UK Autumn Statement 2015
An update for foreign domiciliaries and their advisers
George Osborne has unveiled the 2015 Autumn Statement in conjunction with the Spending Review.
Having vowed to create a surplus of £10 billion by 2020, the Chancellor cited “economic security” as the cornerstone of the Autumn Statement and Spending Budget. With the headlines leading up to the Autumn Statement focusing on the Spending Review and the proposed cuts, the Chancellor needed to deliver a bold Autumn Statement. It was widely anticipated that “the evasion and aggressive avoidance” of taxation would be targeted, as well as further reforms to the taxation of foreign domiciliaries, otherwise known as ‘non-doms’ however the Chancellor barely mentioned these issues during his hour long speech. We have provided below an overview of the changes which we believe are most relevant for our international client base.
The Chancellor did not make any mention of the swathe of reforms to the UK tax regime for non-doms which were announced in the July Summer Budget. However, significant changes are proposed and these are due to take effect from 6 April 2017. Many had hoped for clarification on the future UK tax landscape for non-doms.
What upsets wealthy investors most is the uncertainty about what the rules will be and whether they are likely to change while they are UK resident. For them, the Chancellor’s statement was rather less illuminating than one might have hoped.
However, we can recap on the changes which have already been announced and are due to take effect from April 2017:
- Access to the “remittance basis” will be limited through changes to the “deemed domicile” rules.
- The taxation of offshore trusts and company structures created by non-doms is being reformed.
- Inheritance tax protection for non-doms holding UK residential property through offshore companies is being removed.
There is a lot of debate about the detail of these changes, which is for the most part yet to be published. For example, the new legislation on the taxation of offshore trusts has not yet been finalised and may not be available for some time, possibly as late as Autumn 2016. HMRC will also be consulting with the tax profession and other stakeholders in relation to the proposed inheritance tax changes, but that is not expected to begin until early in the New Year.
The key headline for most non-doms at the moment is that, with effect from 6 April 2017, once they have been living in the UK in more than 15 (out of the previous 20) tax years, they will become deemed-UK domiciled. This will apply for income tax, capital gains tax and inheritance tax purposes.
It means that once they are deemed-UK domiciled, they will not be able to benefit from the remittance basis of taxation; whereby foreign income and gains are only taxed in the UK if they are remitted, used or enjoyed here. Once deemed-UK domiciled, it will also be impossible to create offshore trusts that are tax-favoured for inheritance tax purposes. A deemed domicile rule already exists for inheritance tax, but it is slightly more generous. In practice, the difference for inheritance tax is that after April 2017 deemed domicile will apply sooner than before.
We know as much about the non-dom reforms now as we did before the Autumn Statement, and so the message continues to be “watch this space”. The devil will be in the detail and it is difficult to plan ahead of the draft legislation being published by the government. What is clear is that sensible tax planning involving offshore trusts will continue to be possible for non-doms, provided it is done before they are caught by the deemed domicile rules.
Business Investment Relief (“BIR”)
BIR provides a valuable opportunity for non-doms to invest foreign income and gains in the UK without triggering a tax liability. The Autumn Statement has confirmed that the government will be opening a welcome consultation on how the existing rules can be improved in order to increase investment in UK businesses.
Individuals who are taxed on the remittance basis are generally taxed on foreign income and gains they remit to the UK for whatever reason. However, the government recognises that this regime acts as a disincentive for wealthy non-doms to invest in UK businesses and, since April 2012, it has been possible for non-doms to claim BIR on qualifying remittances to the UK.
Remittances to the UK that qualify for BIR are tax-free. Importantly, no tax liability arises even if the money brought to the UK represents foreign income or gains that would, ordinarily, be taxable on remittance. A number of conditions must be satisfied in order for BIR to apply, however it is potentially a valuable relief and one which we have been encouraging our clients to take advantage of, where appropriate.
It did not feature in Mr Osborne’s speech, but hidden away in the accompanying Autumn Statement documents was the welcome announcement that “the government will consult on how to change the existing BIR rules to encourage greater use of the relief to increase investment in UK businesses”.
As a firm we have been vocal in saying that we believe the uptake of BIR has been slow and that more needs to be done to make the relief attractive.
Figures obtained by Mark Davies & Associates last month under the Freedom of Information Act showed that use of BIR rose by 65% to approximately £545m in the 2013/14 tax year. The number of non-doms claiming BIR rose by 36% to 317.
Whilst the rising number of claimants is striking, we believe it is just less than one in 1,000 of those people claiming the remittance basis.
We are experienced in guiding our clients through the BIR process, but many non-doms without professional advisers can be dissuaded by the apparent complexity of the relief.
It appears that the government is beginning to listen, and we are hopeful that changes to the current BIR rules will make this relief even more valuable to non-doms in the future.
Buy to let and Stamp Duty Land Tax (“SDLT”)
With the housing shortage in the UK being at the forefront of many political agendas, it was refreshing to hear the issue being addressed by the Chancellor with more than the traditional mantra ‘build more houses.’ With the interest rates still being as low as they are, many people have turned to property to get more from their money. Cash investors are able to act faster than purchasers requiring mortgages and can often afford to pay more. The Chancellor has announced an increase of 3% in SDLT on top of the exiting SDLT charge, from 1 April 2016, on UK residential properties costing more than £40,000 that are purchased as a second home or buy-to-let property. This new penalty for ownership of more than one property along with generally high rates of SDLT will discourage investment buyers. However, given the capital growth offered by residential property in the UK and the possible annual rental yield, we suggest that the government are more concerned with the additional tax that is likely to be raised.
SDLT is payable when land and property are purchased in the UK. The rates of SDLT increase with the value of the property purchased. Under the proposed reforms, investors will pay approximately £9,000 more on a £300,000 property than those buying their own home. In real terms, investors will only see this as an approximate 2% increase given the deduction available for SDLT paid at purchase when calculating the Capital Gains Tax due on disposal. Furthermore, with internationally mobile clients often buying property in multiple jurisdictions, one has to question how HMRC will monitor the number of properties owned by an individual. Could this be an advantage for non-doms with offshore structures and offshore homes?
The government will consult in 2016 on proposed changes to the SDLT filing and payment system. Currently, the SDLT return and payment is due 30 days after completion of the property purchase. It has been suggested that this should be reduced to 14 days in 2017/18, increasing revenue by £110 million, which is surprising as this should only be a matter of timing.
Annual Tax on Enveloped Dwellings (“ATED”) and Stamp Duty Land Tax (“SDLT”)
ATED is an annual tax charge in respect of high value residential properties worth more than £1,000,000 (£500,000 from 1 April 2016) that are owned by non-natural persons, which includes companies, partnerships with corporate members and collective investment schemes. Where ATED applies, ATED-related capital gains tax applies on the disposal of the property. In addition, SDLT of 15% applies on the acquisition of high value residential property by non-natural persons. These provisions were introduced to combat the avoidance of SDLT and to encourage ‘de-enveloping’.
Currently, there are a number of reliefs from ATED available including commercial letting businesses. The Chancellor’s statement has stated that from 1 April 2016, the UK government will extend the available reliefs for ATED and the 15% SDLT rate to include equity release schemes (home reversion plans); property development activities; and properties occupied by employees.
Capital Gains Tax (“CGT”) on residential property
CGT is due on the profit on the disposal of chargeable assets, such as residential property which is not used as an individual’s main home.
Currently CGT due on the disposal of a residential property is paid up to 22 months after the sale of the property. The Chancellor has announced that by April 2019, any CGT due on the disposal of residential property will be reportable and payable 30 days after completion. The new 30-day deadline will be introduced to coincide with the launch of a new digital tax paying system. The change to 30 days aligns the payment dates for both UK and non-UK tax resident individuals. However, it is clear that the acceleration in payment dates for both CGT and SDLT announced in today’s Autumn Statement are a reflection of the need for cash flow by the Treasury. For individuals who already file UK tax returns this could prove to be an onerous reporting obligation and it is yet to be seen whether the new digital tax system will be fully operational by 2019.
Non-Resident Capital Gains Tax (“NRCGT”)
Following the introduction of NRCGT on non-resident individuals (including companies and trusts) disposing of UK residential property from 6 April 2015, there have been instances where individuals have been subject to double taxation because of the computation methods chosen. HMRC will retrospectively amend any such computations to remove these double charges.
Currently, NRCGT returns are required from non-residents within 30 days of the disposal of the residential property. Going forward, HMRC will be able to prescribe the situations in which a return is not required, thus relieving the administrative burden. However, from April 2016, in the absence of a return, HMRC will be able to collect an estimated amount of NRCGT from taxpayers, although the mechanism of this collection is unclear
U-turn on loans secured on untaxed foreign funds
Although not mentioned in today’s statement HMRC has announced that they do not intend to collect the tax on deemed remittances in respect of loans which had been secured on untaxed offshore income and/or gains which had been remitted to the UK before 4 August 2014. Previously, HMRC had stipulated that non-doms should notify HMRC of the existence of such loan arrangements by the end of 2015, and repay such loans using ‘clean capital’, by the end of the 2015/16 tax year.
Offshore Tax Evasion
July’s Summer Budget suggested that there will be new penalties brought in for offshore tax evaders and today’s Autumn Statement has supported this.
Where there is deliberate evasion of tax on offshore income and gains, HMRC will apply penalties based on a percentage of the value of the relevant asset and not, as currently, on a percentage of the tax lost. HMRC will also continue their public naming campaigns for those individuals. This ‘naming and shaming’ will also be extended to individuals who facilitate tax evasion, or “enablers”.
Perhaps more worrying is the new criminal offence for failure to declare offshore income and gains. Intentional tax evasion is already a criminal offence, but the new penalty extends this further so that HMRC would not need to prove an intention to evade tax.
When these provisions were originally proposed there was a de minimis amount so that only serious offenders would be caught and additional safeguards were proposed where the taxpayer had a reasonable excuse or took reasonable care. Therefore, there is now a grey area where taxpayers who have only been careless could be charged with a criminal offence by HMRC.
A consultation process which included draft legislation for the penalties took place over the summer. The results of this have not yet been published, but the Autumn Statement’s announcements are a sign that some, if not all, of that draft legislation will become part of the upcoming Finance Bill 2016.
The extension of the civil penalties to tax evaders is continuing the international crackdown on tax evasion and it is our view that the arguably harsh definition of criminal offences will have little impact. Regrettably, those who wish to be dishonest will continue to be dishonest. These new changes only serve to make it easier for HMRC to launch a criminal prosecution at a time when the ever increasing complexity of the UK tax system makes it more likely for the unrepresented taxpayer to make an honest mistake.
It is also likely that non-doms are more likely to be disproportionately affected by these provisions as they are more likely to have offshore sources of income and gains.
There was also a brief mention of new rules requiring individuals to correct previous instances of offshore non-compliance. There will be penalties for failure to do so.
However, the exact details for correcting past mistakes is yet to be announced. For example, how would these penalties tie in with the already announced penalties for tax evaders and tax evasion ‘enablers’. As this is the first mention of this new requirement these proposals will be subject to consultation and, as a result, is unlikely to feature in the upcoming Finance Bill 2016.
Offshore Employee Benefit Trusts
Following HMRC’s recent court win against Glasgow Rangers Football Club and their Employee Benefit Trust arrangements, it is unsurprising to hear that the government “intends to take action against those who have used or continue to use disguised remuneration schemes and have not paid their fair share of tax”.
However, the Chancellor has made similar statements before and there are still no details of what the deterrents will be and so it is unclear if anything has changed or whether they are simply reinforcing the message without committing to identifying the sanctions.
A settlement facility previously existed by which employers were able to resolve outstanding enquiries on Employee Benefit Trusts without recourse to litigation. This facility was withdrawn on 31 March 2015. This coupled with today’s statement could be a sign that the government are more inclined to legislate or litigate against arrangements which defer or avoid tax on earned income.
Non-doms and Employee share schemes
The government announced that it plans to streamline and simplify aspects of the tax rules for approved and non-approved employee share schemes putting beyond doubt ‘the tax treatment for internationally mobile employees of certain employment-related securities (ERS) and ERS options.’
There is definitely an element of déjà vu here. The Finance Bill 2014 already brought significant changes to the rules taxing ERS and ERS options of internationally mobile employees (IMEs). Those changes came into effect on 6 April 2015 and applied to most types of ERS and ERS options received while UK resident including taxable events in relation to ERS and ERS options received when non-resident.
Those changes were aimed at putting IMEs on an equal footing with full-time UK-resident employees in relation to ERS and ERS options earnings. One major impact of those changes resulted in UK-resident non-dom employees (of non-UK resident companies) being unable to claim the remittance basis because their ERS would be UK situs and so deemed to be remitted to the UK on receipt.
We suspect that these new proposals will build upon those changes that came into effect from 6 April 2015. What is interesting is that with the new proposals announced today any charge to tax will arise under the rules that deal with ERS options, rather than earnings. Hopefully more details will be in the draft clauses of the Finance Bill 2016 due to be released on 9 December 2015.
We would recommend that any employees looking to relocate to the UK or those about to leave should seek clarification on how their share awards are going to be treated under these new proposals.