21 March 2012
Tax rates and allowances
There is particularly good news for those currently paying tax at the additional rate of 50%. The Government has acknowledged that this rate is potentially damaging to the attractiveness of the UK ‘particularly as a significant number of those affected by the additional rate are internationally mobile’. Accordingly, with effect from 6th April 2013, the additional rate of tax will be reduced to 45%. Whilst this is a step in the right direction it does fall short of a full withdrawal of the additional rate which many had hoped for.
As widely predicted, the Government has also announced that the personal allowance for 2013/14 will increase to £9,205 in line with the coalition agreement objective to increase the personal allowance to £10,000 over the life of this Parliament. The basic rate band will be simultaneously reduced to £32,245 from £34,370 and consequently higher rate taxpayers will see a smaller reduction in their income tax liability.
For those who are retired or approaching retirement, April 2013 will also see the freezing of age-related allowances (‘ARAs’) for anyone born on or before 5th April 1948. Anyone born after this date will no longer be entitled to the ARAs which are currently available on reaching 65.
There is also good news for companies paying corporation tax at the main rate of 26%. From next month it will be reduced to 24% and there will be successive reductions in the main rate of corporation tax to reach a level of 22% with effect from April 2014.
Taxation of Non-Doms
The Chancellor has confirmed that the reforms published in the consultation last summer will be made effective from 6 April 2012. For example, Non-doms who have been resident for 12 or more years will now need to pay the increased annual charge of £50k to claim the remittance basis. There will also be an exemption for remittances of foreign income or gains to the UK for the purpose of “commercial investment in UK businesses”.
There are plans to review the IHT-exempt amount (currently £55,000) that a UK domiciled individual can transfer to their non-dom spouse or civil partner and even allow that non-dom to elect to be treated as domiciled in the UK for the purposes of IHT. The statutory residence test which was hoped would give taxpayers that certainty about their tax residency has been postponed. The test looks likely to be legislated in Finance Bill 2013 and will take effect from 6 April 2013, to allow further time to ‘tweak’ the details.
The outcome of the consultation on ordinary residence means that it will be abolished for tax purposes from 6 April 2013. The good news is that overseas workday relief and SP1/09 (a relaxation in the rules for employees who have a single contract of employment covering duties carried out in the UK and overseas) will be retained and placed on a statutory footing which will be a welcome reprieve for the internationally mobile executive.
Tax Reliefs
Although there have been no cuts to pension tax relief legislation will be introduced in Finance Bill 2013 to apply a cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply only to reliefs which are currently unlimited, for example loss reliefs against total income, qualifying loan interest, Gift Aid and charitable gifts of land and shares. For anyone seeking to claim more than £50,000 in reliefs, a cap will be set at 25 per cent of income (or £50,000, whichever is greater). This appears to be an attempt by the Government to target the practice of setting up loss making businesses purely to claim tax relief. It will be interesting to see the draft
legislation when it is published later this year.
UK/Swiss Agreement
Budget 2012 confirmed that legislation will be introduced in Finance Bill 2012 to give effect to the Agreement between the UK and Switzerland. It is likely to be effective from 1 January 2013 but there are a number of special provisions relating to non-doms who pay tax on the remittance basis. These include being able to opt out of the one off charge for the past; and being able to opt for an alternative basis of calculating the one-off historical charge (broadly, to pay 19-34% on UK source income and gains and amounts remitted, rather than on the full account balance).
In terms of the withholding tax going forward this will only apply to UK source income and gains or remittances to the UK, however confirmation needs to be provided to the Swiss bank/institution by an accountant, tax advisor or lawyer who is a member of a professional body, that the account holder is a non domiciled person.
Anti-Avoidance
There may be some important developments to two pieces of legislation designed to protect the UK tax base, broadly the transfer of assets abroad regime and rules on gains on assets held by foreign companies closely controlled by UK participators. The Government has said that it will publish a consultation, including draft legislation, after the Budget on how it proposes to amend them. This is likely to be in consequence of the recent challenge by the European Commission and we may see a relaxation in the provisions where the person(s) abroad or offshore company is located in an EU jurisdiction.
General Anti-Avoidance Rule (“GAAR”)
The idea of an overarching General Anti Avoidance Rule is not new. The last time we had consultation on a GAAR was back in 1997 in those heady first days of New Labour; the era of Blur and Oasis, “Britpop” and “Cool Britannia”.
In the same year, the Tax Law Review Committee published a substantial report on tax avoidance. The report was chaired by Graham Aaronson QC and argued for a “sensible targeted statutory general anti-avoidance provision” in preference to “the continued development of judicial anti-avoidance doctrines.”
New Labour duly shelved the plan for a GAAR in favour of targeted anti-avoidance rules (“TAARs”) and managed to double the length of the tax code to 12,000 pages in the process.
Fast forward 14 years and step forward once more Graham Aaronson QC this time leading the Coalition’s review of a GAAR. Even though the Ramsay principle (the judicial anti-avoidance doctrine referred to in the 1997 tome) has largely been resolved by interim case law, it was no surprise to see that Aaronson’s 2011 report called for a “specifically targeted anti-abuse rule”.
This time though the Coalition intends to act and has promised inclusion of a GAAR in the 2013 Finance Bill. Thankfully the Government appreciates that this is a highly complex area and has not tried to rush draft legislation through in time for 2012. We have some breathing room at least.
A UK GAAR will not be a first; such legislation already exists in countries such as Ireland, Canada, Australia and even in Guernsey, all with mixed results. A GAAR has certainly not proved to be a panacea to tax avoidance. In Australia, the GAAR introduced in 1936 had to be redrafted in 1981 as its effectiveness had been eroded by the Courts!
Based on the Aaronson report we can expect a GAAR which is targeted on the fringes and not at “the centre ground of responsible tax planning”, with safeguards to prevent HMRC mission creep or misuse of the legislation by HMRC. In a nice turn of phrase he states that the GAAR should be used “as a shield not a weapon”.
While all this is well and good, recent articles which have applied the draft GAAR to basic planning highlight the obvious difficulties with a GAAR – identifying the reasonable centre ground of planning. No doubt this is something which will be heavily consulted on over the course of the next year and we will of course be bringing you updates. Don’t expect any revelations though – if governments were able to define the dividing line between acceptable and unacceptable tax planning we wouldn’t be considering a GAAR in the first place.
Stamp Duty Avoidance – Stamped Out?
No doubt the recent media focus on SDLT and the Lib Dem desire for a “Mansion Tax” crystallised the Government’s thinking on SDLT.
Among the measures:
· A new 7% rate for residential properties valued at over £2 million to apply from 21 March 2012;
· A new 15% rate for residential properties valued at over £2 million purchased by non natural persons to apply from 21 March 2012. This is clearly devised as a deterrent. Thankfully this is not retrospective so any properties already owned by companies and trusts are not subject to SDLT.
· A consultation on how to introduce an “annual charge” on residential properties valued at over £2 million owned by companies and trusts.
Before the Budget we didn’t think the Government had a workable plan on how to attack property already owned by a non natural person. We still don’t think they do so we shall wait with baited breath to see the proposals. Based on what we do know we still think it will be possible to plan around SDLT.
Of course the Government consults on lots of matters which they never implement. If the media attention dies away who knows, this may well get shelved!
CGT on Residential Property
In line with the announcements on SDLT, the Chancellor announced an extension of CGT on disposals of UK residential property by non resident non natural persons with effect from 6th April 2013.
This is a rather dramatic departure for the UK in that it looks like, for the first time, CGT is to be extended beyond the territorial limits of the UK. UK CGT as it stands is only chargeable on UK residents and while there is extensive anti-avoidance legislation in place it all attempts to tie the charge to CGT back to UK resident taxpayers.
This could be the first step on a slippery slope for CGT and we may yet look back and see this Budget as the move to CGT being applied to all UK situs assets.
Whether Principal Private Residence (“PPR”) relief will be extended accordingly remains to be seen. Likewise how this will interact with the existent anti-avoidance legislation remains to be seen.
The consultation should be with us in the summer so we should know more then but as with SDLT, based on what we know already we believe that with careful planning it will still be possible to dispose of UK property and remain outside the charge to UK CGT.
In response to disclosures made under DOTAS (The Disclosure of Tax Avoidance Schemes) the government has introduced legislation to counter specific avoidance schemes.
The measure will amend the settlements legislation to confirm that income which arises under a settlement and originates from any settlor who is not an individual is not treated as that of the settlor.
The schemes used an inconsistency in the law which allowed beneficiaries of an interest in possession trust to avoid tax if the settlor was a corporate entity. The amendment to the legislation amends this flaw in the legislation and ensures that the beneficiaries of the trust are taxed in full on the income. Anyone who has entered into such a scheme should take advice on the next appropriate steps.
QROPS
On the 6th April this year, we will see the biggest shake up of Qualifying Recognised Overseas Pension Schemes (QROPS) since their introduction in 2006. QROPS are popular with expats as they allow them to move their UK pensions out of the UK when they go to live abroad. Unfortunately QROPS have, in some circles, become synonymous with tax abuse e.g. “pension busting” which allows beneficiaries to access 100% of the pension pot in some cases.
To counter abuses, the Government is introducing new rules from 6th April 2012 but it also announced in the Budget that changes in primary legislation will be introduced in Finance Bill 2013 to strengthen the reporting requirements and powers of exclusion relating to the QROPS regime.
The Government also announced that where the country or territory in which a QROPS is established makes legislation or otherwise creates or uses a pension scheme to provide tax advantages that are no intended or available under the QROPS rules, the Government will act so that the relevant types of pension scheme in those countries or territories will be excluded from being QROPS.
The States of Guernsey and Jersey have recently shown some deft footwork in handling the imminent QROPS changes and one cannot but wonder if this latter announcement is not the result of that footwork.
Mark Davies |
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| Director | |
| Telephone: + 44 (0) 203 0088102 | |
| Email: mdavies@mdaviesassociates.com |
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