is that the order will come into force on 1 April 2018, but it is subject to approval by Parliament.

Responses should be emailed to: Nicola.Lloyd@dwp.gsi.gov.uk

PPF bridging pension draft regulations published

(AF3, FA2, JO5, RO4, RO8)

A technical consultation has been published looking at the proposal for the PPF to take account of bridging pensions by smoothing the amount of PPF compensation over the individual’s lifetime

Bridging pensions allow individuals who retire before reaching State Pension age to be paid a higher rate of pension initially. The bridging pension then reduces when the individual begins to receive their State Pension or reaches an age specified in their pension scheme rules.

So a further technical consultation has been published seeking to establish whether the new draft regulations achieve the policy intent.

The changes to PPF compensation rules will come into effect in February 2018, subject to Parliamentary procedures.

The draft Pension Protection Fund (Compensation) (Amendment) Regulations 2017 would allow the Pension Protection Fund (PPF) to take account of bridging pensions by smoothing the amount of PPF compensation over the individual’s lifetime.

This consultation seeks views on:

  • the implications of the government’s preferred option to allow the PPF to take account of bridging pensions by smoothing the amount of PPF compensation over the individual’s lifetime
  • whether the draft regulations achieve their intended purpose

The consultation closes on 3rd December 2017.

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