Author Archives: Scott Grassick

26 March Spring forecast – are tax changes likely?

The Spring forecast, which is not to be a fiscal event. However, some tax changes can’t, it seems, be ruled out.

On 16 December 2024, it was announced by the Treasury that the Chancellor had commissioned the Office for Budget Responsibility (OBR) to prepare an economic and fiscal forecast (which they described as a “Spring forecast”) to be presented to Parliament alongside a “Statement” from the Chancellor on 26 March 2025. The OBR has to publish two forecasts every year by law.

The Chancellor and the Treasury have been clear that there will only be one full fiscal event each year “to give families and businesses stability and certainty on upcoming tax and spending changes”.

And with the clarity of that commitment and the fact that the October 2024 Budget announced £40 billion in tax rises and £70 billion in spending policies, the expectation would, understandably, be that no further tax increases will be announced.

However, it appears that high borrowing costs and low economic growth have already wiped out the Government’s £9.9 billion “fiscal headroom”, according to reports from Bloombergearlier this month. And that’s without factoring in any accelerated increase in defence spending that may need to be factored in. As a result, speculation is rising as to whether the Chancellor will need to reassess this stance.

The Chancellor told a recent CBI conference that there would be no more tax rises on the scale of the Autumn Budget, but she was then forced to row back on that statement by the Prime Minister – leaving it open for more tax increases in 2025.

So, what could these be?

Let’s consider theory first.

It will be too late for any relief from VAT being imposed on private education starting in January 2025, but, as 26 March 2025 is 11 days before the 6 April 2025 rise in employers’ national insurance (NICs), it is not out of the question that employers may be offered some relief. This might be via an increased Employment Allowance or perhaps a higher threshold before employers’ NICs become payable.

Additionally, could there be an announcement on NIC relief for the charity sector, which faces a major funding issue to manage the NIC rise?

There is also an opportunity to offer the business and farming communities some respite from the impact of the April 2026 reductions in inheritance tax reliefs, perhaps by increasing the proposed £1m limit on business property and agricultural property relief. We shall see if protests by farmers have had any effect on the Chancellor. It seems unlikely.

The proposed rise in the rate of capital gains tax on those claiming business asset disposal relief could also be reviewed, but, again, this seems unlikely.

In practice, though, a more likely tax change, if there is to be any, may be a continuation of the freeze on income tax thresholds and allowances beyond 5 April 2028. The move was apparently considered by the Chancellor in her October 2024 Budget, but she decided against it. The freeze in income tax thresholds and allowances began in April 2022, meaning that a move to continue the freeze would extend it beyond the currently planned six years.

The Institute for Fiscal Studies (IFS) said that freezing income tax thresholds from 2028/29 onwards would bring in roughly £3.5 to £4 billion a year, if inflation is at 2% or more and NICs thresholds are also frozen.

Treasury officials reportedly told the FT that the idea was “interesting” and the “obvious thing to do”.

Ahead of the October 2024 Budget, the Government briefed that continuing a freeze to thresholds, which began under the Conservatives, would not breach Labour’s manifesto pledge not to raise income tax.

Paul Johnson, the head of the IFS, said that it would be “relatively politically painless”, given that Ms Reeves could announce the change now but reverse it later if the economy improves.

An announcement of the freeze could allow the OBR to include the measure as a positive for the public finances later in the parliament, but would not require immediate legislation.

The fiscal outlook could improve between now and when the OBR produces its final report alongside the March 26 Statement, meaning tax increases or harsh spending cuts prove unnecessary.

As mentioned above, the OBR’s most recent forecast reportedly shows that the Chancellor’s headroom has been wiped out. Asked by the FT whether it could exclude Ms Reeves making tax changes in her March 26 Statement, the Treasury failed to do so.

A Treasury spokesman said: “Our commitment to fiscal rules and sound public finances is non-negotiable. As the Chancellor has said, the Office for Budget Responsibility will publish their updated forecast on March 26, and she will respond to it then.”

The Treasury reaffirmed that it was committed to one “major” fiscal event a year, the Autumn Budget.

Announcing future freezes in tax thresholds could be seen as effectively being a tax rise and still be politically risky for Ms Reeves, but much less so than an actual rate increase or a new tax.

In November, the Chancellor told the House of Commons Treasury select committee: “We have now set the envelope for spending for this parliament. We are not going to be coming back with more tax increases or more borrowing.”

Let’s see.

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Thousands of people top up National Insurance records to maximise State Pensions

In 2016, the Basic State Pension changed to the New State Pension and the rules about the number of years of credit needed to get the full benefit also changed. The new rules state that an individual needs 35 years of full credits to be eligible for full State Pension and that, if they have less than ten years’ service, they won’t get any State Pension.

There are also transitional protections to ensure that no one who has earned credits under the old system is worse off. However, this adds additional levels of complexity. Individuals should check if they can get National Insurance credits before they look into paying voluntary contributions. Men born after 6 April 1951 or women born after 6 April 1953 are eligible to make voluntary National Insurance contributions to boost their New State Pension.

The Check your State Pension forecast service on GOV.UK is the quickest and easiest way for an individual to check what their pension will be in retirement and take action if they need to. It will be necessary to have (or sign up for) a Government Gateway account. People can also use the HMRC app to check their State Pension forecast. According to HMRC, since the launch of the enhanced digital service in April 2024, more than 4.3 million people have used it to check their State Pension forecast. The end-to-end service means individuals can also use it to check and view gaps in their National Insurance record, calculate the difference any payment will make to their State Pension and then make one payment for however many years they need to top up.

According to HMRC’s recent Press Release, more than 37,000 people have plugged gaps in their National Insurance record by adding a total of 68,673 years, worth £35 million, using its online service since April 2024.  

Analysis of the digital service has shown that: 65% of the years topped up by individuals were from 2017 onwards; the average online top-up payment was £1,835; and the largest weekly State Pension increase was £113.76.

HMRC and the DWP are reminding people they only have two months up until 5 April 2025 to fill any gaps from 6 April 2006 onwards. From 6 April 2025, people will only be able to make voluntary National Insurance contributions for the previous six tax years, in line with normal time limits.

According to HMRC, since the launch of the enhanced digital service in April 2024, more than 4.3 million people have used it to check their State Pension forecast. The end-to-end service means individuals can also use it to check and view gaps in their National Insurance record, calculate the difference any payment will make to their State Pension and then make one payment for however many years they need to top up.

Part of the reason why transitional protection is required is because of the need to have more than the previous 30 years of credits and, because many people were contracted out of the State Pension prior to 2012, it allows the purchase of missing years. This protection allows the purchase of full or part years that are missing all the way back to 2006. This option is being removed on 5 April 2025 and will revert to the standard six years as per legislation. Note that, where the rates of voluntary National Insurance went up from 6 April 2023, top-up payments made by 5 April 2025 will be paid at the lower (2022/23) rate. Please see here.

It’s important to consider if there are gaps that need filling and make the most of the option to go back to 2006. Not everyone needs to fill gaps, even if they currently don’t have full State Pension entitlement and care needs to be taken to avoid buying years unnecessarily.

When looking at the State Pension forecast, then, the first thing to consider is the projected pension figure, and then what the individual has already earned based on the current records and how many more years they need to get the full amount.

If the forecast shows, for example, that only three more years are needed, and the individual intends to work full time or receive credits for three years, then there is no need to do anything more. In addition, with just three years to accrue before retirement, then buying additional years should an individual decide to cease work shouldn’t be a problem because there are plenty of years until State Pension Age. There are other ways in which to accrue State Pension credits, some of which are automatic and some of which need to be claimed. More details can be found here.

More consideration is required where the numbers are more challenging, if there is a disparity between what an individual can hope to accrue before they reach State Pension Age.

In some cases, the forecast may seem too low. This can be for a number of reasons. For example, contracting out of the State Second Pension or SERPS. This could have resulted in a Contracted Out Pension Equivalent (COPE) deduction being made to the forecast. The COPE deduction is already included in the forecast, so there is no need to try and factor this additional information in. However, because the New State Pension accrues at a flat rate of 1/35th for each year of credits under the new system. If an individual works longer then they can still get the full New State Pension at State Pension Age.

Further information

Please see voluntary National Insurance contributions.

The majority of people of working age will be able to use the online service, without needing to phone HMRC or DWP, including those living abroad who want to pay voluntary contributions for years they were resident in the UK. However, it is not currently available to those who are already receiving their State Pension, self-employed people or people currently living outside the UK with gaps incurred while working abroad. They can continue to manage their National Insurance as set out on GOV.UK.

HMRC app users can also see their pension details, including their current potential retirement date as well as annual, monthly and weekly forecasts as well as checking their National Insurance record.

Please also see our earlier Bulletin.

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ISAs and CTFs – an update from HMRC

This newsletter has been published by HMRC to update stakeholders on the latest news for Individual Savings Account (ISA) managers and Child Trust Fund (CTF) providers. It includes articles on:

  • additional permitted subscriptions;
  • National Insurance numbers;
  • Repair of an ISA account where the overall subscription has exceeded the legislative limit;
  • Partial transfers of current year subscriptions;
  • European Economic Area (EEA) Undertakings for Collective Investment in Transferable Securities (UCITS) and the Overseas Funds Regime (OFR); and
  • Extended period for issuing tax calculation (P800) letters.

Key areas of interest:

Additional permitted subscriptions

Since April 2015, spouses or civil partners of deceased ISA savers have been eligible for an additional ISA allowance, the Additional Permitted Subscription (APS), for deaths on or after 3 December 2014. For deaths on or before 5 April 2018, the allowance transferred to the surviving spouse/civil partner was equal to the value of the ISA on the date of death. However, for deaths on or after 6 April 2018, the APS can be either the value of the deceased’s ISA at their date of death or the point the ISA ceased to be a ‘continuing account of a deceased investor’, whichever is higher. For more information on this, please see Death of an ISA investor.

HMRC’s latest update says that, where an APS allowance based on the value at date of death was transferred but not used, and the continuing account of the deceased investor was not closed, there may be a higher additional permitted subscription allowance to which the spouse or civil partner is entitled when the estate is finalised. 

The transferring manager will be unaware if there has been an APS with the receiving manager. Similarly, the receiving manager will be unaware if there has been an increase in value when the estate is finalised.

There is no expectation from HMRC that the receiving manager will request a second APS value from the transferring manager, unless instructed to do so by the investor. Similarly, there is no expectation that the transferring manager will provide a second APS value to the receiving manager unless it has been requested by the investor or the receiving manager.

National Insurance number

Broadly, an individual will have, or is eligible to apply for, a National Insurance number if they are over the age of 16 and:

  • are planning to (and have the right to) work and have a UK National Insurance liability;
  • are claiming benefits;
  • applied for a student loan;
  • is paying Class 3 voluntary National Insurance contributions.

The Model Application Form is due to be updated. ISA managers are reminded the model form is an example only, and exact replication is not mandatory providing all the regulatory obligations are met. If the investor is eligible and does have their National Insurance number, the form will allow them to confirm this and provide the information. The form will also provide the relevant link where the investor can check if they are eligible for a National Insurance number. If the investor is eligible and does not yet have a National Insurance number, the form will allow them to confirm eligibility and direct them to where to apply for their National Insurance number. If the investor is not eligible for a National Insurance number, they can confirm this and continue to open an ISA providing other required conditions are met. The form will be amended to read: 

‘Please click on this link Apply for a National Insurance Number for information on National Insurance number which includes a section on who can apply.’

From 6 April 2025, managers can no longer accept an ISA application with a missing or dummy National Insurance number for new accounts. There is no change to the guidance for provisionally opening an ISA where all the required information is not provided straight away.

Repair of an ISA account where the overall subscription has exceeded the legislative limit

Previous year subscriptions

HMRC says that it has updated its guidance for invalid ISA accounts where the investor has exceeded the overall subscription limit in previous years. This is effective on all repair action taken from 6 December 2024. Only invalid investments in a repairable ISA will lose their tax exemption. This will be from the date of the first invalid subscription up to the date of repair (and could include current year investments). These dates are specified in a notice of discovery from HMRC to the ISA manager and the valid investments in a repaired ISA account may keep their tax exemption. Subscriptions to a repaired ISA for years other than that covered by the notice of discovery are not affected by that notice.

Current year subscriptions

If an ISA manager knows the investor has exceeded the subscription limit with the information they hold, they can void the invalid subscriptions. If the ISA manager is informed by the investor about the oversubscriptions, (for example, they’ve subscribed to accounts elsewhere) ISA managers should keep records. HMRC says that a phone call is acceptable if a record of the call is held.

European Economic Area (EEA) Undertakings for Collective Investment in Transferable Securities (UCITS) and the Overseas Funds Regime (OFR)

HMRC says that it is currently discussing with Financial Conduct Authority (FCA) the timetable for transitioning to OFR and the implications for funds which do not apply for OFR recognition. The outcome of those discussions will inform future newsletters. In the interim, managers should take no action regarding funds where OFR recognition had not been sought or has been denied.

Extended period for issuing tax calculation (P800) letters

In relation to non-ISA accounts, HMRC is reminding people that, due to higher than expected volumes, some individuals may have to wait until the new year to receive their P800s. This includes those who think they may have additional tax to pay on savings for the year ending 5 April 2024.

This is slightly longer than in previous years, where HMRC has aimed to complete most end-of-year PAYE reconciliations by the end of November. HMRC says that this process will be complete by the end of March 2025 and PAYE taxpayers are kindly asked not to chase until after that point. GOV.UK guidance is being updated to this effect. Please also see how to contact HMRC regarding income tax enquiries and our earlier Bulletin.

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Salary sacrifice traps highlighted by a recent tax case

A recent First-tier Tribunal (FTT) case in which the employer company failed to show reasonable care.

A salary sacrifice / exchange happens when an employee gives up the right to part of the cash remuneration due under their contract of employment. Usually, the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit, i.e. a pension contribution. The sacrifice is achieved by varying the employee’s terms and conditions of employment relating to remuneration. Please see Salary sacrifice and pension contributions.

From 6 April 2017, the income tax and national insurance contributions (NICs) advantages where benefits in kind are provided through salary sacrifice arrangements (described in the Finance Act 2017 as “optional remuneration arrangements”) are largely withdrawn, apart from for certain exceptions, such as for pension contributions. Guidance on the changes from 6 April 2017 starts at EIM44000.

The FTT case of The Best Connection Group (TBC) Ltd v HMRC concerned two travel and subsistence payment arrangement schemes for its employees, both via salary sacrifice. The scheme in question was the BestPay Salary Sacrifice scheme (or the “BSS”). It was made available to the company’s temporary employees whose salaries generally exceeded the National Minimum Wage (NMW) by £1. This category of employees comprised HGV drivers and skilled industrial workers.

Over the period 2006 to 2009, the company had become aware that a number of its competitors had implemented salary sacrifice schemes for dealing with the travel and subsistence expenses of their employees and was concerned that it was falling behind the market in not offering the same facility to its employees. Accordingly, it sought advice from Aspire Business Partnership LLP on how to implement its own scheme of that nature. Mr Andrew Sweeney was the Chief Executive and a part owner of the company. He was in charge of finance at the company at all times relevant to the appeals and was responsible for liaising with the company’s advisers in relation to the creation and continuing operation of the BSS.

The dispute between the parties concerned the appropriate income tax and NICs treatment of three different categories of payment which were made by the employer company to employees participating in the BSS over the four tax years ending 5 April 2013 to 5 April 2016 (both inclusive), namely:

(1) payments in respect of mileage undertaken by the participants in going to and from their temporary places of work by car, motorcycle or bicycle;

(2) payments in respect of expenses incurred by the participants in going to and from their temporary places of work by public transport; and

(3) payments in respect of expenses incurred by the participants on food and drink while they were away from home in the course of their employment.

The employer company considered that it did not have to account for income tax or NICs on any of the above payments because, in the case of the payments in respect of mileage, the payments were exempt and because, in the case of the other two categories of payments, the payments fell within the terms of a dispensation that was given to the employer company by HMRC and which covered those payments.

The employer company believed that, in consequence of the above, and the fact that each participant gave up part of their salary in return for the relevant payment:

(1) the relevant participant was better off because:

(a) in contrast to the receipt of salary, no deduction of income tax or employee NICs was required in respect of the relevant payment; and

(b) there was no need for the relevant participant to claim a deduction for the expenses in question in his or her tax return; and

(2) The employer company was better off because, in contrast to paying salary, it did not have to account for employer NICs in respect of the relevant payment.

HMRC did not agree and said that the employer company should have accounted for income tax and NICs on all of the payments.

In addition to the above, the employer company argued that, without prejudice to its submissions on the tax implications of the payments, even if HMRC were found to be correct in their analysis of those tax implications, that it took reasonable care to comply with its obligations to account for income tax in respect of the payments and its failure to do so was due to an error made in good faith. However, HMRC did not agree and argued that the company did not take reasonable care to comply with its obligations to account for income tax in respect of the payments.

HMRC argued that the company had failed to show reasonable care in two respects as follows:

(1) first, it had failed to operate the BSS in the manner that the scheme had been explained to HMRC in applying for the dispensation; and

(2) secondly, in any event, the scheme as operated did not ensure that participants received payments under the scheme only if they had actually incurred mileage or subsistence expenses or public transport expenses. Mr Sweeney, the company’s Chief Executive, had known of this at the time, as he had admitted in giving his evidence. Moreover, he had allowed the scheme to proceed on that flawed basis despite knowing of the importance to HMRC of compliance in relation to payments in respect of expenses.

The FTT considered whether:

  • the provision relating to the salary sacrifice was a valid contractual term despite the fact that some matters of detail were not spelled out – and it decided that it was;
  • the payments in question were “round sum allowances” by virtue of there being an insufficient causal link between the expenses in question and the making of the payments – and it decided yes, in relation to the payments in respect of subsistence and no, in relation to the payments in respect of travel;
  • based on the evidence, it was possible to conclude on the balance of probabilities that all or a specified percentage of the payments in any category related to mileage or expenses that had actually been incurred – and it decided that there was insufficient evidence to reach that conclusion and, instead, the onus was on the employer company to show in the case of any particular payment that the relevant payment met that description;
  • the payments in respect of subsistence or public transport were covered by the dispensation given by HMRC – and it decided no, because they fell outside the terms of the dispensation;
  • the employer company was entitled to a direction [under Regulation 72 of the PAYE Regulations] that it was not liable to pay the income tax on the basis that it had exercised reasonable care to comply with the PAYE Regulations and its failure to account for income tax was due to an error made in good faith – and it decided no, because the employer company had not exercised reasonable care.

The FTT decided that the Mr Sweeney did take reasonable care to comply with the PAYE Regulations insofar as he:

(1) took comfort from the fact that other employers operated travel schemes involving salary sacrifice; and

(2) relied on Aspire, as experts in the area, to create a scheme that would be lawful and tax effective.

However, in the FTT’s view, Mr Sweeney did not take reasonable care to comply with the PAYE Regulations when he:

(1) did not ask to see a copy of the opinion of leading tax counsel on the tax–effectiveness of the scheme. Although he was relying on Aspire as the relevant experts, it was incumbent on him to read the legal advice on which Aspire said it was relying;

(2) took comfort from the fact that neither BDO nor KPMG had raised issues in relation to the BSS in the course of their audits. This is because those firms had not been asked for their advice in relation to the scheme and therefore their failure to raise issues hardly amounted to a compelling endorsement of the scheme;

(3) apparently did not enquire why the way in which the BSS was set up – with a system of declaration on first registration and then subsequent notification and audit – differed from the system used by Aspire’s other clients;

(4) did not notice that the second stage in the process of dealing with HMRC in relation to the scheme, as outlined in the Aspire letter of engagement, was meant to be obtaining a clearance in relation to the scheme from HMRC and that that clearance had not been sought or obtained; and

(5) did not ensure that the scheme was operated in accordance with what was said to HMRC in the correspondence leading to the issue of the dispensation, particularly given that he was aware of the importance to HMRC of compliance in connection with expenses payments.

The judgement is 82 pages long, and the case has still not been fully resolved. However, there are few key points for employers to consider:

  • The payment and deduction arrangement in this case was quite complicated and the employer failed to deduct the correct amount of tax and NICs and pay this over to HMRC. Employers should check that the contractual arrangement is replicated correctly in their payroll software.
  • Once the contractual arrangements are in place and payroll software effects this when the employee is paid, the employer is legislatively required to take ‘reasonable care’, i.e. operationally, do all they can to collect the statutory deductions and pay these over to HMRC. In this regard, the term reasonable care is wide and open to interpretation. Yet it is important, as an employer who takes reasonable care is then able to say that they have a reasonable excuse for any non-compliance that may result. 
  • In this case, the employer was judged not have to have taken reasonable care in the operation of their scheme and the ruling pointed to the payroll system set-up as being one of the reasons. This highlights why, all processes need to work effectively together across HR and payroll software. Although, of course, software is often only as good as the information that is entered.
  • Finally, an effective audit process did not appear to be in place at this company. The first audit did not take place until 18 months after the scheme was introduced and the auditors had not been asked for their advice in relation to the scheme. An effective audit process should help an employer to understand if they are operating in accordance with the law.

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A view of the markets since the start of 2020

A five-year view, which shows the dominance of the US stock market since the start of the decade.

 31/12/201931/12/2024Five-year change
FTSE 1007542.448173.028.36%
FTSE 25021883.4220622.61-5.76%
FTSE 350 Higher Yield3653.23799.734.01%
FTSE 350 Lower Yield4512.454784.066.02%
FTSE All-Share4196.474467.806.47%
S&P 5003230.785881.6382.05%
Euro Stoxx 50 (€)3745.154895.9830.73%
Nikkei 22523656.5239894.5468.64%
Shanghai Composite3050.123351.769.89%
MSCI Em Markets (£)1574.2911606.6972.06%
UK Bank base rate0.75%4.75% 
US Fed funds rate1.5%-1.75%4.25%-4.50% 
ECB deposit rate-0.50%3.00% 
Two-yr UK Gilt yield0.65%4.37% 
Ten-yr UK Gilt yield0.76%4.57% 
Two-yr US T-bond yield1.59%4.24% 
Ten-yr US T-bond yield1.92%4.57% 
Two-yr German Bund Yield-0.64%2.08% 
Ten-yr German Bund Yield-0.19%2.36% 
£/$1.32471.2524-5.46%
£/€1.18021.20952.48%
£/¥143.9671196.826436.72%
Brent Crude ($)66.0274.6513.07%
Gold ($)1519.52609.171.71%
Iron Ore ($)92100.739.49%
Copper ($)61568811.543.14%

We recently issued a Bulletin headlined with the perhaps surprising fact that the FTSE 100 had just achieved its fourth successive calendar year of growth. That set us pondering what global investment performance would look like from the viewpoint of the start of the decade, which we will take – perhaps controversially – to be where the markets started 2020. The table above provides one answer, while the graph below offers a more limited but quicker to grasp view:

The table and graph highlight several factors:

  • Interest rates, whether dictated by the central banks or measured by Government bonds, have increased significantly across the half decade. The start of the period was very much the closing era of ZIRP (zero interest rate policy). The 0%ish world survived until 2022, at which point Covid related inflation prompted central banks into action.
  • The US stock market (orange line) is the standout performer. A significant slice of this is down to the Magnificent Seven, as discussed in our earlier Bulletin. Even so, the equal weighted S&P 500 was up 51.4% over the period.
  • The second place (grey line), for Japan’s Nikkei 225 hides the miserable performance of the Yen in the 2020s. Against the mighty US Dollar the Yen fell by almost 31% from the start of 2020, meaning that, in US Dollar terms, the Nikkei 225 rose just 16.6% across the five years.
  • Sterling and the Euro both also fell against the US Dollar, by 5.5% and 7.7% respectively. In US Dollar terms, that meant the Footsie was up 2.4% over the five years although, as we remarked in our earlier Bulletin, higher UK dividend yields would narrow the total return gap to a small degree.
  • The MSCI ACWI, a global equity index, rose by 57.5% over the five years in Sterling terms (48.9% in US Dollar terms). Unsurprisingly, a good slice of that was due to US equities.
  • Gold was a strong performer, mostly in the second half of the period. However, it was overshadowed by the price of its supposed digital counterpart, Bitcoin, which rose by just over 1,200%.

Comment

The first half of the 2020s has belonged to the US stock market and US currency. Can that momentum can continue for the next five years or does reversion to mean bite at some stage?

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Deathbed destruction of a will

An England and Wales High Court (EWHC) case in which it was decided that a woman who partially tore up her will on her deathbed had intended to revoke the document and thus prevent her extended family inheriting her £800K estate.

In this case, Crew & Anor v Oakley & Ors [2024] EWHC 2847 (Ch), Carry Keats was 92 when she died in February 2022.

She had made six wills in all, her first being a mutual will with Ron in 2003, by Kirklands Solicitors, who prepared all of her wills. By her second will, in 2013, drafted by Mrs Haffwen Webb, she appointed David and partners from Kirklands as her executors. A third one in identical terms (the second was invalid) was made in April 2013, and then a fourth in February 2016. Mrs Webb became a partner in Kirklands in February 2022. Ms Keats became Mrs Webb’s client as, at some point, Mr Michael Joy, a partner in Kirklands, handed her matters over to her. Mrs Webb also prepared the fifth will in August 2018. In September 2019, Ms Keats appointed her cousins (once removed) Angela and David Crew as her Attorneys under a Lasting Power of Attorney.

In July 2020 Ms Keats instructed Mrs Webb again, with regard to what became her sixth and final will. Instructions were taken by telephone due to the pandemic. The Crews were to be executors. They were also given a caravan and 25% each of the residuary estate with the balance to Kevin Whitehorn (25%) and Jason and Leon Whitehorn (12.5% each), Ms Keats’ cousins twice removed. Ms Keats was driven to Kirkland’s car park by the Crews who, at Mrs Webb’s request, went for a walk. Then Mrs Webb went through the terms with Ms Keats who executed that will in the car on 21 September 2020.There appears to be no question of testamentary capacity at the time of this will’s execution.

On the 16 November 2021, Ms Keats explained to her solicitor how she had fallen out with David and Angela as they indicated they would put her in a nursing home if she had another fall. She was, in Mrs Webb’s word, adamant that she wanted to revoke her 21 September 2020 will as she did not want the Crews to benefit. Nor were they to be her executors.

On 6 January 2022, Josephine Oakley called Mrs Webb and told her that Ms Keats was in hospital.

On 9 January 2022, a Mental Capacity Assessment completed by an Occupational Therapist for discharge noted that Ms Keats could not retain information long enough to make a decision nor could she weigh up the information. On 17 January 2022, in response to a question on a form “Does the patient have capacity? (informal assessment)” the “No” box was ticked. The hospital records then state, on 21January 2022, “Patient confused”. Under Nursing Notes it records that the staff declined to witness Ms Keats signing some documents produced by Josephine due to “…Carry’s fluctuating capacity. Unclear if she signed whilst we were not present”.

Mrs Webb telephoned the hospital on 25 January. The ward staff told her no visits were allowed due to the pandemic but on hearing she was a solicitor and it was to finalise Ms Keats’ will she was told a formal attendance was permissible. Mrs Webb tried to call Ms Keats. Amazingly, as she put it, Ms Keats answered but had little idea how to hold the ‘phone and was: “…very disorientated…didn’t give clear instructions about being to update her Will. She was very muddled. HW [the solicitor] uncertain if Carry would be able to give instructions. However, Carry confirmed that she would like HW to go and see her and to attend tomorrow.”

The dispute arose from events that occurred on 26 January 2022, when the solicitor visited Ms Keats in hospital. A detailed attendance note made by the solicitor set out the course of these events. Ms Keats had had a serious falling-out with Angela and David Crew about their alleged plans to move her into a nursing home and, while in the hospital, she wanted to make a new will leaving her estate to her sister Josephine Oakley. The solicitor had no doubts about Ms Keats’ testamentary capacity at that meeting, despite the earlier notes made by hospital staff which had described her as confused and not having capacity.

The solicitor told Ms Keats that, if she was adamant that she did not want Angela and David Crew to deal with the administration and to inherit from her estate, she could tear up the original of her existing will, which the solicitor had brought with her. According to the solicitor’s attendance notes, ‘…Carry was happy to do this. Carry was able to tear around three quarters of the way through and then HW [the solicitor] helped her tear up the rest of it.’ The solicitor had also brought a new draft will with her, but Ms Keats was not able to execute it as she was falling asleep due to some pain medication she had been given.

Ms Keats died on 15 February 2022, never having executed the new draft will. However, her destruction of the old will, if valid, meant she died intestate. In that case, her sister Josephine would inherit the majority of her estate. Josephine Oakley duly applied for letters of administration. Angela and David Crew challenged this, and proceedings then commenced on 23 June 2023.

The agreed points of issue were: whether the will was sufficiently destroyed to amount to revocation; whether Ms Keats had authorised her solicitor to complete its destruction; and whether Ms Keats had the requisite intention and mental capacity to destroy the will.

The case came before the EWHC, which found that Ms Keats did sufficiently destroy the will as it was entirely torn in half as she intended. Moreover, she had properly authorised her solicitor to complete the destruction of the will by a nod of the head, that was not a mere acquiescence but a ‘positive and discernible’ non-verbal communication. Further, the evidence of the solicitor showed there was sufficient intent on the part of Ms Keats to destroy the will, because the solicitor had just specifically advised her of how destruction would remove Angela and David Crew from the will. This accorded with the draft will that the solicitor prepared in accordance with Ms Keats’ instructions at a previous meeting, which she never countermanded.

The most difficult issue was that of capacity, given that medical evidence showed that Ms Keats had had several episodes of delirium while in hospital. Ultimately, the EWHC found the solicitor’s evidence as to the bed side meeting recorded in her attendance note so convincing that it was clear that Ms Keats had met the Banks v Goodfellow test, Goodfellow (1870) LR 5 QB 549, and therefore had the requisite mental capacity to revoke her will. In that case, Cockburn CJ stated that to establish capacity it was essential:

“…that a testator shall understand the nature of the act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he ought to give effect; and, with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties – that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not have been made.”

The EWCH found that Ms Keats had ‘a sufficiently lucid interval during which the revocation took place’. Ms Keats therefore had the requisite mental capacity to revoke her will.

The EWHC concluded that the will had been validly revoked and Ms Keats died intestate. It accordingly dismissed Angela and David Crew’s arguments and found for the sister’s counterclaim.

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Employer’s National Insurance Contributions and the Budget

Employer’s National Insurance Contributions (NICs), which it is looking increasingly likely will be increased in the Budget. It looks an easy revenue-raiser, but is it?

Here is the paragraph on page 21 of the Labour manifesto which is currently causing what might be described as a certain amount of controversy:

It is the only mention of the words ‘National Insurance’ in the entire manifesto. Labour’s stance is that the reference to ‘working people’ means that it is clear the pledge is not referring to employer’s NICs.

While the Conservatives are now disputing that claimed clarity, during the election campaign the then Chief Secretary to the Treasury, Laura Trott (now the Shadow), flagged up the possibility of employer’s NIC rises in a document entitled ‘Labour’s 18 Tax Rises’. In response, Labour’s shadow ministers refused to make a commitment to keep employer’s NICs rates unchanged.  

Leaving aside the political gaming, what would be the effect of a rise in employer’s NICs?

  • HMRC’s ready reckoner says an extra one percentage point on the employer’s Class 1 rate in 2024/25 (taking it to a main rate of 14.8%) would raise £8.45bn in 2025/26 and £8.9bn in 2027/28.
  • The impact of applying employer’s NICs to employer pension contributions is not covered by the ready reckoner. HMRC data puts the total employer NIC savings/relief on employer’s contributions at £15.4bn in 2022/23. This suggests that each one percentage point of NIC on pension contributions would yield £1.1bn-1.2bn.
  • There is a major qualification to both these estimates: the biggest single UK employer is the government. Thus, an increase in employer’s NICs would lead to higher departmental expenditure requirements or, if it was not compensated for, spending cuts. On the pension front the impact is very significant: £5.3bn of the employer’s NICs relief related to public sector pension schemes.
  • Just to muddy the water a little more, the HMRC data shows that £2.6bn (17%) of all employer’s relief related to salary sacrifice contributions. £2.3bn related to the private sector.
  • From an economic viewpoint, raising employer’s NICs is generally considered to ultimately impact on employees, making the ‘not increase taxes on working people’ an awkward statement for the Government to justify.
  • For proof, look no further than the Office for Budget Responsibility (OBR)’s Economic and Fiscal Outlook for October 2021 and its comments on Rishi’s Sunak’s introduction of a brief 1.25% NICs rise followed by the short-lived Health and Social Security Levy:

The OBR’s views were reinforced at the time by the then Shadow Chancellor, Rachel Reeves:

  • A further economic criticism is that if only employer’s NICs were increased, this would add to the distortions in the tax system between salary, dividends and self-employed earnings. These have been shrinking as a consequence of the employee and self employed NICs reductions.

Comment

We have said before that the great political advantage of NICs is that the Great British public does not understand them. This has been well demonstrated by the cuts to employee’s NICs, which were equivalent to 4p off the basic rate of tax but produced no obvious political advantage for the last Government.

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ISAs and fractional shares – an update

With fractional shares, rather than owning a share in a company, individuals own fractions of one or more shares. This could be useful, where, for example, the price per whole share in a company is prohibitively high, or a whole share would cost more than the £20,000 annual ISA subscription.

The emergence of fractional shares post-dates the ISA regulations. Last October, HMRC issued a definitive answer on the topic of fractional shares in ISAs, by way of its tax-free savings newsletter.

At that time, HMRC said, a fraction of a share is not a share and therefore cannot be held in ISAs. ‘Shares’, as referred to in paragraph 7(2)(a) of the ISA Regulations, refers only to whole shares and not parts or derivatives thereof. A fraction of a share does not give the investor the same legal rights as a whole share does. Fractional shares could only qualify for inclusion in ISAs if the ISA Regulations were amended to allow them.

HMRC’s newsletter went on to say that, where fractional shares are an underlying investment in a collective investment scheme or fund (for example an exchange traded fund), they are not subject to the same restrictions.

At that time, HMRC said that any ISA managers who allow fractional shares to be purchased or held within their ISAs as a qualifying investment under Regulation 7(2)(a) should contact HMRC by email at savings.compliance@hmrc.gov.uk.

Then, after considerable public pressure, the previous Government announced, in the November 2023 Autumn Statement, that it intended to “permit certain fractional shares contracts as eligible ISA investments” and would engage with stakeholders on the implementation of new legislation. This commitment was repeated in the March 2024 Spring Budget, with it saying that it was “working as quickly as possible to bring forward legislation by the end of the summer”. This was then put on hold by the general election in July.

However, according to a recent AccountingWEB article, a spokesperson for the new Government has now said: “We have committed to changing the ISA rules to allow certain fractional shares. Taking a pragmatic approach, HMRC will not raise an assessment on managers or investors for fractional shares acquired before these changes are made.”

The department is working with the industry to make clear what the new regulations require of them and the timeframe for implementation. The amended regulations will be publicly available in advance of coming into force, to give ISA managers and investors time to assimilate the new legislation into their processes.

In other ISA news, the Financial Times has reported that plans for the new UK ISA have been shelved. At the time of writing, this has not been confirmed by HMRC, which maintains that the option is still on the table, so, we may have to wait until the 30 October Autumn Statement to find out more.

Please look out for information on Techlink on any developments regarding the above.

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Pension tax relief – ideas for reform

A new paper from a Labour-supporting think tank, which has called on Rachel Reeves to make reform of pension tax relief a priority.

What sort of organisation publishes a paper on Bank Holiday Monday calling for the reform of pension tax relief? The answer is ‘a democratically governed socialist society, a Labour affiliate and one of the party’s original founders’ – the Fabian Society.

In a paper entitled ‘Expensive and Unequal’, the Society’s general secretary has called on Rachel Reeves to consider a radical restructuring of the pension tax landscape. None of the proposals are new, but as we head towards the ‘difficult decisions’ of 30 October, they are worth noting. Although, we should make it clear, this isn’t a Government-sanctioned paper. It’s just some ideas put forward by a Labour-supporting think tank:

a) Reform income tax relief on pension contributions

  • Create a single flat rate of tax relief for individual pension contributions. The paper is vague about the actual rate, initially giving an example of 30% as midway between 20% and 40%. It then suggests ‘…a lower rate could be set to generate rather than recycle revenue, for example 25%’. The Society’s estimate for tax savings on these two rates are £1.4bn and £5bn, based on applying an estimate from a June 2020 Pension Policy Institute paper to recently published HMRC data for 2022/23. The Institute for Fiscal Studies (IFS) recently calculated that a 30% rate of relief would raise £3bn a year in the long run.
  • The same flat rate would apply to employer contributions, which would become taxable income. However, the paper says it would be necessary to ‘consider special arrangements for defined benefit schemes.’
  • Rebadge tax relief as ‘a simple top-up credit on pension contributions (e.g. a £1 match for every £3 of contributions after tax)’, echoing the approach for Lifetime ISAs.

b) Consider increasing taxes on pensions in retirement

  • Revise the taxation of pension lump sums, for example, by reducing the maximum pension commencement lump sum (PCLS) to the lower of £100,000 or 25% of pension value.
  • Charge employee national insurance (NICs) on private pension incomes, with an annual allowance (matching the personal allowance) that would exempt small pensions. The paper says the measure should be introduced instead of means-testing the Winter Fuel Payment, albeit, on its calculation, such a move would have produced £2.5bn extra revenue in 2021/22 against the projected Winter Fuel Payment saving of £1.5bn in 2025/26.
  • Make pension assets subject to inheritance tax and levy income tax on all inherited pensions. This echoes a frequent IFS proposal and, on its estimates, would raise about £1.9bn a year in the long term.

c) Consult on reforms to NICs for pension contributions

  • The paper gives the example of replacing the current NICs exemption for employer contributions with ‘a clearer cashback scheme that rewards employers only for making voluntary contributions beyond the auto enrolment minimum’.
  • It also suggests levying employee NICs on employer contributions, in exchange for a higher flat-rate pension tax credit on the first tranche of annual pension saving (e.g. £1 match for every £2 of contributions after tax on the first £7,500 of contribution).

d) Recycle some of the savings into improving support for under-pensioned groups

  • Increase minimum employer contributions under automatic enrolment from 3% to 7% of earnings. On its own this would represent revenue loss to the Treasury due to increased tax relief, but the paper notes that ‘This could easily be absorbed as part of a comprehensive reform package that reduced the overall cost of pension tax relief, largely targeting high earners’. The paper does not put any numbers on this or consider the impact of such an increase on the Government’s economic growth goals.
  • Develop a new opt-out pension for the self-employed with tax relief designed to match what employees receive (income tax and NICs). This would add to expenditure, both because of the greater total relief and more encouragement to make pension savings.
  • Consider providing pension credits to people out of work because they are caring for young children or disabled people.

The paper says that ‘even if only a sub-set [of its measures] were progressed there would be ample scope to generate £10bn per year in extra tax revenues.’

Comment

Pensions tax relief has been the ‘low-hanging fruit’ of nearly every journalist’s pre-Budget copy for years. 2024 might just be their last opportunity to recycle the story.

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IHT interest rates – latest update

Updated interest rates for inheritance tax (IHT), published by HMRC.

HMRC has published updated interest rates for IHT. As of 20 August 2024, interest on late payments of IHT has decreased from 7.75% to 7.5%. Interest on IHT overpayments has decreased from 4.25% to 4% from the same date.

Where IHT is paid in instalments, interest will not be charged on the first instalment unless it is paid late. On each later instalment interest must be paid on both of the following:

  • the full outstanding tax balance;
  • the instalment itself, from the date it’s due to the date of payment (if it’s paid late).

The first instalment is due at the end of the sixth month after the death (for example if the deceased died on 2 June 2024, the first instalment would be due by 31 December 2024). This is the due date and payments are then due every year on that date.

Assets on which IHT can be paid in instalments

  • Houses – individuals can pay 10% and the interest each year if they decide to keep the house to live in.
  • Shares and securities – individuals can pay in instalments if the shares or securities allowed the deceased to control more than 50% of a company.
  • Unlisted shares and securities – individuals can pay in instalments for ‘unlisted’ shares or securities (ones not traded on a recognised stock exchange) if they’re worth more than £20,000 and either of these apply:
    • they represent 10% of the total value of the shares in the company, at the price they were first sold at (known as the ‘nominal’ value or ‘face value’. The face value of a share, and whether it’s an ordinary share, can be found on the share certificate).
    • they represent 10% of the total value of ordinary shares held in the company, at the price they were first sold at.
  • Businesses run for profit – individuals can pay in instalments on the net value of a business, but not its assets. 
  • Agricultural land and property.
  • Gifts – donees can pay in instalments if there is still IHT to pay and they were given: buildings; shares or securities; or part or all of a business. If the gift was an unlisted share or security, it must still have been unlisted at the time of the death.

Individuals can also pay in instalments if either of these apply:

  • at least 20% of the total IHT the estate owes is on assets that qualify for payment by instalments;
  • paying IHT on them in one lump sum will cause financial difficulties.

More information on paying IHT in instalments can be found here.

HMRC also previously announced that it was reducing interest rates by .25%, to 7.5% for late payments of income tax, National Insurance, capital gains tax, Stamp Duty Land Tax, Stamp Duty, Stamp Duty Reserve Tax and corporation tax, and decreasing repayment interest rates for these taxes from 4.25% to 4%, also from 20 August 2024. Please see our earlier Bulletin.

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