Technical news update 13/08/2019

Taxation and trusts 

• The Personal Injury Discount Rate
• Corporation tax capital losses – new legislation
• Lowest paid set to receive sick pay for the first time
• IHT investigations rose by 183 in 2018/19
• Succession problems in family companies
• Enterprise Investment Scheme approved knowledge-intensive fund – new legislation
• Changes to the IHT rules on excluded property trusts
• First-time buyer study published by Santander
• Vulnerable taxpayers

 Investment planning 

• The top 1% UK income tax payers

Pensions 

• Pension schemes newsletter 112 – July 2019
• Pension freedoms statistics: £28.37 bn from April 2015
• QROPS Transfer Statistics - £11.41bn transferred overseas
• FCA looks at competition in the non-workplace pensions market

 

TAXATION AND TRUSTS 

The Personal Injury Discount Rate     

(AF1, RO3) 

Where damages for personal injury take the form of a lump sum, the settlement is determined using the Personal Injury Discount Rate (‘PI discount rate’). 

The report provides advice and analysis to the Lord Chancellor to assist his judgement when setting the Rate. This Rate is used to determine lump sum damage awards to claimants who suffer a personal injury. 

In formulating his advice, the Government Actuary reviewed the responses from stakeholders as part of a call for evidence, which was issued in April. 

A key part of the report’s findings centres on illustrating the risk to claimants, under different Rates, of having sufficient funds to meet their future needs. 

Currently, a single PI discount rate applies to all settlements. The Lord Chancellor is allowed to set multiple PI discount rates, such that different rates are applied for different settlements.  

However, the Government Actuary’s report proposes a single PI discount rate based on a representative claimant profile whereby regular future damages costs are to be met over a 43-year period through the investment of a mid-range portfolio of assets. 

The report will be laid before Parliament alongside other documents relating to the PI discount rate. 

Personal injury trusts 

If an individual is entitled to a damages award for personal injury and receives his or her compensation outright, the funds will have to be disclosed on any financial assessment for benefits. 

This will impact upon any means-tested benefits currently received by the individual and may prevent the client from becoming entitled to means-tested benefits in the future. 

The main purpose of a personal injury trust is to protect the client's entitlement to current or future means-tested benefits and to preserve the fund for the client’s benefit and upkeep, and for the benefit of the client’s dependants or relatives. 

Even if a person is not currently in receipt of means-tested benefits, circumstances may change so that the individual becomes eligible to claim in the future. Other individuals may simply not be aware that they can claim. If such circumstances are likely to arise, it would be useful to pay any compensation award into a personal injury trust so that it doesn’t prevent a claim for such benefits at a later date.

Source: Government Actuary’s Department news story: The ‘Personal Injury Discount Rate’ – advice to the Lord Chancellor – dated 15 July 2019.

Corporation tax capital losses – new legislation

(AF2, JO3)            

Last October, the Government published a consultation on reforms to the rules for the relief of corporate capital losses. 

From 1 April 2020, new corporate capital loss restrictions will mean that companies making capital gains will only be able to use carried-forward capital losses to offset up to 50% of those gains. However, a deductions allowance of £5 million (shared with the existing corporation tax income loss restrictions – see below) is designed to remove smaller companies from the scope of these changes and enable them to use their allowable losses without restriction. The Government estimates that this reform will affect approximately 200 companies who will pay additional tax each year. 

The Government has now published its response to the consultation feedback, alongside draft legislation, which is now itself subject to further consultation until 23 August 2019. 

Despite concerns raised about the timing of this policy in the context of EU exit and the potential impact on UK competitiveness and several comments about the potential unfairness of restricting capital losses - many had raised the point that as capital gains arise irregularly there are few opportunities to utilise allowable capital losses so a restriction might result in such losses never being used - the Government has said that it does not intend to revise the fundamental features or the start date of the reforms.

Also, the Government says that whilst it recognises that the restriction will have an impact on sectors making frequent gains, such as the property and real estate sectors, retail, the financial sector, aggregates, utilities and life insurance, and Real Estate Investment Trusts (REITs), it considers this to be an acceptable consequential impact of the restriction. 

Company losses 

A company can claim relief for a loss, for example, from trading, the sale or disposal of a capital asset, and on property letting, provided that the company would normally be liable to pay corporation tax. 

Relief is obtained by offsetting the loss against other gains or profits in the same accounting period, or a claim can be made to carry the loss back. Any remaining loss will be carried forward to future accounting periods.

Capital losses

Companies are charged corporation tax on their chargeable gains, not capital gains tax; and there are some differences between the rules for calculating chargeable gains and allowable losses for companies, compared with individuals and trustees, etc.

Also losses made when a company sells or disposes of a capital asset are treated differently from trading losses. 

Capital losses arising to a company in an accounting period are set against any capital gains arising in the same period. When capital gains exceed capital losses in an accounting period, the company will have chargeable gains that are subject to corporation tax. Remaining capital losses can be carried forward and set against capital gains (but not income profits) arising in future years. 

Companies within a group for capital gains purposes can elect to transfer gains or losses arising in an accounting period to another company within that group. 

Income losses 

Major reforms were introduced to corporation tax income losses from 1 April 2017 (the corporation tax income loss restrictions): 

• Losses arising from 1 April 2017 can, in most cases, be carried forward and set against the total profits of a company or another company within the same group; and 

• From 1 April 2017, the amount of profit that can be relieved by carried forward losses is limited to 50%, subject to an annual deductions allowance of £5 million per group.

Source: HMRC Consultation outcome: Corporate Capital Loss Restriction - consultation on delivery – dated 11 July 2019.

Lowest paid set to receive sick pay for the first time 

The Work and Pensions Secretary, Amber Rudd, and Health Secretary, Matt Hancock (at the time of writing, are setting out new measures to transform how employers support and retain disabled staff and those with a health condition. As such, a consultation has been launched which seeks views on different ways in which Government and employers can take action to reduce ill health-related job loss.

Recent figures show that each year more than 100,000 people leave their job following a period of sickness absence lasting at least four weeks. 

Under the new measures the lowest paid employees will be eligible for Statutory Sick Pay for the first time. Small businesses may be offered a sick pay rebate to reward those who effectively manage employees on sick leave and help them get back to work. 

Businesses and health providers will be asked for their views on how to remove the barriers in the current system which stop employers from taking action. 

The Government will also consider whether the legal guidance needs to be changed to encourage employers to intervene early during a period of sickness absence. 

The consultation will also look at how to improve the capacity, value and quality of occupational health services and consider how to reduce the high costs, particularly for smaller employers. 

The aim of this consultation is to ensure that all employers have access to good advice and support so that they understand and can act on their responsibilities to employees. 

The consultation will close on 7 October 2019 and it will be interesting to see the outcome. 

Source: DWP Consultation (online survey) and press release: Lowest paid set to receive sick pay for the first time – dated 15 July 2019

IHT investigations rose by 183 in 2018/19

(AF1, RO3) 

Last year we highlighted the results of a Freedom of Information (FoI) request from UHY Hacker Young to HMRC for data on investigations into inheritance tax (IHT) returns. This year, Quilter have asked the same question and received a very similar answer. 

In 2018/19, HMRC launched 5,537 investigations into IHT returns, against 5,354 in 2017/18. The 3.4% increase is smaller than last year, but then HMRC puts the number of IHT liable estates at ‘about 22,000’ in 2018/19, 2,500 fewer than in the previous year. The decline is almost certainly due to the impact of the residence nil rate band, (RNRB). Many of the returns received in 2017/18 would have related to deaths before 6 April 2017, which would have been before the RNRB came into being. 

The simple maths suggests that HMRC are investigating 25% of the tax returns of estates that pay tax. However, that is an illusion. As the Office of Tax Simplification (OTS) indicated in its recent report, only about 9% of estate returns result in an IHT liability, suggesting investigations cover only about 2.5% of all returns. 

Unfortunately, that proportion is also misleading, as HMRC is going to concentrate its  efforts on larger estates where they can get more tax bang for their investigative buck. 

As we said last year, the level of investigations is a reminder that HMRC sees IHT as an area where scrutiny is rewarding. That is unlikely to change, whatever happens to the OTS recommendations. 

Source: Old Mutual Wealth Press Release: A quarter of estates that pay IHT are investigated by HMRC – dated 22 July 2019.

Succession problems in family companies 

(AF2, JO3) 

When considering share purchase arrangements for owners of private companies, typically less attention will be paid to family businesses where succession following the death of the present owner is apparently secured, for example where the children of the owner are involved in the business and will inherit their parents’ shares. A case decided in the High Court last year (Weatherley v Weatherley and others [2018] EWHC 3201 (Ch)) shows just how much can go wrong following an unexpected death, especially where human emotions step in. 

The main facts of the case were as follows: 

Weatherley Fencing Contractors Limited (the "Company") was a private company owned and managed by the Weatherley family. The business was started in the early 1970s by Ken Weatherley and incorporated in 1978 with Ken and his wife June equal shareholders and directors. Their son, Mark, worked in the business and, following his 21^st birthday, Ken and June gifted to him 20% of the shares in the Company. In due course, Mark gradually took over the running of the Company and in 2006 was appointed as a director. Mark's sister, Debbie, took a role managing the Company's invoicing, was gifted 20% of the shares in the Company in 2009 and was appointed as a director in 2011. Debbie's husband also worked for the Company. 

Mark's wife, Fiona, worked for the Company on a part-time basis. Her role was secretary and personal assistant to Mark. Their son, Aaron, also worked in the business. Despite his advancing age Ken remained active in the Company, working at least 40 hours a week. 

Unfortunately, from 2014 Mark suffered ill health and died from cancer in 2017. At that time the shares in the Company were owned: Ken 36.66%, June 23.34%, Mark 20% and Debbie 20%. 

Under Mark's Will his shares passed to his wife Fiona. Apart from the shares themselves there were a number of family properties registered in Mark and Debbie's name. There was an argument as to whether the properties were owned as joint tenants or tenants in common. There was also a property in the Company's name. 

Without going into details, suffice to say that, after Mark's death, relations between the remaining family members and Fiona broke down, and the Company passed a resolution adopting new Articles of Association which enabled it to refuse to recognise Fiona as a shareholder and therefore also denying her the right to dividends. The Company dismissed both her and her son as employees of the Company and actioned a transfer at undervalue of the Company's 50% share of a property into Ken's personal ownership. 

Fiona brought an unfair prejudice petition against the Company. 

Unfair prejudice and subsequent conduct 

By way of explanation, an unfair prejudice petition is the procedure by which a minority shareholder, who is the victim of "unfairly prejudicial" conduct by the majority shareholders, can obtain relief from the Court. 

The Court has a wide discretion as to the appropriate remedy to grant, but will often order that the minority shareholder's shares be purchased by the majority shareholders at a predetermined price. 

During the course of proceedings and presumably as a result of the same, the Company agreed to adopt new Articles or to amend the existing Articles to permit the transmission of shares by Will, which restored the position to that as set out in the original Articles. The Company agreed to, and did, recognise Fiona as a shareholder and she was registered as such, receiving the dividends due on the shares. The Company also offered to re-employ her son, and all parties, including Fiona, agreed that the remaining shareholders would purchase Fiona's shares at the price to be negotiated. 

In the circumstances, although the alteration of the Company's Articles had been unfairly prejudicial at the time, this had been remedied by the trial date, as had the refusal to register Fiona as a shareholder and pay her dividends. Therefore, the petition was dismissed. 

During the trial Ken admitted that, when he started the Company, no thought was given to succession but he was delighted when his son showed an interest in the business. As with many such businesses, no proper thought was ever given to succession and during the trial it transpired that, while Fiona believed that a share of the Company would pass down to each side of the family (i.e. Mark's children  and Debbie's children respectively) in due course, Ken's stated view was that only those who actually worked in the business would ever inherit any shares in the Company. We never found out what the Will provisions of Ken and June were but clearly the family had never properly discussed this and did not have the benefit of proper advice. If only they had considered the usual "What if (one of you) died yesterday...?” 

The case should be a reminder that even if business succession appears to be secured within a family, when one looks at the situation in depth, this will not necessarily be so, and the owners will need advice on how to protect both the business and their families from the disruption caused by the death or ill health of a shareholder. 

Help to Buy ISAs – quarterly statistics 

The Help to Buy ISA scheme was launched on 1 December 2015 with accounts available through banks, building societies and credit unions. The scheme enables people saving for their first home to receive a 25% boost to their savings from the Government when they buy a property for £250,000 or less (with a higher price limit of £450,000 in London). This means that for every £200 saved, first-time buyers can receive a Government bonus of £50. The maximum Government bonus is £3,000. 

Latest Government statistics show that: 

• Since the launch of the Help to Buy ISA scheme, 234,074 property completions have been supported by the scheme. 

• 310,658 bonuses have been paid through the scheme with an average bonus value of £920. 

• The highest number of property completions with the support of the scheme is in the North West and Yorkshire and The Humber, with the lowest number in the North East and Northern Ireland. 

• The mean value of a property purchased through the scheme is £173,470 compared to an average first-time buyer house price of £190,999 and a national average house price of £226,798.

• The median age of a first-time buyer in the scheme is 28 compared to a national first-time buyer median age of 30. 

The Help to Buy ISA is available to UK residents over the age of 16 for a temporary period of four years, which started on 1 December 2015 and ends on 30 November 2019. 

Help to Buy ISA account holders can, however, continue saving into their account until 30 November 2029 when accounts will close to additional contributions. The Help to Buy ISA Government bonus must be claimed by 1 December 2030.  

Source: HMT Collection: Official Statistics on the Help to Buy ISA scheme – dated 25 July 2019.

Enterprise Investment Scheme approved knowledge-intensive fund – new legislation 

(AF4, FA7, LP2, RO2) 

In March last year, the Government published a consultation, ‘Financing growth in innovative firms: Enterprise Investment Scheme knowledge-intensive fund’, which asked for views on improving the supply of capital for knowledge-intensive companies. 

The consultation responses suggested that the new rules for the approved fund should provide more flexibility for investors to claim tax relief. 

The Government has now published the EIS approved guidelines of proposed policy and practice for approving funds, along with draft legislation in Finance Bill 2019, which includes powers for HMRC to set appropriate conditions and approve funds. 

Summary of the proposed changes 

The legislative requirements for an EIS-approved fund in section 251 Income Tax Act 2007 will be amended and an ‘approved knowledge-intensive fund’ will be introduced, from 6 April 2020, that will: 

• require the funds to focus on investments in knowledge-intensive companies; 

• give approved funds a longer period over which to invest fund capital (requiring 50% investment within one year of the fund closing and 90% within two years, compared to the current requirement of 90% within one year); 

• allow investors in an approved fund to set their income tax relief against liabilities in the tax year, or against their liability of the previous tax year, before the fund closes. 

The fund manager will have to provide HMRC with information relating to their fund. 

These changes will be subject to State aid approval. 

Source: HMRC Policy paper Income Tax relief and the Enterprise Investment Scheme approved knowledge-intensive fund – dated 11 July 2019.

Changes to the IHT rules on excluded property trusts

(AF1, JO2, RO3) 

The proposed changes have been expected since the Court of Appeal decided that, for the purpose of treating property as excluded for inheritance tax (IHT) purposes, what mattered was that the settlor was non-domiciled when the trust was first established, not when the property was transferred into it from another trust (see Barclays Wealth Trustees (Jersey) Limited & Michael Dreelan v HMRC (Dreelan). [2017] EWCA Civ 1512 overturning the High Court decision from 2015).

The use of excluded property trusts (EPTs) as an IHT planning tool for those with non-UK domicile but who are likely to become deemed domiciled is well known, as is the Government's opposition to such planning.

Generally speaking, an EPT will retain its excluded property status even after the settlor has become deemed domiciled although, following the changes to the domicile rules introduced in 2017, this protection is no longer available to individuals who were born in the UK with a UK domicile of origin, have subsequently acquired a domicile of choice elsewhere but then return to the UK and become UK resident. These individuals will be deemed domiciled in the UK for tax purposes in any tax year that they are UK resident after 5 April 2017. Furthermore, trusts created by such individuals at a time that they were neither UK-domiciled nor deemed domiciled will not be protected from IHT for any year in which the settlor is UK resident. This means that if an individual with a UK domicile of origin establishes an EPT having acquired a domicile of choice outside the UK and then returns to the UK and becomes UK resident, the trust will no longer be excluded property for IHT purposes while he or she remains resident in the UK for tax purposes. 

The proposed changes deal with three areas: 

(i) Additions to a settlement 

The new legislation confirms that non-UK property added to a trust will only be excluded property if the settlor was non-UK domiciled when the property “becomes comprised in the settlement”. This means that if a settlor adds property to a settlement after becoming UK domiciled or deemed domiciled, that property will be within the scope of IHT (although the rest of the settlement will not be tainted and will remain excluded property). 

The legislation will take effect for all IHT charges after Finance Act 2019/20 is passed, even if the settlor added property to the settlement before that date. 

(ii) Transfers between trusts 

The new legislation will not be retrospective for transfers between trusts, so there will be a different set of rules for transfers between trusts before and after the Finance Act is passed. 

Non-UK property transferred between trusts before the Finance Act is passed will be excluded property provided: 

• the settlor of the transferring settlement was non-domiciled when the property became comprised in the settlement; and 

• the settlor of the recipient settlement was non-domiciled when the recipient settlement was made (i.e. when it was first established). 

This means that where a settlor has established two trusts before becoming UK domiciled or deemed domiciled, the trustees can still transfer property between the trusts after becoming UK domiciled or deemed domiciled but before the Finance Act is passed, without jeopardising the excluded property status of the transferred property. 

The position will be different after the Finance Act is passed. Where trustees transfer non-UK property to another trust, the transferred property will only be excluded property if the settlor of the transferring settlement remains non-domiciled immediately before the transfer or has died. 

(iii) Section 80 IHT Act 

The draft legislation also introduces a change to section 80 of the IHT Act 1984, which applies where the settlor or his or her spouse have a qualifying interest in possession immediately after the settlement comes into existence. 

At present, non-UK property in such a trust is excluded property provided that: 

• the settlor was non-domiciled when the settlement was made (i.e. first established); and 

• the settlor or their spouse/civil partner with the qualifying interest in possession (QIIP) was non-domiciled at the time they ceased to have their QIIP.

 This most commonly arises where a settlor gives his or her spouse/civil partner an immediate post-death interest in possession in his or her assets, with remainder on trust for their children – in that case, the excluded property status of the settlement would be re-tested on the spouse’s/civil partner’s death, and would be dependent on the spouse’s/civil partner’s domicile at the time of his or her death. 

The new legislation requires that in addition to re-testing the domicile of the spouse/civil partner losing their QIIP, you must also re-test the domicile of the settlor at the same time. 

As mentioned above, these changes have been anticipated. While EPTs continue to provide a planning tool for non-doms, for settlors of EPTs who have become UK domiciled or deemed domiciled there is no way (if indeed there ever was) to add property and claim excluded property status over the added property. 

There is still the possibility of making transfers between offshore trusts before the Finance Act is passed (likely to be in February 2020), although if the recipient trust is a "protected settlement" for income and capital gains tax purposes, such a transfer would mean the loss of protected status. 

Source: Macfarlanes Update: draft inheritance tax legislation on additions to settlements and transfers between settlements – dated 25 July 2019.

First-time buyer study published by Santander 

According to Santander’s First-Time Buyer Study: The Future of the Homeownership Dream – based on a national survey of 5,002 non-homeowners aged 18-40 years –while nine in ten still want to get on the property ladder, the reality is that by 2026 just one in four under 34s will achieve that goal. 

The report says that over half (51%) of those surveyed said that owning their own home was one of their top life goals. However, over two thirds (70%) of potential first-time buyers believe that the dream of homeownership is already over for many young people, with 64% expecting homeownership to fall for future generations. 

The research found that the sharpest fall in first-time buyer homeownership was among those on middle-incomes (taken as being between £20,000-£30,000 in 2019) – with homeownership rates falling from 65% in 1996 to 27% two decades later. Of the new buyers entering the market today, 64% have household incomes of more than £40,000 and just 16% are individual buyers. 

The biggest barrier cited by first-time buyers to getting on the ladder was raising a deposit (30%), followed by getting a mortgage based on their income (15%). 

According to the report, the challenges faced by today’s first-time buyers include house price inflation outstripping wage inflation, as well as the levels of student debt and the costs of childcare. The average age of a first-time buyer has increased from 25 to 33 years old in the last two decades, and 40% have already started a family, (Ministry for Housing & Local Government: English Housing Survey 2017-18) and Santander found that the most sought-after first-time buyer property is now a three-bedroom house. 

Santander’s research found that 40% of potential first-time buyers were relying on an inheritance to boost their deposit and that aspiring homeowners are underestimating the size of the deposit they need to save. With the majority of mortgage borrowing limited to 4.5x gross salary, the deposit amount buyers in each region said they were looking to save would, say Santander, price individuals, or households relying on a single middle-income, out of every region in the UK. 

Despite their ambitions, Santander’s survey found that two fifths (42%) of potential first-time buyers have saved nothing at all towards their first home. Typically, men have saved twice as much as women (£11,660 compared to £5,620), while one in three men and nearly half of women (48%) have not saved anything. 

Santander’s research found that nearly three quarters (73%) of the people surveyed believe that the Government should do more to help first-time buyers. Over a third (37%) want to see ‘Help to Buy’ extended beyond 2023, 35% want a cap on rent prices, and a third (33%) would like to see the stamp duty cuts, introduced by the Government in November 2017 for first-time buyers, extended to the first £500,000 of a property’s value. 

Potential new policy ideas suggested in the report include:

• Introducing a new lending model backed by the Government to help those without family support to raise a deposit;
• Introducing more flexibility in lending affordability criteria, for example less restrictive ‘stress rates’ for fixed-term mortgages; and
• Making better use of existing housing supply and encouraging greater circulation of homes by introducing a stamp duty incentive for downsizing. 

Santander adds the following warning to the press release promoting its report “The information contained in our press releases is intended solely for journalists and should not be used by consumers to make financial decisions.” 

SOURCE: Santander Press Release: The death of the home ownership dream for Middle-income Britain dated 3 July 2019.

Vulnerable taxpayers

(AF1, RO3)

The House of Commons Treasury sub-committee has made recommendations on HMRC’s approach to dispute resolution – including calling for HMRC to urgently review and improve the guidance it makes available to vulnerable taxpayers. 

The conclusions and recommendations made by the Treasury sub-committee include:

“Given the stress and anxiety that disputes with HMRC can cause a vulnerable taxpayer, we welcome the steps taken by HMRC to improve its approach to vulnerable taxpayers and look forward to receiving an update on progress. However, it is clear that more can be done. We recommend that HMRC provides a clearer explanation of its definition of ‘vulnerable’ when it comes to identifying this sub-set of customers.” 

“We recommend that HMRC reports on how it has reflected on the insights of groups such as the Low Incomes Tax Reform Group, the tax charities and other advice bodies to gain a full insight into the difficulties faced by taxpayers who cannot afford to pay for advice. This should be provided to the Committee in the response to this Report.” 

“We have heard that it is too difficult for anyone involved in a dispute with HMRC and with little knowledge of the workings of the tax system to find adequate information from HMRC to help them understand the law and find out about their rights and the help that is available to them. We recommend that HMRC urgently reviews and improves the accessibility, quality and level of detail of guidance it makes available to vulnerable taxpayers. In its response to this Report it should set out a clear timetable to achieve this.” 

The committee’s recommendations follow on from written and oral evidence given to it by the Low Incomes Tax Reform Group, the Chartered Institute of Taxation and others. Also, earlier this month, the Financial Secretary to the Treasury, Jesse Norman, set out a number of steps that HMRC is taking to improve things for unrepresented taxpayers, saying that the Government will provide a further update later this year. 

SOURCES:

• Hansard: HMRC Powers and Taxpayer Safeguards - The Financial Secretary to the Treasury (Jesse Norman) – dated 22 July 2019;
• Parliamentary business: HMRC’s approach to dispute resolution – dated 31 July 2019;
• CIOT News: LITRG Press Release: Campaigners welcome Parliamentary committee’s recommendations for unrepresented taxpayers – dated 31 July 2019.

INVESTMENT PLANNING

The top 1% UK income tax payers

(AF4, FA7, LP2, RO2) 

How much taxable income would take you into the top 1% of UK income tax payers? 

The answer may be smaller than you think: to join that select band of about 310,000 taxpaying individuals, you need taxable income of at least £160,000 a year. It is only when you get to the top 0.1% tier that the figure reaches £650,000. 

As part of its research into inequality, the Institute for Fiscal Studies (IFS) has issued a briefing note on that top 1%, a prime target market for financial services providers (and HMRC). The key findings of the IFS were: 

• To be in the top 1% of adults by income (as opposed to the top 1% of income tax payers) requires a minimum pre-tax income of £120,000. That covers 540,000 people. 

• As might be expected, the top 1% of income tax payers are disproportionately male, middle-aged and London-based. Almost half of the top 0.1% are based in London and 89% are male. 

• The top 1% of income tax payers has become more geographically concentrated since 2000. Half of all of the top 1% can now be found in just 65 (out of 650) parliamentary constituencies. In 2000/01, 78 constituencies were required to reach the same halfway mark. 

• Partnership and dividend income account for over a quarter of the total income of the top 1%, and over a third of the total income of the top 0.1%. Those on lower income have a much smaller share of income in these two categories. As the IFS notes, partnership and dividend income are taxed more favourably than normal salaries – a de facto policy choice in favour of business owners. 

• The top 1% of income tax payers is not a stable group. The IFS found that a quarter of those in the top 1% in one year disappear in the next. After five years, only half will still be in the top 1%. Past performance is not necessarily… 

• A corollary of the turnover of the top 1% is that someone has a much higher chance of being in the top 1% at some point in their lives than they do in any single year. For example, 3.4% of all people (and 5.5% of men) born in 1963 were in the top 1% of income tax payers at some point between 2000/01 and 2015/16. 

The top 1% of income tax payers account for 27% of all income tax paid, so how they react to tax changes can be of major significance to Government finances. Given that about a third are business owners, they have more scope to reshape their income in response to adverse tax changes. This was well demonstrated when dividend tax was reformed in 2016/17, prompting a pre-emptive surge of dividend payments at the end of 2015/16. 

Source: IFS 06/08/19 

PENSIONS

Pension schemes newsletter 112 – July 2019

(AF3, FA2, JO5, RO4, RO8) 

HMRC Pension Schemes Newsletter 112 covers the following:  

• Relief at source 
• Pension flexibility statistics 
• Annual allowance 
• The Pensions Regulator’s consultation on the future of pension trusteeship and governance 
• Qualifying Recognised Overseas Pension Schemes (QROPS) transfer statistics 

Areas of particular interest 

Pension flexibility statistics 

The quarterly release of official statistics on flexible payments from pensions for the period 1 April 2019 to 30 June 2019 has now been published. 

HMRC can now give more information on the number of tax repayment claim forms processed for pension flexibility payments. 

From 1 April 2019 to 30 June 2019 HMRC processed the following forms: 

Form number	Number of forms
P55	11,974
P53Z	3,503
P50Z	1,761

Total value repaid: £46,793,765. 

Figures for the period 1 July 2019 to 30 September 2019 will be published in October 2019. 

Pension freedoms statistics: £28.37 bn from April 2015

(AF3, FA2, JO5, RO4, RO8) 

HMRC have released figures that show pension savers have cashed in £28.37 billion from their pension pots since pension freedoms were introduced in April 2015. 

Over 6.89 million taxable payments have been made using pension freedoms, with 336,000 people accessing £2.75 billion flexibly from their pension pots in the second quarter of 2019, according to published HMRC figures.  The value is over 20% higher than the same quarter of 2018.

QROPS Transfer Statistics - £11.41bn transferred overseas

(AF3, FA2, JO5, RO4, RO8) 

Since April 2006, individuals have been able to transfer their pension savings in a registered pension scheme to a qualifying recognised overseas pension scheme (QROPS). To be a QROPS a pension scheme must be based outside the UK and meet certain requirements. Provided the requirements are met transfers to QROPS are free of UK tax up to the lifetime allowance. 

Up until the end of the tax year 2018/19 a total of 128,100 transfers have been made totalling £11.41 bn. It is significant that since the announcement and introduction of the overseas transfer charge the amount transferring overseas has significantly dropped.  

This is the third year we have seen a drop in the total amount transferring overseas, this will be at least partly related to the introduction of the overseas transfer charge in 2017. 2017 clearly saw a dramatic drop in the number and value of transfers.

 

Tax year (6th April to 5th April)	Number of Transfers	Total value of transfers
2006 to 2007	2500	£120m
2007 to 2008	5700	£350m
2008 to 2009	6100	£360m
2009 to 2010	6700	£460m
2010 to 2011	12800	£1,360m
2011 to 2012	16400	£1,040m
2012 to 2013(3)	13400	£1,000m
2013 to 2014	11300	£860m
2014 to 2015	20100	£1,760m
2015 to 2016(3)	13700	£1,500m
2016 to 2017	9700	£1,220m
2017 to 2018(3,4)	4700	£740m
2018 to 2019	5000	£640m

Footnotes 

(1) The number of transfers are rounded to the nearest 100 

(2) The total value of transfers are rounded to the nearest £10 million 

(3) There were changes to the requirements schemes had to meet to qualify as a QROPS in April 2012, April 2015 and April 2017 

(4) The first year of data where QROPS transfers can be liable for a 25% Overseas Transfer Charge 
  
Notes on the table 

i) This table shows the number and value of transfers to QROPS each year starting from 2006-07. The information in the tables is taken from returns provided by scheme managers. It is possible that individuals may make more than one transfer, and so the number of transfers should not be assumed to equal the number of individuals making a transfer in any one year.

ii) QROPS were introduced in April 2006. This data is collected primarily for compliance purposes and contains transfers made by and on behalf of individuals. 

FCA looks at competition in the non-workplace pensions market

(AF3, FA2, JO5, RO4, RO8) 

The FCA published feedback Statement FS19/5, on its Discussion Paper on effective competition in non-workplace pensions. The Feedback Statement outlines a package of potential measures to protect consumers. The FCA is seeking comments and will consult on new rules for non-workplace pension schemes in early 2020. This is the second part of the FCA’s package and looks at the extent to which consumers of non-workplace pensions are engaged with their pensions decisions and the charges they face from providers and pension products, and how this might be improved. 

Analysing the response to its Discussion Paper of February 2018, the FCA has concluded that the non-workplace pension market shares many key similarities with other pension markets that lead to weak competitive pressure. 

Charges are highly complex across the market, with older products and smaller pots attracting higher charges, and similar consumers paying materially different charges for broadly comparable products.  There is little consumer engagement, many assuming they have selected a “standard” investment, and little switching between pension products.  Price competition is weak.  The FCA is also concerned about the high level of cash investment. 

The FCA propose some potential remedies. These include: 

• Requiring firms to provide one or more ready-made investment solutions with lifestyling to align with consumers’ broad objectives;
• Requiring non-advised investments in cash to be an “active decision” by consumers;
• Requiring firms to present all charges information as either administration charges or transaction costs, and to report standardised charges data on a regular basis to an independent body (such as the FCA), which would collate and publish the information; and
• Proportionate introduction of independence governance. 

The FCA seeks views by 8 October and aims to issue a consultation paper in the first quarter of 2020 on its simplification and disclosure remedies.  Around the same time it will issue separate papers on the effectiveness of Independent Governance Committees and on a proposed value for money framework for pensions, developed with the Pensions Regulator.