Technical news update 03/12/2019

Taxation and trusts 

• Party manifestos
• Quarterly Stamp Duty Land Tax statistics – Q3 2019
• Wealth holdings between generations – new IFS report
• Surrey taxpayers pay the most income tax in the UK
• Court of appeal confirm that ‘ownership’ of property commences on completion of the contract for CGT purposes
• The first tax increase has been announced
• FTT confirms that explicit permission to occupy property undisturbed confers interest in possession on surviving co-owner
• Helen Fospero wins IR35 appeal 

Investment Planning 

• Mini-bond promotions 

Pensions 

• Pension Schemes Newsletter 115 - November 2019
• NHS to cover clinician's annual allowance tax charges for 2019/20
• PPF publishes updated PPF 7800 index - November 2019
• The Pensions Regulator News

 

TAXATION AND TRUSTS 

Party manifestos

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

The three main UK-wide party manifestos are now out. We have read them so you don’t have to! 

The three main parties have now all published their manifestos. They have all included separate costing supplements alongside their manifestos, which often contain tax detail missing from the main documents. 

Here is a (relatively) brief summary of the elements of most interest to financial advisers. There are marked differences between the parties with Labour planning to spend an extra £82.9bn by 2023/24, the LibDems £51.36bn in 2024/25 (after adjustment for the September 2019 Spending Round) and the Conservatives just £2.9bn by 2023/24. 

At the time of writing a Conservative majority is around 2/5 odds on (according to Oddschecker.com) and the party’s odds on winning the most seats is around 1/20 on. However, political betting, like opinion polls, has not had a good track record of late.  

Party	Conservative	Labour	Liberal Democrat
Documents	Manifesto     Costings	Manifesto     Costings	Manifesto     Costings
Income tax	Guarantee rates will not rise.   No comment on £80,000 higher rate threshold.	Introduce the 45% tax band at £80,000 and start a new 50% band at £125,000 (where personal allowance tapering ends).   Scrap marriage allowance.   Equalise the tax treatment of income from dividends with other income by charging marginal rates equal to those in Labour's income tax policy as well as removing the separate allowance subject to a de minimis threshold.   Single status of ‘worker’ for all but “genuinely self-employed”.	A 1p rise on the basic, higher and additional rates.   Scrap marriage allowance.   Review IR35 changes.   Review tax status of employees, dependent contractors and freelancers to ensure fair and comparable treatment.   End retrospective tax changes “like the loan charge”.
Capital gains tax	“Review and reform Entrepreneur’s Relief”	Scrap annual exemption and tax gains as income after a de minimis allowance of £1,000 and a return adjustment linked to 10-year gilt yields.   Entrepreneur’s Relief scrapped, and a replacement to be considered.	Scrap annual exemption and set gains against any available personal allowance.   All gains taxed as income.
National insurance	Increase primary threshold to £9,500 in 2020/21, with “ultimate goal” of £12,500.   Guarantee rates will not rise.   Employment Allowance increased to £4,000.	National insurance contributions frozen, at least for individuals.	Review national insurance status of employees, dependent contractors and freelancers “to ensure fair and comparable treatment”.
Inheritance tax	No comment	Scrap residence nil rate band.	No comment.
Stamp duties	Additional 3% SDLT on residential purchase by non-resident individuals and companies.	Introduce wide-ranging Financial Transactions Tax raising £8.8bn annually.	SDLT to be graduated according to energy rating of property.   SDLT surcharge on purchase of second homes by overseas residents.
Wealth tax	No comment.	No comment.	No comment, but would “ensure that income earned from wealth is not privileged when compared to income from employment”.
Second homes	No comment.	Second homes levy on holiday homes at 200% of council tax.	Local authorities allowed to increase council tax by up to 500% on second homes.
Universal Credit	“...continue the roll-out.”	Scrap Universal Credit and design alternative system.   Until new system introduced, implement emergency reforms, including interim payment of half monthly payment.   “Explore” universal basic income.	Reform Universal Credit to be more supportive of the self-employed.   Reduce first benefit waiting period to 5 days.
Corporation and business tax	Keep corporation tax rate at 19%, reversing current legislated decline to 17% in 2020.   Increase R&D tax credit rate to 13% and review the definition of R&D.	Raise mainstream corporation tax rate to 21% in 2020/21, 24% in 2021/22 and 26% from 2022/23.   Reintroduce small profits rate at 19% in 2020/21, 20% in 2021/22 and 21% from 2022/23.   Review of corporate tax reliefs aimed at raising £4.3bn annually.   R&D funding would be reformed, creating a £4.0bn savings.   Entrepreneur’s Relief scrapped, and a replacement to be considered.	Raise to 20%.   “Simplify business taxation to lower administration costs.”
Business Rates	Reduce business rates “via a fundamental review of the system”.   Initial £320m one-year reduction aimed at small businesses.	A review of the possibility of replacing business rates with a land value tax.	Replace in England with a Commercial Landowner Levy based solely on the land value.
Gig Economy	“…ensure that workers have the right to request a more predictable contract and other reasonable protections.”	Single status of ‘worker’ for all but “genuinely self-employed”.   Ban zero-hour contracts.   Give individuals who work regular hours for more than 12 weeks a right to a regular contract, reflecting those hours.   Develop “tailored support and protections” for the self- employed.	Establish a new ‘dependent contractor’ employment status between employment and self-employment, with entitlements to basic rights, eg, sick pay.   Give right to request a fixed-hours contract after 12 months for ‘zero hours’ and agency workers, not to be unreasonably refused.   Shift the burden of proof in employment tribunals regarding employment status from individual to employer.
VAT	Guarantee rates will not rise.	To apply to private school fees.   No increases otherwise.	5% VAT for electric vehicles.   Other minor changes.
Excessive executive pay	“…improve incentives to attack the problem of excessive executive pay and rewards for failure.”	Levy on employers where an employee’s pay is deemed excessive.	“Require binding and public votes of board members on executive pay policies.”
Tax avoidance	Consolidate existing anti-evasion and avoidance measures and powers. All avoidance/evasion measures to raise £0.2bn annually by 2023/24.	A ‘Fair Tax Programme” aimed at raising £6.2bn annually by 2023/24.	Introduce “…a General Anti-Avoidance Rule, setting a target for HM Revenue and Customs to reduce the tax gap”. Target £5.7m annually by 2024/25.
University fees	“…look at the interest rates on loan repayments with a view to reducing the burden of debt on students.”	Reintroduce maintenance grants for university students.   Abolish university tuition fees.	“Reinstate maintenance grants for the poorest students”.
State Pension	Keep triple lock, Winter Fuel Payments and free bus passes for all pensioners.   Support the free TV licence for over-75s, expecting the BBC to pay for it.   No comment on WASPI women.	Keep triple lock, Winter Fuel Payments and free bus passes for all pensioners.   Free TV licence for over-75s.   Uprate State Pension of all British pensioners overseas.   Restore pension credit and housing benefit eligibility for mixed-age couples.   Introduce a £58bn scheme, phased over five years to compensate WASPI women for Pensions Act 2011 changes. Announced after manifesto published.   Keep State Pension Age at 66 and review retirement ages for “physically arduous and stressful occupations”.	Keep triple lock.    Ensure WASPI women are “properly compensated … in line with the recommendations of the parliamentary ombudsman...”
Private pensions	“…address the ‘taper problem’ in doctors’ pensions...Within the first 30 days, hold an urgent review, working with [representative bodies] to solve the problem”.   Review the issue of pension schemes operating net pay contributions for those with earnings between £10,000 and £12,500.   Reintroduce the Pensions Schemes Bill 2019/20.	“Stop people being auto-enrolled into rip-off schemes”.   Seek to widen and expand access for more low-income and self-employed workers.   Establish an independent Pensions’ Commission to recommend target levels for workplace pensions.   No comment on tax reliefs.	Review rules concerning pensions so that those in the gig economy do not lose out, and portability between roles is protected.   No comment on tax reliefs.
Social care in England	Additional funding of £1bn a year for the term of the Parliament.   “…build a cross-party consensus to bring forward an answer that solves the problem.”   Guarantee that no one needing care has to sell their home to pay for it.	Free personal care for “older people” would initially be provided, with the ambition to extend provision to all working-age adults.   Create a £100,000 cap for the care costs in old age, with a lifetime cap on personal contributions.	“Commission the development of a dedicated, progressive Health and Care Tax, offset by other tax reductions...”
Minimum wage	Increase the National Living Wage to 2/3rds of average earnings by 2024, currently forecast at £10.50 an hour.   Widen National Living Wage eligibility to everyone over 21.	“…rapidly introduce a Real Living Wage of at least £10 per hour for all workers aged 16 and over”	Set a 20% per cent higher minimum wage for people on zero-hour contracts.   Consult on setting “a genuine Living Wage" which would be paid in all central Government departments and their agencies, with other public sector employers encouraged to do likewise.
Fiscal rules	1.      No borrowing to fund day-to-day spending (current budget); 2.      Limit average annual borrowing to 3% of GDP; 3.      Reassess plans to keep debt under control, if debt interest reaches 6% of revenue; and 4.      Lower debt as proportion of GDP by end of the Parliament.	1.      Eliminate the current budget deficit by the end of the rolling 5-year Office for Budget Responsibility (OBR) forecast period; 2.      Improve the strength of the Government’s balance sheet (Public Sector Net Worth) across the course of a Parliament; and 3.      Keep debt interest repayments below 10% of tax revenue.	1.      Fully fund day-to-day public spending (i.e. current budget); 2.      Borrow for capital spending; and 3.      Ensure overall national debt continues to decline as a percentage of GDP.

Source: LibDem, Labour and Conservative Party Manifestos and associated documents, issued 18/11/19, 21/11/19 and 24/11/19

Quarterly Stamp Duty Land Tax statistics – Q3 2019

(AF1, ER1, LP2, RO3, RO7) 

The Quarterly Stamp Duty Statistics bulletin provides statistics on residential and non-residential stamp duty land tax (SDLT) transactions valued at £40,000 or above. The data is split by property type, liability threshold and price band, including transactions paying higher rates of SDLT for additional dwellings and those claiming the first time buyers’ relief. 

The key highlights are as follows: 

• Transactions increased by 14% from 268,400 in Q2 2019 to 305,100 in Q3 2019. This is a similar increase to last year. 

• Q3 2019 receipts were £3,150 million, 20% higher than in Q2, a sharper increase than for last year. This is due to a 25% rise in residential receipts and a 7% rise in non-residential receipts. Both transactions and receipts have stayed broadly the same in Q3 2018 and Q3 2019. 

• 61,200 transactions claimed first time buyers’ relief in Q3 2019, making a total of 401,900 claims since the relief’s introduction. The estimated total amount relieved over that period is £955 million. 

Currently, first-time buyers purchasing houses costing £300,000 or less do not pay SDLT, provided they have never owned a property and intend to occupy the property as their only or main residence, and they pay reduced stamp duty on houses costing £500,000 or less. Interestingly the number of those claiming first time buyers’ relief has increased each year since it was introduced in November 2017. 

Additional dwellings 

Additional dwellings purchased by individuals and residential property purchased by non-individuals are required to pay the standard rate of SDLT plus 3%. It applies for example to purchases of second homes and buy-to-let properties. These rates, formally known as higher rates for additional dwellings (HRAD or ‘higher rates’) were introduced in April 2016. 

• HRAD transactions increased by 11% to 58,400 this quarter. This period last year had a 7% rise. HRAD transactions are similar in Q3 2018 and Q3 2019. 

• Since Q1 2018, HRAD transactions have made up about a third of all liable transactions. 

• 60% of HRAD transactions were under £250k; transactions in this band increased by 7% to 35,200 since the last quarter. The figures also show that residential transactions have continued to increase whereas non-residential transactions have decreased.

Source: HMRC Official Statistics: Quarterly Stamp Duty Statistics – dated 1 November 2019

Wealth holdings between generations – new IFS report

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

The Institute for Fiscal Studies (IFS) report uses an economic model to illustrate how different circumstances – in terms of earnings, the tax system, the state pension system, rates of return, the number and timing of children, longevity and retirement timing – could be expected to affect wealth accumulation.

Here are some of the results: 

Focusing on wealth at retirement, each generation is simulated to accumulate more wealth than its predecessor (with the exception of the 1940s generation, where wealth drops just before retirement). This is driven mainly by higher earnings levels, but also by a relatively less generous state pension system and lower average tax rates. The effect of longer life expectancies is largely offset by assumed later retirement. 

However, looking at earlier ages, the picture is much more complicated, due to particular periods of high and low rates of return hitting different generations at different ages. At younger ages, the IFS’s simulations do suggest a ‘stalling’ – or in some cases even reversal – of generation-on-generation wealth increases. It gives the example that, at age 40, the 1970s and 1980s generations are simulated to hold less wealth than the 1960s generation, while at age 30 the 1970s and 1980s generations are simulated to hold the same level of wealth.  

Simulated saving rates are unaffected by differences in earnings between generations. However, the IFS’s modelling indicates that it could still expect average working-life saving rates to broadly increase from around 5% for the 1930s and 1940s generations to 8% for the 1950s generation and around 11–12% for the 1960s to 1980s generations. This is driven by falling rates of return and, to a lesser extent, the declining generosity of the state pension and lower average personal tax rates.  

Despite saving at nearly twice the rate of earlier generations, it is interesting to note that the 1960s to 1980s generations have gross retirement replacement rates of 74–77%, compared with 95–104% among the oldest two generations that the IFS considers. This is again driven by falling rates of return and the declining generosity of the state pension. 

State pension system - The IFS’s model implies that reductions in the state pension are partially, but not fully, offset by increased private saving. 

Life expectancies - The IFS’s modelling indicates that expected differences in life expectancies are enough to drive non-negligible increases in the amounts accumulated via a higher saving rate. 

Retirement timing - The results of the IFS’s modelling shows that (all else being equal) those retiring later accumulate less wealth by any given age, but accumulate wealth for longer and so have a greater level of wealth at the start of their later retirement. They have a lower saving rate, since they can spread their saving over more years of working life. They have a higher replacement rate in retirement, since their longer working life means they have higher lifetime earnings and smooth a higher level of consumption over their lifetimes. 

Illustrative magnitudes of the effects of changes in circumstances 

The IFS says that its modelling illustrates that it would expect the wealth accumulation of different generations to differ as a result of differences in the circumstances they have faced. 

The IFS report includes a useful table summarising the results, for its baseline specification of the model of the level of wealth that it simulates that individuals should accumulate, to give a sense of the size of the impacts on saving of a change in a given circumstance. The IFS adds that assumptions, such as the rate at which individuals ‘discount’ the future, and how risk averse they are, will also affect the proportionate effect on wealth accumulation of a change in circumstances.  

In its model, the IFS has changed one circumstance at a time, leaving all other circumstances at the baseline level: a 3% annual rate of return, a retirement age of 66, and earnings, life expectancy, and the tax and state pension systems as for the 1950s generation. The IFS examines the effect on three different ‘metrics’ of wealth accumulation: 

• wealth at retirement (age 66, except when the IFS varies retirement timing); 

• gross income replacement (which is defined as gross income in the first year of retirement divided by average gross income for the final 15 years of working life); and 

• average saving rate during working life. 

The circumstances with the largest effects on the level of wealth holdings are, says the IFS, by a long way, earnings levels and rates of return. The IFS gives the example that, on average, those born in the 1980s might be expected to hold nearly 50% more wealth by age 66 than those born in the 1950s did, simply because of their higher lifetime earnings. 

Of a similar order of magnitude, if individuals had access to a 6% annual rate of return on their savings then they would be expected to accumulate around 50% more wealth by retirement than if they had access to a 3% rate of return. 

The effects of the tax system, state pension system, different life expectancies and different retirement timing are all simulated to be much smaller – yielding simulated differences in wealth holdings between the 1980s generation and the 1950s generation of around 5–10%.  

Key IFS findings: 

• The economic circumstances that individuals face are an important determinant of wealth levels and saving behaviour. The IFS’s modelling illustrates that different earnings levels, state pension systems, tax systems, rates of return, longevity and retirement timing all have important impacts on individuals’ expected wealth accumulation. Given these differ between generations, the IFS says, we should not necessarily expect each generation to accumulate the same level of wealth. 

• Understanding the drivers of differences (or lack of differences) in wealth levels is important in order to understand the extent to which they are a concern, and what policy action – if any – might be warranted. The IFS gives the example that the response to differences in wealth arising from different earnings levels might not be the same as the response to differences in wealth arising from different rates of return.

• Changes in the economic and demographic conditions that the IFS models would be expected to lead to generation-on-generation increases in the levels of wealth held by retirement. These are, says the IFS, largely driven by increased earnings, and also by falling state pension generosity and falling average tax rates, that are not completely offset by falling rates of return. However, at younger ages, the picture is complicated by particular periods of high/low rates of return affecting generations at different ages, and it is not the case that younger generations are consistently simulated to hold more wealth than their predecessors.

• Comparisons of saving rates and replacement rates are ‘safer’, but should still be made with care. Saving rates and (expected) replacement rates are more robust metrics for comparing financial preparedness for retirement between generations, as these are not affected by differences in earnings. However, there are still reasons for these to differ between generations – in particular, different rates of return and state pension generosity. The income replacement rates achieved in retirement by older generations therefore perhaps ought not to be taken as a target to be achieved by generations born more recently. This may be holding younger generations to an inappropriately high ideal. 

You can read the full report here. 

Source: IFS: How and why might the wealth of different generations be expected to differ? – 31 October 2019.

Surrey taxpayers pay the most income tax in the UK

(AF1, RO3) 

According to UHY Hacker Young’s research, nine of the top 10 UK towns paying the highest levels of income tax are so called ‘Stockbroker Belt’ towns, i.e. towns in the South East of England, popular with wealthy commuters and High Net Worth Individuals due to strong transport links with London and proximity to main airports.

The residents of Esher (Surrey) paid the highest rate of income tax as a percentage of their income out of the 579 towns and cities in the study. Residents of Esher paid an average income tax of 28% of their £68,600 in earnings.

The amount of income tax that residents in the top 10 towns contribute has risen by 20% on average over the last five years. Residents can now expect to pay £13,850 in income tax or 24% of their income, up from £11,630 five years ago. This is triple the UK average of £4,617 or 15% of annual income.

The rest of the top five highest income-tax-paying areas are also towns surrounding London, including Beaconsfield which ranked second. Residents of Beaconsfield pay £14,800 on average in income tax or 25% of their income.

Ranking last out of all areas in the UK is Nottingham North, with the average resident paying £2,080 in income tax – just 10% of their income.

The full report can be found here.

Source: UHY Hacker Young: Surrey taxpayers pay the most income tax in UK – dated 4 November 2019.

Court of appeal confirm that ‘ownership’ of property commences on completion of the contract for CGT purposes

(AF1, RO3) 

The England and Wales Court of Appeal (EWCA) has upheld Desmond Higgins' claim for principal private residence (PPR) relief on a flat he bought off-plan but was unable to occupy for four years because its construction was delayed. 

Mr Higgins, who purchased a London apartment off-plan in 2006 but did not move in until 2010 due to development delays, was treated by HMRC as having incurred a capital gains tax (CGT) liability of £61,383 on the basis that his ownership commenced at the point of exchange of contracts.

 Mr Higgins sold the apartment two years after moving in and claimed PPR for the full period of his ownership. If, however, HMRC was correct that his ownership commenced when contracts were exchanged, he would not be entitled to relief for the period of 39 months between 2006 and 2010 during which he owned the apartment but was not in occupation. 

The First-tier Tax Tribunal agreed with the taxpayer that his chargeable period of ownership did not begin until completion of the purchase, and thus he was entitled to full PPR relief. However, the Upper Tax Tribunal reinstated the charge on appeal. 

Mr Higgins has now won his appeal in the EWCA. The court agreed with him that his period of ownership for CGT purposes started only when he completed the purchase, until which time he had no right to occupy the property. 

The central point turned on the meaning of the words 'period of ownership' in s.223 of the Taxation of Chargeable Gains Act 1992, which sets out the conditions for PPR relief, and the assumed intention of Parliament in drafting the legislation. The EWCA reasoned that if ownership commenced at the point of exchange of contracts, then the provisions would rarely entitle ordinary home-owners to full relief from CGT. He agreed with the First-tier Tax Tribunal's conclusion that such an interpretation would be 'perverse'. 

The other two judges agreed, and the court duly allowed Higgins' appeal, cancelling the CGT charge (Higgins v HMRC, 2019 EWCA Civ 1860).

While there is an Extra-Statutory Concession that allows a delay in taking up residence to be treated as a period of deemed occupation for the purposes of PPR relief, the Concession does not cover the situation where the delay occurs between exchange of contracts and completion. The EWCA’s decision will therefore be welcomed by developers, whose potential customers might otherwise be deterred from making an off-plan purchase on tax grounds, as well as clients who have made a substantial profit by buying off-plan.

Source: STEP UK News Digest 7^th November 2019; Higgins v Revenue And Customs [2019] EWCA Civ 1860 (04 November 2019)

The first tax increase has been announced

(AF2, JO3) 

These are strange times… 

In a presentation to the CBI conference in London on Monday 18 November, Boris Johnson announced that a Conservative Government would ‘postpone’ next year’s reduction in the rate of corporation tax from 19% to 17%. The Prime Minister said the postponement would produce an extra £6bn of revenue.

In March 2016 the then Chancellor, George Osborne, announced that he would cut the main corporation tax rate planned for 2020 from 18% to 17%. This was subsequently legislated for in s46 of the Finance Act 2016, so when the Prime Minister says ‘postpone’, he is being somewhat creative: a legislative reversal will be required. 

The choice of what amounts to an increase in corporation tax is safe ground for the Conservatives, given Labour has said it would raise the rate to 26%, while the Liberals have proposed a rise to 20%. 

However, by announcing the change so late in the day, the Prime Minister has created an interesting issue for the biggest UK companies. ‘Large companies’ (those with profits over £1.5m) have to pay corporation tax in four instalments, starting in the seventh month of the accounting period. And for accounting periods beginning after 31 March 2019, ‘very large companies’ (those with profits over £20m) now have to pay corporation tax in four instalments starting in the third month after the beginning of the accounting period. These instalments are based on the company’s estimate of the tax liability for the year in question. Thus, any such company that has a year-end after 31 March 2020 will have calculated quarterly tax payments assuming a rate for the period after March 2020 of 17%. The net result now will be catch-up payments arriving in the Exchequer’s coffers in 2019/20 and then higher estimated payments for all companies from 2020/21.

The hike in the corporation tax rate will bring in extra cash quickly because of the quarterly payment regime.

Sources: FT 18/11/19 OBR EFO 13/3/19

FTT confirms that explicit permission to occupy property undisturbed confers interest in possession on surviving co-owner

(AF1, RO3) 

It is widely known that where a right to occupy property free of rent is conferred on an individual under the terms of a deceased’s Will, this will constitute an interest in possession (known, since 2006, as an Immediate Post-Death Interest) for inheritance tax (IHT) purposes, so that the value of the underlying property forms part of the occupying beneficiary’s estate. But what is the situation where the beneficiary already has a right to occupy the whole property by virtue of owning a tenant-in-common share? 

This question was considered in the recent First-tier Tribunal (FTT) case of Vincent [2019] TC 07432. The deceased, Mrs Hadden, at the time of her death owned a property as tenants-in-common in unequal shares with her brother, Mr Thom. 

On Mrs Hadden’s death in 2001, Mrs Hadden left her three-eighths share of the property to ‘my trustees upon trust to permit [Mr Thom] to reside therein for so long as he shall desire free of rent but he being responsible for general rates, water rates, insurance and maintenance repairs of an income nature’ and, subject to that, to her daughter. 

Mr Thom continued to occupy the property until his death in 2013, while Mrs Hadden’s daughter (Mrs Vincent) left furniture that she had inherited from her parents at the property and frequently stayed in their former bedroom while Mr Thom was away travelling. Mr Thom continued to take responsibility for all the maintenance costs. 

On Mr Thom’s death, HMRC submitted that the three-eighths share disposed of by Mrs Hadden’s Will was settled property in which Mr Thom had an interest in possession that should be included in his estate under IHTA 1984, s. 49(1) and subject to IHT. Mrs Vincent claimed that her mother’s intention was to leave the property to her outright, subject to allowing Mr Thom to live there for the rest of his life, and that there had been no intention to create an interest in possession for his benefit. 

The FTT took the view that Mrs Haddenʼs intention, in explicitly giving her brother the right to reside in the property for the remainder of his lifetime, must have been to give him greater protection than that which he would otherwise have had if she had left her share of the property to Mrs Vincent outright (where there would have been scope for either co-owner to attempt to enforce a sale in the event of a disagreement).  

The FTT also had to consider whether Mr Thom could have disclaimed his interest by reason of his conduct or ignorance of its existence but found, by a majority, that this had not been the case. Indeed, by meeting 100% of the maintenance costs, Mr Thom had demonstrated and accepted the conditions of the Will and Mrs Vincent’s appeal against the IHT determination was accordingly dismissed. 

It is widely recognised that a right to undisturbed, rent-free occupation constitutes an interest in possession and that, where such a right is conferred by Will, the underlying property value will form part of the beneficiary’s estate for IHT purposes. This decision confirms our long-held understanding that the position is the same regardless of whether or not the beneficiary has a pre-existing right to rent-free occupation in any event by virtue of joint ownership. The decision also confirms that compliance with any conditions of a gift is evidence of acceptance rather than disclaimer of the gift.

Source: CIOT News Service 15^th November 2019 Vincent [2019] TC 07432

Helen Fospero wins IR35 appeal

(AF1, RO3) 

Helen Fospero, an ITV presenter, set up her company, Canal Street Productions Ltd, in 2002 when the BBC asked her to be the anchor presenter for Look North. At that time, the BBC told her she could not be an employee and must be engaged through a personal service company.

She subsequently used Canal Street to supply her services to a range of corporate clients, including ITV. 

Helen Fospero’s appeal was only concerned with three contracts between Canal Street and ITV Breakfast Ltd in 2012/13 and 2013/14 for providing her services as a presenter on the programmes “Daybreak” and “Lorraine”. During those years, the ITV contracts generated up to 74% of Canal Street’s income, but the company, Canal Street, also had 10 to 20 other customers. 

The Judge, Ashley Greenbank, cited a long list of strong reasons why Helen Fospero was not caught by IR35, including:  

“In the period in question, Ms Fospero was engaged, through Canal Street, in a separate business, she worked under a series of short-term engagements for ITV, she had no guarantee of further work outside those engagements and ITV had no obligation to provide any work. All of these factors point towards Ms Fospero being regarded as self-employed, and not an employee even if she had been engaged directly by ITV.”

“Ms Fospero was not integrated within ITV’s business. She was treated very differently from permanently engaged staff: she had no employment rights, she provided her own clothes and she did her own research. The engagements were irregular and short, which was indicative of self-employment.”

“Employed presenters were provided with laptops, had ITV email addresses, had workstations or rooms at ITV’s studios and were provided with more generous expenses allowances. Ms Fospero had none of these things.”

“Canal Street and Ms Fospero incurred costs and expenses in relation to that business. In particular, Canal Street and Ms Fospero engaged agents to source a variety of work from a variety of clients. Ms Fospero purchased and used her own equipment.” 

Helen Fospero’s absence of a substitution clause was effectively explained away by the FTT, as being due to the nature of the contract and the fact that the broadcaster wanted her and her alone. 

HMRC is reportedly considering an appeal. 

Sources:

• FTT: [2019] UKFTT 0647 (TC) TC07422 – dated 25 October 2019;
• AccountingWeb News: IR35 - Another win for TV presenter – dated 15 November 2019.

INVESTMENT PLANNING 

Mini-bond promotions

(AF4, FA7, LP2, RO2) 

The FCA has announced a ban on the promotion of the majority of mini-bonds to most retail investors from 1 January 2020. 

‘Mini-bonds’ have been at the heart of several scandals recently, the most notable being the demise of London Capital & Finance (LCF) about a year ago. As the Financial Conduct Authority (FCA) notes in its consumer pages, there is no legal definition of a mini-bond. However, it is fair to say that most have been illiquid debt securities, targeted at retail investors. They have often been associated with property lending and/or lending to small unquoted companies.

Mini-bonds are very different from the offerings from the London Stock Exchange’s (LSE’s) Order Book for Retail Bonds (ORB). The LSE’s ORB bonds are generally from high quality issuers (eg Government and UK-listed companies) and can be readily traded. In contrast mini-bonds are usually issued by unlisted companies and normally have no secondary market, meaning that investors are locked in until maturity. As in the case of LCF, where the issuing company is on-lending, it can have very close associations with the ultimate borrowers. 

The appeal of mini-bonds is summed up in two words: interest rate. Many have offered yields of 8% and more, enough to blind some retail investors to the risks involved, most notably that the FSCS deposit protection scheme does not protect them. The FCA reckons that there are about 11,000 mini-bond investors, with an average of over £25,000 worth of these securities, an estimate supported by the facts that have emerged from the demise of LCF.

A business does not have to be FCA-regulated to issue mini-bonds. The FCA’s role has so far been to regulate the promotion of mini-bonds (which usually need to be approved by an FCA-authorised person) and situations in which the mini-bonds form part of an investment service, eg a regulated firm recommends their purchase. The promotional aspect has created problems because retail investors have seen the letters ‘FCA’ in an advertisement and failed to appreciate its limited relevance. 

The FCA has now announced a “temporary intervention” that will ban the promotion of what it describes as ‘speculative mini-bonds’ to retail investors (other than high net worth or sophisticated investors) for a period of a year, starting on 1 January 2020. Where promotions are made to high net worth or sophisticated investors, the FCA says that: 

• the product must have been initially assessed as suitable for the investor;
• the promotion must have a specific risk warning clearly stating the risks to consumers of losing all their investment; and
• there must be disclosures of any costs/payments to third parties that are deducted from the money raised by the issuer (a move designed to highlight extravagant marketing costs). 

The FCA defines ‘speculative mini-bonds’ as unlisted bonds and preference shares where the issuer uses the funds raised to:

• lend to a third party;
• invest in other companies; or
• purchase or develop property. 

The definition specifically excludes companies using unlisted securities to buy or construct property used for their own commercial or industrial purpose and vehicles that only invest in a single UK-based property. 

While the temporary intervention cannot be renewed, the FCA expects to consult on proposals to make permanent rule changes before the end of 2020.

There is likely to be criticism for the time that the FCA has taken to act – nearly a year after LCF – and the fact that it has still left open some opportunities to promote mini-bonds which might be exploited. 

Source: FCA 26/11/19

PENSIONS 

Pension Schemes Newsletter 115 - November 2019

(AF3, FA2, JO5, RO4, RO8) 

HMRC Pension Schemes Newsletter 115 covers the following: 

• lifetime allowance and the 2019 to 2020 event report
• Managing Pensions Schemes service - giving access to Government Gateway administrators and assistants
• Managing Pension Schemes service - pension practitioner IDs
• relief at source - notification of residency status report for 2020 to 2021
• annual allowance - members declaring their annual allowance charge on their self-assessment tax return 

Issues of particular interest  

Apart from the usual reminders about reporting, the newsletter covers the issue that many are not reporting annual allowance excesses on their self-assessment. Scheme administrators are being asked to remind members where they have a charge that the only way to deal with it is via self-assessment, which may need to be requested from HMRC.  

Comment  

The issue with self-assessment and the annual allowance isn’t new, but many of those that will be subject to the tapered annual allowance may not have conducted the calculations because they won’t have received a Pension Savings Statement by default. Only those that have a pension input amount of £40,000 or more into their scheme will receive one by default so those with a tapered annual allowance may still be subject to charges. In most cases it is the Pension Saving Statement that will give details of the calculations and how to report any excess.  

NHS to cover clinician's annual allowance tax charges for 2019/20

(AF3, FA2, JO5, RO4, RO8) 

Simon Stevens, the Chief Executive of the National Health Service, has announced a remedy to the NHS pension issues for the 2019/20 tax year. 

The announcement was made in a letter from Mr Stevens to the British Medical Association (BMA) and the Royal colleges. In the letter he acknowledged that the flexibilities that have already been put in place had not been enough to prevent senior clinicians from reducing their hours or not taking on additional commitments. 

Mr Stevens stated that given the election it was unlikely that the wider issues caused by tapering would be addressed before the next tax year and that in the meantime there was an “urgent operational requirement” to solve the problem. 

The new measures will apply to doctors, nurses and other clinicians who are members of the NHS pension schemes and will cover all savings in the NHS schemes in 2019/20.  

Where clinicians suffer an annual allowance charge, they will be able to choose scheme pays in the normal way, meaning there is no requirement to pay the charge directly themselves. This will lead to the usual reduction in pension benefits when they choose to take them. 

The difference is that the NHS will now make a contractually binding commitment to pay members the corresponding amount at retirement, i.e. they are compensated with additional salary at retirement which is the equivalent to the reduction. The additional salary at retirement will be subject to tax and national insurance (NI). The NHS Q and A document states that the payments will be grossed up to cover any NI that wouldn’t apply to pension income payments.

Whilst the measure is aimed at ensuring clinicians don’t reduce their working hours and/or accept additional duties, it applies to all pension inputs to the NHS schemes in the 2019/20 tax year. 

Comment 

This is a significant step forward for clinicians and their representatives in their long running fight over the impact of tapering on the NHS. With the NHS considered as one of the key election issues it isn’t surprising that drastic action has been taken in an attempt to avoid a pre-election NHS winter crisis. The announcement only covers the current tax year. However, all the main political policies have included a commitment to review the impact of tapering on the NHS in their manifestos. The Conservative Party has stated they will hold a review with the BMA and Royal colleges within the first 30 days to solve the problem.

The announcement, letters and frequently asked questions are available here.

PPF publishes updated PPF 7800 index - November 2019

(AF3, FA2, JO5, RO4, RO8) 

Since July 2007 the Pension Protection Fund has published the latest estimated funding position, on a s179 basis, for the defined benefit schemes in its eligible universe. 

November 2019 Update Highlights 

• The aggregate deficit of the 5,450 schemes in the PPF 7800 Index is estimated to have decreased over the month to £103.6 billion at the end of October 2019, from a deficit of £149.0 billion at the end of September 2019.
• The funding ratio increased from 92.2 per cent at the end of September 2019 to 94.4 per cent.
• Total assets were £1,739.7 billion and total liabilities were £1,843.3 billion.
• There were 3,459 schemes in deficit and 1,991 schemes in surplus.
• The deficit of the schemes in deficit at the end of October 2019 was £230.5 billion, down from £265.3 billion at the end of September 2019.

The PPF 7800 index is published on the second Tuesday of every month, and the PPF publishes The Purple Book each year. 

The Pensions Regulator News

(AF3, FA2, JO5, RO4, RO8) 

TPR publishes master trust market post authorisation: final facts and figures 

The Pensions Regulator (TPR) has published a report: “Master trust market post authorisation: final facts and figures”. This sets out the final facts and figures on the master trust market post authorisation. In the report, TPR revealed that, of the 38 existing master trusts that submitted applications for authorisation, 37 have been granted authorisation and one scheme withdrew its application. 

The 37 schemes represent 16 million memberships and hold more than £36bn in assets and had to prove to TPR that they met the required standards across the following five areas 

• Fit and proper – All the people who have a significant role in running the scheme can demonstrate that they meet a standard of honesty, integrity and knowledge appropriate to their role.
• Systems and processes – IT systems enable the scheme to run properly and there are robust processes to administer and govern the scheme.
• Continuity strategy – There is a plan in place to protect members if something happens that may threaten the existence of the scheme, including how a master trust would be wound up.
• Scheme funder – Any scheme funder supporting the scheme is a company (or other legal person) and meets the requirement that it only carries out master trust business.
• Financial sustainability – The scheme has the financial resources to cover running costs and also the cost of winding up the scheme if it fails, without impacting on members. 

More work for trustees on DB to DC transfers 

The Pensions Regulator (TPR) has updated its DB to DC transfers and conversions guidance. However, this November 2019 edition is only very slightly altered from that issued in April 2015.  Nevertheless, there is one material change of importance. 

The FCA register that trustees need to consult to ensure that the independent advice received by an individual with more than a £30,000 transfer value has been given by someone with the required permissions may no longer hold such details from 9 December 2019. 

TPR says that whilst trustees should continue to check the register for details of the adviser’s firm, they will then need to contact the firms and ask them to confirm that the adviser works for that firm or check an appropriate third-party directory. A new FCA directory containing data on certified individuals will be released in 2020. 

Comment 

The changes to the FCA register will result in more work for trustees in the short term.  It remains to be seen whether the new FCA directory will be an improvement on what went before.