Technical news update 20/02/2020

 

Taxation and trusts

• Inheritance tax – family investment companies
• FCA concerns about the financial services markets
• The removal of EIS qualifying status – how does this impact investors?
• Resolution Foundation comments on the forthcoming Budget
• New fuel rates for company cars
• Corporate non-UK resident landlords – new rules on financing costs
• HMRC Trusts and Estates newsletter
• The latest UK property statistics are now available                                          
• The importance of recording the nature of capital payments made during lifetime
• Witnessing a deed via Skype is not acceptable
• Get ready for changes to CGT payments in respect of UK property disposals

Investment planning

• Borrowing numbers disappoint
• Institute for Fiscal Studies comments on the forthcoming Budget
• An almost instant correction

Pensions

• Pension Schemes Newsletter 117 - February 2020
• ABI report - Pension Freedoms five years on
• Automatic Enrolment Earnings Trigger and Qualifying Earnings Band Review 2020/21
• Guaranteed Minimum Pension (GMP) equalisation newsletter - February 2020 
• DWP: Will the retirement you get be the retirement you want?
• MaPS commissions research into the challenges posed by pensions dashboard

 

TAXATION AND TRUSTS

Inheritance tax – family investment companies

(AF2, JO3)

Since the extension of the trust inheritance tax (IHT) relevant property regime to effectively all trusts that offer a degree of beneficiary flexibility, family investment companies (FICs) have become popular.

By setting up a FIC a wealthy donor can transfer substantial wealth to the next generation without suffering an immediate IHT charge. They can also achieve this with flexibility.

This is achieved by a donor transferring a substantial cash sum into a FIC in which some or all of the shares are held in the names of children. This will represent a potentially exempt transfer (PET) for IHT purposes because it is an outright transfer between individuals. Control is exercised by vesting different rights in capital/dividends or voting in the donee at different times. This will enable the donor to, say, ensure that voting control on the shares transferred does not vest in the donee until sometime in the future. In the meantime, the donor can retain shares that carry voting rights. 

The taxation of the FIC itself is very effective. Frequently, the FIC will use the cash to invest in investments or perhaps even buy-to-let properties.

Either way, income paid to the FIC will only suffer corporation tax at 19% compared to the 45%/38.1% it could suffer in the hands of trustees of a discretionary trust. Furthermore, the FIC can offset any interest paid against income for corporation tax purposes, and although the FIC doesn’t benefit from a CGT annual exemption and no longer benefits from CGT indexation relief, capital gains will only be taxed at the corporation tax rate, currently 19%. 

The possible downside with FICs is the fact that, because of the extra compliance involved, costs and charges are much higher, and it is generally thought that they would be unsuitable in cases where the cash being transferred is less than £2 million. Also, share rights need to be carefully drafted to deal with situations, such as the divorce of the donee, in order to avoid the donee’s ex-spouse/ex-civil partner becoming entitled to the shares.

In light of the considerable tax benefits that FICs offer the very wealthy, especially in the area of IHT, it is perhaps not surprising that HMRC has announced (following a freedom of information request) that in April 2019 they set up a special unit with the specific remit to “look at FICs and do a qualitative and quantitative review into any tax risks associated with them with a focus on inheritance tax implications. The team’s work is exploratory at this stage...” 

Given the tax benefits that FICs offer the very wealthy it is probably not surprising that HMRC is reviewing their use, possibly as a means of circumventing the restrictions that apply to trusts. If HMRC has a special unit it clearly has concerns over their use.

And bearing in mind that the IHT regime is probably under review by the Government following the publication of the Office of Tax Simplification’s report in Autumn 2019, it would not be surprising if specific anti-avoidance rules were introduced to combat the use of FICs to avoid IHT. That is not to say that existing FICs do not work. Provided they are properly administered there should be no reason why they do not provide the current tax advantages they offer.

Persons seriously considering establishing FICs now may like to review the position and consider whether they should implement any planning before the 11^th March Budget. 

Source: FT: Secretive UK tax unit homes in on rich families – dated 21 February 2020.

FCA concerns about the financial services markets

The FCA has published its annual assessment of the risks and potential harm to consumers across financial services markets.

The Financial Conduct Authority’s annual Sector Views look at the impact of macroeconomic developments and common drivers of change emerging across financial markets. They also outline areas where there may be a negative impact on consumers or the integrity of the financial system in that sector. The report sets out what factors are driving harm, as well as considering how the harm may develop over time.

The report covers all the markets regulated by the FCA, grouped into seven sectors:

• retail banking and payments;
• retail lending;
• general insurance and protection;
• pensions savings and retirement income;
• retail investments;
• investment management; and
• wholesale financial markets.

The kinds of issues highlighted by the FCA include:

• Its Financial Lives data shows that 7.4 million UK adults are over-indebted and find their financial commitment a burden.
• Pricing practices in insurance that still penalise loyal customers. According to the FCA, the ‘loyalty penalty’ in home and motor insurance cost 6 million longstanding consumers an extra £1.2 billion in 2018.
• High-risk retail investment products that are often marketed directly to retail consumers with poor communication of the risks involved, and implications that the investments are regulated when this is not the case.
• New products that don’t have protection in place for consumers, for example e-money services advertised as ‘current accounts’, which aren’t covered by the Financial Services Compensation Scheme.

The report also looks at how factors, such as the macroeconomic environment, technological developments, regulation and societal developments, are driving change in the sector, how the sector is changing and notable trends and developments it has observed within the markets it covers.

In light of EU withdrawal and its impact on financial services markets, the FCA also gives an overview of its position in the current international context.

The findings in the report will contribute to the FCA’s upcoming 2020/21 Business Plan and the decisions it will make affecting consumers, market integrity and competition.

Source: FCA News: FCA News: FCA highlights its areas of concern in financial services markets – dated 18 February 2020.

The removal of EIS qualifying status – how does this impact investors?

(AF4, FA7, LP2, RO2)

HMRC has recently written to several companies removing their Enterprise Investment Scheme (EIS) qualifying status after trading for a period of four years. This has resulted from HMRC challenging a technical point several years after the investments have been made and, critically, after advance assurances were given. Note that HMRC has not removed EIS status from these companies because of a performance issue.

To be a qualifying EIS company the company must satisfy certain conditions, and most of those conditions must apply throughout a period that starts with the issue of the shares and ends immediately before the termination date (normally the third anniversary of the date on which the shares were issued). It is possible to obtain advance assurances from HMRC before issuing shares to investors. Advance assurance is not a requirement of the EIS company and does not guarantee that a share issue will qualify, but it is normally useful, both in attracting investors and in ironing out any problems before it’s too late. 

However, HMRC’s view is that it cannot be known for certain whether a company qualifies in relation to a given share issue until the termination date related to that issue. This applies in respect of both income tax relief and deferral relief.

It would appear that HMRC is saying that these companies failed to meet the required qualifying conditions during this period.

The affected companies appear to be isolated cases. However, we thought it would be useful to take a look at what happens in cases such as this, and the impact on investors, specifically:
 

• the process of paying back the income tax relief;
• how deferred capital gains are treated;
• if the EIS investment generates a capital gain, is this subject to capital gains tax (CGT)?
• if the EIS company is still trading, do the shares still qualify for inheritance tax (IHT) business relief?

To recap, EIS investors may be eligible for:

• 30% income tax relief (assuming they have enough income tax liability in the current or preceding tax year);
• Up to 28% CGT deferment;
• IHT business relief exemption after two years of holding the shares.

The legislation provides for the complete withdrawal of any relief attributable to shares if, by reason of some event, any of the conditions for the relief ceases to be satisfied.

In particular, relief is not due, and must therefore be wholly withdrawn, where it transpires that the company is not a qualifying company.

However, note that relief cannot be withdrawn by reason of any event occurring after the death of the individual. Similarly, any relief left following the disposal of the shares by the individual cannot be withdrawn by reason of any subsequent event unless, exceptionally, it occurs at a time when the individual is connected with the company, for example, as an employee.

We understand that the companies will be appealing against HMRC’s decision. However, even if the companies fail to appeal, or if a Tribunal decides in favour of HMRC, a shareholder may subsequently make their own appeal against a withdrawal assessment.

Note that HMRC does not need to await determination of any appeal by a company before making an assessment to withdraw relief from individual investors. If such assessments are made HMRC must ensure that all individuals assessed are aware of the fact and that the company’s appeal is heard first (or at the same time).

The process of paying back the income tax relief

Where HMRC becomes aware that relief falls to be withdrawn it must notify the tax offices dealing with the individuals concerned, including the following details:

• the reason for the withdrawal;
• the amount to be withdrawn, if not the whole of the relief;
• the year in which the shares to which the relief relates were issued; and
• the reckonable date for interest.

Withdrawal of relief is usually by Special Assessment issued by HMRC to the investor.

Where an assessment to withdraw relief is required because of an event occurring after the date of the claim to relief, it may usually be made by HMRC within six years after the end of the year of assessment in which that event occurred.

Where EIS relief is to be withdrawn because of an event occurring after the date of the claim, there are special rules for determining the relevant date from which interest starts to run. This date will always precede the date when the assessment withdrawing relief is made. Normally the relevant date from which interest starts to run will be 31 January next following the tax year in respect of which the assessment is made.

How deferred capital gains are treated

The deferred gain, or part of the deferred gain, will be brought back into the charge to CGT when there is a chargeable event. Such an event can be the shares ceasing, or being treated as ceasing, to be eligible shares, which can happen if HMRC discovers that the shares cease to be eligible because the company does not satisfy all of the conditions. In this case, HMRC should notify the EIS company that the shares cease to be eligible on a certain date.

If the EIS investment generates a capital gain, is this subject to (CGT)?

If the investor does not obtain any income tax relief on a subscription for shares in an EIS company (e.g. because it has been withdrawn) then there is no CGT exemption for those shares.

Note that if the investor never actually claimed EIS income tax relief in the first place (some do forget), then no disposal relief will have been available anyway.

If the EIS company is still trading, do the shares still qualify for IHT business relief?

Business relief can provide relief from IHT, at a rate of 100%, on the transfer of relevant business assets, including unquoted shares, provided the shares are held by the investor for at least two years. This means that even if the EIS company loses its qualifying status, provided it remains an unquoted trading company, that is carried on for profit (and is not one of "wholly or mainly" dealing in securities, stocks or shares, land or buildings or in the making or holding of investments), the shares can still qualify for IHT business relief.

Resolution Foundation comments on the forthcoming Budget

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

The Resolution Foundation has published ‘The Trillion-pound Question’, looking forward to the Budget and the two other key fiscal events of 2020, the Spending Review and the Autumn Budget. Among the points worthy of note are:

• Resolution found a quote from Rishi Sunak in 2015 in which he said that in normal times “public spending should not exceed 37% of GDP”. However, Resolution calculates that the Government is set to preside overspending that is over 40% of GDP (based on the 2019 Spending Round and Conservative manifesto commitments). That could mean, by 2023/24, annual state spending in cash terms will hit £1trn (£1,000bn) – hence the title of Resolution’s paper.
• Simply reversing half of per-person, non-health departmental spending cuts since 2010 would entail £24bn of additional spending by the end of the parliament.
• One idea that has been floated recently – deferring the current budget breakeven from Javid’s target date of 2022/23 to 2024/25 – would only produce about £5bn of extra leeway. Resolution compares that with the average forecast revision five years out of £53bn…
• The Conservative’s manifesto aspiration of a £12,500 starting point for National Insurance contributions (NICs) could be achieved by the end of 2024 at a cost of only £400m if the personal allowance (currently £12,500) and higher rate threshold (£50,000) were frozen throughout the period. Both are already set to remain unchanged in 2020/21.
• One tax-raising avenue open to the Chancellor (albeit likely to prompt some backbench discontent) would be to not freeze fuel duty this year. Resolution estimates that the successive freezes of RPI increases since 2010 now cost the Treasury £11bn a year. A CPI-linked rise for 2020 would produce an extra £1bn and, Resolution notes, be consistent with a promise to “prioritise the environment” in this Budget.
• Resolution says moving to a flat rate of 20% for pension relief would raise about £9bn a year. As an alternative, £2bn could be raised by a reduction in the maximum PCLS that would hit the top 25% of lump sum payments.
• Freezing inheritance tax (IHT) thresholds would produce £400m by 2023/24. Resolution suggests up to £800m could be raised by scrapping agricultural and business reliefs.

Resolution’s paper highlights the scope that Rishi Sunak has for increasing the tax take while keeping to the VAT, NIC and income tax rate freezes.

Source: Resolution Foundation 24/2/2020

New fuel rates for company cars

(AF2, JO3)

HMRC has announced the new fuel rates for company cars applicable to all journeys from 1 March 2020 until further notice.

The rates per mile are based on fuel prices and adjusted miles per gallon figures.

For one month from the date of the change, employers may use either the previous or the latest rates. They may make or require supplementary payments but are under no obligation to do either. Hybrid cars are treated as either petrol or diesel cars for this purpose.

Rates from 1 March 2020:

Engine size	Petrol	LPG	Engine size	Diesel
1,400 cc or less	12p	8p	1,600 or less	9p
1,401cc to 2,000cc	14p	10p	1,601cc to 2,000cc	11p
Over 2,000cc	20p	14p	Over 2,000cc	13p

Advisory Electricity Rate

The Advisory Electricity Rate for fully electric cars is 4p per mile.

Electricity is not a fuel for car fuel benefit purposes.

Source: HMRC Guidance: HMRC Guidance: Advisory Fuel Rates – dated 24 February 2020.

Corporate non-UK resident landlords – new rules on financing costs

(AF2, JO3)

HMRC has published a new policy paper in relation to the 6 April 2020 requirement for a non-UK resident company with UK property income to pay corporation tax, instead of income tax. It covers proposed new simplified rules for individual companies or groups of companies that will deduct over £2 million of financing costs in a 12-month period.

From 6 April 2020, non-UK resident companies that carry on a UK property business, or have other UK property income, will be charged to corporation tax on their property income, rather than being charged to income tax as at present.

Some of these non-UK resident company landlords have an amount withheld on account of tax from their rents under the Non-Resident Landlord Scheme. A non-UK resident company landlord must pay any shortfall if the amounts withheld under the Non-Resident Landlord Scheme do not meet its corporation tax liability.

In theory, non-UK resident company landlords will, from 6 April 2020, also be subject to the Corporate Interest Restriction rules on the deductibility of financing costs.

The Corporate Interest Restriction is a limit to the amount of tax relief a company can get for deducting net interest and other financing costs. It only applies to individual companies or groups of companies that will deduct over £2 million in a 12-month period. See here for more information on this.

However, as the Corporate Interest Restriction is complex, (and being reasonably satisfied as to its application may require the prescribed person to have, or obtain, detailed knowledge of the non-UK resident landlord and its wider group funding requirements), HMRC is planning to introduce a new rule that will enable those agents who are prescribed persons under the Non-Resident Landlord Scheme to use an alternative simpler calculation. The alternative rule provides that the deduction for any financing costs is limited to a fixed allowance of 30% of the UK rental income net of deductible expenses other than financing costs. Any unused allowance may be carried forward from one quarter period to the next. Any unused financing costs above the allowance may also be carried forward.

HMRC says, in many cases, the alternative rule will lead to the right amount of relief for financing costs and the right amount being withheld on account of tax.

The new rule will be subject to an irrevocable election which must be made by the prescribed person and must be notified to HMRC with the annual return that is made by the prescribed person under the Non-Resident Landlord Scheme.

It will have effect on or after 1 April 2020, subject to transitional provisions in relation to financing costs attributable to the period before 6 April 2020, which will disregard any financing costs attributable to the period before 6 April 2020 for the purposes of applying the alternative rule to Corporate Interest Restriction.

Source: HMRC Policy paper: Income tax - Changes to the regulations for the Non-Resident Landlord Scheme – dated 17 February 2020.

HMRC Trusts and Estates newsletter

(AF1, JO2, RO3)

The latest Trusts and Estates Newsletter is now available and, as always, it includes some useful updates and reminders.

Capital gains tax payment for property disposal

From 6 April 2020, capital gains tax (CGT) payable on a disposal of residential property which is not a principal private residence must be reported and any tax paid to HMRC within 30 days of completion of the disposal. This change was originally announced at Autumn Statement 2015 but was deferred by the 2017 Budget.

The rules for non-UK residents are also changing slightly in that disposals of UK residential and non-residential property must be reported, regardless of whether there is a gain or a loss, and any tax paid within 30 days of the disposal.

HMRC is in the process of developing a new micro service to allow customers to report and pay CGT for property disposal which should be available from this April.

Trust Registration Service

All agents and trustees who need to register a taxable trust should do so where possible on the new ‘micro-service’ version of the Trust Registration Service. Where a Trust has already registered with HMRC, the features to view this data and declare there are “no changes” is also available. This new version of the service cannot be accessed via the link on gov.uk as it is currently only open to invited users whilst it is in the ‘private beta’ phase of development. You can obtain access by contacting the Trust Registration Team at service_team17.digital_ddcn@digital.hmrc.gov.uk.

Work is continuing in respect of further features in the new version of the service and HMRC will provide further information during the course of development.

See also the update below on the future extension of the Trust Registration Service.

Fifth anti-money laundering directive (5MLD) and the extension of the Trust Registration Service update

The August edition of this newsletter stated the Government was reviewing the responses to the consultation published on 15 April 2019, entitled ‘Transposition of the fifth money laundering directive’, which invited views on the Government’s proposals to implement the Directive. A number of responses were received and the regulations to transpose 5MLD came into force on 10 January 2020. However, the amendments relevant to the expanded trust register were not included in these regulations as a technical consultation was to take place.

The technical consultation was published on 24 January 2020 and includes the draft legislation and additional information on the proposals, including the scope of the register, data collection and sharing, and penalties. The consultation closed on 21 February 2020.

Estate registration – personal representatives

Personal representatives currently use the Trust Registration Service to obtain a Unique Taxpayers Reference (UTR) for new complex estates which are required to submit trust and estates tax returns.

Any complex estates which already have a UTR are not currently required to use the online service. The facility to update the information held by HMRC for complex estates will be available soon.

Changes to the Direct Payment Scheme – IHT423 update

National Savings & Investments (NS&I) has joined the Direct Payment Scheme which simplifies the process to pay some or all of the inheritance tax in cases where someone dies and had money in NS&I accounts.

The updated process aligns NS&I accounts with the process for other bank or building society accounts. The relevant form (IHT423) and guidance has been updated to reflect this change.

Agent toolkits

It is worth remembering that HMRC has numerous agent toolkits which support tax agents and advisers which can be downloaded and used.

Source: HMRC Trusts and Estates Newsletter January 2020.

The latest UK property statistics are now available         

(ER1, LP2, 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 £40,000 or more.

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.

The latest figures are now available and information relating to these can be found here.

The January 2020 property statistics produced by HMRC show an increase in the number of transactions completed in the UK compared to January last year.

The figures show:

 

•  The provisional seasonally adjusted estimate of UK property transactions in January 2020 was 102,810 residential and 11,170 non-residential.
•  The provisional seasonally adjusted estimate of residential property transactions in January 2020 is 5.2% higher than January 2019, and 4.1% higher than December 2019.
• The provisional seasonally adjusted estimate of non-residential property transactions in January 2020 is 10.7% higher than January 2019, and 10.7% higher than December 2019.

Interestingly, although fluctuating, residential transactions have been relatively stable over the past ten years as shown in the chart below:

 

 

• The fall in transactions from late 2007 coincided with the financial crisis. Prior to this, transaction counts had risen steadily, peaking in mid-2006.
• The December 2009 peak seasonally adjusted estimate was associated with the end of the SDLT 'holiday', when the lower tax threshold was raised to £175,000.
• The peak in March 2016 is associated with the introduction of higher rates on additional properties in April 2016.

 

Source:  National Statistics – monthly property transactions completed in the UK with value of £40,000 or above.

The importance of recording the nature of capital payments made during lifetime

A recent Scottish Court decision illustrates the problems arising after a death when there is no evidence of payments made by the deceased before they died.

Briefly the facts of the case in S Mailer v M Mailer and AM Quinn [2019] SCPER101 were as follows.

Mrs Mary Mailer (known as Molly) died in 2017 leaving three children. Under her Will (made in 2015) her son, Michael, was to receive a legacy of £15,000 and her daughter, Suzanne, the residue of the estate, which consisted mainly of cash in the bank. The family home was held in a trust created by Molly’s husband on his earlier death (Molly had a liferent (ie. life interest) and the house passed to the three children on her death) and so was not part of Molly’s estate. The third child was not mentioned in the Will but as this was in Scotland, he was entitled to his legal rights.

In transpired that in 2016 Molly made a payment of £9,950 into an account of Michael’s partner, which was to help with their house building project at the time they were in financial difficulties. There was no written evidence of what this payment was. There were three possibilities: a loan, an advance against Michael’s legacy or an outright gift. The nature of the payment would, of course, make a difference to the amounts inherited by the respective children. If it was a loan it would have to be repaid to the estate by Michael/his partner; if it was an advance, it would be deducted from Michaels’ legacy; if it was a gift, it would reduce the residue available to Suzanne.

Molly did apparently say to Suzanne that she would “sort” out the position of the payment, but she never did.

Michael and Suzanne could not agree on the outcome and so the case ended up in Court.

The Court decided that, in the absence of any document indicating the requirement that the payment should be repaid or otherwise taken into account when distributing the estate, the £9,950 payment should be treated as an outright gift.

The Court also discussed what is known as the ‘presumption against donation’ which is a legal rule that, ordinarily, someone would expect repayment when giving someone money. However, this presumption can be rebutted when a payment is held to be made “from natural affection and duty”. In this case the Sheriff decided that Molly was making a payment to help her son out “in an hour of need” and “out of a sense of natural obligation”.

Although this was a Scottish case, similar principles apply in England.

It may seem surprising that the dispute ended up in Court, given the relatively small sum involved, but it is actually symptomatic of the growing number of estate disputes ending up in the Courts. It is of course nothing new: as the saying goes; “When it comes to divide an estate, the politest men quarrel” (Ralph Waldo Emerson).

In his decision , the Sheriff actually commented that it was “a matter of regret that such a bitter dispute has developed between [the siblings] following [their mother’s] death over a relatively small proportion of the monies to which they became entitled after Molly’s death”.

Of course, each case will be decided on its own facts, but it is never ideal to end up in Court. When discussing estate/Will planning with clients, they should be reminded that it is important to keep proper records of any payments. A simple letter confirming the nature of any payment, i.e. a loan, an advance, or an outright gift, will usually suffice. If any payment is to be deducted from an entitlement under a Will, then a codicil or a new Will should be made.

Source:  S Mailer v M Mailer and A M Quinn [2019] SCPER 101

​Witnessing a deed via Skype is not acceptable

(AF1, JO2, RO3)

A transfer deed that was signed in Hong Kong and witnessed by one signatory's solicitor in London via Skype, may not have been validly executed under English law.

The progress of consultations on the electronic execution of documents has been rather slow.  The subject of “electronic deeds” is of particular interest to those involved with trusts and associated deeds, such as deeds of appointment of trustees and deeds of assignment.

When it comes to trust-related documents which require to be made by way of a deed, there are statutory requirements that must be met for a deed to be legally valid. These requirements are laid down in the Law of Property (Miscellaneous Provisions) Act 1989. One of these requirements is in section 1(3) of the Act, as follows:

‘An instrument is validly executed as a deed by an individual if, and only if —

(a) it is signed —

(i) by him in the presence of a witness who attests the signature; or

(ii) at his direction and in his presence and the presence of two witnesses who each attest the signature; and

(b) it is delivered as a deed.’

The Law Commission, in their report on the subject, stated that their “view is that the requirement under the current law is that a deed which must be signed ‘in the presence of a witness’ requires the physical presence of that witness”. This therefore would eliminate, for the time being at least, witnessing by video-links, something that had been considered during the consultation.

This view has now been followed by the First-tier Tribunal (FTT) in Man Ching Yuen v Landy Chet Kin Wong (FTT (Property Chamber) 2020 ref. 2016/1089).

The case involved an allegation that a transfer of property had been forged; alternatively, that the transfer was not validly executed.

The signing of the transfer deed took place in Hong Kong, in a meeting between the applicant and respondent. The respondent’s solicitor, based in the UK, joined the meeting by Skype. She had taken steps to verify the applicant’s identity before he signed the transfer deed and viewed the signing remotely. When the transfer deed had been posted to her in the UK, the solicitor then added her own signature and details to attest the signature.

Although the applicant’s claim failed on other grounds, the Tribunal judge held that there was an arguable case that the transfer deed had not been validly executed. In the absence of judicial authority, the Tribunal judge decided that, given the views expressed by the Law Commission, the Courts might conclude that a deed was not validly executed where the witness viewed the signature remotely.

Interestingly, the later addition of the witness’s signature was not a reason for holding that the deed was invalidly executed. In another recent case the Court had held that the witness could witness the signature (whilst physically present) and then add their own signature later.

The FTT’s opinion on this point is not binding so it would be really useful if we got a definitive ruling by the Court (in the absence of any firm guidelines in the form of legislation). Meanwhile, of course, it is advisable that when executing a deed the witnesses are physically present.

Source:  Man Ching Yuen v Landy Chet Kin Wong (FTT (Property Chamber) 2020 ref. 20216/1089

Get ready for changes to CGT payments in respect of UK property disposals

(AF1, RO3)

From 6 April 2020, the deadline for paying CGT after disposing of a residential property is being reduced to 30 days.

The changes from 6 April 2020 in relation to the payment of capital gains tax (CGT) where someone disposes of a UK property which is not their main residence broadly apply to second properties, holiday homes and properties which have been inherited and not subsequently used as the main residence.

Under these new rules individuals and trustees, as appropriate, will be required to report and pay any tax due within 30 days of completion of the property disposal after 5 April 2020.

Non-residents must continue to report disposals of interests in UK property or land, regardless of whether there is a CGT liability, within 30 days of completion of the disposal.

Any transfer to a spouse or civil partner will continue to be on a ‘no loss/no gain’ basis (in that the acquiring spouse/civil partner will take on the acquisition cost of the donor) so a report will not be required. In addition, there will be no requirement to report where the gain is within the individual’s annual exemption, the property is disposed of at a loss, or where the property is situated outside of the UK.

HMRC is in the process of launching a new online service to enable gains to be reported and the tax to be paid.

It is vital that clients who are brought within the scope of these new rules are fully aware of how these changes could affect them.

Source: HMRC News story: Get ready for changes to Capital Gains Tax payment for UK property sales – dated 25 February 2020.

INVESTMENT PLANNING

Borrowing numbers disappoint

(AF4, FA7, LP2, RO2)

 

The last set of public sector finance numbers before the Budget underline the difficulties facing this month’s occupant of 11 Downing Street.

With the Budget now less than three weeks away at the time of writing, the latest set of public sector borrowing numbers will be the final data that goes into the Office for Budget Responsibility’s (OBR’s) Economic and Financial Outlook. As the graph shows, with two months of the financial year remaining, it seems near certain borrowing will come in at above last year’s figure, but marginally below the OBR’s (reworked) forecast. 

In the first ten months of 2019/20 total borrowing amounted to £44.8bn, £5.8bn (14.9%) more than in 2018/19 (on a like-for-like basis of calculation). For the month of January 2020 alone, the Office for National Statistics (ONS) says that the Government enjoyed a surplus of £9.8bn, £2.1bn down on 2018 and £1.5bn below market expectations. January is traditionally a surplus month because of self-assessment receipts.

In its commentary on the latest data, the OBR notes that:

• Total central Government receipts for January rose by 3.8 %. Year-to-date receipts growth of 3.0% is above the OBR’s restated March forecast of a 2.4% rise in 2019/20 as a whole.
• Central Government spending was up by 7.6% in January and up 3.7% for the year to date. Year-to-date spending is thus above the OBR’s restated March forecast of a 3.2% rise in 2019/20 as a whole. Ironically, part of the jump in spending was due to a £1.1bn higher contribution to the EU than in 2019, although the OBR reckons this was largely a timing effect which will unwind in time. Departmental spending, welfare spending and debt interest payments were “all up strongly on a year earlier”. In particular, January marked the first month of the five-year NHS spending settlement that dates back to Theresa May.
• Total Public Sector Net Debt (PSND) was down by 0.7% of GDP from a year earlier at 79.6% (£1,798.7bn). The decline was helped by a £843m payment from Airbus under a deferred prosecution agreement.

These numbers are slightly worse than expected. The current budget deficit, which Mr Javid had targeted to be zero by 2023, looks to be on course to come in close to that figure, underlining how little wriggle room the Chancellor has unless he makes some changes on 11 March (to taxes, current spending and/or fiscal rules).  

​Institute for Fiscal Studies comments on the forthcoming Budget

(AF4, FA7, LP2, RO2)

The Institute for Fiscal Studies (IFS) has published its thoughts on the coming Budget. This is not the usual IFS ‘Green Budget’, as that document was published last October. Much has happened since then, including an Election, Brexit, a change of Chancellor, reduced growth expectations from the Bank of England and the Covid-19 outbreak.

Among the points, made by the IFS, worthy of note are:

• On current policy, Government borrowing in 2020/21 could be £63bn, £23bn more than the most recent Office for Budget Responsibility (OBR) forecastand about £19bn more than the IFS estimate for 2019/20 borrowing. With borrowing not forecast to fall before 2022/23, the IFS says, “it is not clear that the manifesto pledge to target current budget balance three years out would be met even under current policy” 
• With a promise to increase investment spending, even keeping to the current budget balance – the latest fiscal rule - would not see underlying total debt (currently about £1.625trn excluding the Bank of England Term Funding Scheme) fall over the period of this parliament. 
• The IFS noted that over the last decade there had been no less than 16 fiscal targets and that if Mr Javid’s manifesto targets were abandoned, they would be the shortest lived of them all and “surely undermine any credibility attached to fiscal targets set by this government”.
• Entrepreneurs’ relief was a target to scrap. The IFS has long disliked the relief, considering it poorly targeted: its research has revealed that 75% of the relief’s £2.3bn cost in 2017/18 benefited just 5,000 individuals, with an average tax saving of £350,000.
• The IFS reckon a 20% flat rate tax relief on pensions would raise more than £11bn, but would target just the group of individuals (with £50,000+ incomes) to whom Boris Johnson had promised tax cuts before he became Prime Minister. Nevertheless, the IFS still envisage that pensions could be a source of extra revenue, but would prefer to see:
• National Insurance contributions (NICs) levied on employer contributions (worth £16.5bn in 2017/18);
• Some restriction on the maximum pension lump sum; and
• Reform to the “ludicrously generous taxation of inherited pension pots.
• The IFS favours an end to the successive freezes on petrol duty. The IFS calculated that reinstating increases would yield an extra £4bn a year by the end of the parliament.
• On mansion tax, the IFS highlighted the dearth of data on the number of high value residential properties. When the mansion tax was last floated in 2015, estate agents estimated there might be between 50,000 and 150,000 properties valued at £2m+. The top council tax band in England (H – covering properties worth £320,000+ at the last revaluation in 1991) contains 145,000 properties. The implication is that to raise a meaningful sum – say £2bn – would require a £10,000+ per property annual levy.

The latest press rumours are that 11 March may be more a holding operation for the Autumn Budget than a Budget in its own right. There is some logic to such an approach, given the UK Spending Review (also due in Autumn) and the Covid-19 uncertainties about global economic growth.

Source: Institute for Fiscal Studies 26/02/20

​​An almost instant correction

(AF4, FA7, LP2, RO2)

	31/12/2018	21/02/2020	28/02/2020	Change since 31/12/18	Change in week
FTSE 100	6728.13	7403.92	6580.61	-2.19%	-11.12%
FTSE 250	17502.05	21780.2	19330.92	10.45%	-11.25%
FTSE 350 Higher Yield	3391.45	3508.27	3123.36	-7.90%	-10.97%
FTSE 350 Lower Yield	3709.33	4547.84	4033.66	8.74%	-11.31%
FTSE All-Share	3675.06	4132.71	3673.61	-0.04%	-11.11%
S&P 500	2506.85	3375.75	2954.22	17.85%	-12.49%
Dow Jones Index	23327.46	28992.41	25409.36	8.92%	-12.36%
Euro Stoxx 50 (€)	3001.42	3800.38	3329.49	10.93%	-12.39%
Nikkei 225	20014.77	23386.74	21142.96	5.64%	-9.59%
Shanghai Composite	2493.9	3039.67	2880.3	15.49%	-5.24%
MSCI Em Markets (£)	1418.635	1565.387	1472.898	3.83%	-5.91%
MSCI World (£)	669.401	826.834	751.096	12.20%	-9.16%
2yr UK Gilt yield	0.75%	0.45%	0.32%
10yr UK Gilt yield	1.14%	0.57%	0.45%
2yr US T-bond yield	2.56%	1.38%	1.11%
10yr US T-bond yield	2.76%	1.47%	1.16%
2yr German Bund Yield	-0.66%	-0.65%	-0.74%
10yr German Bund Yield	0.18%	-0.43%	-0.61%
£/$	1.2736	1.2959	1.2773	0.29%	-1.44%
£/€	1.1141	1.1942	1.1628	4.37%	-2.63%
£/¥	139.7323	144.7594	137.7762	-1.40%	-4.82%
Brent Crude ($)	54.15	58.36	50.04	-7.59%	-14.26%
Gold ($)	1279	1619	1652	29.16%	2.04%

The last week of February was the worst week for financial markets since 2008. The S&P 500 saw its fastest correction (a 10% fall) since the Great Depression. As the table above shows, the drop in equity markets over the last week of February was brutal, although, ironically, China, the original source of Covid-19, was one of the less hard hit. As ever, there is a danger in focusing too heavily on the immediate picture. Look back from the start of last year and, in sterling terms, most markets are still in positive territory. The UK is a laggard but, if dividend income is included, its total return comes out 8.3% on the FTSE All-Share.

Among the points to note after the past frenetic few days are:

•  Government bond yields have fallen still further, with yield curves once going further into inversion territory.
• There has as yet been no move from the central banks beyond words of comfort. They face two main problems: lack of ammunition with rates already close to or at zero; and the fact that the problem is now as much one of deteriorating supply as weakened demand.
• The opposing movements in the bond and equity markets have created some extremes of relative valuation. The UK offers a good example, with the FTSE All-Share offering an historic dividend yield of 4.56% while 10-year gilts have a yield of just 0.45%, 0.3% below the current base rate.
• Covid-19 has called into question the expectations of economic growth which had been underpinning high market valuations. It is likely to continue to do so, at least in the short term.

The current volatility and economic uncertainty offer the Chancellor a ‘get-out-of-jail’ card to have a ‘holding’ Budget. He can then hope for the outlook to become clearer before his Autumn set piece duo of a Spending Review and (another) Budget.

 Sources: FT, FTSE, STOXX, INVESTING.COM

PENSIONS

Pension Schemes Newsletter 117 - February 2020

(AF3, FA2, JO5, RO4, RO8)

HMRC Pension Schemes Newsletter 117 covers the following:

• Relief at source
• Guidance from The Pensions Regulator (TPR) on Pension Scams
• Guaranteed Minimum Pension (GMP) Equalisation Newsletter – February 2020

Issues of particular interest

Relief at Source – members’ residency status for 2020/21

Administrators should have received their annual notification of residency status report. Where members do not appear on the report or they are unmatched administrators should use the look up residency status for relief at source service to check a member’s residency status.

Administrators should use the rest of UK residency status if:

• they can’t check a member’s status before they apply relief at source for them;
• they don’t appear on either the annual report or the look up service.

Schemes must apply the same tax rate for a member for the whole of the tax year, even if their residency status changes.

Guidance from TPR on Pension Scams

HMRC refers scheme administrators to a Scheme Transfer Checklist issued by TPR aimed at scheme administrators of DB and DC occupational pension schemes. It set out a number of triggers administrators should look for and how to recognise/discover these, all aimed at reducing pension liberation fraud.

​​ABI report - Pension Freedoms five years on

(AF3, FA2, JO5, RO4, RO8)

The Association of British Insurers (ABI) has issued a report looking at the impact of pension freedoms since their introduction in April 2015. The report includes details of how many people have used the greater flexibility, how risks have been handled and what further action is required to deal with any problems that persist.

The report highlights that:

• The average rates at which people are withdrawing funds could see people running out of money in retirement if they do not have other sources of income. 
• More safeguards are needed to protect customers now and in the future.
• While the reforms have proved popular, it will be decades before their full impact can be assessed.

It also makes several recommendations with the aim of helping to future proof pension freedoms including:

• Regulators should use greater flexibilities post Brexit to adapt rules on guidance and advice to support customers.
• The DWP should provide those members wishing to transfer out of defined benefit schemes with a letter warning of the risks.
• The Money and Pensions Service should develop a later life review to help people plan during their retirement.
• The industry should undertake more research into how people can best be supported to make sustainable pension withdrawals.

You can access the report here.

Automatic Enrolment Earnings Trigger and Qualifying Earnings Band Review 2020/21

(AF3, FA2, JO5, RO4, RO8)

The Government has announced the earnings trigger and qualifying earnings band for auto-enrolment purposes for 2020/21.  The earnings level above which individuals must be auto enrolled will remain frozen (as it has been since 2014/15) and the band of earnings on which minimum contributions should be based will still be aligned to the Lower and Upper Earnings Limits for national insurance purposes. 

Therefore for 2020/21:

• The automatic enrolment earnings trigger will be maintained at £10,000;
• The lower limit of the qualifying earnings band will be £6,240 (£6,136 for 2019/20); and
• The upper limit of the qualifying earnings band will remain at £50,000.

The repeated freezing of the £10,000 earnings trigger will be good news for lower-paid workers, more of whom will be brought into the scope of automatic enrolment as earnings rise; particularly those earning the national living wage who will have seen their wages increase by over 20% in the four years ending this April.​

​​Guaranteed Minimum Pension (GMP) equalisation newsletter - February 2020

(AF3, FA2, JO5, RO4, RO8)

In this newsletter HMRC provide guidance to supplement the existing guidance in the Pensions Tax Manual relating to benefit adjustments for registered pension schemes with periods of contracted out pensionable service between 17 May 1990 and 5 April 1997. This is following the Lloyds Case where a number of methods for equalising GMP were considered. This newsletter doesn’t offer guidance on which method is appropriate.  

This guidance covers pension tax issues such as:

• annual allowance, including deferred member carve-out;
• lifetime allowance, including fixed, primary, individual and enhanced protection.

Annual allowance 

The guidance confirms that members are not accruing any new benefits so generally there shouldn’t be an impact on the member’s annual allowance, however it goes on to look at individual circumstances. Although in all cases the result shows that there is no increase in the pension input amount that would otherwise have occurred. In particular for those that are still active members the guidance states that any calculations for the pension input amount in the tax year of implementing GMP equalisation and tax years thereafter will need to take into account the revised amount of the benefit entitlement in both the opening and closing benefit calculations.  

Lifetime allowance protections 

Fixed Protection (FP, FP14 and FP16) – increases in benefits due solely to GMP equalisation won’t be benefit accrual so won’t have any impact on these protections. 

Individual and Primary protection – increases in benefits may mean a greater entitlement to these protections, HMRC should be notified so that protections can be updated.  

Enhanced Protection – only those that have been a member of the scheme, even for just salary increase, at any point since 5 April 2006 could be impacted. The usual test of relevant benefit accrual will need to be undertaken. It should be noted that when the test is conducted the amount of GMP adjustments should be included in the value at 5 April 2006. This should minimise any additional impact on the calculation.  

Late claims for lifetime allowance (LTA) protection - where GMP equalisation benefit adjustments result in an increase in value of the member’s benefits, meaning the individual would qualify for protection from the LTA charge, the individual can approach HMRC with evidence to support their late notification. 

Benefit Crystallisation Events and LTA Charge 

Benefit Crystallisation Event (BCE) 2 (or possibly 5) will need to be adjusted to take account of the new starting amount if the pension was put into payment after 5 April 2006. This may have a knock-on effect, increasing or giving rise to an LTA charge. The Accounting for Tax return in which the original BCE was reported should be amended to reflect the updated amount. Similarly, any Event Report will need to be amended if the value of events reported have changed or the revision to benefits results in further reportable events.

DWP: Will the retirement you get be the retirement you want?

(AF3, FA2, JO5, RO4, RO8)

The Department of Work and Pensions (DWP) has highlighted its ongoing campaign to get people to engage more with their retirement savings and whether they can expect the level of income they hope for in retirement.

The new, dedicated page on the DWP website brings together a number of different practical resources that individuals could find useful when planning for retirement. These include:

• Check your State Pension

The State Pension is the foundation of your retirement. Get your online forecast.

This provides a link to the gov.uk page to apply for a State Pension forecast online, by phone or post.

• Get your retirement checklist

It only takes 2 minutes and can help you get the retirement you want.

No fancy numbers, but just a simple tool designed to give individuals a kick-start into doing something

• Find lost pensions

Need help tracking down your pensions? This service can help.

This is a link to the pensions tracing Agency.

• 10 things you need to know

There’s plenty to think about when planning for later life. Here’s what you need to know.

This aims to give basic information and is designed to dispel some common basic misconceptions about pensions and retirement by answering 10-questions:

• As I have my State Pension, will I need to save?
• Am I saving enough?
• My Grandma only lived to 70 so surely, I won’t live much longer. Why bother saving?
• Are my pension contributions tax free?
• Can my house be my pension pot?
• How is my pension protected?
• Can I join my company pension scheme before 22?
• Can I stop paying into a pension once I’ve begun?
• Will I be forced to retire when I get to the State Pension age?
• When can I get my pension?

• Pension calculator

Use our pension calculator to start planning for the retirement you want.

This takes the individual to the Money Advice Service’s pension calculator, which will give a projection of State and private pension provision, both DB and DC.

These resources, together with the PLSA’s Retirement Living Standards initiative and the Institute and Faculty of Actuaries’ subsequent estimate of the cost of delivering those living standards set out in their Policy Briefing Paper; Savings Goals for Retirement, will we hope encourage those who can put more away for retirement, to do so. These would prove very using source of information for advisers to use for/with clients when planning retirement.​

​​MaPS commissions research into the challenges posed by pensions dashboards

(AF3, FA2, JO5, RO4, RO8)

The Industry Delivery Group (IDG), part of the Money and Pensions Service (MaPS), has announced in a Blog that qualitative, independent research will be conducted in order to gain a better understanding of the challenges pension providers and schemes will face in complying with new compulsion laws, which will require pension scheme providers to make data available to scheme members on a dashboard. As part of this research, interviews will be carried out anonymously with sample pension scheme providers and schemes. In addition, the IDG has announced that it is developing a Data Scope Paper, which is expected to be published in the coming months, on its most recent assumptions for pensions dashboard data throughout the industry.