Today George Osborne unveiled his 7th and first solely Conservative Budget since 1997.
It was widely anticipated before the speech that Mr Osborne would target tax avoidance and, as expected, the Budget contained details of a £5 billion crackdown on what Mr Osborne termed as tax imbalances, avoidance and aggressive tax planning. The Budget also included the Government’s reforms to the tax rules for foreign domiciliaries or “non-doms”.
We have provided below an overview of the changes which we believe are most relevant to our international clients.
Reform of the non-dom regime
The Budget stops far short of Labour’s pre-election proposal to abolish non-dom status entirely. However, it does make significant changes to the existing non-dom regime and puts an end to individuals living in the UK and claiming non-dom status indefinitely. New measures will also prevent individuals with a UK domicile at birth from claiming non-dom status if they acquire a “domicile of choice” elsewhere, then subsequently become UK tax resident.
New “15 year” deemed domicile rule
Once an individual has been UK resident in more than 15 out of the past 20 tax years they will be deemed to be UK domiciled for all tax purposes, even if they are a foreign domiciliary under general law.
With effect from the sixteenth (out of the last twenty) tax years of UK residence, an individual will no longer be able to benefit from the remittance basis, and will instead be subject to UK tax on their personal worldwide income and gains on an arising basis. They will also be liable to UK inheritance tax on their worldwide assets, not only those situated in the UK.
It is intended that the new 15 year rule will apply from 6 April 2017. This does provide sufficient scope for non-doms to undertake suitable planning before the rules are implemented, or before they become deemed domiciled under the 15 year rule. However, the Government recognises that the existing rules relating to offshore trusts are complex and there will be a period of consultation between HMRC and interested parties.
An individual who becomes deemed domiciled under the 15 year rule will need to spend more than five tax years outside the UK in order to lose their UK domicile for tax purposes and “restart the clock”.
Returning “UK doms”
It will no longer be possible for an individual who is born with a UK domicile to replace that domicile with another domicile of choice in the event that they subsequently return to live in the UK. This proposal will specifically affect any UK domiciled individuals who leave the UK, acquire a domicile of choice overseas under general law and subsequently return to the UK and still claim to be non-domiciled for tax purposes.
In addition, new rules will aim to ensure that the tax advantages of trusts set up while a previously UK domiciled individual is not domiciled in the UK will be lost for the duration of any subsequent periods of UK residence. The detailof these rules isnot yet known.
It will be more important than ever for clients to take professional advice in relation to their residence and domicile status. We will be contacting our clients who are likely to be affected by these changes over the coming few weeks. Anyone with concerns should not hesitate to contact their usual adviser at Mark Davies & Associates.
Annual remittance basis charges
Under the current rules, non-doms who are “long term” UK resident are required to pay the annual remittance basis charge in order to claim the remittance basis.
When the charge was first introduced in April 2008, it was set at £30,000 per annum for those who had been resident in at least 7 out of the previous 9 tax years. The level of charge now varies depending on the length of time the individual concerned has been UK resident. Currently, the annual charge is £60,000 for those who have been resident in 12 out of 14 tax years and £90,000 for those who have been resident in 17 out of 20 tax years.
Increases in these charges were widely anticipated prior to Budget day. However, the Chancellor has opted to leave the £30,000 and £60,000 remittance basis charges unchanged. The £90,000 charge will be irrelevant from April 2017 onwards as those who have been resident for more than 15 out of the last 20 tax years will no longer be eligible to claim the remittance basis in any event because of the new “15 year” rule.
Other Income Tax Headlines
The Chancellor’s announcements included confirming an increase in the Personal Allowance for income tax to £11,000 and an increase in the Basic Rate Band to £43,000 for the 2016/17 tax year. Both the Personal Allowance and Basic Rate Band are to increase steadily over the next few years in order to reach the Government’s targets.
Taxation of Dividends
We anticipate that the proposed changes to the taxation of dividends will have an impact on our clients. From April 2016, the system of applying a “10% notional credit” to dividends will be abolished and replaced with a £5,000 tax free allowance on dividends each year. It is anticipated that dividends received will no longer be “grossed up”, and will instead be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayersor 38.1% for additional rate taxpayers.
Restricting mortgage interest expense for buy-to-let landlords
Buy-to-let landlords are currently able to offset the interest, paid on mortgages taken out to acquire their buy to let properties, against their taxable profits. The Chancellor considers that these rules provide a tax advantage to landlords over homebuyers, who cannot offset their mortgage interest against their income.
Higher income tax banded landlords are currently receiving tax relief at up to 45% on the mortgage interest they incur on residential property. With effect from April 2017, the tax relief available on mortgage interest will be restricted to the basic rate of income tax (20%) for all individuals.
It is not anticipated that this will have any impact on non-resident landlords, who pay UK income tax at 20% in any case.
Wear and tear for furnished rental properties
Currently, landlords of properties that are let to tenants fully furnished are able to deduct 10% of the relevant rental amount from their profit as “wear and tear”, irrespective of their actual expenditure on furnishings. From April 2016, this allowance will be replaced with a new system that will only allow the landlord to deduct the actual costs of replacing furnishings.
Inheritance Tax – Enveloped Residential property
The Government have introduced anti avoidance measures to target the ownership of UK residential property held directly or indirectly by non-UK domiciled individuals or their excluded property trusts.
Under the current UK rules, UK residential property held via offshore companies can be treated as ‘excluded property’ for inheritance tax purposes. Excluded property, held by non-domiciled individuals or offshore trusts, is currently outside the scope of UK inheritance tax; thus providing a tax advantage over UK-domiciled individuals (or their structures).
With proposed effect from 6 April 2017, new measures will be introduced that will prevent any offshore company, deriving its value directly or indirectly from UK residential property, from being treated as excluded property for inheritance tax purposes. In other words, the value of any company falling within this definition will be within the scope of a UK inheritance tax charge for any chargeable event. This would include the death of the individual, or the transfer of the shares to the trust, or where there is a gift of the shares to an individual where the transferor dies within 7 years of having made the gift. In addition there will be a tax charge on offshore trustees on every 10 year anniversary or if the shares are distributed by the trustees.
Unlike previous anti-avoidance provisions aimed at the ownership of UK property through structures (e.g. the Annual Tax on Enveloped Dwellings), there is no relief for residential properties that are commercially let and the legislation will potentially affect UK residential properties of any value.
Diversely held vehicles used to hold UK residential property are not within the scope of these reforms. It is intended that this exemption shall closely follow that provided within the Non-Resident Capital Gains Tax. However, it should be noted that closely controlled offshore companies, partnerships or similar structures will be within the scope of this new anti -avoidance rule.
The Government shall consult on the precise details of this legislation towards the end of Summer. The consultation will specifically consider measures to ensure that it is only the value of the UK residential property (less any borrowings) that shall be subject to inheritance tax.
A new tax free “main residence” nil-rate band will be introduced for inheritance tax purposes.
The new allowance will apply to estates where the deceased had an interest in a residential property, which had been their residence at some point, and it is left to one or more direct descendants (e.g. children or grandchildren) on their death.
The allowance will be phased in from April 2017 and will be set at £100,000 initially. It will increase annually until it reaches £175,000 in April 2020 and will be uplifted for inflation each year thereafter. This allowance will be available to supplement the existing inheritance tax threshold of £325,000 which applies to all estates and will also increase with inflation from April 2021 onwards.
Similar to the existing nil-rate band, the main residence nil-rate band will be transferable between spouses where the second spouse dies on or after 6 April 2017. This measure will potentially increase the inheritance tax threshold for home-owning married couples (and civil partners) to £1 million from April 2020.
Following concerns that elderly homeowners could decide not to move to smaller properties in order to benefit from the new allowance, it is intended that it will be available where a person downsizes on or after 8 July 2015 and passes on assets of an equivalent value to their direct descendants on death.
Reduction in Pension Relief for High Earners
The Chancellor has announced the publication of a “Green Paper” intended to look at the alignment of pension input periods.
As part of this paper, from 6 April 2016 onwards, high income earners will have their annual allowance reduced by £2 for every £1 of income exceeding £150,000. The maximum reduction in the annual allowance will be £30,000, so that anyone with annual income of £210,000 or more will have an annual allowance of only £10,000. Any unused annual allowance from the previous 3 tax years can be carried forward and added to the current year’s annual allowance.
Similar reductions in tax relief have been introduced where an individual makes a partial early withdrawal (or “money purchase”) from their pension scheme.
These changes have been brought in as a result of concerns regarding the growing fiscal cost of pension tax relief, and to ensure that pension tax relief is targeted at lower income savers who need it most. The changes follow several reductions in the lifetime and annual allowances over the last 5 years.
Capital Gains Treatment of Carried Interest
The Chancellor has announced changes in the tax treatment of capital gains made on “carried interests” held by individuals involved in private equity or other investment management activities. The new measures, to be contained in Summer Finance Bill 2015, will treat the entire sum received by individuals as constituting a capital gain, with only a limited amount of scope to apply deductions against the taxable gain. This measure seeks to ensure that “economic gains” made by investment managers are fully taxed, as opposed to only taxing the gain element on the sale of an asset that was acquired for zero or nominal consideration as part of an investment / private equity deal.
Corporation Tax Changes
With effect from today’s date, profits falling within the UK’s “Controlled Foreign Companies” regime will be subject to further tax restrictions. These rules will affect companies who are considered to have diverted profits away from the UK through the use of group companies. Going forwards, where profits can be attributed to a UK company under the CFC regime, the UK company will not be able to reduce its “CFC profits” by utilising any losses arising from its own UK activities. This is intended to provide a disincentive to companies who move activity away from the UK.
Other changes to corporation tax affecting international clients include the finalising of measures regarding the taxation of corporate debt and derivative contracts. This measure seeks to ensure that only amounts recognised as accounting profits or losses will be included when computing the taxable profits of a business. This means that artificial costs arising from certain types of intergroup debt structuring will not be recognised as a deduction against taxable profits.
Tackling Tax Avoidance
As is common within recent Budgets and has continued, the government are seeking to implement additional measures aimed at tackling tax avoidance. The Chancellor has confirmed that HMRC are to be given an additional £750 million of funding in order to achieve their aims, paying particular attention to wealhy individuals and corporates. The exact mechanism on how they will achieve this is not yet known. The Government intends to release a Consultation on the matter in the coming weeks.
The consultation, to be undertaken ahead of Finance Bill 2016, will concentrate on introducing tougher measures for individuals who ‘persistently enter into tax avoidance schemes that fail’ and the promoters of such schemes. The suggested plans include a surcharge on the latest tax return later found to be using a tax avoidance scheme and intentions to “name and shame” those people.
In addition, the Government proposes a new penalty in respect of the General Anti-Abuse Rule (“GAAR”) that will be calculated as a proportion of the tax recovered. This will be brought in with Finance Bill 2016 along with plans to strength the GAAR further.
The Government also aims to crack down on disguised employment through the use of personal service companies by improving the effectiveness of the current legislation.
The Government proposes to modernise and strengthen HMRC’s powers to recover tax and tax credit debts directly from debtors’ bank and building society accounts, including funds held in cash ISAs. Having widely consulted, this measure will be subject to robust safeguards including a county court appeal process and a face-to-face visit to every debtor before they are considered for debt recovery through this measure.
The Government will also legislate to require financial intermediaries (including tax advisers) to notify their customers about the new Common Reporting Standard, the penalties for evasion and the opportunities to disclose.
For advice on any of these matters please contact us:
0203 0088 107