Technical news update 08/10/2019

Taxation and trusts 

• Cash gifts to children for house purchase
• The latest inheritance tax statistics show a further increase in the tax take
• Absolute trusts – the IHT treatment of premiums paid directly to the life office
• HMRC’s guidance and news for employers – Brexit edition
• Labour conference: tax policies
• Trading or non-trading for the purposes of entrepreneurs’ relief?
• Higher rate tax cuts and the alternatives
• Entrepreneurs’ relief granted on shares sold by a trust
• Borrowing figures jump on revised accounting treatments
• Trust Statistics – September 2019

Investment planning 

• Third quarter of 2019

Pensions  

• TPR updates DB Investment Guidance
• Members of Pensions Dashboard Steering Group announced
• HMRC updates pension statistics
• PPF publishes draft 2020/21 levy determination and consultation
• Brexit and state pensions uprating
• TPR publishes automatic enrolment declaration of compliance report

TAXATION AND TRUSTS

Cash gifts to children for house purchase

(ER1, LP2, RO7) 

A recent report from Legal and General provides an insight into the extent that parents (the so-called Bank of Mum and Dad) make loans to their children to help them get on the property ladder. 

In 2018, lending from the Bank of Mum and Dad came to £5.7bn  For 2019, it is forecast to increase to £6.3bn with the average size of loan coming out at about £24,000. This makes families the 11^th largest mortgage lenders in the UK! 

The economic background to the increased difficulties faced by adult children who want to buy a house is well known. Given that the life expectancy of parents has increased so children have to wait longer to inherit, and the general feel-good factor that surrounds a lifetime gift to genuinely help the next generation, it is easy to understand why intergenerational lifetime gifting has increased. 

Of course, no such problems will arise whilst all the parties enjoy an amicable relationship but should that relationship break down, or perhaps a child divorces their spouse, the parent may wish to have recourse to the original cash transferred. In such a case, the actual basis of the transfer of cash from parents to child will be critically important.  In general, if it is a loan, recovery is possible. Alternatively, if it is a gift, recovery cannot be made. 

Two examples of cases where problems have arisen were given in the Times on 31 August 2019 as follows:- 

In one recent case a couple spent £380,000 on legal fees and costs intervening in the financial proceedings surrounding their son’s divorce. The parents, distressed at the thought of their estranged daughter-in-law walking off with half the £2 million they made available to buy a house, argued that the money was an investment in the property and not a gift. The parents were unable to convince the judge that they owned the property, and lost their case.  In addition, they then had to pay the daughter-in-law’s legal costs. 

In another case, parents bought a house in the name of their children which they occupied with the children. At a later date the children forced a sale of the house and kept the proceeds despite the parents arguing that the original transfer of money was a loan. 

So, are there any particular factors that parents should take into account before helping their children with house purchase?  Two important areas are these:-

 

(1) However much a child may want their financial help, parents should only make a lifetime gift if they can afford it. 

It seems that more than 25% of those who have lent or given money say they are worried that they won’t have enough money to live on in retirement with more than 15% realising that since making the loan/gift they have accepted a lower standard of living. 

Clearly, people should only make gifts if they are comfortable that they can afford to do so both now and in later life, as otherwise they run the risk of becoming a financial burden on their children in later life.

 

(2) A parent should have fully considered the terms and structure of any loan before they make it. The Times have recently reported that there are between 12 and 15 cases a month of parents taking their adult children or the spouse of an adult child to Court to retrieve money lent.  These cases can absorb hundreds of thousands of pounds in legal costs.

 

These factors reaffirm the view that where a parent is considering assisting a child to purchase a property by making a financial contribution, they need to fully consider what rights the parent expects to have in the future. 

For example, if the parent wants to be able to recover the cash in the event of a breakdown in relations with the child or in the event of the child’s divorce (ie. to prevent the child’s spouse from accessing the funds), the money should be transferred as a loan. The parent could possibly take a charge on the property, which would be a second charge if a mortgage is in place. Alternatively, the parent could help the child obtain a mortgage by guaranteeing mortgage payments.  By adopting this approach the parent’s financial position can be secured and the 3% additional  enhanced rate of SDLT can also be avoided. 

If, on the other hand, the house purchase was made with the parent’s name on the title deeds, whilst the parent could secure their financial position, the enhanced rate of SDLT would not be avoided on purchase if the parent owned other residential property.

Parents who are contemplating giving a financial helping hand to their children to buy a house should consider all financial and security issues – both those that apply now and those that might apply in the future. 

The latest inheritance tax statistics show a further increase in the tax take

(AF1, RO3) 

The latest inheritance tax statistics published by HMRC show that receipts have hit their highest ever level. Interestingly, over more recent months we did see a drop in receipts. However, there has been an overall increase over the course of the year. 

The statistics broadly show: 

• In 2016-17, 4.6% of UK deaths resulted in an inheritance tax (IHT) charge, increasing by 0.4 percentage points since 2015-16. This continues the longer term increase in this proportion since 2009-10 after which the nil rate band threshold has been frozen at £325,000. 

• The total number of UK deaths that resulted in an IHT charge has increased every year since 2009-10. In 2016-17 there were 28,100 such deaths, an increase of 3,600 (15%) since 2015-16. 

• IHT receipts received by HMRC during 2018-19 were £5.4 billion which was an increase of 3% (£166 million) from 2017-18. Again, the figures show that receipts have been rising since 2009-10. 

• The gross capital value (the total sum of the value of assets) of estates since 2009-10 has increased by around £15 billion to £80.1 billion in 2016-17. Around 80% of this increase was in the value of residential property. The decrease since 2015-16 has been 4%. 

What we have seen in more recent years is a decrease in the use of reliefs and exempt transfers to charity. The combined value of agricultural and business relief was £2.1 billion in 2016-17. This was a fall of 18% compared to 2015-16. The value of exempt transfers to qualifying charities also fell, from £3.1 billion in 2015-16 to £1.8 billion in 2016-17. 

In addition, while the net chargeable value of discretionary trusts increased by 21% a year on average to 2014-15, since then the number of trusts and their value has been steadily declining – planning in this area could be key to reduce inheritance tax going forward. 

As we have said before, the increase in inheritance tax receipts provides advisers with an opportunity to engage with clients to consider their estate planning options. 

Source: https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary 

Absolute trusts – the IHT treatment of premiums paid directly to the life office

(AF1, JO2, RO3) 

When a policy is subject to an absolute/bare trust, what is the inheritance tax treatment of premiums? Well, with a regular premium policy, you would expect that in most cases the premiums paid by the settlor/donor will be covered by the normal expenditure out of income exemption. If not, there is the annual (£3,000) exemption. But what if the premiums exceed or are not covered by any of the exemptions? 

Typically, a short answer when considering gifts to an absolute trust is that any gift to it will be a potentially exempt transfer (PET). However, in fact this is not necessarily the case and, for an explanation, you need to look to the statutory definition of a PET in section 3A of the IHT Act 1984. This provides that a gift can be made to an individual and so be a PET: 

• to the extent that the value transferred is attributable to property which, by virtue of the transfer, becomes comprised in the estate of that other individual, IHT Act 84/S3A (2)(a); or 

• so far as that value is not attributable to property which becomes comprised in the estate of another person, to the extent that, by virtue of the transfer, the estate of that other individual is increased, IHT Act 84/S3A (2)(b). 

If the policy in question is a pure protection policy, say a term assurance that will never acquire a surrender value, the payment of premiums will not increase the value of the estate of the other individual; and if the payment is made directly to the life office it will never become comprised in the estate of that other individual either.

HMRC’s IHT Manual includes further clarification of this issue.

IHTM 20332 covers: Life Policies: Potentially Exempt Transfer treatment for renewal premiums: payment of premiums for policies gifted to individuals. It should be noted that policies held subject to bare/absolute trusts will be treated in the same way – our italics.

IHTM 20332 confirms that the PET treatment is available to the extent that the value of the transferee’s estate is increased. Value in this context means the open market value and is a matter for HMRC’s Actuarial Team to consider.

If the amount of the premium paid direct to the insurance company is more than the increase in the value of the policy, the excess will be an immediately chargeable transfer (CLT) (subject to any other available exemptions).

This means that if the protection policy has no value, the PET treatment will not apply if premiums are paid directly to the life office. 

To avoid the premiums being treated as CLTs the donor should make payment to the trustees (which will then increase the value of the trust fund and so the value of the beneficiary’s estate) for the trustees to pay the premiums. 

There is further clarification of the PET treatment for renewal premiums: payment of premiums for policies in accumulation and maintenance trusts or trusts for disabled persons in IHTM20331. This includes the following: 

‘IHTA84/S3A (3) provided that PET treatment for such premium payments before 22 March 2006 is only available to the extent that the value transferred is attributable to property which, by virtue of the transfer, becomes settled property to which IHTA84/S71 or IHTA84/S89 applies. So, if a transferor put a policy into an accumulation and maintenance trust or a trust for a disabled person and then paid the renewal premiums direct to the insurance company before 22 March 2006, PET treatment will not be available. This is because the premiums do not become settled property. That is still the position for disabled trusts where premiums are paid in this way on or after 22 March 2006, S3A (3A). 

However, if the transferor made payments to the trustees before 22 March 2006 (and also on or after that date in the case of disabled trusts) and the trustees used those payments to pay the renewal premiums PET treatment is available - even if payment by the transferor was by a cheque which the trustees endorsed in favour of the insurance company. Neither the associated operations provisions nor the principle in Ramsey/Furniss should be invoked to deny PET treatment in these cases. 

S71 cannot apply to property settled on or after 22 March 2006 (IHTA84/S71 (1A)) except in specific circumstances where rights under a contract of life insurance were settled on accumulation and maintenance trusts before 22 March 2006, but premiums continue to be paid after that date and further rights become comprised in the settlement as a result. In those circumstances, the payment of premiums on or after 22 March 2006 will continue to be treated as potentially exempt transfers if they are made by an individual, S46B(5) , whether the payment is made direct to the insurance company or to the trustees in the first place, who use it to pay the premiums. Where the payment is made to the trustees who then pay the premiums, we can agree that the two payments could be regarded as together comprising a disposition by the transferor by associated operations which is to be treated as a transfer of value under S3’. Note that the above was a concession granted to pre-2006 policies only. 

While for the vast majority of absolute trusts premiums will be covered by one exemption or another, it is important to remember the above conditions. Of course, even if the premiums exceed the exemptions and do not qualify as PETs, there will be no immediate IHT liability on any CLT if the settlor’s nil rate band is still available. On those rare occasions where an immediate IHT liability may result, it will be important to remind the settlor/donor that the payment should first be made to the trustees and this will require them to open a bank account from which the premiums will be payable to the insurance company. 

HMRC’s guidance and news for employers – Brexit edition

(AF2, JO3) 

HMRC’s latest update includes information for UK employers sending workers to the EU, the EEA or Switzerland. 

HMRC produces regular Employer Bulletins which, whilst they are aimed at employers, can also provide helpful insights into issues clients may be talking about to their financial advisers. Here’s what’s covered in HMRC’s latest Employer Bulletin in relation to social security contributions (such as National Insurance contributions in the UK): 

Changes for UK employers sending workers to the EU, the EEA or Switzerland 

In the event the UK leaves the EU without an agreement, there may be changes for UK employers who have people working in the EU, the EEA or Switzerland.

Currently, the EU Social Security Coordination Regulations ensure employers and their workers only need to pay social security contributions (such as National Insurance contributions in the UK) in one country at a time. However, if we leave without an agreement, the coordination between the UK and the EU will end. 

This will mean that employees working in the EU, the EEA or Switzerland may need to make social security contributions in both the UK and the country in which they are working at the same time. 

Businesses will need to do the following to prepare: 

• If their employee is currently working in the EU, the EEA or Switzerland and has a UK-issued A1/E101 form, they will continue to pay UK National Insurance contributions for the duration of the time shown on the form. 

• However, if the end date on the form goes beyond Brexit day, the employer will need to contact the relevant EU, EEA or Swiss authority to confirm whether or not their employee needs to start paying social security contributions in that country from that date. The European Commission’s website will help them find the relevant country’s authority. 

• If their employee is a UK or Irish national working in Ireland, their position will not change after Brexit - they are covered under the international agreement signed by the UK and Ireland in February 2019. Their employer won’t need to take any action. 

• A replacement for the A1/E101 form will be issued for new applications after Brexit. This ensures that their employee continues to make UK National Insurance contributions to maintain their social security record. The employer can still use the same form on GOV.UK to make an application after the UK has left the EU.

The Government says that it is working to protect UK nationals by seeking reciprocal arrangements with the EU or Member States to maintain existing social security coordination for a transitional period until 31 December 2020. Individuals in scope of these arrangements will only pay social security contributions in one country at a time. 

For more information about sending workers to the EU, the EEA or Switzerland after Brexit please go to the new information on GOV.UK, where further information will be published as it becomes available.

Source: HMRC Guidance: Employer Bulletin - Brexit edition – dated 24 September 20119. 

Labour conference: tax policies

(AF1, AF2, JO3, RO3) 

We had hoped to be able to provide an article on Labour’s tax policies after their conference. Unfortunately, the Labour Party decided to follow Sajid Javid’s approach to the Spending Round i.e. announce the spending promises while holding back on the corresponding tax and borrowing numbers. 

This half-a-Budget was confirmed by John McDonnell in an interview with the Times Red Box podcast. He said that Labour would repeat the 2017 strategy of issuing a ‘Grey Book’ with details of how it would finance the pledges alongside its manifesto. The 2017 Grey Book was an attempt to match the type of calculations that the Office for Budget Responsibility (OBR) performs for the Government. Back in 2017 it was criticised by the Institute for Fiscal Studies as being overly optimistic on how much revenue would be raised. 

The only real points of note to emerge at or around the conference were: 

• John McDonnell (re)pledged to end non-domicile status in his first Budget. This was red meat to the Party faithful, but in practice non-dom benefits have been steadily reduced over recent years and the latest data from HMRC show that in 2017/18 there were only 78,300 people claiming non-domiciled taxpayer status in the UK on their SA tax returns (64,100 of whom were UK resident), down from 123,000 in 2014/15 (86,500 UK resident). Over the same period the tax and NICs raised from non-doms has also fallen, but less significantly – from £9,338bn in 2014/15 to £7.539bn in 2017/18. 

• In the Times Red Box interview, John McDonnell stressed that the focus for raising extra revenue would be on “the top 5%”, a repeat of the 2017 strategy. This would have brought the additional rate threshold down to £80,000 and created a new 50% rate, starting at the point where the personal allowance had been tapered away (i.e. £123,000 in 2017/18 and £125,000 in 2019/20). 

• The £6bn pledge to provide “free personal care for all older people” (not free social care and not for all) would be funded “through general taxation” – equivalent to about 1p on all tax rates. 

The absence of any clear information on Labour tax plans makes sense from the political viewpoint, as they would doubtless provide useful ammunition for the Government at a time when any distractions from the parliamentary pantomime would be welcome. In practice, it looks likely that Labour’s plans will have much in common with their 2017 manifesto. 

One additional factor, which may further explain why Labour held back from issuing numbers, is the revenue which would be raised by the proposed ‘Inclusive Ownership Fund’. This controversial measure would, over 10 years, effectively nationalise 10% of every UK company (private or public) with more than 250 employees. While the employees would receive dividends of up to £500 a year, calculations by Clifford Chance suggest that the Treasury would be the main beneficiary, to the tune of £9bn a year. 

Trading or non-trading for the purposes of entrepreneurs’ relief?

(AF2, JO3) 

In the recent case of Potter and Potter v HMRC [2019] UKFTT 554 (TC), the taxpayers equally owned all of the shares in Gatebright Ltd, which traded on the London Metal Exchange. 

The company had been a successful business and had built up reserves of over £1m when the financial crash occurred in 2008. In order to safeguard its reserves, the company used around £800,000 of reserves to purchase two six year investment bonds which paid interest of £35,000 a year from 2009 to 2015. 

Following the 2008 financial crash, Gatebright Ltd’s trading activity in terms of volume of trades declined dramatically and the company issued its last invoice in March 2009. 

While the taxpayers tried to maintain the company’s trade they didn’t succeed. As a result, they decided to close the company by means of a member’s voluntary liquidation in November 2015. 

The issue was whether the Potters could claim entrepreneurs’ relief (ER) on the gain triggered by the deemed disposal. The taxpayers claimed the relief on the basis that Gatebright Ltd had continued to be a trading company until June 2014, which was less than three years before its liquidation. However, HMRC refused the claim on the basis that no invoices were issued after March 2009 and, as a result of the crash, the company ceased to trade which meant that the company ceased to be a trading company outside the three year period in condition B of the relevant legislation (section 169I of the Taxation of Chargeable Gains Act 1992).

HMRC added: 

“Even if there were some trading activities, following the investment of the reserves in the bonds, the activities of the company became substantially investment activities. ER was not therefore due because the company was not a trading company as it could not be said that its activities did not include, to a substantial extent, activities other than trading activities.” 

The First-tier Tribunal determined that the main point to consider was whether Gatebright Ltd was a trading company after March 2009. 

Mr Potter submitted that the company was not carrying on an investment business in the relevant period. The purchase of the bonds was a one-off transaction carried out to safeguard the company’s accumulated profits. The First-tier Tribunal accepted Mr Potter’s account of his activities after 2009 and found that the company had been carrying on trading activities with a view to reviving its trade. As such the Tribunal concluded that Gatebright Ltd was a trading company and the taxpayers were entitled to entrepreneurs’ relief – so the taxpayers’ appeal was allowed. 

This case illustrates the importance of the need to understand the nature of a business to determine whether or not entrepreneurs’ relief will be available – a fundamental point here was that Mr Potter was able to show that his focus was geared towards reviving the company’s trade and, even though investments were purchased, these were not substantial and were a ‘one-off’ transaction. 

A company counts as trading if its activities do not include to a substantial extent activities other than trading activities. Substantial in this context means more than 20%. 

There isn’t a simple formula for applying this limit, but the measures or indicators that might be taken into account include: income; asset base; expenses incurred; and time spent by employees.

 

This case also reminds us of the importance of the 1999 inheritance tax business [property] relief case, Farmer and another (exors of Farmer dec’d) v IRC SpC 216, in a situation where there are factors pointing both ways.

 

Referring to the general approach set out in the Farmer case, of considering the factors and then standing back and considering “in the round” the nature of the business, the Tribunal judge said: 

“The asset and income position of the company are factors against trading activities. The expenses incurred and time spent by the directors/employees are factors pointing to trading activities. When one stands back and looks at the activities of the company as a whole and asks “what is this company actually doing?” the answer is that the activities of the company are entirely trading activities directed at reviving the company’s trade and putting it in a position to take advantage of the gradual improvement in global financial conditions.” 

HMRC’s capital gains tax manuals also refer to the Farmer case, suggesting that where some indicators point in one direction and others the opposite way: “You should weigh up the relevance of each in the context of the individual case and judge the matter “in the round””. 

Source: Potter and Potter v HMRC [2019] UKFTT 554 (TC) – dated 29 August 2019; www.bailii.org/uk/cases/UKFTT/TC/2019/TC07348.pdf 

Higher rate tax cuts and the alternatives

(AF1, AF2, JO3, RO3) 

The early publication of a chapter from the Institute for Fiscal Studies Green Budget once again highlights the cost of the higher rate tax and NIC reforms floated by Boris Johnson. 

Long, long ago, in June, when Boris Johnson was running for the Conservative Party leadership, he talked of raising the higher rate tax threshold to £80,000 and bringing the National Insurance contribution (NIC) threshold into line with the personal allowance. Subsequently, the Institute for Fiscal Studies (IFS) ran its slide rule over the costs of these two proposals and decided that they were not only costly, but also heavily biased towards higher earners. 

Mr Johnson has since gone quiet on the proposals, but the IFS has now chosen to revisit them in a pre-released chapter from its Green Budget (which will be published in full on 8 October).The chapter also examines options for supporting low earners, which is an aim the Chancellor has spoken about as part of his Budget planning. The IFS’s key findings are: 

• Raising the higher rate threshold and the NIC thresholds that are aligned with it to £80,000. The IFS reckons this would cost £9bn a year and cut taxes for the highest-income 8% of individuals, i.e. 92% would see no benefit. The threshold hike would offset some of the big tax increases that have affected the very highest earners since 2009 (additional rate, personal allowance tapering, etc). 

• Raising the higher rate threshold to £80,000 alone. This would take 2.5m people out of higher rate tax, reversing the increase over recent decades and taking the number of higher/additional rate taxpayers to its lowest level since the UK’s individual tax system began in 1990/91. 

• The tapered withdrawal of the personal allowance. The IFS wants a more coherent approach to tax bands and views the taper as a “bizarre and opaque feature of our income tax system”. It points out that the £25,000-wide 60% marginal income tax band above £100,000 is hitting ever more people each year – about 1m at the last count. The IFS alternative is to scrap the taper and instead start the additional rate of income tax at the proposed higher rate threshold of £80,000, at an additional cost to the Exchequer of about £1bn. To make the change cost neutral, the 45% threshold would have to be reduced to £75,000. 

• Raising the point at which employees and the self-employed start to pay NICs. The IFS puts the cost of this at about £3bn for every £1,000 by which the threshold is raised. If the employer NICs threshold were raised alongside this, the total cost would be £5bn per £1,000. Raising the NIC thresholds would benefit everyone who currently pays NICs, which the IFS says is all workers above the bottom 12% of the weekly earnings distribution (equivalent to an employee aged 25 or over working at least 20 hours per week at the national living wage). The IFS believes an increase to the NICs threshold is the best way to help low and middle earners through the tax system. However, it says that if the aim is to help the lowest earners, increasing work allowances under universal credit would be much more effective. Only 3% of the total gains from raising the NICs threshold (either by £1,000 or to the personal allowance threshold) would accrue to the poorest 20% of households. Spending £3 billion on increasing work allowances could raise the incomes of those same households by 1.5%, compared with less than 0.1% under an equally costly NICs cut.   

The IFS paper arrived just days after the latest borrowing figures underlined the worsening state of Government finances. If there are to be cuts to income tax and NICs, then Mr Javid’s revised fiscal rules will need to be very loosely set. 

Entrepreneurs’ relief granted on shares sold by a trust

(AF1, AF2, JO2, JO3, RO3) 

In a recent case the First-tier Tribunal held that, for the purposes of entrepreneurs' relief, an individual only needs to be a qualifying beneficiary at the time of a disposal of trust business assets by the trustees. 

In the case of Quentin Skinner 2005 Settlements v HMRC [2019] UKFTT 0516, the First-tier Tribunal (‘FTT’) allowed claims for entrepreneurs’ relief by the beneficiaries of three trusts on the basis that they did not need to be ‘qualifying beneficiaries’ throughout the period of at least one year in the final three years before disposal. 

Entrepreneurs’ relief may be available where trustees of a settlement dispose of trust property that consists of either shares in, or securities of, a qualifying beneficiary’s personal trading company, or assets used in a qualifying beneficiary’s business. 

The relief will only be available if there’s an individual with a life or absolute interest in possession under the trust, or under the part of the trust which includes the property in question (a ‘qualifying beneficiary’). 

According to HMRC’s guidance, for the relief to be available on the disposal of shares or securities then throughout the period of one year (two years for disposals from 6 April 2019) ending within the three years prior to disposal:  

• the company must have been the qualifying beneficiary’s personal company (this means the beneficiary holds at least 5% of the company’s ordinary share capital), and a trading company (or holding company of a trading group); 

• the qualifying beneficiary must have been an officer or employee of that company (or an officer or employee of one or more members of the trading group); and 

• the qualifying beneficiary must have had the interest in possession throughout the relevant period, which was one year in this case. 

The facts of the case:

Mr Skinner was the major shareholder in DPAS Ltd (‘the Company’) which carried on the business of administering private dental plans and dental insurance. On 11 August 2015 Mr Skinner made gifts of 55,000 ordinary shares in the Company to trusts set up for his three children. Each child had been granted an interest in possession in the trusts on 30 July 2015. Each child also held shares, which accounted for more than 5% of the Company’s ordinary share capital in their own right and which they had already held for more than one year. 

On 1 December 2015, the trustees disposed of the shares and made a claim for entrepreneurs’ relief. However, HMRC denied entrepreneurs’ relief on the basis that in each case the beneficiary had not been a qualifying beneficiary for one year before the shares were sold. The trustees appealed.
The sole dispute was as to whether s.169J(4) of the Taxation of Chargeable Gains Act 1992, contains a requirement for the beneficiary to have been a qualifying beneficiary throughout a period of one year ending not earlier than three years before the date of the disposal.

The FTT said s.169J(4), extended in effect the ‘entrepreneurial connection’ required in the ordinary case (s 169I(5) and (6)) to a situation where a qualifying beneficiary owned an interest in possession in shares through a settlement.

The judge decided that the focus of s.169J(4)(a) was not on the ‘qualifying beneficiary’ but on ‘the company’. In the situation where an individual sells personally owned shares in a company, once the personal company (and trading company) conditions are met, additional shareholdings will automatically qualify for relief even if not held for the requisite period. Therefore, if the individual concerned sells personally owned shares in a company which qualifies as their personal company, any additional shareholdings which are owned by the trust under which the individual is a qualifying beneficiary should also qualify for relief. The judge considered that it would be incorrect to conclude that the ‘qualifying beneficiary’ had to have the attributes of a ‘qualifying beneficiary’ for one year during the three-year window. As a result, the FTT allowed the appeal. 

The decision in this case which, while a welcome result for the taxpayers, is interesting as it contradicts the guidance in HMRC’s help sheet 275 as well as in their manuals at CG63985. 

Many professional advisers have taken the view for some time that HMRC’s interpretation of the legislation was not correct. It will be interesting to see whether HMRC decides to appeal. 

Borrowing figures jump on revised accounting treatments 

The latest government borrowing figures have taken a major turn for the worse, but it was mostly down to accounting changes. 

In August, the Office for National Statistics’ (ONS) latest estimate for borrowing in 2018/19 (last tax year) was £23.6bn (1.3% of GDP). This month its estimate for the same period is £41.4bn (1.9% of GDP). What happened? 

The answer is to be found in a raft of accounting adjustments which the ONS has introduced this month. These include: 

• Student loans The long-awaited revision to the treatment of student loans took effect. This alone added £12.4bn to last year’s borrowing. 

• Public sector pension schemes ONS have introduced “a new, gross presentation of funded employment-related pensions’, which now includes the Pension Protection Fund. The “consolidation of gilts and recognition of liquid assets held by the public pension schemes” has reduced total debt by £28.6bn, but increased 2018/19 borrowing by £1.9bn. 

• Corporation tax receipts and credits HMRC has published revised data on corporation tax receipts and credits which feed through to the ONS numbers. “HMRC recently identified that the Corporation Tax credits had erroneously been included twice within total Corporation Tax receipts.” The error goes all the way back to the financial year ending in March 2011 and, as corporation tax receipts have been rising, means that in 2018/19 there was a £2.6bn over-estimate of Treasury income. 

For the month of August 2019, the ONS says that the government borrowed £6.4bn, £0.5bn down on 2018 and £0.7bn below market expectations. The undershoot may have been helped by a spillover of self-assessment income tax payments, which were £0.4bn higher this year than last. Total central government receipts for the month rose by 3.4% year-on-year with the year-to-date figure up 2.9%. The month saw a 1.9% rise in government spending (5.1% year- to-date), prompting the Office for Budget Responsibility (OBR) to say in its commentary, “…it now seems likely that borrowing will exceed our restated March forecast for 2019/20”. 

In his Spending Round announcement, the Chancellor said that he would be reviewing the ‘fiscal framework’  ahead of the Budget. It has been clear for some time that getting borrowing down to the current target of below 2% of GDP by 2020/21 would be challenging once the student loan numbers were taken into account. These latest figures, showing net borrowing over a quarter up on last year (when borrowing was 1.9% of GDP, remember), suggest that Mr Javid will be introducing a considerable loosening of his predecessor’s framework – if he ever gets the chance to present a Budget. 

At the current revised rate of borrowing, the UK will accumulate another £50bn of debt in 2019/20. That is a baseline number to keep in mind when the manifesto promises of extra spending emerge at the forthcoming General Election. 

Trust Statistics – September 2019

(AF1, JO2, RO3) 

HMRC recently released its Trusts Statistics 2013-14 to 2017-18. Overall, the number of trusts and estate completing self-assessment returns has fallen as illustrated in figure 1 below, whilst there has been an increase in the number of trusts which have been registered under the Trust Registration Service – there have been 107,500 registrations as of 5 March 2019 which was an increase of 22,500 on the previous year.

In summary the statistics show:

• The figures show that in 2017-18, trusts and estates had total income of £2.73 billion which was an increase of 12% on the previous year.
• 49,000 interest in possession trusts made self-assessment returns for the 2017-18 tax year, which was around 4,000 fewer than in 2016-17.
• 86,500 trusts paying tax at the trust rates (trusts taxed under the relevant property regime) made self-assessment returns for the 2017-18 tax year which was also a fall of 4,000 from the previous year.
• Total income tax payable on trusts and estates in 2017-18 was £675 million - £140 million was from interest in possession trusts, £495 million from trusts taxable at the special trust rates and the remainder was from other trusts, such as charities and non-trust structures (namely estates).
• The total amount of chargeable gains was £3.23 billion which was a slight increase to the previous year. 

Source: HMRC National Statistics: Trusts statistics September 2019 – dated 26 September 2019. 

INVESTMENT PLANNING

Third quarter of 2019

(AF4, FA7, LP2, RO2) 

The third quarter of 2019 is over. After a strong first six months, the last three have been much quieter for investors. 

The third quarter of 2019 saw little overall movement in world equity markets, despite the volatility of August. In sterling terms, the MSCI ACWI was up 2.74% and most market changes hovered around that figure as the table below shows. Over the last 12 months the ACWI is up 5.10% in sterling terms, but down 0.69% in US dollar terms. 

	31/12/2018	30/09/2019	Change in Q3
FTSE 100	6728.13	7408.21	-0.23%
FTSE 250	17502.05	19936.67	2.44%
FTSE 350 Higher Yield	3391.45	3583.48	-1.77%
FTSE 350 Lower Yield	3709.33	4324.46	2.31%
FTSE All-Share	3675.06	4061.74	0.12%
S&P 500	2506.85	2976.74	1.19%
Euro Stoxx 50 (€)	3001.42	3569.45	2.76%
Nikkei 225	20014.77	21755.84	2.26%
Shanghai Composite	2493.9	3043.35	2.16%
MSCI Em Markets (£)	1418.635	1519.822	-1.99%
UK Bank base rate	0.75%	0.75%
US Fed funds rate	2.25%-2.50%	1.75%-2.00%
ECB base rate	0.00%	0.00%
2 yr UK Gilt yield	0.75%	0.48%
10 yr UK Gilt yield	1.14%	0.39%
2 yr US T-bond yield	2.56%	1.81%
10 yr US T-bond yield	2.76%	1.66%
2 yr German Bund Yield	-0.66%	-0.74%
10 yr German Bund Yield	0.18%	-0.51%
£/$	1.2736	1.2323	-0.07%
£/€	1.1141	1.1303	0.31%
£/¥	139.7323	133.1809	-1.87%

 

A few points to note from this table are: 

• The UK market was virtually flat over the quarter with more domestically-oriented FTSE 250 stocks outperforming their FTSE100 counterparts. The yield on the FTSE All-Share ended the quarter at 4.21%, making the UK still look relatively cheap. After falling sharply in the first half of the year, dividend cover increased marginally to 1.48. 

• The US market spent the quarter dancing to Donald Trump’s trade war tweets. It was helped by the Federal Reserve, which cut interest rates twice in the quarter before indicating that further cuts were unlikely either this year or next. 

• Bond yields continued to fall as central banks showed no signs of tightening monetary conditions in the face of slowing global growth prospects. The US yield curve remains inverted with the 10-year benchmark bond yielding 1.66% while the Fed funds rate is 1.75%-2.00%. The entire German Government bond market has negative yields, with the 10-year yield now -0.51%. In spite of the ongoing Brexit pantomime, 10-year UK gilts saw a yield drop from 0.79% at the start of the quarter to 0.39% now. The UK yield curve is now inverted out to seven years. 

October promises to be an interesting month, as Brexit looms and the impeachment proceedings against Donald Trump get under way.    

Sources: FT, FTSE, MSCI, LSE, STOXX, BANK OF ENGLAND, FEDERAL RESERVE, EUROPEAN CENTRAL BANK 

PENSIONS

TPR updates DB Investment Guidance

(AF3, FA2, JO5, RO4, RO8) 

The Pensions Regulator (TPR) has updated its DB Investment Guidance to reflect changes arising from the Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2018. The update involves significant rewriting of various sections throughout the Investment Governance and Investing to Fund DB Schemes sections of the guidance. 

Members of Pensions Dashboard Steering Group announced

(AF3, FA2, JO5, RO4, RO8) 

The Money and Pensions Service (MAPS) has announced, in a Press Release, the appointment of ten members to the Pensions Dashboard Steering Group, which will represent the interests of consumers and stakeholders in the pensions industry and support the work of the Industry Delivery Group. The members are: 

• Andrew Lowe, Change and Data Solutions Director at the Institute for Faculty of Actuaries (IFoA) and Equiniti,;
• Dominic Lindley, as an independent;
• Francis Goss, Chief Commercial Officer at AHC;
• Kim Gubler, Chair of the Pensions Administration Standards Association (PASA);
• Nigel Peaple, Director of Policy and Research at the PLSA;
• Paddy Greene, Head of Money and Consumer Rights Policy at Which?;
• Romi Savova, Chief Executive Officer at PensionBee;
• Samantha Seaton, Chief Executive Officer at Moneyhub;
• Will Lovegrove, as an independent; and
• Yvonne Braun, Director of Policy, Long-term Savings and Protection at the ABI. 

HMRC updates pension statistics

(AF3, FA2, JO5, RO4, RO8) 

HMRC has updated some of its pensions-related statistics to include the latest figures for September 2019: 

• Personal pensions, retirement annuity contracts and free standing additional voluntary contributions;
• Personal pensions (including stakeholder pensions) scheme members' annual contributions;
• Registered pension schemes cost of tax relief;
• Personal pensions annual allowance statistics; and
• Personal pensions lifetime allowance statistics.

These statistics provide: 

• the value of contributions to non-occupational personal pensions
• tax relief estimates for employer and individual contributions to personal and occupational non-state registered pension schemes
• Statistics on Annual Allowance and Lifetime Allowance charges 

HMRC has also updated its commentary for the September 2019 statistics and has added separate background and methodology documents.

Some interesting figures from the data sets: 

• Even in 2006/07 when the annual allowance was £215,000 and the default first PIP end date fell in the 2007/08 tax year, 140 individuals had an annual allowance excess charge with £2m of pension savings made in excess of the annual allowance.
• By 2017/18 the number of individuals has increased to 37,300 with excess savings of £895m. These figures do not reflect the impact of the tapered annual allowance.
• In 2006/07 there were some 760 individuals who suffered the LTA excess charge with total tax charges of £13m. One wonders why this was the case given the existence of enhanced and primary protections. Maybe individuals didn’t consider seeking advice?
• By 2017/18, there were some 4,550 individuals who suffered the LTA excess charge with total tax charges not amounting to £185m. 

PPF publishes draft 2020/21 levy determination and consultation

(AF3, FA2, JO5, RO4, RO8) 

The PPF has published the draft 2020/21 levy determination and consultation document alongside draft guidance and draft appendices to the levy rules. 

In the consultation document, PPF Executive Director and General Counsel David Taylor said: “The increased deficits mean we are facing an increase in risk and whilst our levy framework significantly reduces the impact of short term changes in funding - by smoothing asset and liability values over a five year period - we nonetheless expect that this increased risk will lead to an increase in the levies we collect. Our expectation is that our overall collection will rise from around £575m this year to an estimate of £620m for levy year 2020/21.” 

Brexit and state pensions uprating

(AF3, FA2, JO5, RO4, RO8) 

Following the announcement last month, the government is writing to those living in the EU who are in receipt of UK pensions.  The letters aim to reassure pensioners that their pensions will continue to be increased by at least 2.5% for three years even if the UK leaves the EU without a deal. 

During the three year period the UK government plans to negotiate a new arrangement to ensure the uprating continues. 

Full details of the announcement are available here. 

TPR publishes automatic enrolment declaration of compliance report

(AF3, FA2, JO5, RO4, RO8) 

The Pensions regulator (TPR) has published its monthly Declaration of Compliance Report for the period from July 2012 to the end of August 2019. According to the report, between July 2012 and the end of August 2019, 1,552,690 employers confirmed that they had met their automatic enrolment duties. The report also states that 10,149,000 eligible jobholders were automatically enrolled into an automatic enrolment pension scheme during the same period.