What’s New bulletin - July

UPDATE from 30 June 2023 to 13 July 2023

TAXATION AND TRUSTS 

Statistics on non-UK domiciled taxpayers

(AF1, RO3) 

HMRC has recently published statistics on those claiming non-domiciled status in the UK and it is estimated that this has increased from 68,000 (in the tax year ending 2021) to 68,800 individuals claiming non-UK domiciled status (in the tax year ending 2022). 

Non-UK domiciled taxpayer numbers, income tax, capital gains tax and national insurance contributions 

HMRC believes that the increase in the number of non-UK domiciled taxpayers in tax year ending 2022 on the previous year may be explained by a recovery in new arrivals numbers and better retention rates reducing the outflow of non-UK domiciled taxpayers. However, the number of non-UK domiciled taxpayers has not recovered to the numbers seen pre-pandemic when, in tax year ending 2020, there were 77,300 non-UK domiciled taxpayers. 

HMRC estimates that non-UK domiciled taxpayers accounted for £8.490 billion in income tax, national insurance (NIC) and capital gains tax (CGT) in 2021/22. Despite a relatively small increase in the number of non-UK domiciled taxpayers, their aggregate tax and NICs liabilities increased by over £500 million, compared to the previous year’s figure of £7.850 billion.

Since the changes to the deemed-domiciled rules in 2017, there has been a fall in the number of those being able to call themselves non-UK domiciled. These changes meant that an individual who was formerly non-UK domiciled might be deemed UK domiciled for tax purposes if they were born in the UK and have a UK domicile of origin (Condition A), or if they were resident in the UK for at least 15 of the 20 tax years immediately before the relevant tax year (Condition B). 

There were 9,900 individuals claiming deemed UK-domicile status in 2021/22. This is a slight reduction on the number of deemed domiciled taxpayers in 2020/21 (10,100). HMRC estimates that £3.946 billion in income tax, NIC and CGT was paid by deemed UK-domiciled individuals in 2021/22 (up from the £3.432 billion in 2020/21). However, HMRC believes this to be an under-estimate, as not all deemed UK-domiciled taxpayers need indicate their status on their tax returns. 

The remittance basis of paying UK tax is an option available to non-UK domiciled individuals, meaning they only pay UK tax on income/profits remitted to the UK from overseas. For the remittance basis population, HMRC publishes these figures a year in arrears with the latest figures from tax year ending 2021. The total number of non-UK domiciled taxpayers paying on the remittance basis was 37,000 in the tax year ending 2021. HMRC expects to revise this in future years due to a small number of late filers. 

In 2020/21, such individuals paid £6.194 billion (£6.373 billion in 2019/20) in income tax, NIC and CGT. This is a decrease from 2020 of circa £180 million. Those with unremitted income of more than £2,000 and who have been resident in the UK for seven of the last nine years pay a remittance basis charge (‘RBC’) of £30,000 to use the remittance basis. Those who have been resident in the UK for 12 out of the last 14 years have to pay £60,000. There were 2,100 RBC-payers in 2020/21, increasing from 2,000 in 2019/20 - those individuals paying £1.231 billion in 2020/21 (compared to £980 million in 2019/20). 

This shows that the number of remittance basis users who are staying resident in the UK long enough to pay the RBC has been steadily increasing since the 2017 deemed domicile reforms, with their tax and NICs liabilities increasing by over £250 million in tax year ending 2021 on the previous tax year. This is a much larger proportional increase than their respective increase in population numbers. 

London continued to have the largest non-UK domiciled taxpayer population in the tax year ending 2021, with 57% of non-UK domiciled taxpayers in the UK located in that region (compared to, 58% in 2019/20) and 74% of non-UK domiciled UK income tax, CGT and NICs coming from that region. London also had the largest population of UK resident non-domiciled taxpayers. The last two years of data show that the tax liabilities are increasingly concentrated from people in London. 

Remittance basis users can avoid paying UK tax on their remittances if the monies are invested in UK businesses – this is known as Business Investment Relief and has been in place since April 2012. Please see Business Investment Relief (BIR). Between then and 5 April 2021, £7.039 billion has been invested accordingly, with £739 million invested in 2020/21 alone (down by around £110 million from the previous year) from 500 individuals. 

Company cars - latest HMRC data

(AF1, RO3) 

HMRC’s latest data on company cars and ‘free’ fuel for the 2021/22 tax year. 

Key points for company car and fuel benefits in tax year 2021/22: 

• the total number of reported recipients of company car benefit was 720,000, the same level as in the previous year. This figure had been in steady decline from 960,000 in 2015/16. The total taxable value of company car benefit was £3.95 billion in tax year 2021/22, down from £4.62 billion in 2020/21;
• the number of reported fuel benefit recipients was 50,000, down from 60,000 in 2020/21 and continuing a downward trend. The shift towards electric powered cars is expected to be in part behind the decline in fuel benefit use
• in tax year 2021/22, only around 2% of company cars had reported CO₂ emissions in excess of 165 g/km. By contrast in 2002/03, 58% of company cars had reported emissions in excess of 165 g/km;
• the average reported CO₂ emission of company cars including electric cars was 86 g/km, compared to 99 g/km in the previous tax year. For cars with internal combustion engines the average was 103 g/km;
• the proportion of company cars using diesel fuel reduced to 35% in 2021/22, compared to 49% in 2020/21. Diesel cars accounted for around 80% of company cars up to 2017, with a steady decline through to 60% by 2019/20;
• the number of reported recipients of company cars with CO₂ emissions of 75g/km or less was 243,000 (up from around 137,000 in the previous tax year). Fully electric cars account for 17% of car benefit recipients (compared to 7% in the previous tax year);
• the total taxable value of all Class 1A taxable benefits in kind was £8.6 billion, a decrease of £0.4 billion from the previous year. 

The South East of England had the highest number of car benefit recipients, at 105,000 in 2021/22 (compared to 95,000 in 2020/21) with a taxable value of £570 million. 

Comment 

Issues around diesel cars emissions figures, the spread of electric and hybrid vehicles and the introduction of the WLTP (Worldwide harmonised Light vehicles Test Procedure) emissions measurement will all have changed the company car landscape. Road fuel duty was worth an estimated £25.1 billion in 2022/23. The question of when does the Government start raising taxes on electric-only vehicles, was answered in the 2022 Autumn Statement, when it announced the introduction of Vehicle Excise Duty for zero emission cars, vans and motorcycles from 1 April 2025,. This will apply to new and existing electric vehicles. 

INVESTMENT PLANNING 

H1 2023 market performance - not what might have been expected (AF4, FA4, FA7, LP2, RO2) 

Looking at the markets’ performance in the first half of 2023, it appears equity investors are relatively unconcerned about hawkish central bankers triggering a recession.

At the start of 2023, the main central bank interest rates in the USA, UK and Eurozone were 4.25%-4.50%, 3.50% and 2.5%. Six months later, they are 5.00%-5.25%, 5.0% and 4.0% respectively. Such a pattern of rising base rates – which shows little sign of slowing yet – might have been expected to depress equity markets, but, as the graph above and table below show, the main markets are in positive territory for the first half.

 

	30/12/2022	31/06/2023	Change in H1
FTSE 100	7451.74	7531.53	1.07%
FTSE 250	18853.00	18416.76	-2.31%
FTSE 350 Higher Yield	3555.19	3455.00	-2.82%
FTSE 350 Lower Yield	4249.48	4425.83	4.15%
FTSE All-Share	4075.13	4092.26	0.42%
S&P 500	3822.23	4450.38	16.43%
Euro Stoxx 50 (€)	3793.62	4399.09	15.96%
Nikkei 225	26094.5	33189.04	27.19%
Shanghai Composite	3089.26	3202.06	3.65%
MSCI Em Markets (£)	1487.567	1456.184	-2.11%
UK Bank base rate	3.50%	5.00%
US Fed funds rate	4.25%-4.50%	5.00%-5.25%
ECB base rate	2.50%	4.00%
2 yr UK Gilt yield	3.58%	5.33%
10 yr UK Gilt yield	3.70%	4.43%
2 yr US T-bond yield	4.43%	4.90%
10 yr US T-bond yield	3.88%	3.84%
2 yr German Bund Yield	2.74%	3.25%
10 yr German Bund Yield	2.56%	2.39%
£/$	1.2029	1.2713	5.69%
£/€	1.1271	1.1653	3.39%
£/¥	158.7175	183.7535	15.77%

A few points are worth noting from the table and beyond: 

• At 7451.74, the FTSE 100 is 10.91 points (0.14%) below the level at which it ended 2019. The S&P 500 is 37.75% higher over the same period.  
• In the UK, as in the US, smaller companies continued to be out of favour relative to their large cap peers. The FTSE Small Cap was down 2.34% and the Russell 2000, up 6.95 % (against 16.43% for the S&P 500).
• Technology stocks were back in vogue in the US, with the NASDAQ Composite (up 32%) recording its best first half since 1983.
• Similarly, the S&P 500 has been driven by seven big tech stocks which constitute about 27.5% of the index: Apple, Amazon, Microsoft, Nvidia, Alphabet, Meta and Tesla. In the absence of a buzzy acronym, the set is being labelled the Magnificent Seven. The other constituents of the S&P 500 – call it the S&P 493 – had a near flat first half.
• The quirky, less tech weighted nature of the Dow Jones Industrial Index showed through again in the first half: it posted a gain of 4.24%, little more than a quarter of the rise in the S&P 500.
• The strong performance of the Nikkei 225 is not quite what it seems, particularly for UK investors. Like another historic index, the Dow Jones Index, the Nikkei 225 is calculated on a price-weighted basis rather than today’s preferred capital-weighted approach. Just as the S&P 500 is the professional’s choice over the Dow, so too is the Topix over the Nikkei 225. The Topix was up 21.0% in the first half, 6.2% less than the Nikkei. Add in the Yen’s notable weakness (down 13.6% against sterling) and it is not surprising that Trustnet shows a sector average performance for Japanese funds in the first half of 7.2%, 20% below the Nikkei 225’s rise.
• Brent crude ended the half year at $75.72 a barrel, down 10.2% in 2023. That drop has helped ease some of the inflationary pressure.
• The first half’s standout performer was bitcoin, up 84% from the beginning of the year in US dollar terms. However, it remains less than half its November 2021 peak. 

Comment 

The surge in the NASDAQ and the tech-focus of the US indices has some commentators recalling the tech melt-up of 1999. The main difference this time around is that the tech stocks in the spotlight are making serious profits today.   

Lifetime ISAs - statistics in the press

(FA5) 

A Times article exploring the numbers of account holders who have accessed money in their Lifetime ISAs and had to pay a penalty. 

The article HMRC makes £9.4m profit from savers feeling the pinch looks at the numbers of account holders who, due to the general squeeze on incomes, have accessed money in their Lifetime ISAs, other than for a qualifying first property purchase (the attaining 60 years of age will of course not apply as they haven’t been around long enough for any account holder to attain age 60). As a result, they have to pay a penalty to HMRC for that access. 

The article reports that in the year to 5 April 2023, HMRC received £47.2m from Lifetime ISAs, with £33.8m withdrawn in 2020/21 and £30.8m in 2021/22. This figure is higher than during the period when rules were relaxed with the charge being reduced from 25% of the amount withdrawn to only 20%, making the penalty no greater than the contribution top-up made by HMRC. 

These figures do, however, highlight both the advantages and disadvantages of a Lifetime ISA over pensions as a retirement savings vehicle: 

1. The advantage of early access in the event of a financial emergency; and
2. The disadvantage of a charge 20% greater than the bonus added by the Government on making the subscription.

NS&I raises rates again

(AF4, FA7, LP2, RO2) 

NS&I’s interest rate increases to Premium Bonds and some variable rate products.

Two days before a widely predicted rise in the Bank (Base) Rate, National Savings & Investments (NS&I) made an announcement of rate rises for the Premium Bond prize fund and its Junior ISA. Now it has announced a further increase in the Premium Bond prize rate from August and, from 13 July, increased rates for its Direct Saver, Income Bonds and Investment Account. 

For Premium Bonds, the prize rate will rise from 3.70% to 4.00%. The odds of winning will increase from 24,000:1 to 22,000:1 meaning that, from next month, there will about 9% more prizes, albeit their distribution is little changed: 

	Jul-23	Aug-23
Odds of monthly win:	24,000:1	22,000:1
Prize rate	3.70%	4.00%
£1,000,000	0.000036%	0.000036%
£100,000	0.001405%	0.001395%
£50,000	0.002790%	0.002789%
£25,000	0.005619%	0.005579%
£10,000	0.013988%	0.013929%
£5,000	0.028035%	0.027876%
£1,000	0.295979%	0.293327%
£500	0.887937%	0.879981%
£100	34.508959%	33.973150%
£50	34.508959%	33.973150%
£25	29.746291%	30.828786%

On the other variable rate product changes, the details are: 

Product	Old rate	New rate from 13 July
Direct Saver	2.85% gross/AER	3.40% gross/AER
Income Bonds	2.85% gross/2.89% AER	3.40% gross/3.45% AER
Investment Account	0.60% gross/AER	0.85% gross/AER

There is no increase to the Direct ISA, which at 2.4% looks distinctly poor value against NS&I’s main taxable products.

For the record, Moneyfacts shows the best instant access rate to be 4.25% and the best ISA instant access rate to be 4.05%. 

Comment 

The latest rate increase raises a few interesting questions which the Chancellor could find difficult to answer: 

• Given you are criticising the banks for not passing on rate rises, why has NS&I taken since 14 February to announce a rate rise on its Income Bonds and Direct Saver rates?
• Similarly, why is NS&I’s impending increase on these products only 0.55% against a corresponding 1% hike from the Bank of England over the same period?
• Is the taxpayer receiving value for money by paying 4% tax-free for Premium Bond cash when they are paying over 0.5% less taxable interest on other variable rate products? 

PENSIONS 

Pension Schemes Newsletter 151 – June 2023

(AF8, FA2, JO5, RO4, AF7) 

Pension Schemes Newsletter 151 covers the following: 

• annual allowance calculator
• abolition of the Lifetime Allowance — payment of stand-alone lump sums
• Managing Pension Schemes service 

Areas of interest 

Annual Allowance Calculator 

HMRC confirm that they have completed the update to their annual allowance calculator to reflect the higher annual allowances.  This can now be used for the 2023/24 tax year. 

Lifetime Allowance and Stand-alone lump sums 

The government has amended the Finance (No 2) Bill to allow payments of standalone lump sums (SALS) in excess of their 5 April 2023 values.  As part of the restriction on lump sum payments that coincides with the abolition of the lifetime allowance, the maximum tax free SALS is limited to the value of the benefits on 5 April 2023.  The amendment allows any excess to be paid as taxable income at the members marginal rate (s). 

Normal PAYE rules will apply to the payments where there is an excess (ie the payments are likely to be made using an emergency tax code). 

The newsletter sets out full details of how the scheme should report the payments until changes can be made to the Real Time Information programme to identify these separately. 

WPC report: Defined benefit pensions with Liability Driven Investments

(AF8, FA2, JO5, RO4, AF7) 

Having launched an inquiry last year, the Work and Pensions Committee (WPC) has published its first report on DB pensions using LDIs: Defined benefit pensions with Liability Driven Investments. The WPC said the government should rein in the use of liability-driven investment funds by pensions providers, lawmakers said in the damning report in which they blamed "lax" regulators for allowing the economy to almost sleepwalk into a new financial crisis. The WPC said that a consistent theme of its report is that a more systematic, regular and comprehensive collection of data on LDI is needed. Some of the main recommendation made by the WPC in the report included: 

• The Pensions Regulator (TPR) should require trustees to report certain data on their use of LDI, following TPR’s acknowledgement that the information currently being collected on LDI was “not sufficiently detailed” for it to assess whether its guidance is being followed by pension schemes that weren’t otherwise under some form of specific supervision. 
• The DWP should respond to its 2018 consultation on DB consolidation and then work with TPR as a priority to improve the regulation of trustees and standards of governance. 
• Prior to implementing measures to improve governance, DWP should consider whether the use of LDI could be restricted, for example, based on a test related to a trustee boards’ ability to understand and manage the risks involved. 
• The Government should bring forward plans for investment consultants to be brought within the Financial Conduct Authority’s (FCA) regulatory perimeter before the end of this Parliament. 
• TPR should work with the FCA to review whether the guidance the FCA issued to LDI funds in April has been implemented effectively and is providing trustees with a simple mechanism for monitoring LDI. 
• Both DWP and TPR should consult on whether governance would be improved by introducing disclosure requirements on pension schemes relating the use of LDI through the annual report or investment statement. This might include specifying the maximum leverage allowed within the LDI funds; the type of LDI that can be used; compliance with minimum resilience levels; and data on growth and matching asset allocations. 
• DWP and TPR should halt their plans for a new funding regime (previously expected to come into effect from April 2024), at least until a full impact assessment has been produced, covering the impact on financial stability and on open DB schemes. This stems from concerns that the current proposals are not sufficient to allow open schemes to thrive and will result in greater ‘herding’ in investment decisions. 

The report also supports the recommendations from the Bank of England’s Financial Policy Committee that TPR should be given a remit to take account of financial stability and that TPR should specify minimum levels of resilience for the LDI arrangements in which pension schemes may invest and work with other regulators to ensure these are maintained. 

Responding to the report, LCP Partner Steve Hodder said in a Press Release that: “We are pleased that the Committee has given a fair summary of the logic behind schemes using LDI. The vast majority of our clients have continued to use LDI as a core risk management tool. This helps stabilise the assessed cost of the value of their pension promises under generally accepted approaches. We are glad the Committee has not been drawn into some of the more hysterical commentary from last year. In particular, suggestions that the concept of leverage itself is inappropriate.” 

Commenting on the report in their Press Release, the Chair of the Association of Professional Pension Trustees (APPT) Harus Rai said: “APPT agrees with the report’s recommendations that trustees must have high levels of knowledge, understanding and experience to manage complex areas such as the use of LDI. The APPT supports the idea of formally increasing the standards of trusteeship for DB pension schemes, but we have to stress that what may appear to be simple steps, like ‘more consolidation’ require very careful thought and policy actions to accommodate the diverse range of UK schemes. A rushed response to this and other areas of the report could easily create new but different financial risks to members’ benefits.” 

The Association of Consulting Actuaries (ACA) said, in their Press Release, that the WPC's findings of significant weakness in the ability of pension schemes to manage risk “seems completely at odds with the rude health that most UK private schemes find themselves in”. ACA Spokesman and Treasurer Stewart Hastie added: “LDI with appropriate levels of leverage has been, and continues to be, an important and successful risk management tool for UK pensions... There were a small minority of schemes that didn’t fare so well last autumn although many will have started from a better position because of the use of LDI in the years before this. Nevertheless, lessons around managing liquidity risk have and will continue to be learned with the industry moving quickly to adopt higher liquidity buffers and improve governance processes.” 

PLSA The FCA announces it has banned two advisers from providing pension transfer advice

(AF8, FA2, JO5, RO4, AF7) 

In the first case, the FCA’s Final Notice setting out the action it has taken was against Mark Abley of County Capital Wealth Management Ltd (CCWM). He has been banned from providing any advice on pension transfers by the FCA. 

Between April 2015 and February 2018, CCWM advised 575 (allowing for holidays that’s an average of around 4+ cases a week) people to transfer out of their DB pension schemes, including almost 150 members of the British Steel Pension Scheme. Mr Abley was responsible for this advice, 56% of which failed to meet the required standards and showed a lack of competence. The regulator has also ordered Mr Abley to pay £106,100 to the Financial Services Compensation Scheme rather than the FCA, to contribute towards the redress owed to CCWM’s customers. The FCA said that if Mr Abley fails to pay this amount or any part of it, it will enforce this amount as a fine. They also said that: “Mr Abley’s incompetence meant that he failed to give customers the advice they needed to make a significant decision about their retirement. This included hundreds of people who were dealing with the uncertainty around the British Steel Pension Scheme. He earned fees while putting their retirement money at risk. It is only right that he contributes to the costs of compensating these customers.” 

In the second case, the FCA’s Final Notice setting out the action it has taken was against Denis Lee Morgan of Pembrokeshire Mortgage Centre Limited (PMC) from giving any advice on pension transfers and pension opt outs, and from holding any senior management function in a regulated firm. According to the FCA, Mr Morgan demonstrated a lack of competence in his oversight of PMC’s pension transfer advice process between 8 June 2015 and 7 December 2017. The FCA said this particularly affected customers between August and November 2017, when PMC (which is now in liquidation) advised an average of 65 people customers a month — largely members of the British Steel Pension Scheme (BSPS). In all instances, Mr Morgan was either the primary adviser or the Pension Transfer Specialist, which meant he was ultimately responsible for the quality of advice. PMC has already been fined £2,354,331 for providing unsuitable advice to customers to transfer out of the BSPS and other DB pension schemes. 

DWP launches new version of mid-life MOT website

(AF8, FA2, JO5, RO4, AF7) 

DWP has launched the new version of its mid-life MOT website to help older workers with financial planning, health guidance and assessing what their skills mean for their careers and futures. The website, which includes links to check state pension forecasts and to calculate ideal retirement incomes, will be continually reviewed and will soon include content specific to England, Scotland, Wales and Northern Ireland. The mid-life MOT scheme was first launched in 2019  and was expanded earlier this year. 

Minister for Employment Guy Opperman MP said: “We are all living longer and planning for later life is essential but knowing where to start can be daunting. Our digital Midlife MOT is open to everyone and easy to access, and will give people the tools to make informed decisions — on their personal finances, their health and on their careers. I would encourage older people in particular to invest the time to see exactly what it can do for them.”