5th December 2013
This is an autumn statement with very few big surprises. The Government has little spare cash to give away and many of the tax changes have already been announced. Here is our synopsis of the most significant tax changes for our non-dom clients and their service providers.
As promised in the coalition agreement, the Personal Allowance will increase to £10,000 from 6 April 2014. Thereafter, increases will be in line with inflation. However, most non-doms taxable on the remittance basis will not benefit from this increase, the ‘price’ of the remittance basis being the loss of such allowances. Likewise, those earning in excess of £120,000 will continue to see their personal allowance withdrawn completely.
Married couples, neither of whom are higher or additional rate taxpayers will be entitled to transfer £1,000 of their personal allowance to their spouse from 6 April 2015 onwards, with future increases linked to rises in the personal allowance.
Extending Capital Gains Tax (“CGT”) to non-UK residents owning residential property
CGT currently applies to UK residents or to persons engaged in a trade or business in the UK. However, from 6 April 2015 CGT is to be extended to encompass residential properties that are sold by non-UK residents.
A consultation on how best to introduce this change will be published in early 2014, which will hopefully allow individuals to start planning more accurately.
This has given non-UK residents a seemingly lenient buffer for planning, by providing them with nearly a year and a half to dispose of the property with no UK liability. If not wanting to dispose of the property, non-UK residents should take this opportunity to consider restructuring how the property is held. At the very least non-UK residents should consider uplifting the base cost.
It should also be noted that CGT only applies to capital gains, and so profits on the sale of a UK residential property which constitute business profits may escape UK tax entirely if they can be sheltered by the provisions of a Double Tax Agreement.
It is not yet clear whether reliefs, such as Private Residence Relief (“PRR”) (see below) and annual exemptions are going to be available to non-UK residents. At present PRR is only available to UK resident individuals. This provision, as it stands, will almost certainly be contrary to EU law as it is discriminatory to non-UK resident individuals.
Reduction in Private Residence Relief (“PRR”)
PRR seeks to provide full or partial relief for the gain on the sale of an individual’s only or main residence. From 6 April 2014 the rule which treats the final 36 months of ownership as always qualifying for relief is to be reduced to 18 months.
This change has been made with the specific intention of minimising the number of multiple homeowners who aimed to exploit the final 36 month exemption, by changing their PRR election, and comes from an increase of PRR led enquiries from HMRC.
There have been no other announced changes to the relief; so nominating a main residence and the various deemed occupation periods (provided they fall between periods of actual occupation) still stand.
Annual Tax on Enveloped Dwellings (“ATED”)
HMRC have adjusted their estimate for the effectiveness of ATED. Where it had previously been thought that £20 million would be raised in 2013-14, this has been revised to £100 million. This is a staggering underestimation.
Whether as a result of the change in CGT to non-UK residents, PRR relief or the desire to dispose of property that is subject to ATED, one can anticipate that there is likely to be an imminent increase in disposals of residential property in the next year and a half.
Tax Evasion & Tax Avoidance
The Autumn Statement boasts of the additional revenue gained from clamping down on tax avoidance schemes. There are some specific announcements relating to common tax planning techniques, see below:
Legislation will be introduced in the Finance Bill 2014 to put an end to the practice commonly known as ‘dual contracts’. The measures are likely to focus on non-domiciled individuals that create (or have created) an ‘artificial’ division of the duties of one employment between contracts in both the UK and overseas, in order to shift some of their employment income offshore and out of scope of UK tax.
Further guidance is due out on 10 December, so it is unclear at this stage how this will be implemented and the potential impact on individuals that have legitimate dual roles.
New rules on mixed membership partnerships are to come into force from 5 December 2013 in order to ‘protect against risks to tax revenue’. This stems from the consultation published back in May 2013, and the changes today concentrate on two types of arrangements where:
partnership profits are allocated to a ‘non-individual’ partner (i.e. a company) but an individual member may benefit from those profits; or
partnership losses are allocated to an individual partner, instead of a non-individual partner, to enable the individual to access certain loss reliefs.
If the relevant conditions are met then the excess profits can be reallocated accordingly or the claim for loss relief denied. There will also be anti-avoidance provisions that can reallocate excess profits to an individual who is not a partner in certain circumstances. We recommend that any current arrangements involving mixed partnerships are reviewed to ensure that they do not get caught by the new provisions.
Simplification of inheritance tax charges on trusts
Trusts, including offshore trusts, pay UK inheritance tax on their relevant property. For offshore trusts established by non-UK domiciled individuals, relevant property means UK situs assets held directly by the offshore trustees.
The charge manifests itself as an exit charge on the distribution of relevant property and a periodic charge calculated every ten years on the anniversary of the creation of the trust. The calculations are complex and result in an effective tax rate not exceeding 6%.
Following consultation, the Government will legislate to simplify trust calculations, filing and payment dates with effect from 2015. It will also introduce legislation to treat income arising in such trusts which remains undistributed for more than 5 years as part of the trust capital when calculating the periodic charge. This should have little impact on non-UK domiciled individuals who have established offshore trusts which do not contain relevant property.
There will be further consultation on proposals to split the inheritance tax nil rate band available to trusts.
The Chancellor confirmed that the planned reduction in the main rate of corporation tax to 20% with effect from 1 April 2015, will go ahead, bringing the main rate in line with the rate for small companies.
A number of incentives will also be introduced to encourage employee ownership.
To continue with the Amazon and Starbucks bashing several announcements have been made concerning the further restriction of the deductibility of interest on intergroup debts.
The Government also appears keen to encourage employment of younger employees, abolishing employers’ National Insurance from April 2015 for employees under the age of 21.
Should you have any queries concerning the points mentioned above or would like to discuss any other aspect of the Autumn Statement, please do not hesitate to contact us for specific advice.
Telephone: + 44 (0) 20 3008 8100
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.