PFS What's new bulletin - November I

TAXATION AND TRUSTS

The CGT rate increase (AF1, RO3)

 

The main rates of CGT increased, from a lower rate of 10% and a higher rate of 20%, to 18% and 24% respectively from 30 October 2024. The rate of CGT that applies to trustees and personal representatives also increased from 20% to 24% for disposals made on or after 30 October 2024. The 18% and 24% residential property rates have not changed.

 

As we have said before, there is precedent for an in-year change in CGT rates, although Rachel Reeves may not like the comparison. Back in June 2010, George Osborne raised the rate by 10% to 28% for anyone paying more than basic rate tax.

 

The CGT pages of the 2010/11 tax return (SA108) contained separate entries for gains realised either side of the change date (23 June 2010). The accompanying notes made clear that “In working out the Capital Gains Tax payable, you may deduct losses and the annual exempt amount (where due) in the way which minimises the tax due unless there is a specific rule that limits how they may be deducted such as for clogged losses.”

 

The HMRC policy paper for the latest change echoes the 2010 notes, saying “The existing provisions under which losses, the Annual Exempt Amount and any unused income tax basic rate band can be used in the most beneficial way will remain in place, with amendments to reflect the changed rates.” The draft legislation which accompanies the paper has sections which are eerily similar to those in Schedule 1 of the Finance (No 2) Act 2010.

 

As we also suggested before might happen, the draft legislation also includes anti-forestalling rules aimed at preventing tax-motivated unconditional arrangements entered into before 30 October 2024 but not completed by 29 October. There are similar provisions in relation to Business Assets Disposal Relief and Investors’ Relief for any contract made from 30 October 2024 to 5 April 2026 and completed from 6 April 2025.

 

The CGT rates for both Business Assets Disposal Relief and Investors’ Relief will increase more gradually, rising to 14% from 6 April 2025, and 18% from 6 April 2026. However, the lifetime limit for Investors’ Relief has reduced to £1 million for all qualifying disposals made on or after 30 October 2024, matching the current lifetime limit for Business Asset Disposal Relief.

 

The reporting rules for capital gains (other than for residential property) are that if either:

 

• gross gains (e.g. before any losses) of more than the annual exemption (£3,000 for individuals) are realised, or

 

• total proceeds of disposals exceed £50,000, regardless of the size of any gains,

 

 

then a self-assessment tax return is required or the gain can be reported using the HMRC real time CGT service (if a self-assessment return would otherwise not be required).  

 

Comment

 

One side effect of the CGT rate rises is to increase the value of CGT reinvestment reliefs for EIS and SEIS.

 

 

Employee Ownership Trusts and Employee Benefit Trusts (AF1, JO2, RO3)

 

An Employee Benefit Trust (EBT) is a trust set up for the benefit of employees of a company. An Employee Ownership Trust (EOT) is a specific type of EBT whereby the trustees own and control the company for the benefit of all of the employees.

 

The aim of the EOT tax regime is to encourage employee ownership as a feasible long term business model. Giving employees the opportunity to have a stake in the business they are employed by can incentivise them to increase growth and profit, whilst having autonomy to improve their own working conditions.

 

The majority of the current EOT capital gains tax (CGT) provisions are set out at sections 236H to 236U of the Taxation of Chargeable Gains Act 1992.

 

Provisions relating to the income tax annual bonus relief and other provisions relevant to Employee Ownership Trusts are set out at sections 312A to 312I of the Income Tax (Earnings and Pensions Act) 2003, that is, section 383 of the Income Tax (Trading and Other Income) Act 2005 and sections 464A and 1000 of the Corporation Tax Act 2010.

 

Provisions in respect of the inheritance tax (IHT) treatment of EBTs and EOTs are detailed in sections 13, 13A 28, 28A, 72, 75 and 86 of the Inheritance Tax Act 1984.

 

New measures will introduce various reforms to the EOT tax reliefs to ensure these reliefs continue to promote and support employee ownership, whilst attempting to put a stop to the reliefs being manipulated to gain tax benefits outside of the intended scope.

 

Transfers of value to EBTs are exempt from IHT and the purpose of this new policy is to incentivise businesses to reward their employees and encourage them to excel in their roles. However, certain conditions need to be fulfilled in order for the exemption to apply. These conditions have been put in place to avoid EBTs from being established to purely benefit a limited class of employees within the business.

 

In 2023, as part of “Tax Administration and Maintenance Day”, the Government at the time carried out a consultation to assess the uptake and effectiveness of EOT and EBT tax regimes, to check that the reliefs were being used for the intended objective of rewarding employees and keeping them engaged, whilst identifying any unintended opportunities to abuse the reliefs provided.

 

Consultation document Taxation of Employee Benefit Ownership Trusts and Employee Benefit Trusts was issued on 18 July 2023, requesting people’s opinions on various proposals restructure the EOT and EBT tax regimes. The consultation ended on 25 September 2023 and the Government’s response to this consultation was published as part of the Autumn Budget 2024.

 

As a result of the consultation the following measures will be introduced:

 

• changes to the conditions for obtaining relief from CGT on disposal of a controlling shareholding in a company to the trustees of an EOT — these changes will:

 

• ensure that previous owners cannot keep control of the company following a sale by retaining control of the EOT;

 

• mandate that the trustees of a qualifying EOT have to be UK resident;

 

• require that reasonable steps are taken to ensure that the consideration paid on sale of shares to the trustees does not exceed market value;

 

• a requirement for individuals to provide additional information to HMRC when claiming the relief, and an increase to the period of time within which relief can be withdrawn from the individual if the EOT conditions are breached post-sale;

 

• legislative certainty over the distributions tax treatment of contributions paid to the trustees of an EOT to reimburse the previous owner for their shares, by creating a specific relief which covers these contributions;

 

• an adjustment to the conditions for claiming Income Tax relief on annual bonuses made to employees of EOT owned companies, allowing directors to be excluded from the bonus;

 

• three amendments to the conditions that need to be fulfilled for a transfer into an EBT to be exempt from IHT.

 

The amendments to the EBT IHT regime came into force on 30 October 2024.

 

The amendments to the EOT CGT relief conditions will impact disposals made to the trustees of an EOT with effect from 30 October 2024. The alterations to the CGT claim conditions will affect claims made for tax year 2024/25 onwards.

 

The ratification of the tax treatment for contributions made to an EOT to reimburse the former owner and the amendments to income tax relief conditions for annual bonuses to employees of EOT controlled companies came into effect on 30 October 2024.

 

The specific legislative revisions to bring the aforementioned changes into effect are detailed below.

 

Legislation will be introduced in Finance Bill 2024/25 to alter sections 236H to 236U of the Taxation of Chargeable Gains Act 1992 to:

 

• confine previous owners or persons connected with previous owners from keeping control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT;

 

• mandate that trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT;

 

• introduce a requirement for the trustees to take reasonable steps to ensure that the consideration paid to purchase the company shares is not in excess of the market value;

 

• lengthen the ‘vendor clawback period’ at sections 236O and 236R, within which the tax relief can be recovered from the seller if the EOT conditions are contravened post-sale, to the end of the fourth tax year following the end of the tax year of disposal;

 

• require individuals to provide details of the sale proceeds and the number of company employees at the time of sale within their claim for CGT relief.

 

Legislation will be introduced in the Finance Bill 2024/25 to amend Chapter 3 of Part 4 of Income Tax (Trading and Other Income) Act 2005 to launch a new relief from the income tax distributions regime. This relief will apply to contributions paid to the trustees of an EOT to fund costs associated with establishing the EOT, including consideration that is then repaid to the previous owners in return for their shares, and contributions to cover associated costs such as stamp duty and interest paid at a reasonable commercial rate. This will provide legislative confirmation of the treatment that is routinely confirmed through clearance applications at present.

 

Legislation introduced in the Finance Bill 2024/25 will modify section 312C of Income Tax (Earnings and Pensions Act) 2003 to allow for the exclusions of directors from the ‘participation requirement’ for the purposes of determining whether income tax relief is available on annual bonus payments made to employees of companies owned by EOTs.

 

Legislation to be incorporated in Finance Bill 2024/25 will alter sections 13 and 28 of Inheritance Tax Act 1984 to:

 

• ensure that the restrictions on connected persons benefiting from an EBT must apply throughout the duration of the trust;

 

• restrict the IHT exemption to where the shares have been held for two years before settlement into an EBT — where there has been a share reorganisation, the shares formerly held will be taken into account in considering the two-year holding period;

 

• mandate that no more than 25% of employees who can receive income payments should be connected to the participator, in order for the EBT to be able to benefit from favourable tax treatment.
  
  

Comment

 

Those most likely to be impacted by the new measures are:

 

• individuals and trustees who sell their shares to the trustees of an EOT;

 

• employees of companies controlled by EOTs;

 

• employees of a company within a group controlled by an EOT;

 

• individuals who settle property into EBTs, or who are trustees or beneficiaries of these trusts.

 

INVESTMENT PLANNING

 

Changes to Share Incentive Plans (SIPs) (AF4, FA7, LP2, RO2)

 

On 30 October 2024, the Government announced measures that are intended to ensure that Statutory Neonatal Care Pay is treated the same way as other Statutory payments with regards to the notice an employer must give to an employee regarding the possible effect of deductions from salary, in relation to a SIP.

 

The Neonatal Care (Leave and Pay) Act 2023 introduced provisions to enable parents whose babies require specialist care after birth to take additional paid time off work.   

 

A SIP is a tax advantaged share scheme introduced in 2000. A SIP is a non-discretionary scheme, meaning a company that sets up a SIP must allow all their eligible employees to participate. Please see below. The SIP legislation requires an employer, when entering a partnership share agreement, to provide a notice to inform an employee of the possible effect of deductions from salary, on entitlement to social security benefits, Statutory Sick Pay and Statutory Maternity Pay. This measure makes a consequential amendment to the SIP legislation, as a result of the Neonatal Care (Leave and Pay) Act 2023, by including a reference to Statutory Neonatal Care Pay in the list of statutory payments.

 

The measure will have effect on and after the date of Royal Assent to Finance Bill 2024/25.

 

Legislation will be introduced in Finance Bill 2024/25 to make a consequential amendment to Schedule 2 paragraph 48(2) ITEPA 2003 and the ‘Employee Share Ownership Plans (Partnership Shares — Notice of Effects on Benefits, Statutory Sick Pay and Statutory Maternity Pay) Regulations 2000’. This measure will ensure that the notice an employer must provide to an employee regarding the possible effect of deductions from salary on entitlement to social security benefits and statutory payments will also refer to Statutory Neonatal Care Pay. This measure will ensure that this notification works as intended.

 

Share Incentive Plans (SIP)

 

This is a tax-advantaged plan for all employees. The employer can:

 

• award shares to employees in flexible ways;
• encourage employees to save regularly and buy shares in their company.

 

The employees will not pay income tax or NICs on the value of their shares if they keep them in the plan for five years. The employees will pay income tax and NICs on the value of any shares they take out early. There are four share types the employer can offer employees:

 

• free shares;
• partnership shares;
• matching shares;
• dividend shares.

 

PENSIONS

 

PPI Briefing Note 138 - Lost Pensions 2024

(AF8, FA2, JO5, RO4)

 

The Lost Pensions 2024 report by the Pensions Policy Institute (PPI) analyses the ongoing issue of "lost pension pots" in the UK, a term for unclaimed pensions due to lack of contact between providers and savers. This 2024 survey updates findings from 2018 and 2022 and highlights both the growing financial scale of the problem and evolving policy efforts aimed at addressing it.

 

Some of the key findings include:

 

• £31.1 billion. As of 2024, the report identifies 3.3 million lost pots with an aggregate value of £31.1 billion. These "lost" pots occur when providers lose contact with savers, often due to outdated personal information or savers switching jobs without updating pension details. The average lost pot in the 55-74 age bracket, which holds a significant £13,620 per pot, is of particular concern due to its potential impact on retirement adequacy for those nearing retirement age. This contrasts with a reduced average pot size of £6,540 for individuals aged 75 and above, suggesting older cohorts may contain smaller or consolidated pots.
• Reasons for Lost Pots. Lost pensions typically result from career mobility, as individuals accumulate multiple small pots over different employments, many of which are forgotten, particularly if they are from brief job tenures. These lost pots often become untraceable when savers fail to inform providers of address changes. Although tracing services exist, both government-backed and private, reconnecting individuals with lost pensions remains challenging.
• Implications for Retirement Adequacy. The findings highlight adequacy concerns for the 55-74 age group. Many in this demographic have lower Defined Benefit (DB) pension coverage and are less likely to benefit fully from automatic enrolment reforms. Reclaiming lost pots could help close the savings gap for these individuals, as the average lost amount is substantial compared to potential gains from increasing contribution rates. Without intervention, projected declines in retirement adequacy could disproportionately impact these savers.

 

Policy Initiatives and Potential Impacts

The report outlines various policy responses to the lost pensions problem:

 

• Pensions Dashboards: Expected to centralise pension information, these dashboards aim to help savers track all their pots in one place. Survey respondents expressed optimism about the potential of dashboards to reduce lost pensions by improving member engagement. However, delays in implementation have limited their immediate impact.
• Automatic Enrolment: While widely lauded for broadening pension participation, automatic enrolment also increases the risk of small, lost pots due to frequent career changes. The 2017 review suggests expanding the scope of automatic enrolment to include younger and lower-paid workers, which may, however, exacerbate the lost pot problem.
• Default Consolidators for Small Pots: To address the burgeoning issue of small, uneconomical pots, the Department for Work and Pensions (DWP) is exploring a consolidator model. This approach would enable automatic consolidation of small pots without saver consent (though opt-out options may be available), reducing the likelihood of pots being forgotten.

 

Conclusion

The report underscores a steady rise in lost pensions, driven by an increase in deferred small pots. While there are promising policy interventions in development, such as pensions dashboards and small pot consolidation, these are not yet operational, leaving millions of pounds unclaimed. With £31.1 billion tied up in lost pots, this issue has significant implications for both individual retirement security and the pension industry.

 

 

PSIG launches petition to support Pension and Investment Fraud victims

(AF8, FA2, JO5, RO4)

 

The Pensions Scams Industry Group (PSIG), which was established in 2014 to help protect pension scheme members from scams, launched an industry wide petition to secure support for change in the way HMRC treats Pension and Investment Fraud victims. At the time of writing, it had received 788 signatures.

 

There is a serious injustice in the tax system affecting historical victims of pension and investment fraud and it is having a devastating impact on people’s lives. On top of significant loss of retirement savings, HMRC applies punitive tax charges to these victims of up to 55%, plus interest.

 

These historical victims were misled into passing their money to unauthorised schemes by dishonest third parties, but tax law treats the victims as if they are tax cheats – it does not recognise the wrong done by the fraudsters.  This double whammy heaps loss upon loss and is damaging to the victims and their families. It leads to family breakdown, bankruptcy, mental health problems and illness, which in turn means that many victims cannot work to repair the damage. The fraud and the tax issue are therefore damaging to the economy too.

 

Several victims have already given their painful testimony to the All-Party Parliamentary Group on Investment Fraud, as well as to the Work and Pensions Committee Inquiry into Pension Scams. In many of the cases, the tax charges have been hanging over people for 13 years!

 

Victims’ stories have been reported in several newspapers and on TV, but nothing changes.  HMRC must be given the power to waive or reduce tax charges in cases where losses were due to dishonesty or misconduct by a third party, to avoid placing added unbearable financial and psychological burdens on people who have already lost everything.

 

HMRC claims it cannot use its powers to waive or reduce the tax charges under such circumstances, therefore Parliament must change the relevant tax law.  HMRC’s rules ought to fit today’s world where fraudsters prey on innocent people then walk away without consequences, leaving people from all walks of life, including nurses and fire fighters, to face the music.

 

 

Autumn Budget 2024 - GAD Technical Bulletin

(AF8, FA2, JO5, RO4, AF7)

 

The Government Actuary's Department (GAD) has published a technical bulletin on the Autumn Budget 2024. The bulletin focuses on a selection of the Budget measures most closely linked to GAD's work, including national insurance, pensions and benefits, public services and investment.

 

The GAD Autumn Budget 2024 report outlines significant government measures and financial plans. Here is a summary of the key outcomes and policy changes:

 

1. Taxation and National Insurance

The government announced that there will be no increases in the basic, higher, or additional rates of income tax, employee National Insurance contributions, or VAT. However, starting in April 2028, personal tax thresholds will be adjusted in line with inflation. Employer Class 1 National Insurance contributions will rise from 13.8% to 15.0%, and the threshold for employer liability (the Secondary Threshold) will be lowered from £9,100 to £5,000 per year from April 2025. To assist small businesses, the Employment Allowance will increase from £5,000 to £10,500, and the £100,000 cap will be removed.

 

The Capital Gains Tax rates for assets other than residential property and carried interest will increase to 18% and 24% from 10% and 20% for disposals on or after 30 October 2024. The Starting Rate for Savings will remain at £5,000 for the 2025/26 period.

 

2. Pensions and Welfare

The government will uphold the State Pension Triple Lock, resulting in a 4.1% increase in the basic and new State Pension from April 2025, in line with earnings growth. Working age benefits will be uprated by 1.7% from the same date, matching September 2024's CPI rate. The National Living Wage will rise to £12.21 per hour, with significant increases in the National Minimum Wage for younger workers and apprentices. The Carer’s Allowance Weekly Earnings Limit will also be updated to match 16 hours at the new National Living Wage.

 

Changes will be made to the inheritance tax system, including the inclusion of unused pension funds and death benefits in the inheritance tax scope from April 2027. Additionally, a review of the Mineworkers’ Pension Scheme will see the Investment Reserve Fund transferred to the scheme’s Trustees to provide extra payments to members.

 

3. Fiscal Framework and Economic Forecasts

A new fiscal framework has been established, including the stability rule and investment rule, aimed at reducing public sector net financial liabilities as a percentage of GDP. The Office for Budget Responsibility’s Economic and Fiscal Outlook for October 2024 supports this framework and provides forecasts for 2025-2030.

 

4. Compensation and Public Funding

The Budget allocates £1.8 billion to compensate victims of the Horizon IT scandal and £11.8 billion for victims of the infected blood scandal, with payments starting immediately and scaling up by 2025.

 

5. Public Services and Workforce Investment

The government is resetting public spending for 2024–2025 and outlining departmental budgets for 2025/26, with plans for a comprehensive Phase 2 Spending Review in spring 2025. Key funding allocations include:

 

• Health and Social Care: An increase of £22.6 billion in 2025/26.
• Housing and Local Government: £5 billion for housing investments.
• Education: £6.7 billion for capital funding.
• Defence and Transport: Additional funding for military and road maintenance.
• Investments in workforce growth include hiring 6,500 new teachers and expanding recruitment in police, probation, and civil service roles, among other areas.

 

6. Investment Initiatives

The establishment of the National Wealth Fund is a major highlight, aimed at mobilising over £70 billion in private investment to support the UK's clean energy and growth sectors. Key projects include:

 

• Sizewell C Nuclear Development: £2.7 billion allocated through 2025–2026.
• Great British Energy: £125 million funding to initiate clean energy advancements.

 

Local government services will receive a real terms budget increase of 3.2%, with £600 million in new grants for social care. Additionally, over £1 billion is earmarked for the British Business Bank to enhance small business financing over the next two years.

 

Conclusion

According to GAD, the Autumn Budget 2024 includes extensive measures to stabilise and grow the UK economy, addressing public services, compensation, and strategic investments. It underscores the government's commitment to maintaining fiscal stability while fostering investment in infrastructure and clean energy.

 

 

PLSA: Pension schemes confident they are ready for dashboards integration though many challenges ahead

(AF8, FA2, JO5, RO4)

 

A Press Release from the Pensions and Lifetime Savings Association (PLSA) summarises the results of a recent survey which shows that most pension schemes are confident about integrating with the upcoming pensions dashboards. Ninety percent of schemes feel either "very confident" or "moderately confident" in meeting regulatory deadlines for dashboard connectivity. The initial focus will be on the MoneyHelper dashboard, followed by commercial dashboards.

 

However, the survey reveals that some schemes still face preparation challenges. Only 60% have identified data items for matching, 33% have strategies for handling partial matches, and 30% have planned how to calculate Expected Retirement Incomes. Data quality remains a major concern, with issues around data standardisation (44%), consolidation (43%), real-time updates (37%), and data protection compliance (21%).

 

The PLSA emphasises the importance of addressing these issues to ensure a smooth launch and supports schemes by providing updates and collaborating with the government. Nigel Peaple, Chief Policy Counsel, highlighted the role of dashboards in enhancing pension engagement and retirement planning, urging the government to provide ample notice before the dashboards' launch to help schemes finalise preparations.