TRUSTEES OF THE CHURCH OF SCOTLAND HOUSING AND LOAN FUND FOR RETIRED MINISTERS AND WIDOWS AND WIDOWERS OF MINISTERS MAY 2008 DELIVERANCE The General Assembly 1. Receive the Report 2. Regret the imposition of a new taxation liability upon retired ministers and upon widow(er)s and ex-spouses of ministers given much needed housing support from the Fund by way of a house purchase loan. 3. Encourage the Trustees to continue their efforts to persuade the Government to bring in amending legislation under which loans at beneficial rates of interest to retired ministers and their families will be treated as excluded benefits for taxation purposes. REPORT 1 Recent relevant changes in taxation legislation 1.1 Prior to 6th April 2006, non-cash benefits-in-kind provided by employers for their retired former employees were non-taxable. 1.2 From that date however, under legislative changes officially described as “Pension Tax Simplification Legislation” all such benefits, regardless of how they are paid, became liable to tax as employment income. The provision of accommodation on advantageous terms or of loans at beneficial rates of interest is classed as such a benefit. 1.3 Following the introduction of this tax legislation, the Government has since conceded that an unintended consequence is that while certain benefits are exempt from tax for employees (as is the case with manses), if an employer provides the same benefits after the individual has retired (as with the Fund’s rental houses) the benefits become liable to tax. 1.4 Under Statutory Regulations which came into force on 8th January 2008, the tax treatment of non-cash benefits provided for retired former employees and their families has been aligned more closely with that of employee benefits. 2 Rental housing 2.1 Under those Statutory Regulations, accommodation provided for retired ministers of religion is now specifically an excluded benefit for tax purposes, mirroring the exemption relating to manses. Provided, that is, the minister had been employed as such for five years immediately preceding retirement or, where the minister retired after a period of ill health, immediately preceding the period of ill health. And also provided that the minister had occupied a manse, at any time, which was non-chargeable as a taxable benefit. 2.2 The provision of accommodation to a minister’s widow is also an excluded benefit if made consequent upon the death in service of the minister, or upon the death of a retired minister who had either been a serving minister for the five years before retiring or who retired on the grounds of ill-health. 2.3 The position with tenancies granted to separated and divorced spouses of ministers appears complicated and the Trustees have not been able by the deadline date for this Supplementary Report to establish the situation arising from the varied circumstances of separation and divorce. 2.4 Tenants of the Fund (apart from ex-spouses) have been sent a personal letter outlining the tax situation as it relates to them and assuring them that they are not affected by the recent tax changes. Ex-spouses will be kept informed once the position relating to them becomes clearer. 3 Housing loans 3.1 In the Regulations, there is disappointingly no exclusion from taxation for beneficial loans to retired ministers and their families similar to that for rental housing. Loans which the Fund provided before 6 April 1998 to ministers who had retired by that date are excluded from assessment as benefits-in-kind. Loans made to widow(er)s prior to that date are similarly excluded. There is no charge where the beneficial loan is not more than £5,000 in total. 3.2 But what the new tax legislation means, in effect, for all those to whom a loan has been advanced by the Fund since 6th April 1998 and to all those granted loans in the future, is that a tax liability arises each year on the difference between the amount of interest paid at the fund’s beneficial rate and a sum calculated by applying to their loan an official rate of interest set by HM Revenue & Customs (HMRC). The charge to tax applies with effect from 6th April 2006. The official rate for the fiscal year to 5th April 2007 is 5% and for 2007/8 is 6.25% 3.3 The amount of tax payable by each borrower will clearly depend on the amount of their loan throughout the fiscal year and on their marginal tax rate. Rather unfortunately as it transpires, as the beneficial interest rates applied by the Fund to widow(er)s’ loans are only one-half the rate charged to ministers, the tax burden on them is higher. Details of the impact of the tax liability are shown at Appendix 1. 3.4 Also concerning is an apparent anomaly relating to our Shared Appreciation Loans which link loan values over their term to the value of the property concerned over the same period. In recognition of the Fund’s equity share in the properties involved, the interest rate charged is particularly low but it seems the tax charge will make no allowance for our interest rate restriction on account of the potential house value appreciation forgone by borrowers. 3.5 For ministers with joint loans, the benefit-in-kind can be allocated between them and their spouse and, for instance, if the spouse is not a tax payer, then their overall tax burden will be lowered. 3.6 Shortly after 5th April 2008, and following the end of each tax year in future, borrowers will be sent notification of the amount of their benefit-in-kind to enable them to deal with this aspect of their taxation affairs. It is expected that in most cases tax collection will be by way of PAYE Notices of Coding. 3.7 All those who currently have loans from the Fund and who are affected, have been sent two personal letters informing them of the situation. Those to whom future commitments for a loan have been made have been sent an appropriate letter. Those who retired prior to 6th April 1998 and who are therefore not caught by this legislation have been advised accordingly. 3.8 In an effort to ease the impact of this tax imposition which has been introduced after a very lengthy period when no such charge existed; and recognising the anxiety this situation has undoubtedly caused borrowers, the Trustees have decided to approach HM Revenue and Customs with the aim of negotiating a bulk settlement of the tax payable in respect of the fiscal year to 5th April 2007 for all those borrowers affected. This negotiated sum will be met by the Fund. 4 Future implications and policy 4.1 Commissioners can be assured all this is not of the Fund’s making and seems a burdensome complication which is likely to result in relatively insignificant contributions to the Exchequer. The Trustees are concerned at the monetary imposition placed on vulnerable borrowers and at the huge administrative task falling upon the Fund’s limited staff resources. 4.2 The Chairman has written to the Prime Minister and to the Chancellor expressing the Trustees’ deep concern over this regrettable development and seeking their support for the extension of the Regulations concerning accommodation for retired ministers of religion and their families, so as to cover also beneficial housing loans in comparable circumstances. Representations have been made similarly to HM Revenue & Customs. Letters have been sent to every MP representing a Scottish constituency seeking their support. Borrowers have been encouraged to enlist the support of their respective MP’s and it is the present intention of the Trustees to keep up pressure in areas where this may bear fruit. 4.3 The Trustees are giving serious consideration to the Fund’s loan arrangements for the future but initial thoughts are that even taking into account this tax liability, loans from the Fund are still much more beneficial to retired ministers and their families than any commercial loan which might be available to them. And they fulfill a need. In the name of the Trustees WILLIAM McVICAR Chairman LIN J MACMILLAN Secretary Appendix 1 Church of Scotland Housing and Loan Fund Beneficial Loans to Retired Ministers, Widows, Widowers and ex-Spouses Assuming an individual is paying basic rate tax at 22% Housing and Loan Additional tax charge Interest Rate (% of the amount of the loan) Standard Loans     Ministers and ex-Spouses 4.00% 0.495% Widows and Widowers 2.00% 0.935%       Shared Appreciation Loans     Ministers and ex-Spouses 2.50% 0.825% Widows and Widowers 1.25% 1.100%