Technical news update 07/05/2019

 

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Taxation and trusts

• Student loans - lower interest rates on the way
• HMRC’s latest guidance and news for tax agents and advisers
• Trust Registration Service update
• FCA regulated fees and levies for 2019/20
• Long-term care - capital charging threshold for Wales raised
• Self-assessment payments on account
• The National Insurance Contributions (termination awards and sporting testimonials) Bill
• Social investment tax relief - HM treasury consultation
• The latest UK property transaction statistics
• Long-term care - new think tank proposals
• HMRC trusts and estates newsletter – April 2019 edition

Investment planning

• March inflation numbers
• The first estimate of government borrowing for 2018/19 takes us back to the turn of the century
• Fixed interest exchange traded funds
• Growth in dividend payments jumps at the start of 2019

Pensions

• Pension schemes newsletter 109 – April 2019
• Flexible Payments from Pensions: April 2019
• Pension Protection Fund publishes a new guide to help trustees plan for insolvency
• New ROPs list posted
• Government publishes response to consultation on draft age exception order

 

TAXATION AND TRUSTS

Student loans - lower interest rates on the way

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

The interest rates on student loans are set by the Department for Education for 12-month periods beginning from 1 September. The current rates are posted on the Student Loans Company (SLC) website. 

A key driver for all student loan interest rates – regardless of when the loan was taken – is the rate of RPI inflation in the March preceding the academic year. Thus, for 2018/19, the March 2018 RPI of 3.3% set the baseline for interest rates (which can be as high as RPI+3% for current English and Welsh loans). 

The March RPI figure of 2.4% means that from 1 September 2019 the interest charged on most student loans will fall by 0.9%. To judge by past experience, we will have to wait until the second half of August to learn from the Student Loans Company what the new repayment thresholds will be. 

In theory the lower interest rates will mean graduates paying off more of their outstanding debt, thereby reducing the eventual Government write off. The question of how this will be dealt with in Government accounts is due to be settled by the Office for National Statistics (ONS) in September 2019. In its March 2019 Economic and Financial Outlook, the Office for Budget Responsibility estimated that the ONS change would increase Public Sector Net Borrowing by £11.6bn (about 0.5% of GDP) in 2020/21, robbing the Chancellor of some of his ‘fiscal headroom’. 

Source: ONS News Release 17/4/19

HMRC’s latest guidance and news for tax agents and advisers

(AF1, RO3) 

HMRC produces regular Agent Updates which, whilst they are aimed mainly at accountants and tax advisers, can also provide helpful insights into issues clients may be talking about to their financial advisers. Here’s a selection of what’s covered in HMRC’s latest Agent Update: 

Changes for UK self-employed workers working in the EU, European Economic Area (EEA) or Switzerland in a no Brexit deal situation 

Currently the EU Social Security Coordination Regulations ensure 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 a Brexit deal, the coordination between the UK and the EU may end. This will mean UK self-employed workers working in the EU, European Economic Area (EEA) or Switzerland may need to make social security contributions in both the UK and the EU, the EEA or Switzerland at the same time. 

Preparations needed: 

• UK self-employed workers currently working in the EU, the EEA or Switzerland who have a UK-issued A1/E101 form, will continue to pay UK National Insurance contributions for the duration of the time shown on the form. 

• If the end date on the form goes beyond the day the UK leaves the EU, they will need to contact the relevant EU/EEA or Swiss authority to confirm whether or not they need to start paying social security contributions in that country from that date. The European Commission’s website provides information on the relevant country’s authority. 

• The position for UK or Irish national self-employed workers working in Ireland will not change after the UK leaves the EU. They will be covered under the international agreement signed by the UK and Ireland in February 2019 and will not introduce the need to take any action. 

• A replacement for the A1/E101 form will be issued for new applications after the UK leaves the EU. This ensures UK self-employed workers will continue to make UK National Insurance contributions to maintain their social security record. They can still use the same form on GOV.UK to make an application after the UK has left the EU. 

To protect UK nationals in the EU in a ‘no deal’ scenario, the Government is reaching 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. 

Annual Tax on Enveloped Dwellings (ATED) 

If your client owns a property within ATED on 1 April 2019, a return must be submitted by 30 April 2019 to avoid incurring a late filing penalty. More information on ATED chargeable amounts and how and when to submit an ATED return is available under ‘Annual Tax on Enveloped Dwellings guidance’ on GOV.UK. 

Help clients protect their State Pension 

Making a claim to Child Benefit can help protect entitlement to the State Pension. It is paid to a person who is responsible for a child under 16 (or under 20 and in approved education or training). In addition to the payments, until the child is 12 years old a Child Benefit award also provides National Insurance Credits to the person who made the claim. These National Insurance Credits can help protect entitlement to the State Pension. 

Only one person can claim Child Benefit for a child. For couples with one partner not working or paying National Insurance contributions, making the claim in their name will help protect their State Pension. Even where the working partner claims Child Benefit, there is scope to transfer the National Insurance Credits and change who gets Child Benefit to protect the non-working parent’s State Pension. 

If a client receives Child Benefit payments, and they or their partner’s income is over £50,000, they may have to pay the High Income Child Benefit Income Tax Charge. However, individuals may claim Child Benefit and choose not to receive the payments, which means they do not have to pay the charge but still receive the associated National Insurance Credits and protect their State Pension. 

Extension of non-UK resident capital gains tax (CGT) on UK property or land 

From April 2019, more disposals of interests in UK property or land by non-UK residents have been brought into the charge to UK tax. Residential property disposals by non-UK residents have been liable to CGT since April 2015. Disposals of non-residential property or land have now become liable, to CGT from 6 April 2019 and to corporation tax on gains from 1 April 2019. 

The following clients need to complete a non-resident CGT return when they sell or dispose of UK property or land. HMRC must be notified within 30 days of the conveyance date using HMRC’s online form: 

• a non-resident individual; 

• personal representative of a non-resident who has died; 

• a non-resident who is in a partnership; 

• a non-resident landlord or trustee (although this does not apply to non-resident corporate landlords as normal corporation tax time limits for notifying chargeability and payment will apply); 

• a UK resident meeting split year conditions and the disposal is made in the overseas part of the tax year. 

A new charge also applies for non-UK residents’ gains on indirect disposals of interests in UK property, such as selling the shares in a company that derives 75% or more of its gross asset value from UK land. 

Changes to instalment payments for very large companies 

For accounting periods beginning on or after 1 April 2019, companies with taxable profits exceeding £20m will be required to make payments four months earlier. For a 12-month accounting period, payments will be due in months 3, 6, 9 and 12 of the current accounting period, instead of months 7, 10, 13 and 16 after the start of the accounting period. The £20m threshold is reduced where the company is a member of a group and is pro-rata’d for accounting periods shorter than 12 months. The first instalment payment under the new rules will be due before the final payment under the current regime and will impact on cash flow in the first year. 

The disguised remuneration loan charge 

The disguised remuneration loan charge came into effect on 5 April 2019. If a client used a disguised remuneration scheme to avoid paying tax and National Insurance contributions, and they did not settle by 5 April 2019, or they are not in the settlement process, there will be a loan charge to pay. 

Where all necessary settlement information was provided to HMRC by 5 April 2019, and any actions HMRC require are satisfied by the dates that they give in correspondence, the current settlement terms will remain available and the loan charge reporting and accounting requirements will not apply. For anyone who will have difficulty paying their settlement liability HMRC can agree to spread payments over a number of years. More information can be found on the ‘Disguised remuneration: settling your tax affairs’ webpage on GOV.UK. 

Where settlement is not reached, any outstanding loans must be reported as employment income arising on 5 April 2019. Details of the loan charge reporting requirements are available in Agent Update 70, and further guidance on the reporting requirements, can be found on the ‘Report and account for your disguised remuneration loan charge’ webpage on GOV.UK.

Source: HMRC Agent Update 71 – dated 10 April 2019.

Trust Registration Service update

(AF1, JO2, RO3)

HMRC has issued its consultation paper seeking views on the Fifth Money Laundering Directive (5MLD). As indicated previously the scope of the UK Trust Register is being extended. The 4MLD placed a requirement on the UK to create a register for all express trusts that incur a UK tax consequence which resulted in HMRC setting up the Trust Registration Service (TRS) in 2017. The 5MLD expands the scope of this register by requiring all UK express trusts to register whether or not they incur a UK tax consequence.

The Government has not specified the definition of express trust.  However, we believe that the following will likely fall within the definition of an express trust and therefore will have to register: 

• discretionary trusts; 

• interest in possession trusts; 

• many types of bare trust; 

• charitable trusts; 

• employee ownership trusts. 

For those unregistered trusts already in existence on 10 March 2020, the Government proposes a deadline of 31 March 2021 for them to register on TRS. This gives a long lead in time given the greater number of trusts that will need to be registered. 

For trusts created on or after 1 April 2020, the Government proposes that the trust should be registered within 30 days of its creation. The Government envisages that this approach would be the most straightforward, as registration can occur as part of the set-up process, when the required details should be readily available to trustees/agents.

In addition, under 5MLD, the Government will be required to disclose specific data about a trust and the beneficial owners of it held on the Register to law enforcement agencies in line with existing requirements under 4MLD. Data on specific trusts will be shared under three circumstances:

• with ‘obliged entities’ that enter a business relationship with a trust;
• with persons who can demonstrate a ‘legitimate interest’ in access to information on the beneficial ownership of a specified trust;
• with persons who want to know about trusts with a controlling interest in a non-EEA company.

‘Obliged entities’ are those individuals or businesses that are supervised by a UK supervisory authority for compliance with obligations established by 4MLD or 5MLD.

The Government considers someone who has a ‘legitimate interest’ in this data will:

• have active involvement in anti-money laundering or counter-terrorist financing activity;
• have reason to believe that the trust or person that is the subject of the legitimate interest enquiry is involved with money laundering or terrorist financing: in other words, speculative enquiries into all or multiple trusts on TRS will not be deemed legitimate;
• have evidence underpinning that belief.

The closing date for comments to be submitted is 10 June 2019.

A more detailed technical consultation run by HMRC will be published later this year. This will include additional information on the proposals for data collection, data sharing and penalties, taking into account responses to this consultation.

Source: HM Treasury consultation: Transposition of the Fifth Money Laundering Directive – TRS – dated 15 April 2019

FCA regulated fees and levies for 2019/20

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

In addition to raising funds for itself, the Financial Conduct Authority (FCA)’s proposed 2019/20 regulatory fees and levies will fund the:  

• Financial Ombudsman Service (FOS);
• Money and Pensions Service (MAPS);
• Devolved Authorities;
• Illegal money lending expenses of HM Treasury.

Fee payers can identify which chapters relate to them from Table 1.1 in Chapter 1 of the consultation paper. And the FCA’s fee calculator is available to enable firms to calculate their periodic fees for the forthcoming year.

Comments need to be sent to the FCA by 29 May 2019, after which they intend to publish their response and final fee rates and levy rules in a Policy Statement in early July 2019.

Source: FCA News: CP19/16 - FCA regulated fees and levies 2019/20 – dated 17 April 2019.

Long-term care - capital charging threshold for Wales raised

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

The Deputy Minister for Health and Social Services in Wales has announced an immediately effective £10,000 rise in the capital limit used by local authorities in Wales for assessing eligibility for financial assistance with residential care costs. The increase, which comes two years earlier than originally planned, means that residents in Wales will now be able to have up to £50,000 in savings, investments and/or other non-disregarded assets before they will asked to contribute towards their care costs from their own capital. Those with non-disregarded capital above this threshold, will be required to pay for all of their own care home fees. 

The Welsh system was already more generous than the system in the rest of the UK where a two-tier capital limit system operates so that claimants with capital between the two limits must make a capital contribution towards their own care. In England and Northern Ireland, the lower capital limit is currently set at £14,250 while the higher capital limit is set at £23,250. In Scotland, the lower and upper capital limits were raised to £17,500 and £28,000 respectively from 8 April 2019. 

Sources: https://gov.wales/people-residential-care-can-now-keep-even-more-money-wales-almost-double-rest-uk; www.careinfoscotland.scot

Self-assessment payments on account

(AF1, RO3)

The due date for the first payment on account for the tax year 2018/19 was 31 January 2019. However, according to HMRC there is an ongoing problem whereby payments on account for 2018/19, in some instances, have not been created by HMRC’s systems from the 2017/18 tax return. 

This means that some taxpayers were not informed of the amount of tax to pay on account by 31 January 2019. And, reportedly, this problem won’t be fixed before 31 July 2019 (the due date for the next payment on account).   

Payments on account are due where a taxpayer has less than 80% of their tax collected at source (eg under PAYE) and pays more than £1,000 in income tax per year. So, this is mostly likely to affect self-employed individuals. Company shareholder directors may also be affected if they extract the majority of their income from their company as dividends. 

Affected clients could make a voluntary payment on account. However, there is a risk that such a payment could be automatically repaid by HMRC’s computer, so it may be easier for clients to deposit all the tax due into a savings account and pay it all in January 2020. HMRC has confirmed that if the demands for payments on account have been omitted from the taxpayer’s statement, that the taxpayer will not be charged interest as long as full payment of all the tax due for 2018/19 is made by 31 January 2020.   

If the taxpayer did pay the correct amount of tax by 31 January 2019, including the payments on account due, but their statement did not show a demand for the 2018/19 tax, this can be fixed if they, or their accountant, ask HMRC to add the payment on account to their taxpayer record. This will ensure that the tax is not repaid. However, according to HMRC, this adjustment should only be requested if the taxpayer has, in fact, made the payment on account for 2018/19, otherwise interest will accrue until the payment is made.

Sources:

• Agent Update 71 – dated 10 April 2019;
• AccountingWeb News: HMRC computer wipes out tax demands – dated 12 April 2019
  

The National Insurance Contributions (termination awards and sporting testimonials) Bill

(AF1, RO3) 

HMRC has published guidance and a factsheet on the National Insurance contributions (Termination Awards and Testimonials) Bill which was introduced into Parliament on 25 April 2019. 

The Bill introduces an important simplification of the tax system that helps to more closely align the income tax and National Insurance contributions (NICs) treatment of termination awards and sporting testimonials. Currently, termination awards and sporting testimonials are subject to different income tax and NICs treatment which causes confusion. 

The income tax changes have already taken effect (see below) and the Government confirmed at Budget 2018 that the NICs changes would take effect from 6 April 2020. 

The Bill introduces a new 13.8% Class 1A Employer NICs charge to any part of a termination award or payment from a sporting testimonial that is subject to income tax. 

(i) Aligning the NICs treatment of termination awards

At Budget 2016, the Government announced that it would reform the income tax and NICs treatment of termination awards.

Currently, certain forms of termination awards are exempt from employee and employer NICs and the first £30,000 is free from income tax. 

The Bill will align the employer NICs treatment of termination awards in excess of £30,000, with the income tax treatment for such payments. 

The income tax changes were made in the Finance (No 2) Act 2017 and took effect from 6 April 2018.

(ii) Aligning the NICs treatment of income from sporting testimonials 

Sporting testimonials are a practice where a club establishes a testimonial committee to organise a sporting event to honour a player for their service upon retirement. The primary purpose of a sporting testimonial is to support sportspeople who may not have had time to build up retirement savings before they stop playing.

At Autumn Statement 2015, the Government announced that it would reform the income tax and NICs treatment of payments derived from sporting testimonials. 

The income tax changes were made in the Finance Act 2016 and took effect from 6 April 2017. 

Source:  HMRC Guidance: National Insurance contributions (Termination Awards and Sporting Testimonials) Bill – dated 24 April 2019.

Social investment tax relief - HM treasury consultation

(AF1, RO3) 

The Government is asking for feedback around how social investment tax relief (SITR) has been used since its introduction in 2014, including levels of take up and what impact it has had on social enterprises’ access to finance. 

Only a limited number of social enterprises have made use of the tax relief and take up has fallen short of what was anticipated when SITR was introduced and subsequently expanded. 

Costings published at Budget 2014 assumed the relief would cost £10 million in 2015/16, rising to £35 million in 2018/19. However, official statistics published for the first three years of the scheme from its introduction in 2014 to the end of the tax year 2016/17, indicate that around 50 social enterprises have raised £5.1 million of investment through SITR. Even if income tax relief was claimed on all the investments, the cost of the scheme in those three years would be less than £2 million in total. 

As the scheme is set to come to an end in April 2021, this consultation is intended to help inform a decision about the future of the relief. 

The consultation closes on 17 July 2019. 

The SITR scheme is designed to help raise money to support the trading activity of the following types of enterprise: 

• A community interest company (a limited company, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit, and not purely for private advantage); 

• A community benefit society, with an asset lock (ensuring that the assets of the society can never be cashed in by, or transferred, to private individuals or companies for their own advantage); or 

• A charity, which can be a company or a trust. 

It offers the investors tax relief on shares they buy or money they lend to the enterprise, as long as the scheme rules are followed for at least three years. The latest information on investor tax relief can be found here. 

Source: HM Treasury consultation: Social Investment Tax Relief - call for evidence – dated 24 April 2019.

The latest UK property transaction statistics

(AF1, ER1, LP2, RO3, RO7) 

HMRC issues monthly estimates of the number of residential and non-residential property transactions in the UK and its constituent countries with a value of more than £40,000. 

The figures are based on HMRC’s Stamp Duty Land Tax (SDLT) database, which records the information submitted by property purchasers on the SDLT return, and on transactions notified to Revenue Scotland and the Welsh Revenue Authority relating to Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) respectively. (LBTT replaced SDLT in Scotland on 1 April 2015. LTT replaced SDLT in Wales on 1 April 2018.) The latest figures are now available and information relating to these can be found here. 

Whilst the seasonally adjusted residential transactions have remained stable, seasonally adjusted non-residential transactions have risen for the second consecutive month in March 2019. The headline figures: 

• The provisional seasonally adjusted UK property transaction count for March 2019 was 101,830 residential and 11,210 non-residential transactions. 

• The provisional seasonally adjusted count of residential property transactions increased by 1.4% between February 2019 and March 2019, and is 6.8% higher than in March 2018. 

• The provisional seasonally adjusted count of non-residential property transactions increased by 8.9% between February 2019 and March 2019, and is 9.7% higher than in March 2018. 

HMRC points out that SDLT transactions are presented by date of completion and because, from 1 March 2019, purchasers have only 14-days from completion to submit their return, (this deadline had previously been 30-days), estimates for the latest month are based on incomplete data, and are adjusted upwards to compensate. This adjustment is based upon the difference between initial and final estimates in previous months. A similar but smaller adjustment is also made to the penultimate month. 

HMRC has also published its monthly tax receipt statistics, which show that capital gains tax (CGT) receipts hit a record £9.2bn in the 2018/19 financial year, up from £7.8bn in the previous 12 months. Whilst there may be a number of reasons for this, such as investors cashing in on stock market increases, it’s possible that an increase in second property disposals is playing a part. The CGT rate on second property disposals is 18% for gains within any available basic rate tax band, and 28% for gains in the higher rate band or above. The gradual phasing out of mortgage interest relief at the higher and additional rates of tax has been making letting out properties less profitable for many buy-to-let investors and may be leading to an increase in disposals of second properties. 

Conversely, SDLT receipts for April 2018 to March 2019 are 5.3% lower than in the same period last year. Receipts in 2016/17 increased by 10.4 per cent due to the introduction of higher duty rates on additional dwellings in April 2016 and this upward trend largely continued through 2017/18. HMRC’s explanation for the 2018/19 dip is that this is in part due to the devolution of SDLT payments in Wales and the introduction of First-Time Buyers’ relief, which started in November 2017. It will be interesting to see if this downturn continues.

Long-term care - new think tank proposals

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

In the Queen’s Speech of June 2017, the Government said that it would “bring forward proposals for consultation” on the funding of social care in England. The promise followed on from a rapidly withdrawn proposal, made by Theresa May, during the 2017 election campaign. Dubbed a “dementia tax”, Mrs May’s suggestion was to allow an individual to retain £100,000 of assets, regardless of their total care costs.  

Six months after the 2017 election, the Government scrapped a social care funding mechanism which had been legislated for by the coalition Government in the Care Act 2014, with a planned start date of April 2016 (subsequently deferred to 2020). This abandoned scheme was itself a reworking of proposals that first emerged in the Dilnot report back in July 2011. 

The promised social care Green Paper was originally due in Summer 2018, but in the best of Brexit traditions has been kicked down the road several times. The Health and Social Care Secretary said in January 2019 that he “certainly intends for [publication] to happen before April”. Now even the timetable has been dropped in favour of a vague statement that the Paper will appear “at the earliest opportunity”. 

Into the vacuum has now emerged a paper, “Fixing the Care Crisis”, written by Damien Green for the Centre for Policy Studies (CPS). Green is Chair of the All Party Parliamentary Group on Longevity and was Secretary of State for Work and Pensions in 2016/17. The CPS is a right of centre think tank which has, in the past, been used to kite-fly policies subsequently adopted by the Conservatives. The combination of Green and the CPS therefore means the paper’s ideas are worth a careful look. Its main points are: 

• The existing system, under which the state provides care via local authorities, to a nationally funded model – a Universal Care Entitlement (UCE) – where the state pays a set amount for each week or month that an elderly person needs support. The aim would be to mirror the state pension system structure. 

• The paper estimates that the UK currently spends £18.4bn on social care of the elderly, of which £8.4bn comes from the state, with the balance made up by private funding (£7.4bn) and user-charges levied for public sector services (£2.6bn). In terms of the residential and nursing care home sector, private expenditure is estimated at £8-9bn, with the level of state spending around £6bn. 

• The estimated funding gap in 2019/20 is put at £1.55bn-£1.85bn, despite an extra £650m being injected in last Autumn’s Budget. 

• Subject to a local authority administered (care) needs assessment, the paper warily proposes UCE figures for consultation would be: 

• For nursing care £2,500 a month; 

• For full-time residential care, £2,000 a month to cover the core costs; and 

• For those who required domiciliary care, £800 a month. 

Interestingly, the paper places the average cost of each of these services much higher - £3,709, £2,674 and £1,092 respectively. The payments would be made as of right, with claimants able to top-up as they wish, including via a new Care Supplement (see below). Herein could be the explanation for deliberate undershooting of current costs. 

• “To avoid introducing too much complexity”, the UCE would apply only to those who were entering the social care system; existing patients would maintain their current arrangements. However, given the median time spent in a home is 1.6 years, the transition to UCE would be rapid. 

• The paper estimates that to fund UCE would cost an extra £2.5bn a year over current expenditure, based on costings for free care in Scotland plus an addition (a doubling in effect) to cover the cost of basic accommodation. 

• There are three funding proposals, in decreasing order of preference: 

• Removing the winter fuel allowance from higher and additional rate taxpayers (saving £100m a year) and making it taxable for other recipients (producing another £250m); 

• Making savings elsewhere as part of the forthcoming Spending Review, which could be read as a robbing Peter to pay Paul exercise. This looks an optimistic notion given the strong hints that austerity is coming to an end; and 

• “A possible 1% National Insurance Contribution Charge” for those between age 50 and state pension age. This is described as “very much the last resort”, but it would – on what look like somewhat optimistic CPS estimates – raise £2.4bn a year, ie. virtually the entire cost of the system. 

• In addition, the paper proposes an optional Care Supplement, described as “a new form of insurance [with no underwriting] designed specifically to fund more extensive care costs in old age, such as larger rooms, better food, more trips, additional entertainment and so on”. This would be a single premium product (the paper suggests premiums of £10,000, £20,000 and £30,000), funded at or close to retirement age, possibly by some form of equity withdrawal. 

The paper is at the least a starting point for a debate that – rather like several other areas of Government policy – should have been resolved a long while ago. Inevitably, the extra National Insurance Contribution (NIC) charge will be the focus, as may be the fact that baby boomers could be winning again, by paying little if any extra NICs before ultimately benefiting from the new pay-as-you-go system. 

HMRC trusts and estates newsletter – April 2019 edition

(AF1, JO2, RO3) 

The latest HMRC Trusts and Estates Newsletter for April is now available. It covers some interesting updates as well as a couple of reminders.

Agent Toolkits

It appears that a number of advisers/agents are not completing Trust and Estate returns. As a reminder, HMRC does offer a number to toolkits to help advisers/agents in this regard.

Acceptances in Lieu and the 36% Rate of inheritance tax (IHT) 

Under the provisions of Schedule 1A Inheritance Tax Act 1984 (IHTA), a reduced IHT rate of 36% applies where 10% or more of the relevant component(s) of an estate pass to charity. Currently, where an offer of property in lieu of the tax arising on such an estate is made under section 230 IHTA – acceptance of property in satisfaction of tax - section 33(2ZA) IHTA prevents the use of the reduced (36%) rate in calculating the tax credit (the ‘special price’) available. 

In order to ensure that the benefit of the 36% rate can extend to the offer of property in lieu, the amount of tax added back to arrive at the special price (the ‘douceur’) in appropriate cases will be increased to produce the same result as if the 36% rate had been used in the special price calculation. 

The revised douceur will apply only to offers of property in lieu of tax where a rate of 36% is applicable to an estate and the property being offered originates from that estate. HMRC will make appropriate changes to its website guidance in Capital Taxation and the National Heritage. 

Office of Tax Simplification Review into IHT

Given the amount of unprecedented engagement from members of the public, the Office of Tax Simplification decided to produce two reports. The first report focused on administrative issues and the second will focus on broader policy issues. Publication of the second report is expected later this year.

Technical Changes to the Residence Nil Rate Band

The minor technical amendments to the Residence Nil Rate Band (RNRB) relating to downsizing provisions and the definition of ‘inherited’ for RNRB purposes announced at Budget 2019 have now been passed as part of the Finance Act 2019. These changes have effect for deaths occurring on or after 29 October 2018.

New style of probate grant

In March 2019, HM Courts and Tribunals Service (HMCTS) introduced a new style of probate grant, although old style grants will still remain valid.

Trust Registration Service – Ongoing development of the current service 

HMRC plans to develop and deliver various functions to enable changes to the Trust Register over the course of this year. The Newsletter outlines some of these changes and gives details of the additional functions. HMRC plans to test these changes on a small number of users. Anyone interested in taking part in the User Research can contact HMRC via email.

Trust Registration Service - Consultation on the Fifth Anti-Money Laundering Directive 

The Government is currently developing its approach to the implementation of the EU’s Fifth Anti-Money Laundering Directive (5AMLD) and has published a consultation setting out the requirements and key issues. 

Trust Customer Experience Journey 

In March 2019, HMRC began to review the customer experience journey and life event ‘I have become a trustee’. This project will work closely with front line staff, customers, agents and key stakeholders, listening to what they have to say, and using that feedback to drive service improvements with the greatest benefit to customers themselves with a view to improving HMRC processes and the customer experience. HMRC is keen to hear feedback from subject matter experts. You can email your views about the existing processes to HMRC by 10 May 2019. The team will then use your feedback to support the review.

Changes to Entrepreneurs’ Relief Rules

A reminder that Finance Act 2019 introduced a series of changes to the entrepreneurs’ relief rules which are covered in the newsletter. 

Source: HMRC Guidance: Trusts and Estates Newsletter - April 2019 – dated 25 April 2019.

 

 

INVESTMENT PLANNING

 

March inflation numbers

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

The CPI for March showed an annual rate of 1.9%, unchanged from February, although the market consensus had been for a rise to 2.0%. Across February to March prices rose 0.2%, 0.1% more than between February 2018 and March 2018 (rounding keeps the annual rate the same). The CPI/RPI gap narrowed by 0.1% again to 0.5%, with the RPI annual rate down 0.1% at 2.4%. Over the month, the RPI was virtually unchanged. 

The Office for National Statistics (ONS)’s favoured CPIH index was also unchanged for the month at 1.8%. The ONS notes the following significant factors across the month: 

Upward 

Transport The largest upward contribution came from transport, where prices fell between February and March this year but by less than between the same two months a year ago. The main upward effect came from motor fuels, with petrol prices up by 1.2p per litre between February and March 2019, compared with a fall of 1.6p a year ago. Similarly, diesel prices rose by 1.4p per litre this year compared with a fall of 1.5p a year ago. This upward effect was partially offset by smaller downward contributions coming from new cars and air fares. 

Miscellaneous goods and services This category produced a small upward effect, with prices for personal care products rising this year but falling a year ago. 

Clothing and footwear There was a small upward contribution from clothing and footwear, where clothing prices continued to rise following the January sales period but by more than a year ago. The upward effect came principally from a variety of women’s clothing items. 

Downward 

Recreational and cultural goods and services The largest, downward contribution came from this sector, where prices rose by 0.2% between February and March 2019 compared with a larger rise of 0.6% between the same two months of 2018. Within this group, the largest downward effect came from games, toys and hobbies, particularly computer games. Once again, the ONS remarked that price movements for games can often be relatively large depending on the composition of bestseller charts. The downward contribution follows an upward contribution between January and February 2019. There was also a small downward effect from recording media, which fell in price this year but rose in 2018. 

Food and non-alcoholic beverages This sector produced a small downward contribution, with prices rising by less between February and March this year than between the same two months a year ago. The downward contribution came from a range of categories, with the single largest effect coming from oils and fats, where prices of margarine and low-fat spread fell this year but rose a year ago. 

In two of the twelve broad CPI categories, annual inflation decreased, while eight categories posted an increase. Alcoholic beverages and tobacco remain as the highest category with an annual inflation rate at 5.2%. Food and non-alcoholic beverages inflation is now just 0.8% whereas a year ago it was 3.0%.

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) was unchanged at 1.8%. Goods inflation, at 1.3%, was flat, as was services inflation, at 2.5%.

Producer Price Inflation was 2.4% on an annual basis, unchanged on the output (factory gate) measure. Input prices rises grew 3.7% year-on-year, down 0.3% on February. The main driver here – as ever - was oil prices.  

These inflation figures emerged a day after Labour Market statistics revealed that wage inflation was running at 3.5% (including bonuses – 3.4% ex-bonuses). The 1.9% CPI figure will have given the Bank of England some relief as it contemplates what action to take on interest rates when the curtain finally falls on the Brexit pantomime. For now, the Old Lady can take comfort from the fact that the combination of poor productivity growth and rising real wages is not (yet) pushing up the inflation rate. 

Source:  ONS 17/04/19

The first estimate of government borrowing for 2018/19 takes us back to the turn of the century

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

The Government borrowing figures for March were released on 24 April giving us the first take on the 2018/19 deficit. This is by no means the end of the story, as the figure will be revised regularly over the coming months. For example, the 2017/18 deficit was first calculated as £42.6bn but has now settled at £41.8bn. 

With that proviso in mind, the borrowing figure for 2018/19 has (initially) come in at £24.7bn, £1.9bn above what the Office for Budget Responsibility (OBR) forecast at the time of the Spring Statement. Even so, the outturn will please the Chancellor who started 2018/19 with the OBR forecasting a deficit of £37.1bn. Before those inevitable future adjustments, the 2018/19 deficit is the lowest since 2000/01, when Gordon Brown recorded a £16.1bn surplus on the back of raising £22.5bn from the auction of 3G spectrum. 

The reduction in government borrowing over the year is due to two sets of factors: 

• The big three revenue producers sharply outpaced inflation: VAT receipts were up 5.6%; Income and capital gains tax receipts rose by 7.0%; and National Insurance contributions were up 4.6%;

• On the expenditure side, growth was slower than for income: Interest costs fell by 12.7% (£7.0bn) despite increased total debt (now £1,801bn, 1.5% up on the year). The drop was due to the impact of lower RPI inflation on index-linked gilt values; Social security expenditure rose by 3.0%; and Other central Government expenditure increased by 3.6%.

Despite the small ‘miss’, these numbers leave the Treasury pretty much where it expected to be when the Spring Statement was given. Looking ahead, borrowing is forecast to rise by £6.5bn this year, not least because the OBR forecasts debt interest will increase by about £2bn rather than repeat last year’s decline.

Source:  ONS 24/4/2019

Fixed interest exchange traded funds

(AF4, FA7, LP2, RO2) 

Two weeks ago the value of exchange traded funds (ETFs) invested in fixed interest securities breeched the $1tn barrier. 

Think of ETFs and you probably think of equity index tracking funds. ETFs started life as funds following the major stock market indices and the largest ETFs remain equity index trackers – the biggest, State Street’s SPDR S&P 500 (ticker: SPY), is now worth over $280bn. 

SPY was born in 1993 and it was not until nine years later that the first ETFs tracking fixed interest indices were launched by iShares. The delay was mainly down to doubts about the practicality of running bond ETFs, given the very different nature of bond and equity markets. Today the largest bond ETF is iShares Barclays Aggregate Bond Fund (ticker: AGG), with a value of just under $60bn. iShares now accounts for nearly half of the bond ETF market.

Last week one of the leading ETF data providers, ETFGI, announced that fixed interest ETFs (including exchange traded notes – ETNs) had reached a total value of $1.03tn at the end of March. ETFGI put the total ETF universe at $5.6tn, meaning that bond funds represent about 18% of the total. When this decade started, bond ETFs had a total value of $0.22tn out of an ETF universe of $1.1tn, underlining the growth of both parts of the ETF market.

Bond ETFs have become more widely used by institutional investors as a way to gain rapid fixed interest exposure without having to assemble a portfolio of individual securities. Bond ETFs also generally offer better liquidity than their component securities. Underlying fees, especially in the US, are very low; AGG charges just five bips (0.05%).

There are critics who believe that bond ETFs are an accident waiting to happen. Their concern is that the funds offer an illusory liquidity because the underlying assets are often relatively illiquid – an echo of the problem the UK has seen with directly invested property funds. However, so far, the ETF market has not encountered any problems of note. That might be because, despite reaching the $1tn figure, the bond ETF universe is still less than 2% of the size of the market tracked by the Bloomberg Barclays Global Aggregate Index.

Source: ETF Stream 24/4/19

Growth in dividend payments jumps at the start of 2019

(AF4, FA7, LP2, RO2) 

UK dividend payments in the first quarter of 2019 were over 15% higher than a year ago. But that headline number is not all that it seems. 

Link Asset Services (LAS) has published its latest quarterly dividend monitor, revealing some surprising numbers for dividends in the first three months of 2019. The figures confirm the picture contained in data from the last year that the growth of underlying dividends is slowing down, but that one-off payments are causing significant distortions: 

• In the first quarter of 2019, total dividend payouts were 15.7% higher than in Q1 2018 at £19.7bn. 

• However, the increase was primarily down to a £1.7bn special dividend from BHP, which distributed the proceeds of the sale of its US shale oil interests. Overall special dividends in Q1 amounted to £2.1bn (10.7% of the total payout) whereas in Q1 2018 they amounted to £330m (2.0% of the total). 

• Strip out the special dividends and underlying dividend growth was 5.5% year-on-year, still more than double the rate of inflation, but about 1.5% lower than LAS expected. 

• LAS attributes the underperformance in particular to weakness in telecoms and retail, but notes that “growth from top 100 and midcap companies alike was a little lower than we expected”. 

• Despite the slight rise in sterling over Q1, exchange rate factors boosted the payout by just over 3% on LAS’s calculations. This reflects the fact that sterling was stronger a year ago (around $1.40 rather than $1.30, for example). 

• Shell remained the top dividend payer although, as LAS observes, it was the 20^th successive quarter in which its dividend had been fixed at 47c. BHP, with its bumper special dividend and a big increase in ordinary dividend, took second place. Along with Astra Zeneca, BP and Vodafone, those five companies accounted for 51% of total dividend payments. Tellingly, none declare their dividends in sterling – Vodafone accounts in euros, while the others favour the dollar. 
• The top 15 companies accounted for 80% of all payouts, 4% up on Q1 2018. 

• Underlying dividend payouts (i.e. excluding specials) from the Top 100 companies rose 6.3% year-on-year, but two thirds of this was due to exchange rate effects. The Top 100 accounted for 90.8% of total dividend payments in the quarter. 

• The more UK-focused Mid 250 registered a 2.5% drop in underlying dividends, with LAS noting that “Earnings growth for companies outside the multinational superleague has slowed markedly recently”. 

• In terms of sectors, the bumper payment from BHP meant that Mining leapt to second position, behind the usual chart topper of Oil, Gas & Energy. Healthcare and Pharmaceuticals came in third, boosted by an unchanged final dollar-denominated dividend from Astra Zeneca equivalent to about 2.5% of the company’s market value. 

• LAS has reduced its expectations for 2019 dividend growth, which it now estimates will be 3.9% on an underlying basis and 6.3% if special dividends are included. It now sees the latter to be on track to reach £6.5bn in 2019 against £3.9bn in 2018. 

As LAS says “special dividends are by their nature very unpredictable”…

 

PENSIONS

 

Pension schemes newsletter 109 – April 2019

(AF3, FA2, JO5, RO4, RO8)

HMRC Pension Schemes Newsletter 109 covers the following:  

• Pension flexibility statistics 
• Registration statistics 
• Managing Pension Schemes service 
• Relief at source for Scottish taxpayers 
• Pension scheme returns 
• Overseas transfer charge - regulations 
• Master Trusts authorisation of existing schemes 
• Updates to the ROPS notifications list 

Areas of particular interest 

Pension flexibility statistics 

HMRC have given the quarterly breakdown of information on the number of tax repayment claim forms processed for pension flexibility payments. From 1 January 2019 to 31 March 2019 HMRC processed: 

Form number	Number of forms
P55	7,166
P53Z	3,922
P50Z	1,485

Total value repaid: £31,101,988.97. 

Registration statistics 

For 2018 to 2019 HMRC received in total 1,925 applications to register new pension schemes. This is a 23% reduction compared to applications received in 2017 to 2018. 

Of these schemes, 81% have been registered and HMRC has currently refused registration for about 11% of applications. No decision has yet been made on the remainder. 

Since 2012 to 2013 HMRC has seen an 88% decrease overall in the number of applications to register pension schemes. 

Relief at source for Scottish taxpayers 

The Scottish Income Tax rates for 2019 to 2020 are: 

Starter rate	19%
Basic rate	20%
Intermediate rate	21%
Higher rate	41%
Top rate	46%

Scheme administrators will still claim 20% for RAS schemes, members can claim any additional relief due in the normal way.  

Overseas transfer charge - regulations 

The following regulations have been made and laid: 

• The Pension Schemes (Information Requirements – Repayment of Overseas Transfer Charge) Regulations 2019
• The Pension Schemes (Information Requirements — Qualifying Overseas Pension Schemes, Qualifying Recognised Overseas Pension Schemes (ROPS) and Corresponding Relief) (Amendment) Regulations 2019

The Pension Schemes (Information Requirements – Repayment of Overseas Transfer Charge) Regulations 2019 detail the conditions and process for claiming a repayment of the overseas transfer charge where the charge was either paid in error or a change in the individual’s circumstances means the original transfer has now become exempt from the charge. 

The second set of regulations align the information requirements of SI2006/208 with those detailed in the Repayment of Overseas Transfer Charge regulations. 

Flexible Payments from Pensions: April 2019

(AF3, FA2, JO5, RO4, RO8)

HMRC have released figures that show pension savers have cashed in £25.62 billion from their pension pots since pension freedoms were introduced in April 2015.

Over 6.13 million taxable payments have been made using pension freedoms, with 284,000 people accessing £2.06 billion flexibly from their pension pots over the last 3 months, according to published HMRC figures.

Pension Protection Fund publishes a new guide to help trustees plan for insolvency

(AF3, FA2, JO5, RO4, RO8) 

The PPF has published a new guide entitled Contingency planning for employer insolvency.  This aims to help trustees understand the challenges they will face when there is a higher risk of the employer becoming insolvent.  The PPF worked closely with the TPR to produce the guide and state that it should be read in conjunction with the TPRs general guidance available on their website.

Commenting on the new guide, TPR's Executive Director of Policy David Fairs said: “This new guidance for trustees highlights the need for trustees to maintain the high standards of governance and administration we expect, even during unexpected situations such as employer insolvency or a loss of infrastructure. Adequate risk management is vital so trustees should read this guidance, and ours, and update their contingency plans.”

New ROPs list posted

(AF3, FA2, JO5, RO4, RO8)

On 25 April 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 1619 schemes listed, from 28 countries, and an EU institution, the most recent update added 14 schemes and removed 2.

Government publishes response to consultation on draft age exception order

(AF3, FA2, JO5, RO4, RO8) 

The Government has published its response to the consultation on the draft Equality Act (Age Exception for Pension Schemes) (Amendment) Order 2019. The proposed order would amend the Equality Act (Age Exception for Pension Schemes) Order 2010. The amendment enables integrated pension schemes (those that provide a Bridging Pension) to take into account a member’s State Pension when calculating the occupational pension payable, where the member has a State Pension age later than age 65, without breaching their age related equality obligations under the Equality Act 2010.