CMS calculations

[Skep59]

Hi all, new to this site .....and to this situation, but looking for some advice. My understanding is that CMS calculations are based on your annual 'gross taxable income'. The key word there being 'taxable', i.e. any income that is not taxable is not included -- this might include income generated from an ISA, for instance. Does anybody have a view on this? I am correct in my assumption? Thanks in advance.

 

[Unknown01]

They get their figures from HMRC so it normally wouldn't include ISA income. Also, things like pension contributions will reduce what is payable.

That said, if you get a lot of your income from ISAs or pay too much into a pension then the CMS might do a more thorough investigation of your finances and vary the amount you pay.

 

[Skep59]

Thanks for that Unknown01. In my case I do get quite a lot of income from a stocks & shares ISA. I am retired and live off savings and investments and some rental income (no pension in my case) -- all of which is declared, except for the ISA element. My ex has taken this all the way to tribunal, which is progressing at the moment. But recently I have also been contacted by the CMS Financial Investigations Unit - a new one on me - who appear to be conducting their own investigation in parallel with and separate from the Tribunal process, which is a bit surprising.....and confusing. But even more surprising is that the F I Unit has open access to all my bank accounts and share portfolio information without my knowledge! I didn't know we lived in such a police state - big brother is watching!

 

[Fellowshipper]

On the general topic of CMS, I haven't yet been contacted by this service, in my personal situation. It's been over a year and a half now, since I'm no longer living at home. Is there any known time frame in which it is most likely to receive a letter or any other type of notification?

 

[bakedapple]

Thanks for that Unknown01. In my case I do get quite a lot of income from a stocks & shares ISA. I am retired and live off savings and investments and some rental income (no pension in my case) -- all of which is declared, except for the ISA element. My ex has taken this all the way to tribunal, which is progressing at the moment. But recently I have also been contacted by the CMS Financial Investigations Unit - a new one on me - who appear to be conducting their own investigation in parallel with and separate from the Tribunal process, which is a bit surprising.....and confusing. But even more surprising is that the F I Unit has open access to all my bank accounts and share portfolio information without my knowledge! I didn't know we lived in such a police state - big brother is watching!

I understand that the income that goes to tax should specifically exclude ISAs.

However, the other side of the coin is notional income on stocks, shares, property, cash etc ... of 8% against which CM is then calculated (i.e. you end up paying c.1.5% of your net worth each year). There are a couple of areas where I'm unsure how it works:
1. if you are already receiving a yield of, say, 4% on your rental property - will they decide that the notional income should be 8% and apply that figure to what you owe rather than the 4% that is being generated?
2. income generated by an ISA does not go to tax. As such, my argument would be that any notional income from your ISA should not go to tax either, and should be outside the CM calculation.
I've not seen any clear answers on these two points.

 

[Skep59]

Thanks bakedapple.
There certainly are some grey areas! What is absolutely clear is that ISA income is all tax free, and does not have to be reported to HMRC. (just for the record my HMRC tax returns are all correct!). But the CMS now seem to be taking a different view and are contradicting everything they have told me for the last 3 years, saying that my ISA income should be included in the CM calculation -- how can they suddenly change the goal posts? In my case this will almost double my gross income figure and therefore have an enormous impact on what I have to pay, particularly if its back-dated!!

 

[bakedapple]

My dealings with CMS have been that they understand the simple 99% of cases, but struggle with the 1%. Things like how to treat ISA income will fall into the 1%; some will refer you on to a specialist in the area, others will just try to make it up as they go along so you will find you get a different answer every time. I would suggest you look up the raw legislation on this, rather than rely on any simplified CMS guide that's aimed at the 99%.

The relevant part of legislation on unearned income (aka stocks and shares) is:
https://www.legislation.gov.uk/uksi/2012/2677/regulation/69
For the purposes of this regulation unearned income is income of a kind that is chargeable to tax under—

(a)Part 3 of ITTOIA (property income);

(b)Part 4 of ITTOIA (savings and investment income); or

(c)Part 5 of ITTOIA (miscellaneous income).

This seems clear that investment income is only relevant where it is "chargeable to tax" - i.e. not an ISA.

However, the rules on notional income (https://www.legislation.gov.uk/uksi/2012/2677/regulation/69A) a) don't mention ISAs nor b) stop double counting between unearned income and any notional income from that asset.

On the first point, I would try to argue that any notional income ("The Secretary of State shall calculate the weekly value of an asset by applying the statutory rate of interest to the value of the asset and dividing by 52") stays within the ISA wrapper (in the same way as any interest received on a cash ISA) unless the legislation explicitly removes it from the ISA wrapper - which I don't believe it does.

On the second, google points me to https://www.legislation.gov.uk/ukpga/1991/48/section/28F - S28F-1b of Child Support Act 1991:
(b) it is [the Secretary of State’s] opinion that, in all the circumstances of the case, it would be just and equitable to agree to a variation.
Its not a get out clause, but gives an argument that double charging is not just and equitable.

 

[Unknown01]

I guess the easiest thing to do would be to switch all of the ISA investments into funds that accumulate rather than distribute income?

 

[bakedapple]

I guess the easiest thing to do would be to switch all of the ISA investments into funds that accumulate rather than distribute income?

I'd argue the other way. As ISA dividends are tax free, they shouldn't come under CM; its the notional income I'd be more worried about.

If the CMS successfully argue that an ISA should come under notional income, then the counter argument is that it is not equitable to try to charge you based on an 8% return just because the law doesn't allow them to get at it at whatever rate of return you are actually receiving. It would be unjust to charge someone a higher rate of CM on the same asset in an ISA vs outside an ISA wrapper simply because they have been prudent in their savings. If, however, your investments are purely accumulation, then this counter argument goes away.

 

[Unknown01]

If CMS do stick their beaks in, it might be better moving the money to North Dakota and paying the withholding tax on dividends.

It also sounds very unfair if someone is locked out of home ownership whilst the other party squats on their mortgage capacity. If they save to buy later, the squatter can come along and demand some of the interest. Absolute madness.