Investment trusts, unlike collective funds such as unit trusts and open-ended investment companies, spend far less on marketing and, as such, are often overlooked. Here are five advantages worth thinking about:
• Although charges on all funds are slowly coming down, investment trusts tend to levy lower fees than unit trusts and open-ended investment companies.
• Some investment trusts appeal to income-seekers because they are able to grow dividends.
• Trusts are, arguably, better equipped to increase dividends than unit trusts or open-ended investment companies because they are allowed to hold back some income they receive from holdings
• unlike rival funds they can borrow money to increase exposure to markets. This can work in favour of shareholders if subsequent equity gains surpass the cost of borrowing.
• The average investment trust has outperformed its unit trust counterpart over one, three, five, ten and 15 years.
In 2010, the Government announced that it would remove child benefit for high income households. In the Government’s view such a household would be one where one of the partners has income of more than £50,000 and this is reflected in the legislation.
Child benefit is currently worth £1,076 per year for the first child and £712 for each subsequent child.
Where income of one of the claimants exceeds £50,000 there is a tax charge equal to 1% of the amount of child benefit for each £100 of income between £50,000 and £60,000. Child benefit is therefore tapered away until, when income hits £60,000, it is lost completely.
This has led to many partners who stay at home and don’t work not bothering to register for child benefit. After all, what is the point of claiming a benefit that has to all be subsequently paid back because the other partner has income of more than £60,000?
For those parents who officially opt out of receiving child benefit but still register, they can still continue to receive a credit towards their State pension entitlement. However, for those who simply do not claim child benefit this may cause them to lose entitlement to part of their State pension.
Such people should, if they are responsible for a child under age 12, still fill in the claim form and tick the opt-out box to make sure they get their National Insurance credits which will count towards their State pension entitlement. These credits are particularly vital for stay-at-home parents who are unlikely to be contributing to any other type of pension.
Clearly this is a bit of a trap for couples where one stays at home and looks after the children and the other is out at work with an income of more than £60,000. The “at-home” parent should still register for child benefit – even though none will be paid.
More people are selling second-hand properties. This could give rise to substantial CGT liabilities. How are those CGT liabilities calculated? Advance planning can reduce those CGT liabilities.
It would seem that some of the tax measures announced by George Osborne in his Budget in 2015 are beginning to take effect. More and more people are selling their buy-to-let investments. This naturally leads into considerations on potential capital gains tax (CGT) liabilities.
Capital gains tax is payable on the profit made from the sale of property that is not the taxpayer’s principal private residence, as well as assets such as shares (that are not held inside a pension or ISA).
Whilst no CGT is payable on the profits arising on the sale of a private residence, CGT is a reality on the sale of a buy-to-let property. After deduction of the CGT annual exempt amount, tax will be payable on the gain at 18% (to the extent it falls within the investor’s basic rate tax band) and 28% (to the extent it takes him or her into higher rate tax). It should be noted that the top rate of CGT on residential property is therefore 28% - even for 45% income tax payers.
And we can expect that HMRC is taking a keen interest in these transactions.
It has been reported that HMRC is apparently cracking down on those who sell a second home or buy-to-let property but fail to pay tax on the profits.
In this regard, apparently HMRC is to write to 1,500 people it has identified as having sold a property in the 2015/16 tax year but not declared a profit on which capital gains tax would potentially be payable. The letter will ask recipients to explain why they have not declared the gain and paid any tax. Failure to respond to the letter or provide an adequate explanation could result in a formal investigation and fines.
As mentioned earlier there has been an increase in sales of buy-to-let properties after a series of tax changes, that began to come into force in April 2016, reduced their attraction to investors.
The question is, is there any way in which the CGT tax bill can be reduced?
The tax is levied on the capital gain that arises on disposal – this is the difference between the purchase price of the property and the price at which it is sold.
Each individual has an annual capital gains tax exemption of £11,700 in 2018/19. This is £23,400 per couple where the property is in joint ownership. This, of course, is an investor’s total annual exemption and so, if the investor also has taxable capital gains elsewhere, these will count towards it. Losses from, say, the sale of shares or another property can be offset against gains.
Furthermore, the investor can deduct from the gross gain any costs incurred in the process of buying and selling the property, such as legal fees, agents’ fees and SDLT. It is also possible to deduct the cost of improvements, such as a kitchen extension or putting in a new bathroom.
It is not possible to deduct mortgage interest, repair costs or the cost of replacing items, (known as running repairs). However, in the case of buy-to-let properties, such costs will typically have been claimed against income in the year they were incurred. Matters can get complicated if an item is replaced with one of a higher specification, (in which case part of the cost can be offset against income and the other part against any gain.)
If a property has been the principal private residence of the investor for part but not all of the time it has been owned by the investor, in principle, CGT will only be charged on the pro rata gain for the period during which the property was not the investor’s principal private residence. It is also possible to claim an exemption for the last 18 months of ownership whether the property was occupied or not.
If a property that has been occupied as a private residence has been let out, it is possible to make use of lettings relief, which will reduce the gain by £40,000 — or the amount of the gain that is chargeable, whichever is lower. For investors who have more than one home that they have used as a private residence, they can nominate which will qualify for principal private residence relief. It does not have to be the one where they have lived most of the time.
Generally, it would make sense to nominate the one expected to make the largest gain when the property is sold. The problem here is that the investor needs to act quickly as they only have two years from when a new home is bought to make the nomination.
Unmarried couples can each nominate a different home as their main residence and therefore benefit from two “principal private residence” exemptions. This does not apply to married couples or civil partners.
When is the tax due?
The deadline for paying CGT is the last day of January after the end of the tax year in which the taxpayer realises the gain. For example, if the taxpayer sold a property on 1 August 2017 (in the 2017/18 tax year) the deadline to pay the tax due would be 31 January 2019.
There are plans to change the rules to require tax to be declared and some paid on account on such properties within 30 days of sale. This is expected to come into force on 6 April 2020.
Example - Frank
Frank bought a house on 1 February 2006, for £120,000, lived there until 31 July 2010, and let it until it was sold on 31 January 2018 for £260,000. He will have made a profit of £140,000 over the 12 years he owned it.
He is entitled to the principal private residence (PPR) relief for the time it was his main residence — in this case, the initial 54 months. A further relief is available for the final 18 months before it was sold, allowing him to claim PPR relief for 72 of the 144 months of ownership.
Deducting £70,000 from the total gain of £140,000 (72/144ths) leaves £70,000 that is subject to capital gains tax (CGT) — assuming no other capital expenditure that could be used to reduce the gain further.
Because Frank had let the house, a further £40,000 letting relief can then be deducted, reducing the gain to £30,000. From this he can deduct the annual CGT exemption in the tax year the property was sold — £11,300 in this case — pushing the taxable gain down to £18,700.
If he were a higher or additional rate taxpayer, Frank would pay 28% tax, giving a bill of £5,236. If the gain kept Frank in basic rate tax, he would pay 18% or £3,366.
An increasing number of workplace pension schemes are coming under greater scrutiny from The Pensions Regulator (TPR) as part of a significant shift in its approach to protect savers.
To reflect major changes in the political, economic and pensions landscape, TPR will be working proactively with more pension schemes through a new range of interventions to address risks sooner, clearly set out its expectations and take action where necessary.
The changes result from TPR’s major review of the way it does regulation, which is now transforming how the organisation works to safeguard member benefits. Key to the new approach is the introduction of a supervision regime to monitor schemes more closely, which will include higher and lower intensity interventions depending on the risks identified.
Chief Executive Lesley Titcomb said: “Following a complete review of our entire approach to regulation, we are now implementing a radical shake-up of the way we regulate to embed our pledge to be clearer, quicker and tougher.
“Schemes across all sectors, whatever their size, can expect the volume and frequency of their interactions with us to increase so that potential risks to pension savers are identified early and put right before it becomes necessary for us to use the full force of our enforcement powers.”
“Our new model is flexible – we will take a systematic approach to set out our expectations and will respond swiftly to emerging risks, taking tough action where necessary to tackle bad behaviour, including by corporate entities.”
“An important element of our new approach will be the use of a broader range of communication channels to drive behavioural change by promoting greater understanding of what schemes need to do in order to comply with the law and demonstrate high standards. This was a vital ingredient in the success of automatic enrolment amongst employers and we look forward to developing a closer relationship with schemes, both large and small.”
Dedicated, one-to-one supervision will be introduced for 25 of the biggest defined contribution (DC), defined benefit (DB) and public service pension schemes from next month, with this approach being rolled out to more than 60 schemes over the next year.
TPR will maintain ongoing contact with these schemes and in some cases their sponsoring employers, reflecting their size and strategic importance within the pensions landscape.
In addition to one-to-one contact, higher volume supervisory approaches are also being introduced from next month to address risks and influence behaviours in a broader group of schemes.
This second type of intervention will be piloted with approximately 50 DB schemes to assess compliance with messages in TPR’s 2018 annual funding statement, specifically concerning whether schemes are being treated fairly when it comes to dividend payments to shareholders. Hundreds of schemes are expected to experience higher volume supervisory approaches over time to tackle different risks across the pensions landscape.
An expected ban on lucrative “no transfer, no fee” incentives paid to pensions advisers will not happen until next year at the earliest after the financial regulator said it needed more time before making a ruling. Currently, anyone looking to transfer a defined benefit fund to a personal pension must seek advice from a regulated adviser if their fund is valued at more than £30,000. The adviser either levies an upfront fee or enables the client to pay from their pension fund if they choose to go ahead with the transfer. This year The FCA said that contingent charging, in which advisers are paid only when they persuade savers to move out of final-salary company schemes, was potentially harmful to customers. On Thursday it said that it had sought views and because of comments needed to carry out more work. Any proposals to change the rules will be consulted on “in the first half of 2019”.
A new consultation has been published by the Ministry of Justice looking at radically overhauling the legal requirements for divorce in England & Wales. The consultation is running until 10th December 2018.
There is currently a Bill before Parliament looking at the financial provision within divorce and together with the recent high profile case of Owens v Owens it has highlighted the outdated nature of the legal process on divorce.
The current law in England and Wales – which has remained unchanged for fifty years –sets requirements which can themselves introduce or aggravate conflict, and which encourage a focus on the past, rather than on making arrangements for the future.
The Government believes there is now broad consensus that the current divorce process does not serve the needs of a modern society. Difficulties with the current law have also been highlighted recently before the Supreme Court. In particular, the current divorce process is complicit in exposing children to the damaging impact of ongoing adult conflict during, and too often after, the process. While the wider family justice system is focused on helping people to resolve family issues in a non-confrontational way, the legal divorce process can make this more difficult because of the way it incentivises the attribution of what is perceived as blame. Parents in particular, who need to continue to work together in their children’s bests interests, may struggle to overcome feelings of hostility and bitterness caused by the use of “fault” to satisfy a legal process.
Under the current requirements, couples must either live apart for a substantial period of time before a divorce can be obtained, or else one spouse must make allegations about the other spouse’s conduct. This is sometimes perceived as showing that the other spouse is “at fault”. Three out of five people who seek divorce make allegations about the other spouse’s conduct. Both routes can cause further stress and upset for the divorcing couple, to the detriment of outcomes for them and any children. There have been wide calls to reform the law to address these concerns, often framed as removing the concept of “fault”.
Marriage is a solemn commitment, and the process of divorce should reflect the seriousness of the decision to end a marriage. The Government believes that the law should not exacerbate conflict and stress at what is already a difficult time. The Government accepts the principle that it is not in the interests of children, families and society to require people to justify their decision to divorce to the court.
The divorce process would retain irretrievable breakdown as the sole ground for divorce but remove the current requirement for the petitioner to give evidence of conduct or separation. Instead, one or potentially both parties will petition the court with a notice of the intention to divorce. The court will no longer need to check the particulars of the evidence but will continue to check other evidential aspects of the notice to the court (for example, to make certain that the court has the jurisdiction to act, that there is a valid marriage to dissolve, and to guard against fraudulent petitions).
The court will then be able to grant a provisional decree of divorce (the decree nisi) if these other requirements are satisfied and, following an application by either party after a statutory period of time has elapsed, may ask the court to make the divorce final by granting the decree absolute, as under the current law.
The two stage process (decree nisi and decree absolute) it is proposed remains but with a change to the minimum time frame between the issue of both decrees. There is currently a minimum time frame of 6 weeks and a day between the two decrees. There are arguments for the time frame to be extended but with potentially a shorter timeframe for specific circumstances.
Another proposal is to remove the right to contest the divorce. The case of Owens v Owens is exceptional, but it does illustrate the difficult position of one spouse who, it is reported, feels legally trapped in a marriage she regards as over.
The Government believes that as a general rule it serves no purpose – whether to the parties or to the state – to keep the opportunity to contest the divorce. Most divorce petitions in practice support a one-sided account that may not reflect the real reason for the breakdown of the marriage. Few respondents want to spend time and money on contesting the particulars in the petition, especially if they agree that the marriage is over. If one party has decided that the marriage is over then, arguably, the marriage is at an end. A marriage benefits the family and society only where each party is committed to the other. Any other marriage is a marriage in name only, the “empty legal shell” in the words of the Law Commission over fifty years ago.
The responses to the consultation will be published in March 2019 and it will be interesting to see if the Financial Provisions bill is also incorporated into the reform.
A “specialty debt” is a debt, contract or obligation that:
• is executed as a deed;
• is incurred under statute; or
• is a debt of the Crown.
It is a long-established principle of the common law that the situs of a specialty debt (i.e. its location for legal purposes) is the place in which the document recording that debt is physically situated.
By ensuring that the deed recording a specialty debt is physically stored outside the UK, it has therefore been possible to ensure that the debt itself will be treated as “excluded property” and so fall outside the scope of the charge to UK inheritance tax (“IHT”) for non-domiciled and non-deemed domiciled individuals. For example, life insurance policies taken out by UK resident non-doms have often been executed by way of deed or under seal and held offshore to ensure that their proceeds should not be subject to IHT (for as long as they also remain non-UK deemed domiciled for IHT purposes).
Historically, HMRC’s approach to specialty debts had followed the accepted common law position, however, in 2013, they abruptly changed their stance and revised their guidance to state that “many such debts are likely to be located where the debtor resides or where property taken as security for the debts is situated”. Although HMRC advised insurers that the position would revert to the previously held view in relation to life policies written under seal unless the arrangement is ‘artificial’, there has been no further communication on the point. This has left UK insurers – as well as resident, non-domiciled individuals who had previously taken advantage of the special treatment afforded to speciality debts - in a position of uncertainty.
The promised update has now, however, finally emerged and the revised guidance (which can be found in the IHT Manual at IHTM27079, IHTM27080 and IHTM27104) confirms that:
• Where the speciality debt is secured on land or other tangible property situated in the UK, the situs of the debt will also be in the UK;
• Where the debt is not secured, the common law approach will generally be followed unless both the creditor and debtor are UK resident;
• Life policies executed by way of deed or under seal will be treated as situated where the deed is to be found provided that the policy holder is non-UK domiciled and there is no evidence to suggest the location of the policy documents has been artificially arranged;
• Lloyds policies will not be treated as specialty debts unless they also bear the witnessed personal signature of the General Manager of Lloyds Policy Signing Office; Lloyds policies that do not bear this signature are chargeable to IHT in the country where the debtor (the company) resides.
The publication of the long-awaited guidance will be welcomed by insurers and affected policyholders. Policies effected with an overseas insurer are not, of course, affected by this guidance and will always be excluded property in the hands of a non-UK domiciled investor.
The £50,000 higher rate threshold, accompanied by a £12,500 personal allowance, has some interesting hidden consequences. The Chancellor’s announcement that in 2019/20 the personal allowance (PA) would rise to £12,500 and the basic rate band to £37,500 came as something of a surprise. Prior to the Budget there had been suggestions he might even have frozen both at this year’s level.
With the benefit of a few days hindsight since the Budget, the consequences of the increases and the resultant £50,000 higher rate threshold (HRT) are beginning to emerge. Here are a few:
- Reaching the 2017 Conservative manifesto targets for PA and HRT one year early has only a one-off cost, assuming they would anyway have been met in 2020/21. That is because there will be no increase to either PA or HRT in 2020/21, meaning that from then onwards the Chancellor is working from the same PA/HRT baseline for CPI indexation.
- The HRT increase is automatically carried across to the upper earnings limit for full rate NICs. An employee earning £50,000 a year will save £860 a year in tax from the PA/HRT uplift in 2019/20 but will simultaneously lose £340 – 40% – in extra NICs.
- A £50,000 HRT now means that theoretically the threshold at which the high-income child benefit charge is triggered matches the end point for basic rate tax. Thus, someone with two children could be in the position where their marginal income tax rate (ignoring NICs, a de facto tax) goes from 20% at £49,999 to 57.89% from £50,000 to £60,000.
While the effect for an additional rate taxpayer is the same as if all income between £100,000 and £150,000 were taxed at the old additional rate of 50%, the overall result is better for the Exchequer because there will be more people in the first £25,000 of that band, paying a rate 10% greater.
Unless a decision is taken to the contrary, the upper end of ‘band earnings’ for auto-enrolment will rise to match the HRT at £50,000. Allowing for the lower earnings threshold rise of £104 (to £6,136), that means the band will widen by £3,546 (8.8%) on an annual basis, just as the overall minimum contribution rate steps up from 5% to 8%.
Worst hit will be someone earning £50,000 as their larger contributions will also come with 20% rather than 40% tax relief in the next tax year.
From 1 April 2019 all VAT-registered businesses with a taxable turnover above the £85,000 VAT threshold are required to keep their VAT-business records digitally and send their VAT returns using MTD-compatible software.
MTD for business is a requirement to keep digital records and make regular quarterly reports of income and expenditure to HMRC, the intention being that transactions will be recorded, using accounting software, as near as possible to the time when those transactions occurred.
At the end of the accounting period taxpayers will need to send a final digital report to confirm their income and expenses for the year, and to claim allowances and reliefs.
The timetable for MTD currently remains as:
- Consultation on MTD for corporation tax expected later in 2018;
- Digital records required for VAT purposes from 1 April 2019;
- Digital records and quarterly reporting required for other taxes, e.g. income tax and corporation tax, from April 2020 at the earliest.
In R Ames v HMRC (2018) UK UT190 the Upper Tribunal found that CGT relief was not available on the disposal of EIS shares where no income tax relief had been claimed on their acquisition but granted judicial review of HMRC’s decision not to allow a late claim for EIS income tax relief.
The circumstances of this case are somewhat unusual. While most investors in Enterprise Investment Schemes (EISs) do so primarily to obtain income tax relief on the investment into the scheme, in this case Mr Ames invested £50,000 in an EIS scheme in 2005, but he did not claim EIS income tax relief. This was because his taxable income for that tax year was only £42 which was considerably less than his personal allowance which meant he had no income tax liability to reduce.
In June 2011 Mr Ames sold his shares for £333,200. He did not include any gain in his self-assessment because he understood that the gain was exempt from capital gains tax (CGT) under the EIS rules.
Following an enquiry, HMRC determined that Mr Ames was only entitled to the exemption from CGT if he had obtained EIS income tax relief on the acquisition of the shares and as he had not done so, he was liable for CGT on the gain. Accordingly, HMRC issued an assessment for a tax liability of over £72,000. Mr Ames appealed, however the First-Tier Tribunal (FTT) found against him.
Mr Ames also wanted to make a late claim for EIS income tax relief but, given that any claim for EIS income tax relief needs to be made not later than the 5th anniversary of the 31st January following the year of assessment, the crucial date for him was 31 January 2011. In fact Mr Ames made his claim in October 2012.
Generally speaking, HMRC has discretion to allow a late claim if a taxpayer has a reasonable excuse for failing to make the claim before the statutory deadline. In this case, however, HMRC did not accept that Mr Ames had a reasonable excuse and so refused to accept the late claim.
Mr Ames then took his case to the Upper Tribunal. The Upper Tribunal (UT) upheld the FTT decision that CGT relief on disposal of EIS shares will not apply unless there had been an income tax relief claim when the investment was first made. However, the UT heard that the decision-making process by HMRC as a result of which it declined to allow a late claim for income tax relief was flawed. HMRC did not properly apply the guidance on when and how it should exercise its discretion. The Guidance Note SACM10040 specifically states that there may be exceptional cases which are not covered by specific guidance relating to particular claims or elections where it may still be unreasonable for HMRC to refuse a late claim or election.
In Mr Ames’ case the exceptional circumstances included the fact that he had almost no income in the relevant tax year and therefore claiming relief would result in no income tax relief being in fact obtained. It would be a pure formality in order to preserve his entitlement in principle in the future to CGT exemption.
The UT accepted that it was perfectly reasonable and understandable for Mr Ames to believe that, given his very small income, he did not have to make a claim for relief. There is in fact no guidance dealing specifically with such unusual circumstances.
Given Mr Ames’ minimal income in that year and the fact that it’s not just a question of a claim but actual relief against income tax that was required in order to benefit from CGT exemption, to achieve that, Mr Ames would have had to waive in whole or in part his personal allowance. This, again, is not dealt with in any guidance.
The UT accepted that the legislation has created an anomaly for investors with taxable income below the personal allowance. In such circumstances the argument presented by HMRC that misunderstanding of legislation or guidance does not justify that a late claim was considered to be too inflexible and a mechanical approach. For this reason, the Upper Tribunal quashed HMRC’s decision from 2015 and remitted it back to HMRC for reconsideration.
Clearly Mr Ames was not a typical EIS investor, namely someone with relatively high income on which relief against income tax is sought in the first place. But this is not the first case where the highly technical EIS rules have come under scrutiny.
Whilst the legislation appears to be clear in that in order to benefit from CGT relief on disposal of the EIS shares there must first be an income tax relief, there is no logical reason why the two reliefs need to be linked. In fact, given that one of the objectives of the EIS reliefs is to increase private investments in the type of businesses which are covered by EIS rules, it seems odd that the CGT relief needs to be linked to the income tax relief. Given the Upper Tribunal’s critical assessment of HMRC’s decision making process when considering a late claim for the income tax relief, it is hoped that HMRC will reconsider and allow Mr Ames' late claim.
The case illustrates how important it is for the investor to be familiar with all the rules relevant to EIS investments before committing themselves.