Technical news update 18/06/2019

Quick links

Taxation and trusts

• Proposed Changes To The Law On Divorce
• Trust Assets Protected From A Trustee In Bankruptcy
• Maturing Child Trust Funds
• Changes To Company Car Benefit In Kind Tax
• Student Finance: The Augur Review
• Do your clients understand the High Income Child Benefit Charge?
• Boris’s £80,000 higher rate threshold

Investment planning 

• The US Yield Curve
• HMRC statistics show interest in SEIS falling

Pensions

• Taxpayer failed to avoid Unauthorised Payment Surcharge by not acting “reasonably”
• HMRC updates MPAA Guidance
• NHS Pensions – additional flexibility
• The Pension Regulator (TPR) news – investment governance
• New ROPS notifications list posted

 

TAXATION AND TRUSTS 

Proposed Changes To The Law On Divorce

(AF1, RO3) 

In September 2018 we outlined the Government consultation looking at overhauling the legal requirements for divorce. 

Following that consultation, the Government has published their proposals aimed at simplifying the divorce process. The key change that is proposed is that divorcing couples will no longer have to blame each other for the breakdown of their marriage. 

The main proposals for changes to the law include: 

• retaining the irretrievable breakdown of a marriage as the sole ground for divorce; 

• replacing the requirement to provide evidence of a ‘fact’ around behaviour or separation with a requirement to provide a statement of irretrievable breakdown; 

• retaining the two-stage legal process currently referred to as ‘decree nisi’ and ‘decree absolute’; 

• creating the option of a joint application for divorce, alongside retaining the option for one party to initiate the process; 

• removing the ability to contest a divorce; and 

• introducing a minimum timeframe of six months, from petition stage to final divorce (20 weeks from petition stage to decree nisi; six weeks from decree nisi to decree absolute). 

The new legislation is expected to be introduced as soon as Parliamentary time (read “Brexit”) allows. 

The proposed legislation will not cover other areas of matrimonial law, such as financial provision or pension sharing. Financial provision on divorce is handled in separate proceedings and the Court has wide discretion to decide on the provision for future financial needs. 

The proposals to simplify the divorce process are clearly welcomed by most people, but none of the above will, of course, eliminate disputes as to the asset splitting on divorce if the parties are not minded to agree. 

Many more couples now enter into pre-nups, although in this country there is still considerable resistance to discussing money generally. Interestingly, it has recently been reported that the most common pre-nup agreements are about family pets (rather than finances). Whilst pre-nups are not legally binding in the UK, the Court will usually take such an agreement into account when considering financial provision. 

Source: MOJ consultation outcome: Reform of the legal requirements for divorce – dated 9 April 2019.

Trust Assets Protected From A Trustee In Bankruptcy 

(AF1, JO2, RO3) 

A recent case confirms the protection of trust assets from creditors where a trust was created for tax planning purposes more than five years before bankruptcy. The case is also of interest because the individual concerned worked in financial services. 

The case in question was Robin Farrell (a bankrupt) sub nom (1) Andrew Tate (2) James Hopkirk (Joint Trustees in Bankruptcy of Robin Farrell) V (1) Barbara Maria Farrell (2) Andrzej Leslaw Swiatkowski (3) Penntrust Ltd (2019) [2019] EWHC 119 (Ch). 

The facts of this case were as follows: Robin Farrell (RF), an investment manager, ran the Arch Group of companies which provided investment and other financial services. Relevant to the case is that the Group's products, performance and record keeping were first investigated by the FSA in 2007 and that the 2008 financial crisis created liquidity problems for the Group. 

In 2009 RF made various large gifts of cash from his own bank account, totalling £855,000, and transferred 47% of his 50% interest in the family home to his wife and to trusts set up in favour of his children. 

In 2011, claims for mismanagement were brought against the Arch Group and RF personally. In 2014, damages of £24.2 million were ordered in relation to the mismanagement claims and, as a result, RF was declared bankrupt in late 2015. 

Under section 423 of the Insolvency Act 1986 (Transactions defrauding creditors), the Court has the power to unwind gifts made by a person if the gifts are for the purpose of either putting assets beyond the reach of a person who is making, or may at some time make, a claim against them, or otherwise prejudicing a claim. 

The person applying to Court must prove that the purpose of the gifts was to put assets beyond the reach of, or to prejudice, a third party claimant, on the balance of probabilities. RF's trustees in bankruptcy applied for an order under section 423 to unwind the gifts and return the gifted assets to the bankruptcy estate saying they were transactions defrauding creditors. 

The High Court ruled that the primary purpose of the gifts was tax planning and therefore the gifts were not transactions defrauding creditors. All the gifts and trusts were therefore safe. 

RF had received tax advice and was motivated by his desire to provide for his family in the future and to pay for household expenses. The tax planning advice he had received included equalising his assets with those of his wife. Having examined the circumstances at the time of the gifts, the Court also took the view that the liquidity problems faced by RF's business and the FSA investigations were not sufficiently troubling as regards his personal assets at the time of the gifts for him to have potential third party claims in mind, and in fact RF's state of mind regarding his personal finances appeared optimistic at the time of the gifts. 

The judge made a point that this was very much a borderline case and that he was very close to finding in favour of the trustees. Obviously, each case will depend on its own facts, but this decision illustrates that it is very difficult to argue (let alone prove) an intention to defraud. 

We should add that had the gifts been made within the five year period prior to the bankruptcy, there would have been no need to prove the intention to defraud as such gifts (sections 339-441 Insolvency Act 1986) would be brought back into account as transactions at undervalue and this applies regardless of the motives. 

Every decision obviously turns on its own facts and, clearly, the mere existence of a trust does not by itself offer any protection from creditors. The Court will carefully examine all the evidence but what is clear from the above decision is that the standard of proof in cases of fraud is extremely high. However, it is reassuring that the tax planning motive is seen as a legitimate reason to transfer assets to family members. The case should also be a reminder that when it comes to implementing tax planning strategies, the sooner any action is taken the better. RF only just got away from falling into the five-year trap.

Maturing Child Trust Funds

(AF4, FA7, LP2, R02) 

As part of the 2018 Budget, it was announced that the Government would publish a consultation in 2019 on draft regulations for maturing Child Trust Fund accounts. 

Child Trust Funds initially became available for children born between 1 September 2002 and 2 January 2011 which means the first set of accounts will begin maturing in September 2020 when the first children reach 18. At present, without legislative change, the investments will lose their tax-advantaged status at maturity. 

The consultation, together with draft regulations and a tax information and impact note, has now been published. 

The consultation is aimed at seeking views to ensure that funds in maturing Child Trust Fund accounts can retain their tax-advantaged status after maturity. 

The changes to the regulations will provide the ability to transfer the investments at maturity to a tax-advantaged ‘matured account.’ The ‘matured account’ can be a continuing Child Trust Fund account, or a cash ISA or stocks and shares ISA offered by the original CTF provider. The funds held in the ‘matured account’ will therefore retain their tax-advantaged status and will also be subject to the terms and conditions which applied before maturity. It will not be possible to make subscriptions to the ‘matured account’ and it must be retained by the original provider. 

The closing date for comments is 11 August 2019. 

For those who may not have any immediate use for the funds, this will no doubt be a welcome change as savers will be able to continue to benefit from the tax-advantaged status rather than having to fully withdraw the funds.

Source:  Open consultation – Draft regulations: maturing Child Trust Funds published on 6 June 2019 by HMRC

Changes To Company Car Benefit In Kind Tax

(AF1, RO3) 

At Autumn Budget 2017, the Government announced that cars registered from April 2020 will be taxed based on Worldwide harmonised Light vehicles Test Procedure (WLTP) figures. WLTP is a laboratory test for emissions and fuel efficiency, initially developed by the United Nations Economic Commission for Europe (UNECE). 

Late last year, the Government commissioned a review, considering the impact of WLTP on Vehicle Excise Duty (VED) and company car tax for cars first registered from April 2020 onwards. Cars registered before April 2020 will maintain their current tax treatment; for example, based on CO 2  emissions or engine size. 

It said initial evidence provided by manufacturers suggested that over 50% of cars will see an increase from the New European Driving Cycle (NEDC), which has been in place since 1992, to WLTP of between 10% and 20%. For motorists choosing a new car from April 2020, this could result in an increased tax liability, compared to an identical model chosen before this date. (Although WLTP impacts CO 2  figures provided on a car’s type approval certificate, actual emissions are not impacted.) 

The Treasury was recently asked  when they plan to announce the benefits in kind rate for company cars for the years after 2021; and what assessment they have made of the impact on car owners of the rates not yet being publicly available. 

The response, provided by Lord Young of Cookham, was that the Government aims to publish emissions-based company car tax rates in advance to help employees and industry plan. However, as regards emissions testing changes in 2020, the Government is reviewing the impact of the new WLTP on vehicle taxes and  will respond to the review shortly. 

Source: Parliamentary business: Company Cars: Taxation: Written question - HL15703 – dated 23 May 2019.

Student Finance: The Augur Review 

A report into student finance in England has proposed a radical shake up of the existing structure for new students. 

Cast your mind back to the distant past of just under two years ago and the general election campaign. One of the policy proposals which helped the Labour Party gain votes and win university town seats (eg Canterbury) was the abolition of university tuition fees, accompanied by a re-introduction of maintenance grants. It was the Party’s most costly manifesto proposal at £11.2bn a year. To add to its attraction was a deliberate vagueness about what would happen to existing student loans, even though the potential cost of writing them off (£120bn – 6% of UK GDP) made such a measure virtually unaffordable. 

The response of the new Government was twofold: 

1. In October 2017, Theresa May announced that the tuition fee cap for England would be frozen at £9,250 and that the repayment threshold would be raised from a frozen £21,000 to £25,000, which would subsequently be index-linked (as it was before the freeze). 

2. In February 2018, Mrs May announced an independent review of post-18 education and funding in England, headed by Philip Augur. 

The results of that review have now been published. It is a weighty document (216 pages plus sundry annexes) which makes a range of proposals for reform, some of which were widely anticipated, while others were not: 

• Tuition fees The maximum tuition fee should be frozen at its current level for the 2019/20 and 2020/21 academic years and then reduced to £7,500 in 2021/22, with its availability extended to many further education courses. Indexation of the cap would resume from 2023/24. Augur suggests the introduction of a single lifelong learning loan allowance for tuition loans, set at the equivalent of four years’ undergraduate fee funding.

• University finances The average per-student resource for universities should be frozen in cash terms for a further three years from 2020/21 until 2022/23, with inflation linked increases resuming in 2023/24. The shortfall would be made up by a Government grant, which indirectly gives the Government more control of universities, a move they will not welcome. The continued cash-terms freeze, ie no inflation adjustment, would put pressure on universities to operate more efficiently. Augur notes that “Institutions providing predominantly low value and/or lower cost provision [are] likely to see a reduction in funding”.

• Student loans. Augur proposes that the threshold at which loans start to be repaid should be cut (in 2018/19 terms) from £25,000 to £23,000. Given that the 2019/20 threshold is £25,725, that implies £23,667 in today’s terms. The report argues that the current threshold is higher than the median graduate salary three years after graduation and points out that the October 2017 concession reduced the estimated student contribution from 65% to 50% of outlay, adding £2.3bn a year to Government expenditure. Augur also calls for an increase in the term before loans are written off from 30 years to 40 years, starting in 2021/22, as “this would enable the contribution threshold to stay relatively high”. The corollary is that loan repayment would continue until 10 years closer to retirement and capture a longer period of higher earnings. On interest rates, Augur proposes that during study, the interest rate charged should match inflation, rather than the current inflation (RPI) + 3%, ie. the debt would not grow in real (RPI) terms. Post-graduation interest rates, which are income-related (minimum RPI for income up to £25,725, maximum RPI + 3.0% for income of £46,305 or more) would be unchanged. On the question of the use of RPI as an inflation measure, while Augur recognizes “widespread concerns”, he ultimately cops out and says “This is a matter for the Treasury”. The hard (unmentioned) fact is that a switch to CPI would imply greater additions to the inflation rate, eg a maximum of perhaps CPI + 4%, if Government costs are not to be increased. 

• Maintenance grants Maintenance grants were withdrawn from 2016/17 as a cost-saving measure. Augur proposes their reintroduction for “socio-economically disadvantaged students” of a minimum maintenance grant of £3,000 a year. At the other end of the wealth scale, Augur wants to see the expected parental contribution (which reduces maintenance loan entitlement) “made explicit in all official descriptions of the student maintenance support system”. The existing thresholds of £25,000 and £42,620 between which maintenance loan entitlement taper occurs should be revalued in line with inflation, as both have been frozen (since 2008/09 and 2016/17 respectively).

As we have mentioned before, the basis for showing the cost of student finance in the national accounts is set to change in September, adding £17.1bn to the Government deficit by 2023/24. Augur projects the total UK-wide cost of his proposals as a one-off £1.2bn with ongoing costs of between £1.2bn and £1.5bn a year by 2024/25. This may look modest, but it reflects the mix of additional costs (eg lower tuition fees and new maintenance grants) alongside reduced expenditure (eg the per-head cash freeze on university funding and revised loan repayment terms). 

There is an irony in these proposals in that the changes will reduce the overall inflation-adjusted outlay significantly for the highest earning graduates (the 75^th percentile borrowers and above) – those who mostly repay within the current 30 year limit – while adding to the burden of the middle and some lower earners, who will be hit both by the lower earnings threshold and the extra 10 years of repayment term, as this table (in an annex published alongside but, perhaps deliberately, separate from the main report shows):

 

Source: DfE 30/5/2019

Do your clients understand the High Income Child Benefit Charge?

(AF1, RO3) 

HMRC commissioned research into claimants’ understanding of the High Income Child Benefit Charge (HICBC). 

The research, entitled “High Income Child Benefit Charge: awareness, understanding and decision-making processes”, was carried out by IFF Research and comprised 42 face-to-face and three phone interviews with parents of children aged under 16 (or under 20 if in full-time education), who were in a household where at least one adult had an annual income of at least £50,000. 

The research considers aspects such as what are the benefits of claiming Child Benefit and the reasons as to why some people don’t claim. 

It was found that while most had a good understanding of most aspects of Child Benefit there was lower knowledge of the charge itself and very limited awareness of the other benefits of claiming, namely: 

• the ability to qualify for National Insurance credits which count towards the State Pension;
• the ability to qualify for other benefits, such as Guardian’s Allowance; and
• juvenile registration, that is, the process whereby children are automatically allocated a National Insurance number shortly before their 16th birthday.

While some paid via self-assessment, a minority did not even realise they were liable for the charge and thought it was HMRC’s responsibility to inform them. 

In looking at the group who chose to opt-out, many did so as they did not want to be faced with the administration burden of having to complete a tax return. 

Surprising to us, the most common misconception held by respondents was that individuals are not eligible to claim Child Benefit if their income is over the £50,000 HICBC threshold given that there are planning opportunities available to reduce a claimant’s income for the purposes of the charge.  

Source: HMRC Research and analysis: High Income Child Benefit Charge - awareness, understanding and decision-making processes – dated 5 June 2019.

Boris’s £80,000 higher rate threshold

(AF1, RO3) 

The tax idea that caught the headlines in the first official day of the Conservative Party’s contest to find a new leader was Boris Johnson’s proposal to raise the higher rate threshold to £80,000. 

It has been suggested that the change is necessary to counter the effect of fiscal drag, i.e. the tendency of governments (of all hues) to raise tax bands and allowances at a sub-inflation rate. As the graph shows, fiscal drag was the order of the day in the aftermath of the financial crisis. In real terms, today’s higher rate threshold is still about £3,000 below where it would be if it had been revalued in line with RPI over the last 15 years. However, in CPI terms – the current basis of indexation – it is about £2,000 above the 2014/15 level. 

The Daily Telegraph, where Johnson launched his tax proposals, estimates their cost to the Treasury at £9.6bn. Johnson says this would be funded partly by increasing the National Insurance upper earnings threshold in line with the new higher rate threshold and partly from money set aside by the Treasury for a no deal Brexit. The IFS is reported to have put the cost at around £9bn – about the same tax loss as reducing the basic rate to 18.4%. 

The latest HMRC stats show that there were 4.114m taxpayers with income of at least £50,000 in 2018/19, of which 3.13m were in the £50,000-£100,000 band. Thus the full benefit of Mr Johnson’s idea would be felt by perhaps 1.5m people at the top end of the income scale. 

An £80,000 higher rate tax threshold would have the largest benefit for wealthy pensioners, who would save 20% tax (25% for dividends) on £30,000, but not pay the corresponding extra National Insurance contributions of up to 10% on the same amount. That is a small demographic, although probably not amongst the electorate of the next head of the Conservative party… 

Source: Daily Telegraph 10/6/19

INVESTMENT PLANNING

The US Yield Curve

(AF4, FA7, LP2, RO2)

 

In the past we commented on the inversion of the USA yield curve and the potential risks which precedent suggested accompanied such a move in interest rates. 

After the inversion on 22 March, when the yield on the US Treasury 10-year bond dropped below the three-month rate, there was much comment, but initially no real further widening of the gap. Then the inversion disappeared for a while – by early May the 10-year rate was more than 0.1% higher than the three-month rate, as the graph shows. 

However, the ratcheting up of the US-China trade war has since reinstated the inversion with a gap between the two key yields now of almost 0.25%. That has happened despite US growth at an annualised rate of 3.2% in the first quarter. 

As the graph makes clear, the increased inversion is due to lower 10-year yields as three-month rates are virtually unchanged, anchored as they are by the Federal Reserve’s target rate of 2.25%-2.50%. The US money markets are now reckoning on an even chance that by the end of 2019 the target rate will be 0.50% lower. The statement issued after the last meeting of the Federal Reserve on 1 May gave no indication a cut was likely, indicating that the central bank would “be patient as it determines what future adjustments to the target range for the federal funds rate”. However, in a recent speech the Chair of the Federal Reserve, Jerome Powell, said the bank “will act as appropriate to sustain the expansion”, which could be read as a hint at a rate reduction. 

The deeper the inversion and the longer it lasts, the more markets are going to worry that a recession is on the way. The next Federal Reserve meeting, on 18-19 June, might look to be an interesting one, but it will probably be another steady-as-she-goes affair. The Fed’s gathering starts 10 days before the G20 meeting in Osaka, when all eyes are on whether there will be any tension-easing conversations between Donald Trump and Xi Jinping.  

Source: Yieldcurve.com, Federal Reserve

HMRC statistics show interest in SEIS falling.

(AF4, FA7, LP2, RO2)

 

At the end of last month, HMRC issued its latest set of annual data on Enterprise Investment Schemes (EIS) and their smaller counterpart, Seed Enterprise Investment Schemes (SEIS). Alas, the data was only to 2017/18, as it was based on relief claims received by April 2019. Many claims for 2018/19 investment will not arrive at HMRC until much nearer next January’s filing date. The EIS claims for 2018/19 will be interesting to see, as they will be the first that reveal the impact of the Finance Act 2018 changes, in particular the “risk to capital condition”. Anecdotal evidence suggests that this may have reduced EIS investment by about one third from the 2017/18 figure of £1,929m (itself £28m up on 2016/17). 

Looking at the SEIS figures reveals an interesting story. In a similar way to EIS, total funds raised each year have flatlined in recent years, albeit at a much lower level of around £185m – roughly 10% of the EIS level. The number of SEIS investors has also started to drop off – 2017/18 saw 10 fewer investors than 2013/14, the first full year of SEIS operation. 

SEIS was probably less affected by the Finance Act 2018 reforms because, almost by definition, SEIS investment comes with considerable risk to capital. However, the sub-8,000 total of investors and sub-£200m capital raised do look small beer on terms of supporting new micro-businesses. In terms of tax cost, HMRC data shows that the Government spends over 20 times as much on entrepreneurs’ relief as it does on SEIS income tax relief. 

The average SEIS company raised about £81,500 in 2017/18. How long before the Office of Tax Simplification starts asking whether SEIS is worth the weight of legislation, and compliance?

Source: HMRC 31/5/19

PENSIONS 

Taxpayer failed to avoid Unauthorised Payment Surcharge by not acting “reasonably”

(AF3, FA2, JO5, RO4, RO8) 

The details of the case recently held in the First Tier tax Tribunal have been published; Franklin v Revenue & Customs (PROCEDURE: Other) [2019] UKFTT 232 (TC) (09 April 2019). The taxpayer, Mrs Franklin transferred her retained benefits from the Civil Service Pension Scheme back in 2011 and invested approximately £51,000 into a SIPP. The SIPP purchased shares in KJK Investments which then lent money to G Loans which lent some £26,842 back to Ms Franklin. 

She had been made aware by the scheme promoters of the risks of unauthorised payment charges, but they felt they were not applicable to their arrangement but pointed out HMRC might disagree. After involvement by the Insolvency Service, on 8 August 2013 petitions were made to wind-up KJK and G Loans Ltd. Following on from that, HMRC assessed Mrs Franklin for an unauthorised payment charge of £10,736 and an unauthorised payment surcharge of £4,026.30. 

Initially Mrs Franklin refused to pay either liability, but then settle the unauthorised payment but contests the unauthorised payment surcharge. 

The Tribunal dismissed the case and confirmed unauthorised payment surcharge of £4,026.30 is due the on the grounds that Mrs Franklin:

• must have realised that entering any scheme in which it was proposed that no tax charges would result, came with some risk.
• nonetheless decided against taking independent legal, accounting or tax advice before making the decision to proceed. She honestly believed, albeit mistakenly, that the scheme and the payments were compliant and authorised. She relied on the generic advice of Optimum, who owed her no personal duty of care, that no tax charges would follow. She was relying upon the opinion of a third-party agent who was simply expressing a view rather than providing advice. The local agent through whom she entered the scheme and who had a financial interest in selling the product stated in clear terms that he was not providing independent advice. His literature stated that he was not regulated by the FSA. This should have put the appellant on her guard.

HMRC updates MPAA Guidance

(AF3, FA2, JO5, RO4, RO8) 

HMRC has updated its guidance in respect of the Money Purchase Annual Allowance (MPAA). The guidance covers the following:

• What you’ll need
• Use the calculator
• Work out if you’ve gone above the money purchase annual allowance
• Work out what your alternative annual allowance is
• Work out if you’ve gone above your alternative annual allowance
• Check if you need to pay tax
• Pay tax if you go above your allowance

NHS Pensions – additional flexibility

(AF3, FA2, JO5, RO4, RO8) 

The Interim NHS People Plan, published on 3 June, has confirmed that the Government will bring forward a consultation on a new pension flexibility for senior clinicians. 

It says the proposal would give senior clinicians the option to halve the rate at which their NHS pension grows in exchange for halving their contributions to the scheme. 

The NHS report has cited concerns raised by senior clinical staff that their current pensions taxation arrangements were discouraging them from doing extra work for patients and causing them to think hard about remaining in the NHS Pension Scheme or continuing to work in the NHS. It added that the NHS would work with the Government to seek changes that encourage individuals to stay within the NHS and ensure the right incentives are in place for them to maximise their contribution to patient care. 

The Pension Regulator (TPR) news – investment governance

(AF3, FA2, JO5, RO4, RO8) 

TPR have undertaken a new drive to ensure trustees are meeting their obligations relating to default investment arrangements. More than 500 defined contribution schemes with between two and 999 members have been contacted as part of a pilot.  Trustees are asked to confirm if the strategy and performance of their scheme’s default arrangement have recently been reviewed and remain suitable. 

Where the scheme’s default strategy has not been reviewed, TPR provides guidance on the steps to follow in order to comply with the law. 

Read the full news release here

New ROPS notifications list posted

(AF3, FA2, JO5, RO4, RO8) 

On 1 June 2019, HMRC published a new list of schemes that have informed HMRC that they meet the updated conditions to be a Recognised Overseas Pension Scheme (ROPS).  This list only contains pension schemes that have asked to be included on the list. 

There are now a total of 1657 schemes listed, from 28 countries, and an EU institution, the most recent update added 18 schemes.  Of these, 14 were based in Australia, two in the Isle of Man, one in India and one in New Zealand.