TECHTALK APRIL 2017 ISSUE 4 VOLUME 16 BUDGET SPECIAL EDITION

Transcription

1 TECHTALK APRIL 2017 ISSUE 4 VOLUME 16 BUDGET SPECIAL EDITION

2 EDITOR CONTENTS Sandra Hogg Sandra is the senior tax manager within Scottish Widows with 17 years of hands on experience dealing with HMRC and advising owner managed businesses as an accountant and tax adviser. She also has over 18 years insurance industry experience as a financial planning expert within the group. She represents Scottish Widows at industry forums and at the ABI s Life Insurance Product Tax Panel and is Scottish Widows expert spokesperson on Tax and Financial Planning. CONTRIBUTORS Chris Jones Chris joined the group in He s worked in a number of technical roles in marketing, product development and technical support. His recent focus has been on pensions taxation and the new pension reforms. Bernadette Lewis Bernadette joined the group in She has over 35 years experience in Financial Services with both intermediaries and providers. She has broad and deep technical experience across pensions, protection, tax and trusts. Thomas Coughlan Tom has spent over 15 years in technical roles. He has wide experience including the provision of technical support to financial advisers covering life, pensions and investment compliance. He currently specialises in pension planning. Jeremy Branton Jeremy has over 25 years experience working for financial services providers in a number of technical and advisory roles in life, pensions and protection. Having joined the group in 2006 he now specialises in corporate pensions, with particular focus on pensions reform PENSIONS AND LIFETIME ISAs COMPARED Chris Jones The Lifetime ISA became available as planned in April 2017 giving those under 40 a new savings option. How does it stack up against the traditional retirement savings plan; the pension. THE TAXATION OF DIVIDENDS Thomas Coughlan From 6th April 2018, the recently introduced dividend allowance will reduce from 5,000 to 2,000. The implications for business owners and investors are looked at in detail. QROPS: OVERSEAS TRANSFER CHARGE Bernadette Lewis The new 25% tax charge on transfers to QROPS and the exceptions explained. UPCOMING CHANGE TO BEREAVEMENT BENEFITS Johnny Timpson A detailed look at the bereavement benefit reforms that came into effect on 6th April AN INTRODUCTION TO THE RESIDENCE NIL-RATE BAND Jeremy Branton The IHT residence nil-rate band (RNRB) came into effect from 6th April PENSION LIMITS: A SUMMARY OF FREQUENTLY ASKED QUESTIONS Thomas Coughlan A useful round up of frequently asked questions relating to the tapered annual allowance, money purchase annual allowance and lifetime allowance protection. Johnny Timpson Johnny Timpson is Scottish Widows protection specialist. Johnny is a member of the Income Protection Task Force, a member of the IPTF Welfare Working Group and is also a member of the Seven Families initiative project team. He is also a member of the ABI Protection committee, the CII Insuring Women s Futures Programme and chair of TISA s Consumer Protection Policy Council.

3 WELCOME TO THE APRIL 2017 EDITION OF TECHTALK Welcome to the Budget 2017 edition of Techtalk. Despite relatively few announcements being made by Philip Hammond in March, a number of changes made in previous Budgets and Autumn Statements have only just started to apply from this April. In this edition we ve included our in depth analysis of the impacts of the recent Budget announcement as well as a broad range of topical subjects and specialist planning considerations. Chris reflects on this April s introduction of the Lifetime ISA and considers how it equates to traditional pension saving using a helpful comparison table. Tom takes a detailed look at the dividend allowance and uses examples to illustrate the impact on shareholding directors of the Budget announcement of its proposed reduction from 5,000 to 2,000 in April A somewhat surprise Budget announcement was a new 25% tax charge on transfers to qualifying recognised overseas pension schemes or QROPs. Bernadette explains how the new rules are intended to work and looks at when this new charge does, and doesn t, apply. There are already significant barriers to transferring UK pensions overseas. The new rules undoubtedly add further complications for advisers, who ll need additional information about clients circumstances and future plans to identify whether any suitable QROPS are available. I m pleased to welcome back our protection specialist, Johnny Timpson, as a guest author for this edition. Johnny looks in detail at the bereavement benefit reforms that came into effect in April and considers what impact this change may have on individuals and ultimately their protection needs. From this April, the residence nil-rate band will be available on death where an individual is leaving their residence to direct descendants. It will help many individuals with estates above 325,000 or spouses benefitting from the full transferrable nilrate band with estates above 650,000 on second death. However, conditions apply and it s tapered for estates over 2 million. Jeremy provides a useful summary of this new relief. And Tom rounds of this edition with answers to common questions about three important restrictions to pension tax relief: the money purchase annual allowance, the tapered allowance and the lifetime allowance. The complexities of these three allowances have dominated our technical enquiry service over the last year, and no doubt will continue to do so for the foreseeable future, so I hope these FAQs will prove helpful. The first few months of this year have certainly been as busy as ever. We ve tried to help you by covering the most topical legislative changes impacting you and your clients at this time. I hope you ll find this is a useful addition to your technical library. We will of course endeavour to remain a constant source of support through whatever changes the rest of 2017 may bring to challenge us. With the Greens (Plymouth Argyle) still sitting in the top three of the table at the time of writing, I m also hoping that by the time you re reading this we will have safely secured that long awaited promotion out of League Two! For more information on workplace and individual pension planning please take a look at our extensive range of support on the Financial Planning area of the Scottish Widows Adviser Extranet, at: adviser-automaticenrolment and And please also take a look at the new Defined Benefit advice resource centre which has material to help in conversations with clients concerning the detailed considerations around DB to DC transfers: Enjoy the read. Sandra Hogg

4 PENSIONS AND LIFETIME ISAs COMPARED Chris Jones The Lifetime ISA became available as planned in April 2017 giving those under 40 a new savings option. How does it stack up against the traditional retirement savings plan; the pension. 4 techtalk

5 The Lifetime ISA (LISA) has been available since 6th April 2017 offering a new tax incentivised savings option for those who meet the eligibility requirements. It is billed as a dual purpose product attempting to overcome the younger generation s dilemma of which to save for, a house or pension. The answer will usually be both of course but whether that is best achieved all in one product is another question. The LISA offers savers a 25% bonus on savings up to 4,000 a year so a maximum benefit of 1,000 a year. Savers must be between the ages of 18 and 40 to take out a LISA. Savers will be able to withdraw their own contributions plus the tax free bonus when purchasing a first home in the UK worth up to 450,000 at any time from 12 months after opening a LISA. For those saving for their first home, there is little doubt that the LISA is an attractive option, but how does it compare with a pension for its other intended purpose - retirement planning. ELIGIBILITY, CONTRIBUTION LIMITS, BONUS AND RELIEFS The eligibility requirements and bonuses are much more restrictive for the LISA than a pension. To take out a LISA you must be at least 18 years old and under 40. The bonus is a fixed rate of 25% but limited to a maximum of 1,000 a year. The maximum contribution is 4,000 topped up with the bonus to 5,000. In addition, the bonus only applies to age 50. This means savers can receive up to 32 years of bonuses or 32,000 based on the current limits. Contributions to a LISA will count towards the increased 20,000 overall ISA limit for 2017/2018. The 20,000 limit covers contributions to cash ISAs, stocks and shares ISAs and innovative finance ISAs. In contrast there are no minimum age limits required to benefit from personal tax relief on a pension and this can continue up to age 75. The contribution limits are also much higher. The standard annual allowance is 40,000 and carry forward is also available. However, for high earners the annual allowance may reduce down to as low as 10,000 a year. From 2017/2018 those that have accessed their pension benefits flexibly will be subject to a 4,000 a year money purchase annual allowance, however those that have will nearly always be beyond the age limit for LISA bonuses. Tax relief is available on personal pension contributions at the individual s highest marginal rates. For basic rate taxpayers this is the equivalent to the 25% bonus offered on the LISA. The tax relief on investment for pensions will be greater than the LISA for higher and additional rate taxpayers. INVESTMENTS AND INVESTMENT TAXATION The tax whilst invested is neutral. Neither the pension or LISA are subject to tax on income or gains whilst invested making both very tax efficient. Both LISA and pensions can provide a wide range of investment options. ACCESS, PENALTIES AND TAX ON BENEFITS Aside from the purchase of a first home as noted above, penalty free access from the LISA isn t available until age 60. Funds can be withdrawn earlier but this is subject to a penalty charge of 25%. This recovers all of the Government bonus and applies a charge at the equivalent of 6.25% of the individual s investment. This is because the 25% charge is applied to the investment plus bonus. Funds can be accessed without penalty in the event of terminal illness. Pension funds can t normally be accessed until the member reaches 55 (57 from April 2028 which is more relevant here). If the member is in ill health it is possible to take benefits early. The ability to access the LISA before retirement may be seen as an advantage for some savers, however, this is only available at a relatively high cost. The big advantage of the LISA is that if funds remain invested until at least age 60, there is no tax to pay on the withdrawals. With a pension of course, whilst 25% of the funds are usually free of tax, the rest will be subject to income tax at marginal rates. Pension freedoms allow complete flexibility in how and when benefits are taken once you have reached the minimum retirement age. This can help manage the tax position on withdrawal of funds but unlikely to match the tax free LISA. techtalk 5

6 EMPLOYER CONTRIBUTIONS LISAs can t accept employer contributions. Increasingly employers are offering the option to facilitate ISA contributions for employees and this may be extended to LISAs, however, they offer no tax advantages over taking the taxed salary and investing directly. The big advantage for pensions is that most (and eventually all) employers have to make minimum contributions into a pension scheme. The employer contribution, even at automatic enrolment minimum levels will mean the pension should provide far greater benefits on matched contributions (see table 2 below). DEATH BENEFITS Pensions have advantages in relation to death benefits. The benefits from a pension are normally outside of the member s inheritance tax (IHT) estate whereas with a LISA they will form part of the estate. It is also possible to pass pension funds down through the generations outside of anyone s estate, while keeping the funds invested in tax efficient beneficiary s drawdown. As with the standard ISA, on death the allowance can pass to a spouse but it doesn t offer the wider IHT planning options and advantages of a pension. WHAT ABOUT THE NUMBERS? Table 1 compares a personal contribution into an LISA and pension assuming a number of tax scenarios. The figures assume there is no matching employer contribution. We have assumed no investment growth for simplicity. As the investment tax is neutral the growth assumption will change the returns but won t change the percentage differences between the scenarios. The numbers assume the benefits are taken without a charge or penalty. Table 1 Unmatched contributions of 4,000 Investment + relief/bonus LISA Pension (Basic rate) Pension* (Higher rate) 5,000 5,000 6,667 6,667 Post tax withdrawal 5,000 4,250 4,667 5,667 Pension * (Higher to basic) Pension V LISA % -15% -6.7% % *Assuming net pay method The table demonstrates that from a pure taxation point of view, a LISA would produce a 15% better return than an unmatched pension contribution for a basic rate taxpayer. The LISA also produces a slightly higher return for a higher rate taxpayer who remains a higher rate taxpayer when the funds are withdrawn. The final column shows the more likely scenario where the client is a higher rate tax payer when making contributions but will drop down to basic rate when they take their funds. Here the pension achieves over 13% higher return than the LISA. Table 2 looks at a basic rate tax paying employee who will benefit from an employer pension contribution. For this we have assumed the eventual automatic enrolment minimum contribution levels of 5% employee and 3% employer. Table 2 Employed basic rate taxpayer 25,000 salary, 5% employee and 3% employer contribution. Investment + relief/bonus LISA Pension with employer contribution 1,250 2,000 2,150 Post tax withdrawal 1,250 1,700 1, Pension V LISA % +36% +46.2% Pension with employer contribution and EE NICs* *Have assumed salary sacrifice where 12% of employee contribution level NI saving is added for simplicity. Actual levels can be higher. This table demonstrates that with minimum employer contributions the pension produces a far greater return than the LISA. The pension option produces a 36% higher return than the LISA and if the employee can benefit from salary sacrifice as well, the pension advantage is even greater. The differential for a higher rate taxpayer will be even greater still. 6 techtalk

7 So from a purely tax point of view and just considering retirement benefits, the possible order of planning for those under 50 when contributing, could look something like this: Basic rate tax payers 1) Maximise any employer matched pension contributions 2) Fund LISA for the next 4,000 3) Return to pensions if any more savings available Higher rate tax payers 1) Maximise any employer matched pension contributions 2) Consider likely tax status in retirement If basic rate taxpayer continue with pension If higher rate taxpayer LISA for next 4,000 3) Return to or continue pension funding. LISAS AND PENSIONS COMPARED Tax treatment of funds paid in Tax treatment while invested Tax treatment when funds are paid out Workplace arrangements Lifetime ISA 25% government bonus equates to 20% tax relief No tax on income and gains within the funds Tax-free if used to towards first home after at least 12 months Tax-free from age 60 or on diagnosis of terminal illness Can access earlier, but subject to 25% deduction Employer can t contribute Employers may be able to facilitate payment but it will be from after tax/ni income Pension Income tax relief on member contributions at highest marginal rates No tax on income and gains within the funds 25% tax free cash from age 55 (57 from 2028) Balance available subject to income tax at highest marginal rates Employer can contribute Employer contributions exempt from employer NI, employee NI and income tax Employer/employee NI savings possible via salary sacrifice Death benefits pre 75 In member s IHT estate Doesn t normally form part of member s IHT estate Available as a lump sum or drawdown nominated to beneficiary free of all tax Lifetime allowance restrictions can apply Death benefits post 75 In member s IHT estate Doesn t normally form part of member s IHT estate Available as a lumps sum or drawdown nominated to beneficiary free of all tax Lifetime allowance restrictions can apply techtalk 7

8 THE TAXATION OF DIVIDENDS Thomas Coughlan In April 2016 the taxation of dividends underwent some much needed simplification. The major changes were the introduction of a tax-free dividend allowance, the removal of the dividend tax credit and an increase in the effective rates of tax. But in the Spring Budget, the Chancellor, Philip Hammond, partially reversed one of these changes, announcing that from 2018/2019 the dividend allowance will reduce to the less than half of its original level. This change will affect owners of incorporated businesses and investors in shares and collective investments. THE SIMPLIFIED DIVIDEND REGIME Before looking at the implications of the reduced allowance from April 2018, we will recap on the changes introduced in One of two major changes was the introduction of the 5,000 dividend allowance, which currently exempts the first 5,000 of dividends from income tax, irrespective of what tax band they fall in. The exempted dividends, however, still use up part of the tax band that they fall in. This change also removed the tax credit, taking with it any distinction between net and gross dividends. The other major change was an increase in the effective rates of tax from 0%, 25% and 30.6% to 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers a 7.5% increase in each band. The implications for investors in shares and collectives and director shareholders are summarised as follows: 8 techtalk

9 Investors: In the main, investors benefitted significantly from the original tax-free dividend allowance of 5,000. No tax on dividends up to this amount took many out of dividend taxation altogether. This change didn t matter for those whose dividends under the old rules would have fell within the basic rate income tax band, because their liability was previously covered by the tax credit. But those with dividends up to 5,000 falling in the higher and additional rate tax bands benefited significantly as previously they would have been taxable. Investors with dividends above 5,000 but below the critical thresholds explained below would also have benefitted but to a smaller extent. And investors with dividends in excess of the critical thresholds were worse off. Business owners: Director shareholders paying themselves dividends as part of their remuneration strategy would in many cases be receiving dividends well above 5,000, so many fewer in this category found the introduction of the dividend allowance to be quite as beneficial. The critical threshold which is the level of dividends above which the new tax rules resulted in a higher overall amount of tax than the previous rules was used as a rough guide to determine who would have had to pay more tax. The critical thresholds in 2016/2017 and 2017/2018 were: 21,667 for higher rate taxpayers, and 25,250 for additional rate taxpayers. (No calculation was necessary for basic rate taxpayers, who were always worse off if dividends above the allowance fell into the basic rate band.) These thresholds were based on the simple assumption that all of the dividends fell wholly within the relevant tax band. If the dividend fell across two bands, the critical threshold would have been different, and would have required a separate calculation. As these critical thresholds for 2016/2017 and 2017/2018 were relatively low, it was straightforward to conclude that many director shareholders would suffer an increased dividend tax liability as a result of the new rules. The amount of extra tax depended on the actual level of dividend and non-dividend income received in the tax year, so relied on a personal tax calculation. But despite this increase in tax against higher levels of dividends, many were still better off compared with a remuneration strategy based wholly on salary. THE FORTHCOMING REDUCTION TO 2,000 From 6th April 2018, the dividend allowance will reduce to 2,000. Whilst the press have correctly highlighted the increase in tax from the current position, this change is perhaps best viewed as a comparison against the pre- 2016/2017 tax rules. After all, the new rules came in just over a year ago, and the increase in dividends from 2017/2018 to 2018/2019 for high earners (a maximum of 3,000 x 38.1% or 1,143) will in many cases be a fraction of the overall increase as a result of the new tax rules from 2016/2017. The reduction in the dividend allowance will change the critical thresholds, which will become: 8, for higher rate taxpayers, and 10, for additional rate taxpayers. An example can be used to confirm that these dividend levels result in the same income tax liability under both sets of rules. How these thresholds are calculated is explained in the appendix. Example 1 Higher rate taxpayer (Salary of 70,000, dividends of 8,666.67) Old dividend rules Dividends ( 8,666.67/0.9) 9, Total dividend 9, Dividends 9, New dividend rules (incl. 2,000 allowance) Dividends 8, Deduct dividend allowance ( 2,000) Total income 6, Dividends 6, Higher rate tax: 9, x 32.5% 3, Higher rate tax: 6, x 32.5% 2, Tax liability 3, Tax credit ( ) Total tax 2, Total tax 2, techtalk 9

10 Example 2 Additional rate taxpayer (Salary of 170,000, dividends of 10,100.15) Old dividend rules Dividends ( 10,100.15/0.9) 11, Total dividend 11, Additional rate tax: 11, x 37.5% 4, New dividend rules (incl. 2,000 allowance) Dividends 10, Deduct dividend allowance ( 2,000) Total income 8, Additional rate tax: 8, x 38.1% 3, Tax liability 4, Tax credit ( 1,122.24) Total tax 3, Total tax 3, So, higher and additional rate taxpayers receiving dividends above 8, and 10,100.15, respectively, will suffer more tax under the new tax rules, taking into account the 2,000 dividend allowance, when compared to what their position would have been had the pre-2016/2017 tax rules remained in place. The reduced dividend allowance, then, significantly lowers the critical thresholds, which means the majority of director shareholders will be worse off in 2018/2019 than if the old rules had not been changed. Investors too will be worse off if they receive dividends above the critical threshold. And to ensure that the shorter-term perspective is not ignored, other than those whose dividends do not exceed 2,000, everyone s dividend taxation position will be worse off in 2018/2019 onwards when compared to their position in 2016/2017 and 2017/2018. SHAREHOLDING DIRECTORS Whilst this is helpful to establish the overall change in dividend taxation in recent years, a much more meaningful comparison for director shareholders is between their current remuneration strategy and the alternatives available to them in the same tax year. As the owners of small private companies can exercise control over the type of remuneration they receive, they will want to ensure they have the most tax-efficient mix of salary, dividend and employer pension contributions. This will involve a discussion with their accountant to establish: how much salary they should pay themselves, ensuring entitlement to valuable social security benefits; the level of dividends available to them, within the constraints imposed by HM Revenue & Customs and the amount of distributable profit within the company; and their ability to fund their personal pension within the available annual allowance plus carry forward. Let s look at an example for the 2018/2019 tax year, assuming that the personal allowance and basic rate income tax band will be 12,000 and 35,500. Example Anton is aged 54, runs his own limited company, remunerates himself using salary and dividends, and has his full annual allowance available in this tax year plus 35,000 carry forward. In 2018/2019 he wants to distribute 100,000 out of his company to remunerate himself. After a discussion with his accountant around the level of dividends he can receive, he decides to pay himself a salary of 8,164 (the national insurance primary threshold) and the rest in dividends. As there will be no employer national insurance liability in relation to the payment of salary, the remainder 91,836 can be paid as a dividend. The remuneration package is, therefore: Salary: 8,164 Dividend: 91,836 The total tax liability is as follows: 2018/2019 Salary 8,164 Dividends 91,836 Total income 100,000 Full personal allowance available: 12,000 Earned Income: Salary 8,164 Deduct PA ( 8,164) Taxable 0 Dividends: Dividend 91,836 Deduct PA ( 3,836) Taxable 88,000 Dividend allowance: 2,000 x 0% = 0 Basic rate tax: 33,500 x 7.5% = 2, Higher rate tax: 52,500 x 32.5% = 17, Total tax 19, techtalk

11 What is ultimately important here is the overall extraction rate of this particular remuneration strategy. As the dividend itself is a distribution of post-tax profits, the corporation tax bill has to be accounted for. The profit before tax was 113,377.77, which is found by grossing up the dividend by 100%/81%. The extraction rate, then, is the monetary amount received by the shareholder director as a percentage of the total cost to the company: Amount received after all taxes: 100,000-19,575 = 66.17% Cost to the company: 113, ,164 WHAT ALTERNATIVE REMUNERATION STRATEGY IS AVAILABLE? Following a discussion with his financial adviser, Anton is aware that he is able to swap some of his remuneration for an employer pension contribution to improve his overall tax position. As he is close to his 55th birthday he knows that he will be able to access these funds very shortly under the Freedom & Choice regime. Anton looks at swapping some of his dividend for the maximum contribution he can make to a personal pension. Example Anton considers his potential tax bill if he swaps 75,000 of the dividend for an employer pension contribution, thereby maximising his annual allowance plus carry forward in 2018/2019. To compare the overall tax position it is necessary to take all tax liabilities into account. The remuneration package would, therefore, be: Salary: 8,164 Dividend: 31,086 Employer pension contribution: 75,000 The total tax liability is as follows: 2018/2019 Salary 8,164 Dividends 31,086 Total income 39,250 Full personal allowance available: 12,000 Salary: Salary 8,164 Deduct PA ( 8,164) Taxable 0 Dividends: Dividend 31,086 Deduct PA ( 3,836) Taxable 27,250 Dividend allowance: 2,000 x 0% = 0 Basic rate tax: 25,250 x 7.5% = 1, Pensions: Pension 75,000 Deduct provision for retirement tax (assume basic rate taxpayer) Tax-free cash: 18,750 x 0 = 0 Taxable pension: 56,250 x 20% = 11,250 Total tax 13, As the dividend itself is a distribution of post-tax profits, the corporation tax bill has to be accounted for. The profit before tax was 38,377.77, which is found by grossing up the dividend by 100%/81%. The extraction rate, then, is the total received by the shareholder director as a percentage of the total cost to the company: Amount received after all taxes: 101, = 83.19% Cost to the company: 121, The potential to reduce his overall tax bill should motivate Anton to consider the most tax-efficient way to remunerate himself. Switching some of the dividends to an employer pension contribution can save a significant amount of tax in 2018/2019. There is no need to have salary of a certain level to be able to receive employer pension contributions, and as Anton is the driving force that generates the company s profits there should be no issue deducting the employer pension contribution from profit. In other words, it is likely to be incurred wholly and exclusively for the purposes of trade and is, therefore, a deductible expense. Looking further forward, Anton will not be able to utilise this strategy each year (he would have exhausted all of his carry forward), so he will have to revert to a higher level of salary and/or dividends in later years. He can, however, pay up to a maximum of 40,000 in employer pension contributions depending on the annual allowance available to him and any other contributions he makes to registered pension schemes. Many director shareholders will be able to improve their overall tax position by considering whether they are receiving the right mix of salary, dividends and pension contributions. Any such discussion will involve the client s accountant, but ensuring pension contributions which are sometimes overlooked by director shareholders are maximised within the annual allowance can help to better the extraction of profits, in addition to the usual retirement benefits that are available. Appendix: calculating the critical thresholds These thresholds can be determined by dividing the amount of higher rate / additional rate tax that would have been due if there were no dividend allowance by the difference between the old effective rate of tax and the new rate of tax: ( 2,000 x 32.5%) = 8,667 (32.5% - 25%) ( 2,000 x 38.1%) = 10,100 (38.1% %) techtalk 11

12 QROPS: OVERSEAS TRANSFER CHARGE Bernadette Lewis The March 2017 Budget introduced a 25% overseas transfer charge on transfers to qualifying recognised overseas pension schemes (QROPS). In addition, UK tax rules will apply to transfers to QROPS for five years after transferring. The 25% overseas transfer charge doesn t apply if someone had formally requested a transfer to a QROPS by 8th March A number of exceptions apply to transfers formally requested from 9th March 2017, with the aim of enabling people with genuine reasons for transferring UK pensions to QROPS to do so. The charge applies if someone is exempt at the outset, but their circumstances change during the relevant period of five full tax years (explained below) so that none of the exceptions applies. The charge is refunded if it s applied at the outset, but at least one of the exceptions becomes applicable during the relevant period. In addition, payments out of funds transferred to a QROPS on or after 6th April 2017 will be subject to UK tax rules for the relevant period of five full tax years after the date of transfer, regardless of where the individual is tax resident. It s understood that the Government is introducing these provisions to discourage the use of QROPS to facilitate pension scams and tax avoidance. 12 techtalk

13 OVERSEAS TRANSFER CHARGE EXCEPTIONS There s no overseas transfer charge if at least one of the following applies. The individual is tax resident in the same country as the one in which the QROPS is established. The individual is tax resident in the European Economic Area (EEA) and the QROPS is established in the EEA. The QROPS is provided by the individual s employer. The QROPS is an overseas public service scheme and the member is employed by one of the participating employers. The QROPS is an international organisation s pension scheme and the member is employed by that international organisation. Examples of international organisations include the European Union and United Nations, but not multi-national companies. The QROPS is an occupational pension scheme and the member is employed by the scheme s sponsoring employer. HMRC states it s keeping this provision under review, implying it will act if there s abuse. RELEVANT PERIOD The relevant period covers five full tax years following the date of the transfer which could be closer to six calendar years. If the transfer is made on 6th April, the relevant period runs for five years from that date. If a transfer is made on 17th May 2017, the relevant period runs to 5th April That is, 17th May 2017 to 5th April 2018 plus the five full tax years 6th April 2018 to 5th April EFFECTS ON PENSION SCHEMES To help advisers understand the new rules, the main effects on UK pension schemes and QROPS are as follows. The tax charge applies to transfers from UK schemes to QROPS. It also applies to transfers from QROPS (or former QROPS) to other QROPS. It doesn t apply where a member had made a substantive request before 9th March 2017 to transfer their UK benefits to the specific QROPS to which they actually transfer their benefits. Nor to benefits that derive from such a transfer. In all other cases, a UK scheme must ask the member for information about the transfer on revised form APSS263. If the member s answers show the charge applies, or they don t provide the required information, the scheme must deduct the 25% overseas transfer charge from their fund before transferring it. Existing QROPS providers must have given HMRC an undertaking by 13th April 2017 that they ll operate the new overseas transfer charge and pay it to HMRC. If they didn t, they ceased to be QROPS from 14th April The receiving QROPS must apply the overseas transfer charge if a member ceases to meet the conditions for exception from the charge during the relevant period. The member must inform the scheme if they become tax resident in a different country during the relevant period. The QROPS must also check whether the member has become liable for the charge if there s a transfer to another QROPS during the relevant period. The new QROPS has the same obligations in respect of this onward transfer as do any subsequent QROPS. Both UK schemes and QROPS must report all overseas transfers to HMRC, the member and the overseas scheme or new overseas scheme stating whether or not the overseas transfer charge applies. If the charge doesn t apply, the transferring scheme must state why not. The scheme and member have joint and several liability for the charge. The scheme should deduct and pay the charge to HMRC. But if it doesn t, the member must pay the charge via self-assessment. techtalk 13

14 OVERSEAS TRANSFER CHARGE AND BCE 8 Transfers of both crystallised and uncrystallised funds from UK pensions to QROPS are subject to a lifetime allowance (LTA) test under benefit crystallisation event 8 (BCE 8). The LTA charge is 25% and provisions ensure there s no double charge for crystallised funds. The scheme must carry out the LTA check and calculate any LTA charge before calculating any overseas transfer charge. If both charges apply, the scheme calculates the overseas transfer charge on the value of the fund available for transfer after deducting the LTA charge. Example Hywel has 1 million available LTA. He transfers his 1.2 million uncrystallised personal pension to a QROPS in July His circumstances mean the overseas transfer charge applies. LTA charge: 1,200,000-1,000,000 = 200,000 x 25% = 50,000. Overseas transfer charge: 1,200,000-50,000 LTA charge = 1,150,000 x 25% = 287,500. Amount transferred to the QROPS after deducting the LTA and overseas transfer charges: 862,500. QROPS BASICS HMRC s Pensions Tax Manual provides detailed guidance on the QROPS regime in its international section starting at PTM In order to be a QROPS, an overseas pension scheme must first be a recognised overseas pension scheme (ROPS). To become a QROPS, the scheme must self-certify to HMRC that it s a ROPS. It must also undertake to report information on UK tax relieved pension savings, pay tax when due and inform HMRC if it ceases to be a QROPS. Furthermore, HMRC must not have excluded it from being a QROPS. HMRC publishes a regularly updated ROPS list. However, it warns the member and their UK pension provider or adviser that they re responsible for the due diligence to establish whether a particular overseas pension scheme actually is a QROPS before transferring. The transfer of a UK pension to an overseas scheme is a recognised transfer and an authorised payment if the overseas scheme is a QROPS at the time of the transfer. This applies even if the receiving scheme ceases to be a QROPS at a later date. Where relevant, the overseas transfer charge applies to QROPS and former QROPS. Any transfers made after a scheme ceases to be a QROPS or is excluded from being a QROPS aren t recognised transfers. If it turns out that a receiving scheme wasn t actually a QROPS at the date of the transfer, it s not a recognised transfer. All these transfers are subject to a 40% unauthorised payments charge and possibly also a 15% unauthorised payments surcharge and a scheme sanction charge. The overseas transfer charge does not apply. POTENTIAL ADVICE COMPLICATIONS There are already significant barriers to transferring UK pensions overseas. The new rules add further complications for advisers, who ll need additional information about their clients circumstances and future plans to identify whether any suitable QROPS are available. The 25% charge means some clients moving to non-eea countries with no QROPS will have little choice but to leave their pensions in the UK. It s even possible that a client with a genuine reason for transferring, where a suitable QROPS is identified, could be trapped by an unexpected change of circumstances. So advisers will need to provide appropriate warnings. Example Alina is a 51 year old German national. She s been UK tax resident since She s employed by a UK company and is a member of its group personal pension. She moves to Germany to start a new job in June She has strong local connections and plans to retire there. She becomes German tax resident and ceases to be UK resident under the statutory residence test. She transfers her UK pension to a German QROPS in October She meets the conditions for no overseas transfer charge. She doesn t expect her circumstances to change until at least the end of the relevant period, which runs until 5th April However, following a takeover of her German employer in June 2022, she s offered a secondment to a non-eea country with no QROPS. If she takes up the offer, she ll become tax resident there before 5th April If this happens, the German QROPS will have to apply the overseas transfer charge. 14 techtalk

15 UPCOMING CHANGE TO BEREAVEMENT BENEFITS Johnny Timpson The Government recently announced the details behind the reforms to working age bereavement. They came into effect in April techtalk 15

16 On 6th April 2017, a new bereavement support payment will replace the current Bereavement Payment, Bereavement Allowance and Widowed Parent s Allowance claims. So what are the details of this change and what impact may this have on individuals and ultimately their protection needs? BEREAVEMENT SUPPORT PAYMENT BENEFIT WHAT IS IT? The full details of the new benefit payment were confirmed in a House of Commons Written Statement on 12th January The main features of the new Bereavement Support Payment benefit are: For those without dependent children, Bereavement Support Payment consists of a lump sum of 2,500, followed by 18 monthly payments of 100. For those with dependent children, the lump sum is 3,500, followed by 18 monthly payments of 350. The benefit is not means-tested. For the full payment, the deceased must have paid sufficient National Insurance contributions in any one year before their death. All payments are tax-free. Payments are disregarded for the purpose of Universal Credit (i.e. not counted as income). They are also disregarded for other means-tested and contributory benefits, such as contributory Jobseeker s Allowance and Employment and Support Allowance, and for the benefit cap. Marrying, cohabiting or entering a civil partnership does not affect payments. The claimant s age does not affect the amount received. HOW DOES THIS COMPARE TO CURRENT BEREAVEMENT BENEFITS? The new payment is different from the welfare payments it will replace in a number of ways: Payment period Payment period is now 18 months, which is an improvement on the current Bereavement Allowance (available for a year). However, this is a significant reduction from the current Widowed Parent s Allowance benefit which could be paid for many years (until the youngest child ceases to be financially dependent, which could potentially be age 20). A widowed parent with a newly born child could potentially receive 119,052 under the current system as opposed to 9,800 under the new. The average payment under the present system is 29,000. Payment The initial lump sum is higher, however the amount paid on a monthly basis is lower. Especially for widowed parents with dependent children (at 350 monthly for those with dependent children, and 100 monthly for those without), than either Widowed Parent s Allowance or Bereavement Allowance (both of which have a maximum of weekly, equivalent to 488 monthly). Interestingly the level of actual benefit is significantly lower than that consulted on. Tax All payments are tax-free. This differs from Widowed Parent s Allowance and Bereavement Allowance, which were taxable. However, Bereavement Payment is also a taxfree lump sum. Impact on other benefits All payments are disregarded for the purpose of applying for other means-tested benefits, whereas Widowed Parent s Allowance (after the first 10) and Bereavement Allowance were counted as income for the purpose of calculating means-tested benefits. Benefit cap Payments are disregarded for the benefit cap, whereas Bereavement Allowance and Widowed Parent s Allowance are taken into account. Relationship status Beginning a new relationship does not affect the benefit this is not the case with the current Widowed Parent s Allowance and Bereavement Allowance benefits, where entering into a new relationship post-bereavement would see these benefits cease. Age eligibility The claimant s age does not affect the amount received; this is not the case with the current Bereavement Allowance. National Insurance contributions eligibility Conditions are simpler than the current Bereavement Allowance and Widowed Parent s Allowance benefits since there is no requirement that the deceased have paid contributions for a proportion of their working life. The contribution conditions are similar to those for Bereavement Payment. WHAT HASN T CHANGED? Coverage sadly, as with all previous UK bereavement benefits, support is only for those who lose a spouse or civil partner, not for those who lose a partner to whom they were not married or in a civil partnership with. This is despite the fact that latest figures from the Office for National Statistics show that in 2016, 48% of babies born were born to parents who were not married or in a civil partnership. Around 60% of those births will be to parents who live together, which the Office for National Statistics says is consistent with the increasing number of couples choosing to cohabit rather than wed. One possible reason for the Government s reticence could be cost. The Childhood Bereavement Network estimates that 21% more parents would be eligible for bereavement benefits if the rules were extended to cohabiting couples with dependent children together. Under the planned new system being introduced next year, it estimates that extending the support would have cost around 21.6 million a year. 16 techtalk

17 WHAT SHOULD YOU DO AS AN ADVISER? You should be aware of how changes in welfare benefits can lead to lesser state financial provision and therefore may mean an increased protection need for your clients. Too often, clients overestimate the level of support they can expect from the state in times of need. The changes to the bereavement benefits and the reformed household benefit cap (which includes mortgage and rent support), reformed Support for Mortgage Interest Benefit, reformed Housing Benefit, reformed Council Tax support plus reform to Tax Credits does mean that life for bereaved families with young children could be harder. These reforms do have a disproportionate impact on working age women as they are statistically more likely to suffer bereavement. I don t believe in paying for financial protection cover if it is not needed, but if families feel that life assurance cover may be appropriate, it is key that they receive appropriate financial advice and discuss the benefits of placing their life cover in trust, especially if they are cohabiting (as cohabiting families in England and Wales did not benefit from reform of intestacy rules in Oct 2015) and/or have just not gotten around to writing a Will. For further information on working age welfare reform, I would suggest checking the support available from charities and If you d like to know more on this topic, here s a short history on the development of Bereavement Benefits in the UK: HISTORY OF BEREAVEMENT BENEFITS Bereavement benefits have long been a feature of welfare in the UK. They were first established by the Widows, Orphans and Old Age Contributory Benefits Act 1925, and were built upon by William Beveridge in his National Insurance Act 1946, the blueprint for the modern welfare state. One of Beveridge s core objectives was to improve support and outcomes for bereaved families saying: There is no reason why a childless widow should get a pension for life; if she is able to work, she should work. On the other hand, provision much better than at present should be made for those who, because they have the care of children, cannot work for gain or cannot work regularly. Up until 2001, the only bereavement benefits available were widows benefits, which were: Widow s Payment a lump sum of 1,000 Widowed Mother s Allowance a regular payment for widows with children or who were pregnant, and Widow s Pension payable to widows over 45 until retirement From the 1980s onwards, this system was successfully contested at European Community level and at the European Court of Human Rights, on the grounds that men should receive similar benefits. As a consequence, the current system of bereavement benefits was introduced in 2001 with the objective of supporting people and families who have recently lost their spouse/civil partner, and need some financial support to help them get back on their feet. It comprises the following benefits, which are available in England, Scotland and Wales, with a parallel system operating in Northern Ireland: Bereavement Payment: a tax-free lump sum of 2,000, payable when a spouse or civil partner dies, generally for people under State Pension age. Widowed Parent s Allowance: a taxable weekly benefit for parents who lose their spouse or civil partner. It is paid until the claimant reaches State Pension age, begins a new relationship (i.e. marries, cohabits or enters a civil partnership) or becomes ineligible for Child Benefit (i.e. their youngest child turns 20 or leaves fulltime education, whichever is earlier). The amount paid depends on the deceased person s National Insurance contributions, to a maximum of per week. Bereavement Allowance: a taxable weekly allowance paid for one year, to widows, widowers and surviving civil partners over 45 without dependent children. The amount received depends both on the deceased person s National Insurance contributions and the claimant s age, from per week for 45-year-old claimants to for those between 55 and State Pension Age. These benefits are not means-tested and eligibility is determined by the deceased s National Insurance contributions. SO WHAT ARE THE LEVELS OF CLAIMANTS FOR THE CURRENT PROVISION OF BEREAVEMENT BENEFITS? In November 2014, figures showed 66,000 people were receiving current bereavement benefits, of whom 23,000 received Bereavement Allowance and 44,000 received Widowed Parent s Allowance. Over 70% of claimants were women. 27,000 people, who were bereaved before the current system was introduced, continued to receive Widow s Benefit. The Department for Work and Pensions spent 582 million on bereavement benefits in 2013/14. In the 2014 calendar year, 28,830 people initiated a claim for bereavement benefits. The development of the bereavement support payment came out of the Government s working age welfare reform agenda, with the DWP launching a Bereavement Benefits for the 21st Century consultation in This proposed two options for a simplified Bereavement Support Payment benefit: Option 1: A lump sum payable on the death of a spouse or civil partner: 10,000 for claimants with dependent children and 6,000 for those without dependent children. Option 2: A lump sum followed by a monthly allowance for one year: for claimants without dependent children, this would be a lump sum of circa 3,000, followed by 12 monthly payments of around 250. For claimants with dependent children, this would be a lump sum of circa 5,000, followed by 12 monthly payments of around 400. Having considered the responses to the consultation, the DWP proposed the introduction of a Bereavement Support Payment, which would replace all three current bereavement benefits for new claims received after April techtalk 17

18 AN INTRODUCTION TO THE RESIDENCE NIL-RATE BAND Jeremy Branton The IHT residence nil-rate band (RNRB) came into effect on 6th April Given the complexity of some of the rules it will be important for advisers to work closely with a client s solicitor. 18 techtalk

19 KEY POINTS The RNRB provides an additional nil-rate band where an individual dies on or after 6th April 2017, owning a residence which they leave to direct descendants. In 2017/2018 the maximum RNRB available is 100,000. This rises in 25,000 increments in subsequent tax years until it reaches 175,000 in 2020/2021, after which it will be indexed in line with the Consumer Prices Index. The RNRB is set against the taxable value of the deceased s estate not just the value of the property. Unlike the existing nil-rate band (NRB) it doesn t apply to transfers made during an individual s lifetime. For married couples and civil partners, any unused RNRB can be claimed by the surviving spouse s /civil partner s personal representatives (PRs) to provide a reduction against their taxable estate. Where an estate is valued at more than 2m, the RNRB will be progressively reduced by 1 for every 2 that the value of the estate exceeds the threshold. Special provisions apply where an individual has downsized to a lower value property or no longer owns a home when they die. The relevant legislation is contained in Finance (No.2) Act 2015 and Finance Act 2016 and HMRC has issued guidance and a series of case studies illustrating how the RNRB will apply in different circumstances. They re available on the Gov.uk website. WHO IS INCLUDED AS A DIRECT DESCENDANT? For these purposes direct descendants are: lineal descendants of the deceased children, grandchildren and any remoter descendants together with their spouses or civil partners, including their widow, widower or surviving civil partner a step, adopted or fostered child of the deceased or a child to which the deceased was appointed as a guardian or a special guardian when the child was under 18. CALCULATING THE RNRB The amount of RNRB available to be set against an estate will be the lower of: the value of the home, or share, that s inherited by direct descendants the maximum RNRB available when the individual died. Where the value of the property is lower than the maximum RNRB, the unused allowance can t be offset against other assets in the estate but can be transferred to a deceased spouse or civil partner s estate when they die having left a residence to their direct descendants. Example David, a divorcee dies in August 2019 leaving his home worth 400,000 and other assets totalling 150,000 to his children. In tax year 2019/2020 the maximum available RNRB is 150,000. He had previously made an outright gift, treated as a potentially exempt transfer (PET) of 50,000 to his children within seven years of his death. The maximum available RNRB is capped at 150,000 due to the value of the property exceeding this figure. The standard 325,000 NRB is firstly applied against the failed PET: PET 50,000 Covered by NRB ( 50,000) IHT due on gift 0 NRB remaining 275,000 The RNRB is then applied against the taxable estate before the remaining NRB: Value of estate 550,000 Less RNRB ( 150,000) Remaining value of estate 400,000 Less remaining NRB ( 275,000) Amount subject to IHT 125,000 TRANSFERRING UNUSED RNRB A surviving spouse or civil partner s PRs may claim any unused RNRB available from the estate of the first spouse or civil partner to die. This is subject to the second death occurring on or after 6th April 2017 and the survivor passing a residence they own to their direct descendants. This can be any home they ve lived in there s no requirement for them to have owned or inherited it from their late spouse or civil partner. The facility to claim unused RNRB applies regardless of when the first death occurred if this was before RNRB was introduced then 100% of a deemed RNRB of 100,000 can be claimed unless the value of the first spouse or civil partners estate exceeded 2m and tapering of the RNRB applies. The unused RNRB is represented as a percentage of the maximum RNRB that was available on first death meaning the amount available against the survivor s estate will benefit from subsequent increases in the RNRB. The transferable RNRB is capped at 100% - claims for unused RNRB from more than one spouse or civil partner are possible but in total can t be more than 100% of the maximum available amount. techtalk 19