ONLINE CENTRAL REGISTER OF TRUSTS IN THE UK FROM 2017
The December 2016 edition of HM Revenue & Customs’ trusts and estates newsletter describes HMRC’s recently launched project to build an online central register of trusts, to be introduced in 2017
This follows the Consultation paper on the Transposition of the Fourth Money Laundering Directive issued by the Treasury last September.
The register will act as a single point of contact for trusts and estates to comply with their registration obligations, replacing the current paper 41G form and the ad hoc process now used by trustees to notify changes. The aim is to allow HMRC to collect and hold adequate and up-to-date trust information centrally, in line with the Fourth European Anti-Money Laundering Directive.
The new service will provide a single online service for trustees and legal personal representatives to comply with their registration obligations and notification of any changes. It should also improve the processes around the administration of trusts, and allow HMRC to collect and hold adequate and up to date information in a central register.
The above changes will affect customers who need to register new trusts and estates with HMRC and existing trustees who will need to provide and update their details.
As well as implementing the requirements of article 31 of the EU Fourth Anti Money Laundering Directive (4MLD), the register will be in line with HMRC’s digital strategy and provide greater tax transparency going forward.
Clearly this is something that all involved with trusts need to be aware of.
COMPLAINT HAS PROMPTED FCA TO RE-THINK PII RULE
Investor’s complaint has prompted the Financial Conduct Authority to re-think how professional indemnity insurance is mandated.
An investor’s complaint to the Complaints Commissioner has prompted the Financial Conduct Authority (FCA) to rethink how professional indemnity insurance (PII) is mandated for advice firms who wish to de-authorise.
The change came following a complaint against the FCA for allowing an advice firm which had a claim against it to become de-authorised. This meant the investor could not seek compensation from the Financial Ombudsman Service (FOS) and had to go to the Financial Services Compensation Scheme, which has a compensation cap of £50,000.
While the Complaints Commissioner did not find the FCA had acted ‘unreasonably’ in approving the de-authorisation, it did recommend the FCA change the way it allows for de-authorisations.
Currently advice firms have to tell the FCA of any outstanding claims against them when they look to de-authorise and also to hold the requisite PII. However, the FCA is not responsible for checking if advice firms are telling their PII providers about claims against them when they look to wind down.
So, the Complaints Commissioner has suggested a change to make the FCA have more scrutiny of this area.
‘An additional step would be to require firms to demonstrate that they have notified their insurance provider of all the outstanding complaints (be that internal or external) against them, both when they submit their cancellation application and when that is assessed by the FCA,’ the decision said.
‘This would give complainants a better chance of recovering any awards made to them by the firm or by the FOS.’
It appears that the FCA has agreed to consider the proposal so it will be interesting to see whether any changes are actually made.
GOVERNMENT RELENTS ON LISA EXIT PENALTY FOR FIRST YEAR
Financial Secretary to the Treasury, Jane Ellison, said the government will waive the exit penalty for the first year after launch.
Financial Secretary to the Treasury, Jane Ellison, has said the government will waive the “exit penalty” on its new Lifetime Individual Savings Account (LISA), which will be available from April 2017, for the first year following its launch.
The LISA, which will be open to anyone who is aged under 40, offers a 25% government bonus on savings up to £4,000 per annum.
As originally planned, savers who accessed cash before age 60 for any other purpose than to buy a first home would have faced a 25% penalty on any withdrawals, unless they were terminally ill.
Waiving the penalty in the first year following launch on 6 April 2017, while not a substantial benefit, provides good news for savers.
DIGITAL ASSETS
Dealing with online accounts and cloud stored treasures is a new topic to be included in will and IHT planning
Readers of the Sunday Telegraph were recently alerted by their Money editor to the question of dealing with their online accounts and in particular of the need to inform their family, or at least those who would be dealing with their assets in the event of serious illness or death, of their passwords to enable them to access their online accounts. It is surprising how many people do not give it a second thought. Indeed it is not just a question of online accounts but of the so called “digital assets” in general.
This is, of course, something that did not exist until relatively recently and so, unsurprisingly, many people forget to specifically address this subject.
Many digital assets are of predominately sentimental value, such as photographs saved on a laptop or in the ‘cloud’. However, the term includes film, music and book collections purchased and stored electronically so can also have significant monetary value. Other such assets may include online accounts generating reward or frequent flyer points, or even investments in digital currencies, such as Bitcoin. So what happens to those assets after your death?
Apart from photos and digital content that has been purchased, a digital legacy also consists of our social media accounts on sites such as Facebook, Twitter and YouTube and this is where potential problems for executors may arise. It may come as a surprise to some that they do not in fact own their online content and actually only have a license to use the website’s services. What happens to their profiles on death is governed by the website’s Terms of Use. Terms vary depending on the service provider, but often the license to use the e-platform terminates and the deceased’s online data is non-transferable.
When a person dies, their personal representatives will need access to these electronic records in order to administer the deceased’s property, but few people plan for this.
Accounts or other assets that are digital-based often leave no paper trail which makes it difficult for an executor to locate the assets or even know they exist.
Even if an executor has knowledge of the assets, if they do not know the relevant passwords, they will be blocked from accessing them by layers of cyber security.
An additional problem is that accessing someone else’s account without their specific authority arguably breaches section 1 of the Computer Misuse Act 1990 and may contravene the service provider’s Terms of Use. As there is no specific UK legislation dealing with this, executors will have to consult the Terms of Use of each provider separately in order to establish their rights to access and manage the assets.
The potential pitfalls surrounding digital assets can be avoided by taking certain steps. An ideal occasion to discuss this with a client is when reviewing their will. The following recommendations are likely to be appreciated:
– Making an inventory of all digital assets and keeping the list up to date. This should be stored alongside the will (although bear in mind that such information should not be included in your will because it becomes a public document on death). It is also advisable to make a record of all passwords, but for security reasons, this should be stored separately.
– Updating a will to include gifts of the digital assets. While sentimental assets (such as digital photos) can be gifted under a personal chattels clause in your Will, digital assets with a significant financial value or any associated intellectual property rights will need specialist treatment.
– For online assets, checking the Terms of Use to see if they specify what will happen to the account on death of the account holder. Appropriate guidance can then be given to the executors. For example, you may want your Facebook profile to be changed to an ‘in memorium’ page or deleted.
– Specific authority should be given to the executors to access and manage the digital assets.
UNAUTHORISED MEMBER PAYMENTS AND LOANS AS MADE IN CONNECTION WITH AN INVESTMENT.
Richard White (appellant) vs The Commissioners for HMRC (respondents) – Whether a loan is an “unauthorised member payment” for pension purposes within Part 4 of the Finance Act 2004, meaning of “payment” and “in connection with”—held loan was an unauthorised member payment as made in connection with an investment by the pension scheme
The appeal was released in the case of Richard White (appellant) vs The Commissioners for HMRC (respondents) on the 30th November 2016 following the sitting at The Royal Courts of Justice, Strand, London WC2 on 5 September 2016.
The appeal concerned the application of the pension scheme provisions contained in Part 4 of the Finance Act 2004 to a loan of £75,000 entered into by the Appellant in October 2010. The issue is whether or not, when viewed in conjunction with certain other transactions, the loan was an “unauthorised payment” to the Appellant, giving rise to an income tax charge on him of £30,000.
The outcome was that the loan was deemed an unauthorised payment and the appeal was dismissed.
DWP PUBLISHES A CALL FOR EVIDENCE ON BULK TRANSFERS OF DEFINED CONTRIBUTIONS PENSIONS WITHOUT MEMBER CONSENT
The Department of Work and Pensions is seeking views on how the current provisions on the bulk transfer of defined contribution pensions, in particular from occupational and stakeholder pension schemes, without member consent could be improved.
The DWP have published a call for evidence called “Bulk transfers of defined contribution pensions without member consent”
The current provisions were designed for DB schemes rather than the defined contribution landscape and the DWP want to make sure they work effectively particularly look to see if they can:
1. reduce unnecessary burdens whist ensuring members are adequately protected; and
2. allow providers of stakeholder pension schemes to transfer members to more modern and often lower cost schemes.
The DWP acknowledge that there are currently issues with the provisions application to defined contribution schemes because of the focus on defined benefit schemes, especially the requirement for an actuarial certificate in relation to the member’s benefits in the receiving scheme. They request evidence on the clarity of the rules surrounding this certificate in this context.
There is believed to be less of an issue with regards to the provision that the two schemes have a relationship but evidence is sought to address issues of orphaned schemes and transfers to a new scheme for deferred members, such that the scheme is new and has no members to be related to the employer before the first transfer.
The remainder of the document looks at transfers from stakeholder schemes and seeks views on the possibility of lifting some of the restrictions, such as the transfer can only be to another stakeholder scheme. The reasoning behind this is because more modern schemes and auto enrolment schemes may be more appropriate for the member and obtaining consent can be time consuming and difficult. In addition, questions are asked about the need for the scheme to be winding up to invoke the bulk transfer without consent provisions.
The consultation runs from 20th December 2016 until 21st February 2017.
THOUGHTS ABOUT FLAT RATE TAX RELIEF ON PENSIONS CONTRIBUTIONS
Many possible changes have been discussed to try and save the Government money by changing pensions tax relief, in this bulletin we look at the issues associated with flat rate relief.
The cost to the Government of pension tax relief is £34 billion a year and has been under constant fire for many years with commentators suggesting it favours higher rate tax payers while not incentivising basic rate tax payers enough. This is fair comment if you only consider it as a give away from the Government to the tax payer but in reality, it is just a deferral of tax received by the Government. In order to be a higher rate tax payer they have to be earning enough and paying tax at the higher rates so are therefore contributing more overall as it is.
One of the possibilities that has been mooted to reallocate the tax relief in a so called fairer way is flat rate tax relief or as has recently been used in the Lifetime ISA, a bonus payment which is a percentage of the amount paid in. Both these options amount to the same thing just by another name. The implications of going down this route would be so significant it would pretty much see the pensions industry as we know it destroyed and reinvented overnight.
Death of salary sacrifice
We have recently seen changes announced with regards to salary sacrifice but we were promised that pensions would be left alone. I am sure this was welcomed across the board but should a significant change be announced along the lines of flat rate relief then its days will be numbered.
Salary sacrifice reduces salary in exchange for an alternative benefit, usually an increased employer pension contribution. By doing this the member will not be paying tax or national insurance contributions on the sacrificed amount. This means that they are technically getting full tax relief on the contribution as well as the benefit of lower national insurance contributions. This isn’t currently an issue because the member would be entitled to that tax relief anyway, even if they had to reclaim the higher rate proportion through their self-assessment. In some cases the employer will also pass on some of their national insurance contribution savings to the member.
This, however would not work should flat rate relief be introduced because a higher rate tax payer would still be getting full tax relief when sacrificing their salary for employer pension contributions. The taxable amount of salary would be reduced so they wouldn’t be paying their highest marginal rate on that amount any longer. The only way around this would be tax the member on the contribution, possible by was of the benefit in kind regime, where a P11d is issued at the end of the tax year. This takes account of all benefits that the employee has received and should be taxed on their value. This will usually then result in an adjustment to their tax code to the following year to recoup the underpaid tax or in this case claim back additional tax relief they would have benefitted from. Other options would be available and are offered by employers now, such as including the contribution, or benefit in kind as a notional payment on a payslip so the correct tax is paid at the time, but this is subject to the employer being able to offer this, it basically negates the benefit of salary sacrifice in the first place at least in respect of the tax relief.
It would therefore be simpler to just abolish salary sacrifice for pensions. This would be an issue for a good number of employers and pension schemes who operate the whole of their pension scheme on a salary sacrifice basis to benefit their employees. Indeed salary sacrifice has been used significantly by employers who have set up new pension schemes in order to meet their automatic enrolment obligations. It would be costly for the employer stop offering the sacrifice arrangement and also reduce the employee’s benefits, which really isn’t what the Government is trying to do here, well not for basic rate tax payers. The knock-on effect for the Government is the additional benefit of increased National Insurance payments received.
Employer Contributions
The same argument applies for employer contributions, should flat rate be brought in. Employer pension contributions really are just another payment to the employee even though it goes straight into their pension. The employee is receiving full marginal rate tax relief on this payment because it isn’t a taxed benefit. Employers could change contracts for employees to pay them a higher pension contribution and a lower salary. This isn’t salary sacrifice because the employee would never have been entitled to the payment as salary but the outcome is the same. Higher rate tax payers would still be benefitting for higher rate relief even if the rules only offered personal contributions a lower flat rate.
This again would mean that employer contributions would need to be monitored and the employee taxed accordingly to ensure no one is getting a different rate of tax relief into their pension.
Final Salary Schemes
Final salary schemes face their own challenges, many are underfunded and this may see less funds going into the scheme from members, depending on the spread of tax payers that are members. This will mean that the employer may need to make up the difference to keep the scheme solvent.
Employer contributions are not calculated based on the needs of the scheme which means that contributions are not attributable to individual members in the same way are money purchase pension scheme contributions are. This would mean that trying to ensure that higher rate tax payers aren’t getting more than their fair share is impossible. Final salary schemes would therefore need to be excluded from these rules or another test applied. We already have significant differences in the way money purchase and final salary schemes are treated and this would just increase that.
Other options
All these complexities is why we have the system we do, which isn’t perfect but it does still limit the amount of tax relief any individual can receive by limiting their total tax relieved input into pensions by way of the Annual Allowance. This was as high as £255,000 per annum but now we are restricted to a more realistic figure of £40,000 for most but as low as £10,000 for the highest earners and those taking benefits.
It is possible to pay in more than this but any tax relief received will be negated by an annual allowance charge. The annual allowance has worked, to a fashion, and is understood by most. It is relatively simply in its basic form, although over recent years this has been made more complicated to try and limit tax relief for high earners. We need to get back to this simplicity, scrapping all the variants and restrictions on the annual allowance to stop all the confusion, encourage saving and rebuild trust in the system.
Thoughts
The issues with tax relief going predominantly to higher rate tax payers is something that has been around for many years but without a complete overhaul of the pensions regimes then there is unlikely to be a way to sort it out without causing further pain and cost to everyone involved. Flat rate relief may sound great to lower earners but whatever amount of tax relief they receive they still need the cash in their pocket to make the contribution in the first place. No amount of incentives will encourage someone contribute if they need to money to live on today.
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