Home > News > 2004 > June 2004 > FURBS and the 2006 Tax Simplification Proposals
FURBS and the 2006 Tax Simplification Proposals
Further comment on the effect of the 2006 pension scheme tax simplification proposals as they will apply FURBS.
The Finance Bill 2004, currently making its way through Parliament, includes preliminary provisions to reform the taxation of retirement benefit schemes, including FURBS. The reforms have implications for FURBS, and some clients may want to take action on their FURBS before the changes happen.
- Capital Gains Tax was increased from 34% to 40% from 6 April 2004. However, taper relief will still be available.
- Income Tax will increase from 20% on savings income, and 22% on other income to 40% with effect from 6 April 2006.
- Contributions to FURBS after April 2006 will not be tax-deductible for the employer until benefits are paid. Employees will not be liable for income tax on contributions but benefits will be taxable..
- Lump Sum Benefits from FURBS arising from pre April 2006 contributions will not be taxable (provided that all such contributions into the FURBS were taxed on the employee).
- Lump Sum Benefits on death from FURBS arising from pre April 2006 contributions will not be subject to Inheritance Tax.
- Lump Sum benefits on death arising from post April 2006 contributions will fall into the member's taxable estate.
Should I keep my existing FURBS after 6 April 2006?
We expect that members of FURBS worth, say, over £100,000 will want to keep them running after April 2006. We believe that in these cases the Inheritance Tax protection which these trusts enjoy will compensate for the increased taxation of income.
However, trustees may revise their investment strategy to mitigate the impact of the higher income tax. For example trustees may switch into assets which produce little income, such as fine art and antiques (but of course any such investments must always be made on arm's-length terms). These assets would still be subject to capital gains tax at 40% but in practice may not be sold until maximum taper relief is obtained after 10 years of ownership. In fact, if these assets are purchased from the member, this could be a useful way of providing the member with liquidity. If the member keeps the use of this kind of asset, then a market rent should be paid to the FURBS.
Where a FURBS is worth less than £100,000, the running costs may become uneconomic.
Can a FURBS be wound up easily, and benefits paid to the members?
The usual FURBS rules would allow a member to take benefits after age 50, if he is leaving service or if there is a "change in the nature of the employee's job". These pass muster as "relevant benefits" under Section 612 of the Taxes Act.
There could be a problem however if the member is under age 50, or if he is over 50 but remains in unchanged employment. We would expect the Inland Revenue to be relaxed since the decision by the trustees or the company to wind up the FURBS would follow directly from the government's decision to change the tax rules (incidentally it could be argued that these are retrospective changes because members accepted a tax liability up front in return for a kinder regime on income and capital gains).
What happens if the member is not changing their job in the company?
In this case we would suggest the following procedure.
- A letter from the member to the trustees requesting benefits "in anticipation of retirement". For example the member might write to say "I would like the cash now to purchase a cottage in Devon which is part of my planning for retirement".
- A letter from the employer announcing its decision to step aside from the position of "Principal Employer". The rules will normally allow the FURBS to be wound up in these circumstances.
- A letter from the Trustees to the member stating that the winding up of the Trust was prompted by the tax changes and that they deem it is in the best interests of the member to wind it up now.
It is unlikely that the Revenue will make further enquiries concerning benefit payments where the amounts involved are relatively small. We do intend to get further legal advice on this after July when the Finance Bill should have finished its passage through parliament.
How about members who want to draw their FURBS benefits but are (relatively) young?
It might be difficult to establish that benefits are being paid at or in anticipation of retirement if the member is under 50! It would be easy enough to change the rules to permit benefits to be taken, say, at 40, but we would still have to ensure that the benefits are "relevant benefits" under the Taxes Act. A change in the nature of employment will always help but might not be practical.
How can I mitigate the CGT liability on winding up the FURBS?
With difficulty! However it might be worth delaying the wind up until as near 6th April 2006 as possible - or even a little after then - in order to qualify for as much taper relief as possible.
Is it worth establishing new FURBS?
Probably not after 6th April 2006. However, there will still be opportunities to pay contributions before April 2006, with the main aim of the trust being to mitigate Inheritance Tax.
FURBS where contributions were paid in specie
Some employers paid some contributions into FURBS "in specie": for example by transferring property or other assets direct into the FURBS. These in specie contributions were not normally taxed on the employee as a P11D benefit. However, the coming tax reforms suggest that, after April 2006, where tax was not paid on all the contributions, the member will not be entitled to receive benefits free of tax. Furthermore they will not keep the post 6th April 2006 Inheritance Tax shelter. This would suggest that these particular FURBS should wind up before April 2006. However this in turn would trigger any unrealised capital gains.
FURBS and post APril 1998 National Insurance
In the 1998 Finance Act, the Chancellor sought to impose National Insurance on Employer's FURBS contributions. Although the drafting of the legislation was not watertight, most FURBS "volunteered" to pay National Insurance on the contributions after April 1998. However, there is apparently robust legal advice that the levying of National Insurance post 1998 could be challenged in the courts (in fact the Revenue did make some NI refunds in late 2003 before shutting the door again). A national firm of accountants is putting together a consortium of FURBS clients to raise a fighting fund to raise a test case before the Inland Revenue Commissioners. The legal costs are likely to be substantial. Clients who could reclaim NI of over, say, £100,000 might wish to join the consortium, and make a contribution to the costs. A minimum contribution of 5% of the NI has been suggested. Please contact us if you would like further details.
Please speak to your usual Barnett Waddingham LLP contact to discuss the above.
Barnett Waddingham LLP, June 2004.