Charegable gains and personal allowance revisited - a nasty shock

thelordgiveth

Apologies to anyone likely to be offended by moaning by someone clearly about to received a large sum of money. But I'm assuming that MSE is an equal opportunity forum, so here goes...

My father died late last year, aged 94. He had taken out non-qualifying polices 27 years earlier, placed in trust for my sister and myself (also the only estate beneficiaries). He had educated me about the possible income tax implications, top slicing and (as he liked to put it) the importance of not dying late in the tax year.

I duly completed the R27 income tax return, detailing the chargeable gain over 27 years. As the annualised gain was insufficient to take him into higher rate tax for the year, I expected there to me no further tax liability on the gain, and that (for the normal reasons) a modest refund would be due.

The HMRC assessment came as a nasty shock. At first I thought that they had simply messed up the top slicing calculation but on closer examination they had given him no personal allowance whatsoever. The assessment came with no explanation. I queried it and have just had the explanation given that because his income for the year was above a certain level, no personal allowance was available. As a result, virtually the whole of the total chargeable gain, all 27 years worth, became liable to higher rate tax rather than the basic already deducted.

This seems both illogical and unfair but unfortunately that doesn't necessarily make it incorrect in taxation terms! It seems to go back to the Finance Act 2010. As far as I can see, all the rhetoric at the time was that this was intended to target the top 2%, so we were all paying our share in the crisis. The financial columns duly gave lots of advice to these people on how they could avoid or mitigate the measure, which no doubt those with regular large incomes were able to do.

That's generally not the case for people in their latter years who took out policies many years earlier. Were these people the real target, I wonder hidden by the rhetoric about "fat cats"? Quite clearly, the (total) chargeable gain is not a reflection of their regular income. The very existence of the top slicing regime implies that this is understood and expected, but if the sum involved is large enough, the impact of the HMRC approach essentially wipes out the benefit of top slicing relief altogether. That is illogical at best.

My father was good on personal finance, but I am sure he was not aware of this, I am sure, and this is probably just as well, as he would have been distraught. In practice I don't think he could have done much about it either (annual withdrawals, perhaps?). I think I was aware that the full chargeable gain was taken into account in determining whether the additional age-related element of personal allowance was potentially available but I had no idea this extended to the entire PA.

So, is HMRC's assessment correct and unchallengeable?

What can anyone else in a similar position do to reduce the potential hit?

I can think of a number of arguments that could be used for a wider challenge, that is to change it for the future, but I've no idea how strong they are. It looks to me like a retrospective change to financial arrangements made years earlier. It could be seen as something Parliament did not intend (given the presentation in terms of fat cats). It hits the surviving family when they are at their most vulnerable. Politically, it does not sit well with the present government's philosophical position on inheritance.

The only smidgen of good news is that the tax payment reduces the estate, so the true hit for the beneficiaries will be 60% of the extra income tax due. But I don't see that as much consolation for a treatment that seems extremely unfair.

Cook_County

thelordgiveth wrote: »

Apologies to anyone likely to be offended by moaning by someone clearly about to received a large sum of money. But I'm assuming that MSE is an equal opportunity forum, so here goes...

My father died late last year, aged 94. He had taken out non-qualifying polices 27 years earlier, placed in trust for my sister and myself (also the only estate beneficiaries). He had educated me about the possible income tax implications, top slicing and (as he liked to put it) the importance of not dying late in the tax year.

I duly completed the R27 income tax return, detailing the chargeable gain over 27 years. As the annualised gain was insufficient to take him into higher rate tax for the year, I expected there to me no further tax liability on the gain, and that (for the normal reasons) a modest refund would be due.

The HMRC assessment came as a nasty shock. At first I thought that they had simply messed up the top slicing calculation but on closer examination they had given him no personal allowance whatsoever. The assessment came with no explanation. I queried it and have just had the explanation given that because his income for the year was above a certain level, no personal allowance was available. As a result, virtually the whole of the total chargeable gain, all 27 years worth, became liable to higher rate tax rather than the basic already deducted.

This seems both illogical and unfair but unfortunately that doesn't necessarily make it incorrect in taxation terms! It seems to go back to the Finance Act 2010. As far as I can see, all the rhetoric at the time was that this was intended to target the top 2%, so we were all paying our share in the crisis. The financial columns duly gave lots of advice to these people on how they could avoid or mitigate the measure, which no doubt those with regular large incomes were able to do.

That's generally not the case for people in their latter years who took out policies many years earlier. Were these people the real target, I wonder hidden by the rhetoric about "fat cats"? Quite clearly, the (total) chargeable gain is not a reflection of their regular income. The very existence of the top slicing regime implies that this is understood and expected, but if the sum involved is large enough, the impact of the HMRC approach essentially wipes out the benefit of top slicing relief altogether. That is illogical at best.

My father was good on personal finance, but I am sure he was not aware of this, I am sure, and this is probably just as well, as he would have been distraught. In practice I don't think he could have done much about it either (annual withdrawals, perhaps?). I think I was aware that the full chargeable gain was taken into account in determining whether the additional age-related element of personal allowance was potentially available but I had no idea this extended to the entire PA.

So, is HMRC's assessment correct and unchallengeable?

What can anyone else in a similar position do to reduce the potential hit?

I can think of a number of arguments that could be used for a wider challenge, that is to change it for the future, but I've no idea how strong they are. It looks to me like a retrospective change to financial arrangements made years earlier. It could be seen as something Parliament did not intend (given the presentation in terms of fat cats). It hits the surviving family when they are at their most vulnerable. Politically, it does not sit well with the present government's philosophical position on inheritance.

The only smidgen of good news is that the tax payment reduces the estate, so the true hit for the beneficiaries will be 60% of the extra income tax due. But I don't see that as much consolation for a treatment that seems extremely unfair.

Did he take financial advice? If so is there a financial adviser who failed to advise? Who were the trustees of the trusts? It appears they may have been negligent so the executors will have a financial duty to the beneficiaries to chase up the trustees for failure to take proper advice. If there was an EPA or LPA in his later years the same applies to the attorneys appointed so that they may have to bear any additional liability that could have been mitigated.

It also seems imprudent to have approached HMRC without professional advice given the amounts involved. Does the Will give the executors powers to appoint professionals.

antrobus

thelordgiveth wrote: »

..... I queried it and have just had the explanation given that because his income for the year was above a certain level, no personal allowance was available.....

Presumably because his 'adjusted net income' is above the £100k limit or whatever?

thelordgiveth wrote: »

....So, is HMRC's assessment correct and unchallengeable?

Probably. If they've applied the law correctly (and that doesn't appear to be a point of dispute.) there ain't a lot you can do about it.

thelordgiveth wrote: »

.... It looks to me like a retrospective change to financial arrangements made years earlier. ...

In general, people make financial arrangements on the assumption that the current tax set up will continue into the future. There's always a risk that said financial arrangements might become subject to a quite different tax regime in the future. Sometimes it's the case that the government can be persuaded to enact some transitional provisions that at least lessen the impact on those people who have already entered into these financial arrangements. Presumably, in this case, either the government didn't think about or didn't care about the effect on people who had made a significant investment in non-qualifying polices.

You can always make representations to your MP.

zzzLazyDaisy

Could you clarify the situation please?

Did these policies mature before or after his death?

And were they written in trust to be paid to the named beneficiaries, ie you and your sister?

The reason I ask is because I am struggling to understand why the payment from these policies would fall to be assessed as part of your father's own income eared in his lifetime.

If the policies matured paid out on death, the money would either have fallen into the estate as an asset and come under the IHT rules OR if they were written in trust to the children, they would pay out directly to the children and would not fall into the estate. Either way, they would not be classed as taxable income that your father received in his lifetime on which income tax is payable. Unless I am missing something?

xylophone

http://www.hmrc.gov.uk/helpsheets/hs320.pdf

The answer may well lie in here?

zzzLazyDaisy

xylophone wrote: »

http://www.hmrc.gov.uk/helpsheets/hs320.pdf

The answer may well lie in here?

This is exactly why I asked the question.

AFAIK, the policies would have had to have matured in the father's life time in order to give rise to a liability to income tax in his name.

madgagoo

zzzLazyDaisy wrote: »

This is exactly why I asked the question.

AFAIK, the policies would have had to have matured in the father's life time in order to give rise to a liability to income tax in his name.

A lot of these policies mature on death, but for tax purposes this is counted as the day of death. It is therefore income received by the deceased and therefore charged to income tax under the deceased's name.

jimmo

http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM3210.htm

thelordgiveth

Thanks to everyone for responses so far.
First, there is no doubt that it forms part of my father's income for the year of his death. This is because they were non-qualifying (single premium) policies. Qualifying policies are treated differently.
The insurance company sends records of the chargeable gain to HMRC so even not reporting it (and it would be evasion not to do so deliberately) would get nowhere. How it gets reported seems clear enough. The shock to me was the way it gets assessed by HMRC.

The financial advice would have been 27 years ago. There was no problem (other than the effect of time of death in year on top slicing relief) until 2010. There was no publicity on this particular effect that I am aware of - from HMT, from HMRC, from financial journalists, from pundits - at the time. It was all about "fat cats" at the time. I've seen a few subsequent references on websites but goodness knows when that was put up. If my father had realised the changed situation, he would have tried to do something (but what? That was one of my original questions, for the benefit of others) at that time.

It would be nice business for financial advisers if everyone sought their advice after every Budget to check they were unaffected, but if you do that you probably solve the tax problem by degrading the investment! Like most people, my father did not employ an ongoing financial adviser. Like most reasonably well-informed people he may well have sought advice if he had an inkling that there was an issue. That's the problem - there was nothing to give him that inkling.

My sister and I are the beneficiaries and surviving trustees. I am sole executor. I don't think there is anything to stop me employing professional (other than being accused of wasting money on the fees) but I really don't see what it would have achieved post-death. I don't think we will be suing ourselves for not taking financial advice and our family name is not Jarndyce!

I will have another go at querying their interpretation, and try writing letters to MPs, the Chancellor or anyone else I can think of. Is it what Parliament intended? That sort of stuff. Not with much hope of success in this case, but I don't like just rolling over.

Gas_Powered_Toothbrush

thelordgiveth wrote: »

I will have another go at querying their interpretation, and try writing letters to MPs, the Chancellor or anyone else I can think of. Is it what Parliament intended? That sort of stuff. Not with much hope of success in this case, but I don't like just rolling over.

You stand absolutely no chance of success with this.

Parliament's intentions were quite clear - people with income over £100k would lose their personal allowance. The reasons behind that policy being brought forward, and the justifications politicians gave, are of no relevance.

thelordgiveth

You are probably right, Gas Powered Toothbrush. I think that judges do sometimes find themselves using "what Parliament intended" when they have to interpret the law, but as you say the law itself does not seem to be ambiguous, once you accept the seemingly illogical way that income that is annualised for top slicing is not annualised for personal allowance calculations, which can then negate the top slicing/

Have you (or anybody else) got any practical suggestions as to what steps anyone else potentially confronted with the same situation could take?

Even if I'm stuck with the outcome, no reason not to write to my MP to express my dissatisfaction. Who knows? The campaign for reform might start here!