The relentless pace of change in matters affecting advisers, and clients, is such that it can be difficult to keep up. We’re now in January 2018 - what’s happened over the last 12 months that affect financial advice today?
This article is part of Oracle Quarterly January 2018.
In no particular order, these are some of the changes which now impact the world of financial advice.
Non-domiciles (AKA non-doms!)
This is all a bit complicated, but here goes.
The deemed domicile rule used to apply for IHT purposes only. It now applies also to income tax and CGT. The’17 out of 20’ rule for long term residents has sped up so that from 6 April 2017, those resident in the UK for at least 15 of the previous 20 years will be deemed domiciled. There is also a new rule which is impacting a small number - those born in the UK with a UK domicile of origin but later acquire a domicile of choice overseas, will be treated as domiciled here for IHT purposes once they become resident in the UK.
For any UK resident, non-dom clients, then an excluded property trust may be worthy of consideration. Your account manager can provide more detail if need be. Just be aware incidentally that trusts created while a returning non-dom was non-domiciled will be treated as if created by a UK-dom.
On the subject of excluded property (i.e. property exempt from IHT), the government closed down a ruse whereby a non-dom, could hold their UK home through an overseas ‘structure’ so that it would be treated as non-UK and free of IHT. Now, IHT has been extended to include homes situated in the UK which are held by non-doms through an overseas company, trust or partnership. This applies whether or not the person is UK resident.
Residence NRB (RNRB)
Back in January 2017, the RNRB didn’t exist. It does now! Here are just three pertinent points:
- Where the first of a married couple/civil partnership died before 6 April 2017, the estate could not have benefited from any of the RNRB as it simply wasn’t available. Therefore, 100% of the RNRB will be available for transfer unless the value of the deceased’s estate exceeded £2m and the RNRB is tapered away.
- A major aspect of planning for HNW clients concerns the £2m taper threshold. Lifetime giving of assets to bring the estate below £2m is worthy of consideration given that the taper applies by reference to the value of the death estate which doesn’t include gifts (even those within 7 years of death are ignored). If the client wants to make the gift in a controlled/flexible manner then perhaps a discretionary gift trust would fit the bill. Again, have a word with your account manager.
- A fundamental rule is that direct descendants of the deceased must become entitled to the home on the death of the deceased. Gifts into a discretionary will trust won’t benefit even if the beneficiaries are limited to lineal descendants.
Despite the RNRB, IHT receipts continue to rise. The recent budget estimated that IHT receipts will rise from £4.8bn (2015/16) to £6.5bn (2022/23). A 35% increase demonstrates why the appetite for IHT planning remains undiminished.
Digitalisation (I) - Trusts Register Service (TRS)
Big changes for trustees.
Twelve months ago, paper form 41G was used to register a trust. That was withdrawn in April 2017 and instead an online register became operational on 13 July. These points, I think, are important.
Trusts with UK liabilities need to register whether UK or non UK resident.
A UK tax liability comprises income tax, CGT, IHT, stamp duty land tax, stamp duty reserve tax and (in Scotland) land and buildings transaction tax.
Bare trusts are excluded.
The first reporting deadline of 5 October 2017 for new trusts (those that first incurred a tax liability in 2016/17) has been twice delayed until 5 January 2018. The deadline for existing trusts to register remains unchanged at 31 January 2018.
Digitalisation (II) - Online Probate
The Probate Service now accepts online applications from personal applicants based on these criteria:
- Only one executor is applying.
- An original will is available (even if the person who died made up to 4 changes (codicils)).
- The deceased was domiciled in England and Wales
- The same supporting documents required under the current paper process remain necessary
- The original will and two photocopies.
- The death certificate.
- The relevant IHT forms and figures.
- Any other supporting documents relevant to the case.
It’s interesting that online functionality will be developed to cover a broader range of probate applications in the future. Also, The Probate Service is looking to enhance this in the future, through links with other departments to automatically gather information.
There’s no turning back it seems.
Digitalisation (III) - Ending Self Assessment
In case you missed it, Simple Assessment has replaced Self Assessment (in certain situations)
Currently, around 11m people complete a tax return every year. HMRC consider that with greater use of existing data, it can obtain the relevant information, for some, without needing a tax return.
From September 2017, it removed the need for these two groups to complete a tax return.
New state pensioners with income more than the personal tax allowance in 2016/17.
PAYE customers, who have underpaid tax and who cannot have that tax collected through their tax code.
State pensioners who receive state pension over their personal allowance, and who have received a Self Assessment notice for 2016/17 should complete their return as usual. They will be removed from Self Assessment for 2017/18, and will receive a Simple Assessment notification instead.
Individuals with more complex tax affairs who continue under Self Assessment will benefit from a modernised process in the future - they will only be asked for information needed to assess their tax, benefits and credits. HMRC will complete the rest of the information automatically.
I know I’m repeating myself, but there’s no turning back it seems!
Did you spot the Staveley case (IHT in relation to pensions)?
The decision on this case was published in January 2017.
Mrs Staveley died in December 2006. In November 2006 she transferred funds from a section 32 policy into an AXA PP. HMRC argued that two transfers of value had taken place - (1) the transfer itself, but then also (2) the omission to take any retirement benefits during her lifetime. The move from the s32 to the PP meant that the money was moving from a return of fund to her estate (although any surplus on the fund would be returned to a company called Morayford, which belonged to her ex-husband with whom she’d had an acrimonious divorce), to a return of fund to discretionary beneficiaries.
With regard to point (1) it was accepted by both sides was the fact that Mrs Staveley wanted the transfer to occur so that her ex-husband couldn’t receive any of the money. It was held this was a transfer of value because the value of her estate immediately after the transfer was less than it would otherwise have been. However, this can be ignored where there this is no intention to confer a gratuitous benefit. In Mrs Staveley’s case, it was held there was no such intention. Regarding point (2), legislation had essentially overtaken this as the subsequent ‘Fryer’ case and amended legislation now allow someone to leave their pension benefits. Anyway, it was held that Mrs Staveley had not omitted to take benefits.
Why was this case important?
The judgement indicates that a discretionary return of fund, transferring to a discretionary return of fund should be exempt. However, it isn't that simple. Would this exemption only apply if there is no change in potential beneficiaries? Substituting beneficiaries could still be an intention to confer a gratuitous benefit even though it is a discretionary fund and the member can express their wishes. However, if the same beneficiaries are mentioned in the expression of wish form but the percentage changed, would that still apply? The total fund is the same, the people are the same but the member wants different percentages to apply. It isn't clear what the answer to this would be.
The judge stated that a transfer for purely commercial reasons should allow the exemption to apply. All well and good, but what counts as a purely commercial reason?
With regard to pension transfers, the potential for IHT has to be a discussion point and should almost certainly be covered in any suitability report.
Reducing the Money Purchase Annual Allowance (MPAA)
The Government announced a reduction in the MPAA to £4,000 from 6 April 2017.
The logic for the £4,000 limit is based on minimum and maximum auto-enrolment qualifying earning figures of £5,824 and £43,000 respectively. If you apply the 8% maximum combined contribution this figure is below £4,000. It’s important to remember that employer contributions do count towards the MPAA
Clients who intend to flexibly access retirement benefits must be made fully aware of the MPAA and how it will affect any future pension savings they are planning to make. The MPAA limit may seem to work against individuals who have the means and the will to save for their own retirement, however, where it applies, it will reduce the cost to the Treasury of pensions tax relief and that's what it's all about.
So, what are we to make of these various straws in the wind? Clearly the government is embracing the digital revolution and we will all need to get to grips with digital tax accounts. Ultimately these will make it easier for HMRC to collect what’s due. The government is proud it has reduced the tax gap to 6% from a recent high of 7.9% (the difference between the amount of tax that should be collected and what is collected), and no doubt the aim will be to reduce that further. It’s clear that money remains tight. It’s not just IHT receipts going up by 2022/23 but so too CGT (58%), NICs (22%) and income tax (21%). And finally, the tax system is becoming increasingly complex and fractured. The Scottish Government has both fully devolved taxes and partly devolved taxes and from April 2019, the National Assembly for Wales will have income tax varying powers. Testing times for an adviser based in England with clients in Scotland & Wales!
The need for tried and tested financial advice has never been greater, and that’s the world we live in.