Since 6 April 2023 no lifetime allowance (LTA) charges apply. All other aspects of the LTA framework have remained in place. However, where there is an excess, either a nil charge applies or the excess is subject to income tax at the individual’s marginal rates.

HMRC are now working on trying to deliver the more complex task of abolishing the LTA altogether from 6 April 2024.

The removal is complicated by the limits on tax-free cash and other tax-free lump sum payments, such as death benefits for those who die under the age of 75. The tax-free element of these payments are currently limited and calculated by reference to the individual’s available LTA. If the LTA is abolished, something else needs to be introduced to replace it.  

In July 2023, HMRC issued a policy paper, some draft legislation and Pension Schemes Newsletter 152 all covering the proposed amendments and their progress to date. Together, they give a good idea of how the process may work but there are still several key issues to resolve and further clarity is required.

Limits on tax-free lump sums

The plan is to introduce two limits on pension payments that can be made free of tax:

• An overall limit of lump sums and lump sum death benefits of £1,073,100.
• A tax-free cash limit of £268,275. This will count towards the overall limit above and will include the tax-free element of uncrystallised funds pension lump sums.

Anything above these limits will be paid subject to income tax at the member or beneficiary’s marginal rates. 

Where LTA protections apply, these will increase the limits in the same way as they do currently. 

Valuations

At high level, the limits are probably what most people expected. However, it is not clear how any previous tax-free cash payments will be valued and accounted for. The policy statement says that HMRC’s intention is not to change the approach that schemes currently take to valuing benefits. However, as the benefits have all previously been calculated by reference to the LTA, it is not clear how schemes will operate the new rules. 

The limit will also include small pots, winding up lump sums and trivial commutation payments which seems an unnecessary complication and one area that HMRC may review.

Hopefully, the valuation issues can be clarified but it is going to be difficult to achieve and implement any changes by 6 April 2024.

Death benefits

The bigger issues appear to be around the potential change in death benefits. Whilst there is nothing in the draft legislation, the policy paper states that death benefits currently paid in the form of income “will no longer be excluded from marginal rate income tax under ITEPA, with effect from 6 April 2024”. Whilst some may have expected the tax-free amount to be limited to £1,073,100, it will come as a shock to many that potentially all death benefits paid as income will now become taxable. The change doesn’t seem to match the policy intention and may well be a mistake. 

Another change in relation to death benefits relates to crystallised funds lump sum death benefits. Currently, these are not tested against the LTA and, so, any crystallised funds paid as a lump sum would be free of tax if the member dies under the age of 75. The proposed changes (if enacted) would mean that all lump sum death benefits will be tested against the £1,073,100 lump sum limit and any excess will be subject to income tax. The logic of this change is that the crystallised funds will not have previously been tested once the LTA is removed.  

Summary

In the current tax year, we still have the LTA framework in place and no LTA charges apply. It is not a perfect situation but is a system that works, one that schemes can implement and it meets the overall policy objective. It was always going to be a much more difficult task to remove the LTA altogether. We are now only seven months away from the next tax year and it may be better to delay the removal of the LTA rather than introduce new rules that are both difficult to administer and introduce new forms of unexpected taxation.    

We will provide further updates as and when we get more clarity.

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How the intestacy fixed sum for surviving spouses and civil partners in England and Wales has been belatedly increased to £322,000.

In July, the Government passed a statutory instrument (SI 2023/758) which increased the fixed sum for surviving spouses and civil partners payable under the intestacy regime in England and Wales. The sum increased from £270,000 to £322,000 with effect from 26 July 2023, a 19.3% increase.

This is the net sum that a surviving spouse or civil partner is entitled to receive if a person dies intestate leaving “issue”. Generally speaking, the term “issue” is used instead of “children”, but “issue” has a wider meaning and includes the lineal descendants, i.e. children, grandchildren, etc.

The change seems to have flown under many people’s radars, not least because the Ministry of Justice (MoJ) chose not to issue any press release. Dig a little and an interesting story emerges which explains – but does not justify – the MoJ’s reticence:

• Schedule 1A of the Administration of Estates Act 1925 requires the level of the fixed sum to be increased in line with the rise in the CPI:
• every five years (as last happened in February 2020); or, if earlier,
• when the CPI has risen by over 15% since the previous increase.
• The 2020 increase was based on November 2019 CPI and the 15% threshold was triggered by the October 2022 CPI, which was published on 16 November.
• Paragraph 4 of Schedule 1A says the Lord Chancellor must make an increase Order to raise the fixed amount within 21 days of the 15% threshold being crossed.
• However, the relevant Order was not set before parliament until 5 July 2023, 231 days after the CPI was announced.
• It appears that the £322,000 figure was based on the March 2023 CPI, issued on 19 April. The latest CPI (for June) would have yielded a figure £6,000 higher.
• The Explanatory Memorandum to SI 2023/758 gives no clue to the seven-month delay, merely referencing the 15% threshold as a reason for its issue.
• The cross-party House of Lords Secondary Legislation Scrutiny Committee picked up the MoJ’s ‘inexcusable error in timing of the Order’ and the ‘deficient Explanatory Memorandum’ in its recent report on the 2022/23 legislative session. It noted that the ‘MoJ has breached the law requiring it to increase the fixed net sum within the 21-day timeframe’. This may explain the absence of any MoJ press release…

The overdue increase in the intestacy fixed sum serves as another reminder of the impact of the freeze of the nil rate band, something else the Government would probably not wish to highlight. Had the nil rate band been index-linked since its April 2009 freeze began, it would now be around £475,000.

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As announced in May 2023, the Government will extend the pensions cold calling ban to cover cold calling for all consumer financial services and products. Please see our earlier Bulletin.

It has now published a consultation paper seeking views on the design and scope of the ban on cold calling for consumer financial services and products, including a call for evidence on the impacts of the proposed ban. This consultation closes at 9:30am on 27 September 2023.

Under the Financial Guidance and Claims Act 2018, cold calls are already banned from personal injury firms and pension providers (unless the consumer has explicitly agreed to be contacted).

Cold calling is defined by the Government as involving individuals or organisations making unsolicited calls to consumers to market a service or product. In some cases, these calls are made by direct marketing companies in breach of relevant privacy regulations, but in other cases the products and services being marketed do not exist and the call is fraudulent.

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Summary of responses to the consultation on tougher consequences for promoters of tax avoidance.

HMRC has published a summary of responses to its consultation entitled, “Tougher Consequences for promoters of tax avoidance”.

The consultation ran from 27 April 2023 to 22 June 2023 following which HMRC received 19 written responses from representative bodies, professional advisers and individuals, and met with eight representative bodies as part of the consultation.

Having considered these responses, HMRC has published draft legislation and accompanying explanatory notes.

The consultation on the draft legislation will run from 18 July to 12 September 2023.

It sets out proposals for a new criminal offence for promoters of tax avoidance schemes who fail to comply with HMRC’s notice to stop promoting an avoidance scheme and a proposal to expedite the disqualification of directors who promote tax avoidance.

The Government would like views from members of the public, representative bodies, advisers and promoters, as well as businesses and individuals who may have received marketing material, taken advice about, or used arrangements, which seek to avoid tax.

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June’s monthly Government borrowing figures. They included £7bn of downwards revisions which brought year to date borrowing below the Office for Budget Responsibility (OBR)’s projections. However, despite the revisions, total debt for June 2023 is above the 100% of GDP threshold.

On Friday, the Office for National Statistics (ONS) published the monthly public sector borrowing data for June 2023. Like the inflation numbers issued on the Wednesday, the borrowing figures were better than had been expected:

• The public sector net deficit ex banks (PSNB ex) in June 2023 is estimated to have been £18.5bn, meaning it was:

• The third highest June borrowing since monthly records began in 1993;
• £0.4bn less than a year ago;
• £0.1bn greater than in June 2021;
• £13.84bn less than in June 2020;
• £2.6bn below the OBR monthly profile projection; and
• £3.5bn below the Reuters economists’ median forecast.
• The latest estimate of total borrowing for the 2022/23 was revised down by £2.1bn to £132.1bn.
• Overall public sector net debt excluding banks (PSND ex) was £2,596.2bn, equivalent to 100.8% of GDP (up 0.9%). Last month’s initial May figure, which just crossed the 100% threshold, was revised down to 99.9% due to a £6.3bn increase in the GDP estimate outpacing a £0.5bn rise in the debt estimate.
  
  In June 2022, debt was 97.3% of GDP and £171.2bn less in cash terms. When the Prime Minister made reducing the debt/GDP ratio one of his five pledges in early January 2023, the then latest figure (for November 2022) was also 97.3%.

• At £12.5bn, the June 2023 interest payments were £3.7bn higher than May’s figure, but £7.5bn less than a year ago. The interest bill was £1.5bn below the OBR forecast, although it still ranked as the third highest payable in any single month on record.
  
  Total interest three months into 2023/24 amounts to £29.8bn, about 1.2% of GDP. Given the UK saw only 0.2% growth in the year to March 2023, that 1.2% serves as a reminder of how difficult it will be to push down the debt/GDP ratio. As the Institute for Fiscal Studies recently pointed out, the interest burden implies that if it is to stand any chance of cutting the debt/GDP ratio, the Government will need to run a large primary budget surplus, i.e. spend significantly less on everything excluding interest payments than its raises in revenue.
  
• Bank of England holdings of gilts (at redemption value) fell by £7.0bn from April to £695.5bn. The gap between the reserves the Bank created to purchase the gilts under QE and their redemption value narrowed by £0.8bn to £107.7bn (counted as Government debt, as the Treasury indemnified the Bank against losses).

The OBR commentary made the following comments:

• Borrowing in the first three months of 2023/24 totalled £54.4bn, £12.2bn above the same period last year but £7.5bn below the OBR’s monthly profile based on its March forecast. This downside surprise is more than explained by higher central Government receipts (£7.7bn above profile) thanks to surpluses across the three major taxes – onshore corporation tax, VAT, and PAYE income tax and national insurance (NICs) – alongside lower borrowing by local authorities.
• Central Government spending at £4.5bn above profile provided a partial offset to the increased tax receipts. Part of this was attributable to the non-consolidated element of the NHS pay settlement.
• HMRC cash receipts were £4.7bn (8.5%) above the OBR profile in June and were up £3.8bn on last June. This strength is explained by:

• Onshore corporation tax cash receipts were £3.1bn (34.9%) above profile and £3.7bn (45.3%) up on last year.

• Cash VAT receipts £1.2bn (15.0%) above profile and £4.2bn (11.4% per cent) higher than the OBR profile for the first three months of the year.

• PAYE income tax and NICs cash receipts were £0.7bn (2.2%) above profile.

Comment

A second piece of relatively good news for the Chancellor will be welcome relief. However, scope for a tax giveaway alongside the Autumn Statement continues to look minimal.

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