Although the general election is almost upon us the outcome is still far from certain but, whatever the result, significant tax changes seem likely. Clamping down on tax avoidance is a major priority across the political spectrum and will continue to hold centre stage regardless of which of the major parties dominate or which of the smaller parties wields the greatest influence. The Labour party favour returning to the 50% income tax rate for those earning more than £150,000 and both the main parties propose to limit higher rate tax relief on pension contributions. We focus below on three key pledges:
One of the most controversial manifesto proposals was Labour’s surprise announcement that it will abolish ‘non-dom’ status. Favourable tax treatment for those who are UK resident but have their permanent home abroad has long been a highly contentious issue, the benefits of which have been eroded significantly in recent years. While the current taxation regime for non-doms is far from perfect, pledging to abolish this fundamental concept without either technical consultation or detailed costs forecasts seems a bold move, especially as the economic effects are unclear.
Labour proposes to prevent new claims for non-dom status after April 2016 but allow existing non-doms a short transitional period some reports say up to five years, some no longer than two years - to adjust their tax affairs. The changes would mean that non-doms could no longer use the remittance basis in order to keep foreign income and gains outside the UK tax net. Indeed there may well be a danger that foreign assets owned by non-doms, possibly including those held in offshore trusts, would also become subject to UK inheritance tax.
The Conservative party is also planning to tighten the existing rules further. Increased annual remittance basis charges are already in force and, in January, the Government published a consultation proposing that individuals must elect to pay the charge for a minimum three year period, rather than being able to do that annually. It has also been reported that the Conservatives may curb inherited domicile (whereby a child takes his or her father’s domicile at birth and retains that until making an active choice when adult to settle permanently elsewhere). Whatever the election outcome, the tax advantages available to international residents living in the UK seem likely to reduce.
Inheritance Tax (IHT)
The main thrust of the Conservative party’s taxation proposals has been billed as an increase in the IHT allowance to £1m so that, in many cases, the family home is taken out of IHT. However, the precise details are far more complicated than the headlines suggest. The exact proposals envisage that each member of a married couple or civil partnership will, from April 2017, have an additional £175,000 IHT free allowance that can be used for their main property, if it is ultimately left to their children or grandchildren, in addition to the existing nil rate bands (currently £325,000 each). The legislation already provides that if, on the death of one spouse, all assets are inherited by the survivor, no immediate charge to IHT arises and on the second death the survivor will inherit the deceased’s unused nil rate band. Under the new proposals the survivor (including existing widows/ widowers) would also inherit their partner’s unused main property allowance. Taking all of the allowances together, the surviving spouse will therefore be able to leave up to £1m to their descendants tax free, although the relief will be limited where the home is worth more than £2m and will cease to apply altogether for properties worth more than £2.35m. Although these proposals will undoubtedly help some families, a general increase in the nil rate band would be simpler and benefit more people, but that would doubtless be more expensive. Neither the Labour party nor the main smaller parties (other than UKIP, who favour the abolition of IHT altogether) seem to have much appetite to increase the IHT thresholds.
In his last Budget, George Osborne announced a review of the use of Deeds of Variation to alter the disposition of an estate within two years of death in a tax efficient way. This may or may not have been a reaction to media stories concerning Ed Miliband’s use of such Deeds and we do not yet know the precise scope of any review, although it is likely to take the form of a technical paper issued by the Treasury in the Summer. Deeds of Variation are not merely useful estate planning tools but are often necessary for reasons unconnected with tax, so we will monitor any developments in this area closely.
The planned changes to the IHT regime for trusts, which will effectively "kill off" the use of ‘pilot’ trusts, did not appear in the Finance Act due to lack of time. However, we expect them to appear in first Finance Bill of the new Parliament, unless a new Government undertakes a more thorough review of trusts.
Another of Labour’s key policies is the introduction of an annual tax on properties worth more than £2m, although very few details have yet been published. It has been suggested that the tax would be banded, starting at £3,000 p.a. and that there may be some form of relief for “asset rich but cash poor” owners. The Liberal Democrats, who could of course hold the balance of power, also favour a watered-down version of a mansion tax. The Conservatives completely oppose any such tax although, whilst in government, they have introduced the Annual Tax on Enveloped Dwellings (ATED), increased SDLT for higher-value properties and imposed a CGT charge on non-resident owners of UK property.
Budget and Finance Act 2015
In the midst of all the speculation about what might happen at the general election, it is easy to forget that there has recently been both a Budget and a Finance Act, the latter passed in record time. Some of the measures relevant to private clients and trusts now in force include:
- Individuals over the age of 55 have flexible access to their defined contribution pension savings.
- If someone dies before age 75, they can now pass on unused defined contribution pension savings tax-free to a wider range of beneficiaries.
- Spouses can now inherit their deceased partner’s ISA benefits.
- A new annual remittance basis charge of £90,000 has been introduced for non-doms who have been UK resident for at least 17 of the last 20 years, and the charge paid by those who have been resident for at least 12 of the last 14 years has increased from £50,000 to £60,000.
- Non-UK resident individuals, trusts, PRs and narrowly controlled companies will now pay CGT on gains arising after April 2015 on the disposal of UK residential property.
- New restrictions apply to the CGT principal private residence relief. This will only now be available if the property is situated in the country where the owner or their spouse is tax resident, or if the owner or their spouse spend at least 90 nights in the property during a tax year.
- A new ATED band for properties worth between £1m and £2m has been introduced and the charges across existing bands have increased. The CGT charge on disposals of properties liable to ATED also now extends to residential properties worth between £1m and £2m.
- The CGT exemption for assets deemed to be wasting assets because they qualify as plant used in a business now only applies to assets used in the seller's own business. This is aimed squarely at minimising effects of the ‘Castle Howard’ decision which allowed relief for a painting on display at a stately home which had been used by someone else for business purposes.
- Individuals are no longer able to claim Entrepreneurs' Relief (ER) on the disposal on or after 18 March 2015 of personal assets used in a business carried on by a company or a partnership, unless they are disposed of in connection with the disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets. Because of the precise wording of the new legislation, this change may have unexpected and probably unintended consequences for family partnerships. When, under standard partnership provisions, a partner dies or retires the other partners may have an option to acquire his share. In that case, however, ER may no longer be available on the disposal of the associated asset. A similar problem could arise for family companies (eg those carrying on the farming activity) if the Articles of Association provide for the shares of a deceased or outgoing member to be acquired by the continuing members. Representations are being made to the Government and it is hoped that this legislation will be amended.
- The requirement that 70% of Seed Enterprise Investment Scheme money must be spent before EIS or VCT funding can be raised has been removed.
From January 2016, the Small Business, Enterprise and Employment Act requires UK companies to keep a register of persons with significant control over the company (a PSC register). Companies will then need to file this information on the PSC register at Companies House from April 2016.
A ‘person with significant control’ over a company means, broadly, anyone who ultimately owns or controls more than 25% of the company’s shares or voting rights, or who actually exercises control over the company or its management. The PSC register will include that individual’s name, date of birth, nationality, address, and details of their interest in the company. In certain circumstances the details of a parent company must be noted on the register as a “relevant legal entity”.
A previous proposal that trusts should keep similar records was abandoned in the UK (but remains, to a limited extent, in separate draft EU proposals). Nevertheless details of trustees and others with significant influence or control over a trust which controls a company will need to be included on the UK PSC register, so some disclosure of trust interests may still be necessary. It is not yet completely clear how the general term “exercising control” over a company or trust will be interpreted but detailed guidance is expected later this year.
The information on the PSC register will be publicly accessible (with the exception of residential addresses) and available for inspection on request by individuals. There will be some scope for refusing such requests but it remains to be seen whether the rather limited statutory provisions will provide adequate constraints.
Although the requirement to keep a PSC register does not begin until next year, companies should now start thinking about how they are going to comply with the new rules. In complex corporate structures, for example, it may be difficult to identify all relevant individuals and enquiries will need to be handled sensitively. The new regime raises issues about how confidential information is used and may well alarm those for whom privacy is important.
FATCA: First reporting deadline approaching
Trustees and their advisers may have breathed a sigh of relief once they had registered with the IRS, reached an agreement with an investment manager to do so on their behalf, or come to the conclusion that registration was unnecessary, but this was only the start of an on-going process. The first FATCA reports must now be filed with HMRC by 31 May 2015, showing income and gains received between 1 July and 31 December 2014. FFI trusts need to make reports if they have a US settlor and/or US life tenants or beneficiaries who received discretionary distributions from the trust. The US Government has, thankfully, clarified that nil returns need not be made. Banks and investment managers acting for NFFE trusts (which did not need to register) may also need to report on US trustees, settlors, protectors or beneficiaries.
It would seem reasonable to assume that only FFI trusts which registered directly with the IRS need take any action. Nevertheless some banks and investment managers may well have contacted clients to seek information that they say they require for their own reports, for both FFI trusts that have delegated their reporting obligations and NFFE trusts which do not need to report. Some of these requests are very wide and may go beyond the scope of what is legally required, so if you have any concerns about either those requests or the registration process generally, do please contact your usual BH adviser. For further details on FATCA generally please see our flyer FATCA - What trustees need to know.
How much does HMRC know?
Whatever the political hue of the next government, tackling tax avoidance (not merely evasion) is going to remain at the top of the agenda. Over recent years, HMRC has been increasingly successful in pursuing tax evaders and avoiders and one reason for this is HMRC’s use of a sophisticated IT system known as “Connect.” This works by pulling together and mathematically analysing a wide range of data from all sorts of sources, such as the Land Registry, bank accounts, loans, company ownership, employment records, DVLA records and so on, enabling HMRC to build to a very comprehensive picture of our finances and lifestyle.
This means that HMRC can assess quickly whether any details have obviously been omitted from a tax return and so launch an enquiry if they feel that appropriate. HMRC’s access to this information has also enabled the launch of various disclosure facilities targeting particular groups or professions where evasion has been identified as a particular problem. HMRC believes that the Connect system has provided over £2.6 billion of additional tax revenue.
The process of gathering similar information about offshore investments and assets is also gaining momentum, at least in part because of increasing international co- operation and the number of automatic exchange agreements that the UK now has with a number of other countries.
The annual investment allowance (AIA) is a type of capital allowance which provides 100% relief for certain qualifying expenditure of up to £500,000. The allowance is due to reduce from 1 January 2016 and the previous amount was £25,000. Although it seems unlikely that the AIA allowance will return to such a low level again, we will not know the precise new amount until, probably, the next Autumn Statement. If you are planning to make investments and take advantage of the AIA, therefore, there may be merit in doing so by the end of this calendar year.