A Tax Update from Mark Davies & Associates Ltd
20th March 2013
Limitation of deduction of debts for IHT
A surprise announcement, on which no consultation has been carried out, are the new rules which will prevent certain debts from being an allowable deduction against IHT on a person’s estate. Debts targeted under this new rule are those incurred ‘directly or indirectly to acquire property which is excluded from the charge to IHT’.
This will be of great concern for non-domiciled individuals who have borrowed against valuable UK situs assets (such as property) and have reinvested the proceeds offshore, in particular those who have, used this technique after ‘de-enveloping’. Paradoxically this new rule gives impetus for UK situs property to be owned via an offshore company for the IHT benefits this structure continues to provide. However, if the acquired property (such as a corporate envelope) has been liquidated or disposed of the deduction may be allowed providing certain conditions are met. Trustees with outstanding loans could also find that the ten year charges are higher than originally anticipated if certain debts are disallowed.
The common planning technique of borrowing against valuable UK situs assets to invest in assets eligible for APR or BPR relief is now also no longer effective – such debts will deducted first of all from the BPR or APR qualifying assets (due to the relief,they would not otherwise be subject to IHT), i.e. the net value of the estate is unchanged, unless the BPR or APR assets have fallen in value.
The new rule will apply to chargeable transfers and deaths which occur after the Bill receives Royal Assent, i.e. Summer 2013, but whilst this gives breathing space for clients to rethink, it does have retroactive effect. Anyone who has undertaken any IHT planning involving debts should obtain professional advice immediately to understand their exposure to IHT.
Full details are expected in the Finance Bill 2013 (FB 2013) which is due to be published on 28th March. We will circulate a further note on this point after publication.
The Annual Tax Charge on High Value Residential Property
The draft legislation was published in December 2012 with a period of consultation which closed on 22 February 2013. Originally called the Annual Charge at Budget 2012, it became known as the Annual Residential Property Tax (“ARPT”) in the draft legislation. Now it seems HMRC would like to call it the Annual Tax on Enveloped Dwellings (“ATED”). So much for simplicity!
The name change aside, there were no new developments in Budget 2013 so we await the publication of FB 2013 on 28th March to see if any further changes have been inserted as a result of the consultation.
CGT on High Value Residential Property.
The draft legislation for this proposed change was published in January 2013. We speculated all throughout 2012 that the draftsmen would have their work cut out trying to implement the policy. It seems they did – the charge has now mutated from a CGT charge on non resident non natural persons to a special CGT charge on high value residential property.
Nothing new (not even a name change) was announced in Budget 2013 although our sympathies go out to the draftsman who will now need to revise the draft legislation to refer to ATED rather than ARPT. We await the publication of FB 2013 on 28th March for the revised wording.
IHT Spouse Exemption for Non Doms
The European Commission issued a reasoned opinion in October 2012 stating that unless the UK took action within two months to rectify this piece of legislation it would refer the UK to the ECJ.
As matters currently stand, transfers of assets between spouses and between civil partners are generally exempt from IHT except where the spouse or civil partner to whom the assets are transferred does not have a UK domicile (or deemed domicile). In these cases there is a lifetime limit of £55,000 on the value of the assets that can be transferred free of IHT. The proposed changes are as follows:
An increase in the cap to £325,000 – i.e. to the same level as the ordinary IHT nil-rate band; and,
The introduction of an election allowing non-doms to be treated as UK domiciled for IHT purposes only.
We would be surprised if these changes are sufficient to bring UK tax law into line with EU Law. In particular, the election seems to be a disproportionate response and EU case law has already shown that the presence of a disproportionate election is not sufficient to be EU Law compliant (c.f. F. Gielen v Staatssecretaris van Financiën). Hopefully we shall see something more sensible in FB 2013 or else the UK may be referred to the ECJ.
Manx Disclosure Facility / Guernsey Disclosure Facility / Jersey Disclosure Facility
As previously announced (though Jersey had us all on tenterhooks, confirming their deal only this morning) the UK has now reached agreements with all three Crown Dependencies. Although the availability of these facilities will extend for a few months past the Liechtenstein Disclosure Facility’s (LDF’s) anticipated end date of 5th April 2016, they do differ quite significantly from the LDF, and are unlikely to be as beneficial as the LDF for most taxpayers with irregularities. We would be happy to advise on the best course of action for regularising such assets. For more details on the Crown Dependency Disclosure Facilities, please see our separate briefing note.
“No safe havens” HMRC’s ‘centre of excellence on offshore tax evasion’ has published its offshore evasion strategy, including a colour coded map showing the prevalence of UK residents with offshore accounts. Having an offshore account does not of course amount to evasion providing UK doms, (or non-doms on the worldwide basis of taxation) report the interest arising, and non-dom remittance basis users report remittances. It is likely that HMRC’s new CONNECT system will check this information against tax returns submitted to ensure full compliance as appropriate, but where this system breaks down, you can expect questions from HMRC.
The strategy’s main focus is on non-compliant tax evaders on whom HMRC is gradually cracking down. For such individuals, the world is a smaller place, and indeed the noose is tightening. Professional advice should be sought as soon as possible to rectify any irregularities which you may become aware of. We can advise on the best way of doing this – the disclosure facility available in the jurisdiction in which the funds are held may not necessarily be the best route.
Transfer of Assets Abroad (“TAA”)/Gains realised by non resident companies (“S.13”)
In February 2011 the European Commission issued Reasoned Opinions stating that it believed that both these anti-avoidance provisions were contrary to EU Law. The Government announced in Budget 2012 that it would consult on amending both. That consultation closed in Oct 2012 and we received the draftlegislation in December 2012.
The Transfer of Assets Abroad legislation has been around in one guise or another since the 1930s. In broad terms, the effect of the legislation is to prevent a UK taxpayer from giving an asset to a person abroad while retaining the ability to enjoy the income but without paying tax on that income. In short, it charges the taxpayer to UK tax on the income as if it had arisen to him directly.
The Commissions Reasoned Opinion held that the TAA provisions impinged on both the Freedom of Establishment and the Free Movement of Capital. The main proposed change to the Transfer of Assets Abroad legislation is the introduction of a new exemption effective 6th April 2012 (although the taxpayer can elect for the rules to commence from 6th April 2013) for “genuine transactions” where EU Treaty freedoms are engaged.
Section 13 is a similar anti-avoidance provision aimed at ensuring UK residents cannot avoid UK CGT by holding assets through a non resident company. Broadly speaking, it does this by apportioning a gain realised by non resident “close” company to the shareholders in proportion to their shareholding.
The main proposed change to s.13 is the introduction of an exclusion for gains realised on assets used in “genuine business activities overseas”. Both amendments are similar in nature in that they try to extract from the charges genuine business activities. What is clear is that both sets of anti-avoidance provisions are likely to continue to be relevant when dealing with offshore trust structures.
As previously announced, from April 2014, the corporation tax rate will fall to 21%, and today Mr sborne announced it would be cut further to 20% from 2015 (Ed.- Just in time for the election?!).
These measures, along with a (previously announced) boost to the allowances available on investment in plant and machinery (up to £250k p/a) aim to boost investment and enterprise which is so badly needed in the UK economy. This may be of interest to those of our clients who will claim the ‘Business Investment Relief’ on remittances used to invest in UK companies. You should seek professional advice before undertaking any investment on which you intend to claim this relief.
The Office for Tax Simplification (OTS) will be looking at ways to simplify the taxation of partnerships. owever, oddly, HMRC will undertake a simultaneous review of the taxation of partnerships because they rank as a ‘high risk’ area of the tax code, having been the feature of many tax avoidance schemes that HMRC have successfully shut down. (May we respectfully suggest that perhaps it would have been better if one review follows on from the other?!)
In particular, there will be a consultation on changes to the current legislation which is seen to allow taxpayers to use limited liability partnerships to disguise employment relationships and to artificially allocate profits and losses to secure tax advantages. In brief, HMRC will no longer presume that members of Limited Liability Partnerships are self employed. This could have major ramifications for members of LLPs and we will be keeping a close eye on this.
In February 2012 the independent Office of Tax Simplification (OTS) identified a population of businesses operating as limited companies who would prefer to operate in unincorporated form and highlighted a number of tax charges and administrative issues that might currently discourage this.
At Budget 2012 a consultation was announced to consider disincorporation relief and the draft legislation was issued in December 2012.
The legislation is designed to allow joint claims to be made by the company and its shareholders to allow qualifying business assets (goodwill and land and buildings used in the business) to transfer at a reduced value for Corporation Tax and Capital Gains Tax. In effect the gain or profit that would have arisen to the company will be deferred until the disposal of the assets by shareholders. Claims will be restricted to those businesses where the market value of the classes of assets allowed for disincorporation relief does not exceed £100,000.
Loans to Participators
The headline suggests a much wider remit than the actual legislation – there are to be new rules brought in to tax loans made by close companies to various intermediaries, but since a close company is by definition UK resident, most of our clients and their structures will unaffected by this change.
Offshore Payroll Providers
In the run up to the Budget we had several media reports based on comments by Danny Alexander that the Treasury was poised to “close a loophole that currently allows businesses to use offshore payroll schemes tododge £100 million annually in National Insurance payments and denies employee rights such as statutory sick pay and maternity leave.”
In the end what we actually got was a promise to consult with a view to legislating. in FB 2014. It’s not clear exactly where this will end up so watch this space.
General Anti Abuse Rule (“GAAR”)
Much has been written in respect of the GAAR which is one of the most emotive issues in tax. We won’t go into any detail here although it was the subject of one of our seminars last December.
We agree with many other commentators that the GAAR is flawed – at its very heart is a subjective test which has been referred to as the (now notorious) double reasonableness test:
“Tax arrangements are abusive if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances.”
What is quite ironic is that in recent times the Courts have seen fit to strike down the vast majority of tax avoidance schemes using the existing legislation and the principles of purposive construction (formerly known as the Ramsay Principle). It is difficult to see why a GAAR is needed and indeed we expect it will bring with it increased levels of uncertainty for negligible tangible result. One can only speculate as to whether a political desire to be seen to be doing something has outweighed the practicalities. It wouldn’t be the first time!
Statutory Residence Test
As anticipated, this will have effect from 6th April 2013. Please see our separate briefing note on this issue.
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This bulletin is intended to provide general information only and is not intended to constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action which may affect your tax or financial position, you should consult a qualified professional adviser.