Q. You have provided some interesting information recently regarding the forthcoming reduction to the maximum amount one can save into a pension. I am several years away from retirement and, whilst my retirement savings are not yet at a level where they will exceed the threshold, I suspect that the total value of my retirement savings may exceed this limit by the time I reach retirement. Is there anything I can do to protect my position and, if so, do you think this would be sensible?
A. You have alluded to the fact that, with effect from 6 April 2014, both the Lifetime Allowance (the maximum amount a person can save into a registered pension scheme in their lifetime) and the Annual Allowance (the maximum amount a person can save into a registered pension scheme in any given year) are set to reduce. The Lifetime Allowance is set to be reduced from £1.5m to £1.25m and the Annual Allowance will be reduced to £40,000.
If you think that you may be affected by the forthcoming reductions to the Lifetime Allowance, there are measures that you can take in order to avoid a punitive tax charge at retirement and to maximise your retirement planning opportunities. It is important to note that these options are not simply for those people who will exceed the Lifetime Allowance on 6 April 2014!
For example, anyone with retirement savings in excess of £1.25m – or who is likely to be in such a position when they reach their chosen retirement age, may consider applying for “Fixed Protection 2014” that will preserve a personal Lifetime Allowance of £1.5m (the current Lifetime Allowance). However, Fixed Protection 2014 would mean that no further pension savings can be made, effectively freezing the party’s pension savings at their current value with only future investment returns on those savings being permissible.
Alternatively, for those people who have pension savings that already exceed the Lifetime Allowance, they may wish to apply for Individual Protection 2014, which will enable them to continue to make contributions to their retirement savings. However, the formal legislation governing the Individual Protection regime is not yet enacted.
Fixed Protection is available now, but must be applied for by 5 April 2014. In contrast, Individual Protection is expected to be available from 6 April 2014 for a period of three years. Therefore, if you think that you may be affected by the forthcoming changes, I recommend that you to seek assistance from a chartered financial planner, who specialises in retirement planning, as a matter of urgency. They will assess your personal circumstances and recommend whether it is in your best interests to apply for one or both forms of protection.
Q. I have read with interest your answers to recent questions regarding divorce, a subject in respect of which you are clearly well informed. I am a share holder in my family’s business, which my parents established more than forty years ago. They gifted 50% of the shares to me and my wife (in equal proportions) approximately fifteen years ago. Both parents own 25% of the shares, although my father maintains control of the business as his shares come with additional voting rights. It has always been the intention that my parents’ shares were held on trust for me and my wife, but I am not aware of them actually having established a trust formally. I suspect that my mother may seek to divorce my father. If she does, would my father’s shares be considered matrimonial assets to be divided between them?
A. I have too little information to provide you with definitive advice. However, I suspect that, in the absence of a formal trust, your father’s shares would be considered a matrimonial asset to be divided upon divorce.
The situation you describe is similar to that which was considered by the courts in the recent case of Shield v. Shield. In that instance, having sought advice from his accountant, the father organised the shareholdings in such a way as to seek to – legitimately – avoid tax. This resulted in the parent shareholders gifting half of their shares to their son (who was responsible for running the business) and retaining the remaining half of the shares.
When the parents subsequently divorced, the mother sought to include the father’s shares in the schedule of matrimonial assets to be divided between them. In contrast, both the father and son argued that the father’s shares were held on trust for his son, with the father merely benefiting form a life interest.
Despite the judge accepting that there was an intention to create a scheme whereby the value in the company’s shares were transferred to the son, evidenced by the father and son being able to produce a clearance letter that had been sent to HMRC, the court found in favour of the mother. It was held that there was no binding agreement and no constructive trust and, therefore, the shares remained the property of the father. Had the father executed a trust, the outcome would (almost certainly) have been different.
If you and your parents wish to structure your shareholdings in a tax-efficient manner, I recommend that you seek advice from a solicitor, who specialises in tax and trusts (if they have the “TEP” accreditation, this ought to be a good indication of their credentials).
Q. I am a high-earner and I have in the past – based upon advice from my accountant – made use of “tax avoidance” schemes. However, a friend has told me that the rules regarding tax mitigation are set to change and that I will be required to pay the tax up front and then seek to reclaim it by proving the legitimacy of the tax avoidance scheme. Is this correct?
A. Yes, sort of.
During his autumn statement, the Chancellor of the Exchequer, George Osborne, announced that HMRC will request payment upfront from taxpayers who make use of tax avoidance schemes that are the same as, or similar to, a scheme that has already been defeated in the courts. This builds upon a general theme of the Chancellor seeking to clamp down upon tax avoidance.
As a consequence, a consultation has been published, “tackling marketed tax avoidance” that runs until 24 February 2014 and which includes proposals to increase those circumstances where individuals and companies should pay tax upfront while HMRC investigates the case. As a result of the consultation, taxpayers will not be able to “hold-on” to the disputed tax while their case is under investigation – because they will be required to make an upfront payment in cases where the scheme hits avoidance hallmarks. In the event that a taxpayer makes their case successfully to the tribunal or court, their money will be returned with interest.
While the consultation does not seek to amend existing tax rules, it is likely that it will assist HMRC in resolving many current cases that are subject to investigation and ought to serve as a deterrent to those who may be considering entering into one of the anti-avoidance “hallmarked” schemes. It is worth noting however, that in the majority of cases HMRC will be due the tax in any event, as it wins more than 80% of its tax avoidance investigations.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
