By way of follow up to our briefing on the highlights from the 2016 Budget published on Budget day, 16 March 2016, we have set out below our more considered thoughts on the key measures affecting private clients.
Whilst there was good news (in the form of the lower capital gains rates applicable from 6 April 2016 and the introduction of “investors’ relief” as an extension to entrepreneurs’ relief), the lack of further detail on the changes to the taxation of non-UK domiciled individuals and to residential property held through non-UK companies was a disappointment (albeit not entirely unexpected).
What follows covers those announcements which merit additional comment over and above that contained in our highlights briefing. Commentary on some measures (such as the changes to the stamp duty land tax treatment of commercial property) is not therefore repeated below.
Income tax rates and allowances
The personal allowance for the 2016/17 tax year had already been confirmed at £11,000 and in his speech, the Chancellor announced a higher than expected rise to £11,500 for the 2017/18 tax year. The basic rate limit in 2016/17 will be £32,000 and this will be increased to £33,500 in 2017/18. As a result, the higher rate threshold will be £43,000 in 2016/17 and £45,000 in 2017/18.
The Government has previously made a commitment to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this parliament in 2020. While there had been some discussion about the possibility of a cut in the 45 per cent additional rate prior to the Budget, the Chancellor clearly felt unable to tackle this against a background of economic uncertainty. He did however stress that the 28 per cent of total income tax revenue paid by the “richest 1 per cent” in 2013/14 was the highest percentage paid by that 1 per cent group in the past 20 years.
The Chancellor acknowledged the recent boom in “micro-entrepreneurs” – those earning income from the sharing economy through websites such as airbnb – by creating two new allowances aimed at those earning small amounts of income from trading or property. From April 2017, individuals with property income or trading income below £1,000 will no longer need to declare or pay tax on that income. It seems that this will also benefit those with relevant property or trading incomes above £1,000, who will be able to deduct the £1,000
allowance instead of calculating their exact expenses. This is intended to reduce the compliance burden on those with modest amounts of income from these sources.
As previously announced, 6 April 2016 is when dividend tax rates will increase. The new rates will be 7.5 per cent for a basic rate taxpayer, 32.5 per cent for a higher rate taxpayer and 38.1 per cent for an additional rate taxpayer (including trustees). The first £5,000 of dividends will be tax free for individuals.
taxatIon of foreIgn domIcIled IndIvIduals
Important announcements were made in the Summer Budget 2015 concerning the tax treatment of foreign domiciled individuals. The headline points were:
the introduction of a new rule which will deem foreign domiciled individuals to be domiciled in the UK for the purposes of capital gains tax, income tax and inheritance tax once they have been resident here for 15 out of the last 20 tax years; and
the introduction of a rule which will deem individuals born in the UK with a UK domicile of origin (but who have acquired a domicile of choice elsewhere) to be domiciled in the UK if they are resident here.
Both measures are to take effect from 6 April 2017.
Individuals to whom the new rules apply will be taxed on their worldwide income and gains as they arise; and their worldwide assets will be within the scope of inheritance tax.
However, the announcement proposed that assets transferred into a trust prior to becoming deemed domiciled will continue to qualify for “excluded property” status for inheritance tax purposes (i.e. foreign situated assets held by the trustees will be outside the scope of inheritance tax). Furthermore, capital gains realised on such assets will only be taxable on the settlor in so far as they can be matched to benefits received by him (on a worldwide basis); and foreign source income arising within the trust will be treated similarly. (UK source income will, however, be attributed to the settlor on an arising basis – presumably only if he is capable of benefitting under the trust.) These trust “protections” are a point of considerable interest to practitioners and clients alike, who are keenly awaiting further details.
Budget 2016
PrIvate clIent BrIefIng
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However, although a formal consultation process was conducted last year (closing in November) no further details on these aspects of the new rules were provided in the Budget; so we will have to wait a while longer. Although legislation implementing the new deemed domicile test has been included in the Finance Bill 2016 it is now clear that the detail of the trust “protections” will not be legislated until the Finance Bill 2017.
There were, however, two pieces of news on this topic. The budget materials included an announcement that assets held by non-UK domiciled individuals who become “deemed domiciled” under the new rules on 6 April 2017 will be upbased for capital gains tax purposes to their value on that date. Also included was a reference to a “transitional provision with regards to offshore funds to provide certainty on how amounts remitted to the UK will be taxed”.
The former provision will be of assistance to clients with non-UK situs assets, where in the absence of an upbasing provision the full amount of any gain - whether accruing before or after 6 April 2017 - would be taxable on a disposal after that date on the arising basis. Although steps could be taken before 6 April 2017 to upbase such assets (such as disposing of them to a closely held company), such steps can be expensive to implement and may result in a local tax charge wherever the assets are situated.
The reference to transitional provisions for offshore funds presumably heralds specific “mixed funds” rules which will deal with the interplay between the regime pre and post deemed domicile. However, neither this nor the upbasing announcement were discussed or trailed before the Budget; and no further details have yet been provided.
There is a good deal of uncertainty concerning both
announcements. Will the automatic upbasing and transitional rules apply only to those who become deemed domiciled under the new rules on 6 April 2017, or to those who become deemed domiciled in subsequent years? Will the pre-2017 element of the gain be taxable on the remittance basis or will it escape tax completely? Will the upbasing apply to assets held in a trust settled by the individual in question (presumably not)? Presumably the forthcoming response to the Autumn 2015 consultation will provide further clarity.
It is increasingly clear that there will be a tight timetable for clients who will become deemed domiciled under the new rules on 6 April 2017 to undertake planning. Even though much of the detail concerning the new regime remains
unresolved, we recommend that those affected start talking to their advisers now.
InherItance tax on resIdentIal ProPerty held through non-uK comPanIes and oPaque entItIes
Another important change announced in the 2015 Summer Budget concerned UK residential property held through non-UK companies and other entities which are opaque for inheritance tax purposes. From 6 April 2017 such entities will be treated as transparent in relation to the UK residential property owned by them.
No further details have yet been published on these changes – a consultation paper is keenly awaited.
Many clients with structures which currently fall within the annual tax on enveloped dwellings (or “ATED”) regime are faced with the prospect of paying another year’s tax with no clarity about the availability of the de-enveloping relief referred to in last summer’s announcement. As with the changes to the taxation of non-UK domiciled individuals, the timetable for taking action before the new rules bite is beginning to look somewhat compressed.
Again, we recommend that clients should start taking advice now so they are in a position to act quickly as and when the details are confirmed.
caPItal gaIns tax (cgt)
reduction in the cgt rates
In the current tax year (2015/16), individuals pay CGT at a rate of either 18 per cent or, if they are higher rate taxpayers, 28 per cent (which also applies to trustees and personal representatives). The 18 per cent and 28 per cent rates will be reduced in respect of gains accruing after 6 April 2016 to 10 per cent and 20 per cent respectively.
However, gains realised on a disposal of UK residential property will remain subject to the current rates of 18 per cent or 28 per cent. Non-UK resident companies disposing of UK residential property to which the Annual Tax on Enveloped Dwellings (ATED) regime does not apply will continue to be chargeable to non-resident CGT at a rate of 20 per cent (aligned with the corporation tax rate); however, gains accruing on the disposal of property subject to ATED will still be chargeable at the 28 per cent rate.
Likewise, receipts of carried interest will continue to be subject to the current rates of CGT.
It should be noted that this relief will apply only to shares which are issued on or after 17 March 2016; it therefore only benefits new investors. The other conditions are that the shares must:
be newly issued, having been acquired by the person making the disposal on subscription for new consideration;
be in an unlisted trading company, or unlisted holding company of trading group;
have been held for a period of three years from 6 April 2016 (hence it will apply to disposals after 6 April 2019); and
have been held continually for a period of three years before disposal.
Individuals who are not domiciled in the UK and who claim the remittance basis of taxation may be able to combine this extended entrepreneurs’ relief with a claim for business investment relief so that there is no taxable remittance when the shares are subscribed for.
Provisions will be introduced to disallow the relief if the individual subscribes for shares for tax avoidance purposes. It is difficult to see what mischief these provisions are intended to target; and presumably they will need to be carefully drafted – so that the very act of subscribing for shares which carry a lower rate of CGT is not caught.
associated disposals
The Government will allow entrepreneurs’ relief where an individual realises a gain on or after 18 March 2015 on a disposal of a privately-held asset which is used in a business, at the same time as the individual reduces their participation in the business in favour of family members. This measure is of potentially narrow application, but is being introduced to counter the negative impact of anti-abuse rules brought in in 2015 on those passing on family businesses. Individuals in this position should seek advice on making a backdated claim.
extension to goodwill
The Government will allow entrepreneurs’ relief to be claimed on gains realised by an individual on the disposal of goodwill to a company in which the individual has less than 5 per cent of the acquiring company’s shares and voting power. This is a further measure designed to counter the effect of changes introduced in Finance Act 2015 which meant that the claimant individual could have no connection at all with the acquiring company, and this will apply to disposals on or after 3 December 2014.
It is assumed that the new rates will also apply to individuals who receive benefits from offshore trusts (where there is no living UK resident and domiciled settlor to whom the trustees’ gains would automatically be attributed). Such benefits are “matched” with gains realised by the trustees; and where the trustees’ gains are not matched within the same year they are realised (or the tax year following realisation) then a supplemental charge applies – reaching a maximum of 44.8 per cent after six years. A reduced headline CGT rate of 20 per cent would mean that the maximum rate (where the full supplemental charge applies) will be 32 per cent. However, there is likely to be some complexity here as gains relating to residential property and carried interest will presumably be carved out – and it remains to be seen how the matching rules will be adapted to address this.
The reduced rate of CGT together with the proposed reduction in corporation tax rates to 17 per cent by 2020 is likely to make the use of family investment companies more attractive going forward as a vehicle through which to hold investment portfolios for the long term.
With the advent of the new lower rates in mind, taxpayers may wish to consider deferring disposals until after 5 April 2016. It should be noted, however, that where assets are disposed of under an unconditional contract the disposal is treated as made on the date of the contract rather than the date of completion (if later) – so where relevant both should be deferred until after 5 April.
entrepreneurs’ relief
The 10 per cent rate applicable in cases where entrepreneurs’ relief applies will remain in force after 6 April 2016.
the creation of “investors’ relief”
Hitherto, entrepreneurs’ relief has only applied to shareholders in unquoted trading companies if they are officers or employees of the company in question and satisfy a 5 per cent minimum shareholding and voting control threshold. The relief is being extended (for disposals after 6 April 2019) to individuals who are not officers or employees of the trading company in which they hold shares, i.e. they are merely investors. This will mean that each individual can realise up to £10m of capital gains on the disposal of company shares in his/her lifetime and the gains will be taxable at a rate of 10 per cent (this being the lowest rate of CGT after 6 April 2016, see above). These new rules will also apply to beneficiaries of trusts, as the current entrepreneurs’ relief rules do.
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withdrawn tax-free after reaching the age of 60, otherwise the bonus (and any interest or growth on this) will be clawed back and a 5 per cent charge will be levied. Contributions to a Lifetime ISA will count towards the annual ISA subscription limit.
InherItance tax
It was widely rumoured that restrictions of on the availability of Inheritance Tax business property relief would be announced in the Budget but no changes were actually made.
The Budget did however include some changes to the heritage property regime. These are beyond the scope of this note but may affect the owners of assets which have been granted conditional exemption from Estate Duty.
There were no further announcements in respect of the proposal to charge inheritance tax on the value of UK residential properties owned by offshore companies with effect from 6 April 2017. A consultation is anticipated shortly.
offshore tax avoIdance and evasIon
The Government is continuing its drive to clamp down on all forms of tax evasion and aggressive tax planning and non-compliance.
tax avoidance
The Finance Bill 2016 will introduce new measures dealing with “serial” tax avoiders who persistently enter into tax avoidance schemes that are defeated by HMRC. These will include a special reporting requirement and a penalty for those whose latest return is inaccurate due to use of a defeated scheme. Tax avoiders’ names may be published, and those who persistently abuse reliefs may face restrictions on their access to certain tax reliefs for a period.
The Government is also strengthening the Promoters of Tax Avoidance Schemes (or “POTAS”) regime by including promoters whose schemes are regularly defeated by HMRC. The POTAS regime was introduced in order to build on the existing Disclosure of Tax Avoidance Schemes (or “DOTAS”) regime, and the proposed changes to the POTAS regime are in line with recent extensions of the DOTAS regime (to, among other things, inheritance tax planning) and will expand the range of tax planning which is now notifiable to HMRC. We would however expect changes to the POTAS to have a very limited impact on bespoke, non-scheme based, tax and estate planning by individuals.
Again, where relevant, backdated claims for relief should be considered.
employee shareholder status exemption
Individuals who enter into an agreement to acquire Employee Shareholder shares in exchange for giving up certain statutory employment rights from midnight at the end of 16 March 2016 will have a limited lifetime exemption of £100,000 on gains realised on disposal of their Employee Shareholder shares. CGT will be charged on gains made above that threshold. Previously the CGT exemption had no limit.
PensIons
Following the 2015 Summer Budget, the Government launched a consultation on pensions tax relief. The consultation closed at the end of September and in the months that followed there were strong hints from HM Treasury that the current regime might be replaced in the 2016 Budget with some form of “Pensions ISA”, where no tax relief would be given on contributions but pension benefit would be completely tax free – in effect a reversal of the current model.
In the end, the Government decided not to make any further changes to pensions tax relief, although the tapered reduction in the annual allowance announced in the 2015 Summer Budget will still take effect on 6 April 2016.
By way of reminder, the tapered reduction will apply to individuals with income above £150,000 including the value of any pension contributions (but only if their income excluding pension contributions is in excess of £110,000). The
allowance will be reduced by £1 for every £2 of income above £150,000 until it reaches a minimum allowance of £10,000. The Government has also announced that it will compel the pensions industry to design, fund and launch a “pensions dashboard” – a digital interface where an individual can view all their retirement savings in one place – by 2019.
Isas
The annual ISA subscription limit will be increased to £20,000 (from the current level of £15,240) on 6 April 2017.
From that date, adults aged under 40 will be also able to open a new “Lifetime ISA”, into which they can contribute up to £4,000 a year until reaching the age of 50. The Government will add a 25 per cent bonus to any contributions. The Lifetime ISA must then be used either towards a deposit on a first home worth up to £450,000 or the funds can be
the general anti-abuse rule (gaar)
The Government has confirmed that the Finance Bill 2016 will include provisions which introduce a penalty of 60 per cent of the tax due in all cases which are successfully tackled by the GAAR. Finance Bill 2016 will also make small changes to the existing GAAR legislation to increase the GAAR’s effectiveness in dealing with marketed avoidance schemes.
The introduction of the 60 per cent penalty is clearly intended to act as a disincentive to tax planning which does not constitute tax evasion but which nevertheless involves steps which are artificial or otherwise aggressive. The impact of these changes will to some extent depend on how HMRC uses the GAAR in the future.
The Courts have not yet had to consider how to apply the GAAR, as no cases have reached the Courts, and so there is no case law in this area. On the one hand, the proposed tweaks to the legislation might be seen as highlighting the limits of the GAAR, and indicating an intention on HMRC’s part to focus on marketed schemes rather than on bespoke tax planning. On the other hand, the introduction of increased penalties may strengthen HMRC’s hand in negotiations with taxpayers, and may therefore exacerbate the trend towards a less consensual approach to negotiations on HMRC’s part, and taxpayers and their advisers will watch these developments with interest.
tax evasion
In the Finance Bill 2016 the Government has confirmed its intention to introduce a new criminal offence to cover the most serious cases of failing to declare offshore income and gains, which will remove the need for prosecutors to prove an intention not to declare the income or gains.
The Government is also introducing new civil penalties for deliberate offshore tax evasion. This will include the introduction of a penalty linked to the value of assets on which tax is evaded, and a new emphasis on the public naming of tax evaders.
Those who assist tax evaders will also face civil penalties, including public naming.
Looking further ahead, the Government has confirmed that in the Finance Bill 2017 it will introduce a new legal requirement to correct past offshore non-compliance within a defined period of time, and with new sanctions for those who fail to do so. This will include inadvertent non-compliance as well as deliberate acts. It can be expected that HMRC will open more enquiries into offshore arrangements when they start getting reports from overseas under the rules for automatic exchange of tax information in 2017 and so it is important that clients look carefully at any such compliance issues in order to avoid possible penalties.
These measures follow on from a number of legislative changes in recent years intended to discourage tax evasion and encourage compliance. These changes have included the introduction of the Liechtenstein Disclosure Facility, the concluding of the UK-Swiss agreement on tax co-operation, the introduction of criminal penalties for tax evasion, and the introduction of a reporting regime based around FATCA and the Common Reporting Standard. The proposed measures will clearly have an impact on individuals whose tax affairs still remain non-compliant.
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This note is intended to provide general information about some recent and anticipated developments which may be of interest.
It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.
contact detaIls
If you have any questions regarding the content of this note, please don’t hesitate to contact one of us or your usual Macfarlanes contacts.
nIcholas harrIes Jonathan conder
PARTNER PARTNER DD +44 (0)20 7849 2576 DD +44 (0)20 7849 2253 [email protected] [email protected] roBIn vos SOLICITOR DD +44 (0)20 7849 2393 [email protected] march 2016
