Notional income variation
my ex-, who works for the CMS, has applied for a variation on the grounds of 'notional income' which is apparently something the CMS have been able to consider since 2018.
From what I understand 'notional income' is a calculation of income from non-income generating assets. It can be calculated on any single asset that is worth in excess of £31,250, and it is calculated on an assumed rate of 8%. (This results in an income of at least £2,500, which is the threshold for unearned income (such as rental income). Assets include things like gold bullion, crypto currency, and any 'money' (whether in cash or deposited in investments or savings accounts).
Refer here for details :- https://commonslibrary.parliament.uk/research-briefings/cbp-7773
Now I was always on the understanding that CM was only calculated on 'actual' income and not assets, but it seems that the above provision essentially allows for asset values over the £31,250 threshold to be 'converted' into 'notional income' and this value added to my 'actual' income with the total then being subject to the CM calculation.
So I have had to list ALL my financial assets to the CMS from bank accounts to pension funds to savings and investments. Most are under the threshold but I have two assets in particular which are over this :- 1) A defined contribution pension fund and 2) ISAs which collectively are over the threshold (I have six ISAs with only two of them individually over the threshold)
The CMS have agreed to exclude the pension fund as it is a pension fund, but they want further information about my ISAs
The ISAs are, and always have been, a repayment vehicle for my mortgage. I.e. instead of getting a repayment mortgage and paying that down directly I chose to get an interest-only mortgage and invest money elsewhere for this investment to build up over time and eventually repay the mortgage. If I had chosen a repayment mortgage instead then I wouldn't even have the ISAs at all (or at least their value would be a fraction of what it is). So it seems absolutely bizarre that - potentially at least - the way I chose to repay my mortgage can have a drastic impact on my CM liability. Money that I have putting away for decades to repay my mortgage may now get assessed for 'notional income' !
I am absolutely flabbergasted at this ! It seems that the receiving parent only has to request a variation on notional income grounds for the CMS to then look at ALL my assets and potential apply the notional income variation on them. And of course my ex-, being a CMS employee, is in the position to know about this. Also - she is in a postion to know about all my personal finances because during the course of our separation she rifled through all my papers and took photos of all my balances (I found the photos on Google Photos one day).
I am just gobsmacked - I sincerely hope that the CMS will listen to reason on this ... this provision seems so utterly unfair and also open to inappropriate application !
Anyone with any advice ?
I think many people do know about this rule although not what it's called nor is it really spoken about or mentioned much.
If CMS was only ever calculated based on actual income like you say, then potentially it would be possible to choose to be out of work but have £100k in cash in your bank account paying 0% interest (or accumulate wealth in another unearned way) which is used to cover your day to day expenditure with no liability for CMS which surely wouldn't be right.
As the CMS is part of the DWP, its also in line with how they assess for Universal Credit for example, in that not only do they look at income but also any assets that you may have and if over a certain level (£6k to £16k on a sliding scale I believe) you would not be entitled to any benefits as your assets should be used to provide for you. In the case of CMS, its considered that your assets should be used to provide for your children.
Its also the reason many paying parents move their money to family/new partners etc to keep their total assets below a certain level so that should the CMS investigate there is nothing to be found.
If you have set aside the ISAs for your mortgage, could you use the funds to overpay the mortgage and bring down below the asset amount allowed?
All the best.
It's also right that pensions are excluded (unless you are drawing down on the pension and therefore would be considered gross income) as the CMS do allow a certain % to be paid into your pension based on your age which is deducted from your gross income. Anything above this would come under diversion of income rather than notional income.
If the threshold is applicable to each individual asset as the provisions seem to state, could I not argue that rather than the sum total of all 6 ISA funds (that happen to be on the same platform) counting as one asset, that each of the 6 distinct ISA funds are treated as six separate assets ?
Further can I not also argue that the valuation should be taken as at the date of the last annual review rather than current date (which would be significantly less) ?
As to your suggestion that I could use the ISAs to reduce the mortgage now, would this be acceptable given that I have already recently provided a valuation of my ISAs before such a withdrawal ? This would surely be viewed as an attempt just to avoid the additional CM amount and therefore the adjusted valuation would not be used in the calculation ?
For me however it seems grossly unfair that purely because of the way I chose to repay my mortgage impacts my CM liability. If I had chosen a repayment mortgage I wouldn’t even have the ISA funds.
Reading the link you provided I don't believe you can argue the ISAs are treated individually as it mentions that multiple shareholdings would be treated as one asset so I assume they will do the same with cash balances.
I agree with you re the fairness point and how you've chosen to pay your mortgage. I'm unsure as you've declared the values how paying down the mortgage would be interpreted. You may need to seek specialist advice re this.
I believe they will only use current valuations, even if they used annual review date you would soon have another annual review thus updating to your current balances anyway.
Re attempting to avoid the additional CM, do you have any evidence that the ISAs were your repayment vehicle for interest only mortgage? Usually you or broker would provide confirmation of payment vehicle to the bank in order to secure the mortgage?
If it was me I'd probably consider changing the mortgage to a repayment only, use the majority of the ISA funds to pay down the outstanding mortgage and improve my LTV and explain to the CMS (potentially having taken advice from a broker) that due to the application for notional income it is no longer in your interests (as confirmed by broker or Financial Advisor) to have an interest only mortgage and therefore have converted to a repayment mortgage as the ISA being considered as notional income will cause undue hardship as the repayment vehicle will no longer be on track to pay off the interest only mortgage due to you having to divert your income to pay the additional CM rather than into your ISA.
Also, aside from the fairness aspect, you probably want to look at what impact adding in notional income will have on your monthly payments and whether it is even worthwhile challenging things and looking at mortgage and solutions etc..
Thanks for your considered opinion.
I seem to recall simply stating to the mortgage provider that I had an adequate repayment vehicle in place to repay the interest only mortgage, so I don’t think there is any evidence explicitly linking my ISAs to repayment of the mortgage.
Also, the mortgage in question is on a property that I let out, and of course the profit on that is already accounted for in the CM calculation as unearned income. An aspect of that, unrelated to the discussion here about my ISAs, is that investment property mortgage interest costs are no longer an allowable deduction in determining taxable profit of the property - they are now taxed at my marginal rate and I then receive an income tax rebate equal to the basic rate of such costs. So the HMRC changes are designed to limit tax relief on such costs to the basic rate and I have no argument with that, however the CM calculation only looks at the gross taxable profit figure and I am now assessed for CM on an unearned income figure that is enhanced by the full value of such mortgage interest costs, despite the fact that I am not actually receiving any more income from the property. Anyway that is a distraction from the issue I am posting about. My point here is that I am already in a worse position CM-wise than before regarding the property that I let out, before any further detriment as a result of the ISAs repayment vehicle being subject to a notional income calculation.
What really p*sses me off however is that during our separation I offered to pay 50% of ALL actual costs in respect of our children rather than go the CMS route. We each earned similar salaries and we each had a similar level of profit from a property that we each let out, so frankly I can’t even think of a ‘fairer’ solution. Regardless of whether this was better or worse financially, I did this to try and play as full a role as possible as a father to my children post-separation. However my ex- declined this offer, and I can only assume this was because she had worked out that she would be better off going via CMS.
My son stays 50/50 with myself and his Mum. My daughter decided to live just with Mum.
This is what they wished to do. I would love to see more of both of them (especially my daughter) but I am not going to drive that just to reduce my CM amounts.
To Trusted Member,
Notional income will not be applied to your primary residence.
Your ISA's will be producing some income so would not be considered as a non-generating asset even if the interest rate is poor.
Likewise, the properties you are letting out are also generating income. So, they too will not be subject to notional income.
I can't remember exactly where I have read it (some article by a UK Law firm), but if an asset is producing income, it is that income that will be used when calculating Child Maintenance and not the value of the asset. Not possible, or fair, to make two different charges against the same asset.
Notional income was a feature of the 2003 CSA scheme. The same 8% was used, but the threshold was 65K.
The 2012 CMS scheme scrapped Variations based on assets, but came under criticism from forums like Gingerbread and leading Judges such as Mostyn.
There was a case a few years ago (which Mostyn was Judge) whereby the father was asset rich (several properties with total value over 5 million), but income poor as his only regular income was his state pension of 113 per week. Mostyn at the time called for the Variation based on assets to be re-introduced to cover examples like this.
I am not legal, but would say the notional income principle is aimed mostly at those who can live off capital and assets alone. Like one poster said above someone who has a large capital sum deposits it in a zero interest account for the purpose of evading Child Maintenance.
Your ISA's will be producing some income so would not be considered as a non-generating asset even if the interest rate is poor.
The ISAs I am being asked to provide more information on are what I have in place to repay the mortgage on my property that I let out (so not my primary residence) - though it has to be said that my choice to invest instead of repay the mortgage directly was a personal financial decision and there is no explicit link between the ISAs and the property itself, so no material evidence to link them.
Your statement I quote above sounds like it could be a determining factor on whether the asset value itself is subject to a notional income calculation or not. However the individual ISAs are all where the underlying assets are stocks and shares. I am sure that these shareholdings will generate dividend income but this isn't paid out to me as income but rather serves to increase the value of the ISA holding (and is probably reinvested in more shares). So how to separate income from asset growth sounds (at least to my brain) rather tricky.
It is also true that the taxable profit I receive from my property is already incorporated in the CM calculation, so if I can convince the CMS that the ISAs are related to the property then your point about not making two different charges against the same asset comes in to play.
Apart from these points, the question of whether it is fair that my decision about how to repay my mortgage, a decision taken before I had even met my ex-, should have an impact on how much CM I am obliged to pay now, is in my opinion a very relevant point when the whole issue is considered from a discretionary point of view.
Thanks all for your inputs
My understanding is that anything in your ISA is not income generating for the purposes of income tax and therefore does fall under notional income variation rules. Even outside of an ISA, whilst the dividends are taxed the underlying asset wouldn't be and therefore would again fall under notional income variation rules. Otherwise you could just buy non dividend paying shares..
The below has a good summary and explanation although consider that the legislation is so wide ranging that its impossible for anyone on this forum or on various websites be able to advise you specifically on your circumstances due to the complexities it involves.