With the General Election looming, we set out below our thoughts on some topical issues, including changes announced in the 2014 Autumn Statement and the 2015 Spring Budget:
1.) Settlement Nil Rate Band
The government have been consulting on the simplification of the taxation of trusts for some time. The concept of a single 'Settlement Nil Rate Band' was scrapped by the government at the end of 2014. However, in the 2015 Spring Budget the government proposed further changes to the inheritance tax legislation to tackle tax avoidance through the use of multiple trusts.
Currently, an individual could set up a series of trusts (known as ‘pilot trusts’) on consecutive days, to be funded in future (e.g. on death), meaning that each trust benefits from its own nil rate band for tax purposes. The new rules seek to take all same-day additions to such trusts into account for tax calculations, thus rendering the use of pilot trusts ineffective.
The proposals implementing the above changes should be included in the Finance Act later this year (assuming the new government follows this through). The use of pilot trusts as a legitimate tax planning tool was always a concession introduced by the government following the sweeping changes to the trust taxation regime in 2006 and it was always a matter of time before the concession would be withdrawn. The single Settlement Nil Rate Band was strongly contested by professionals and we await to see if the original consultation is revisited!
2.) Taxation of Non-residents and Non-domiciliaries
The government announced the increase in the remittance basis charge, the extension of the annual tax on enveloped dwellings and the introduction of capital gains tax for non-residents on the disposal of UK property. See our article for further details http://www.collyerbristow.com/content/burned-once-again.
Labour have included the “abolition” of non-domiciled status in their election manifesto. Although the negligible benefit to the government’s coffers has long been debated, the political and media impact of this announcement cannot be refuted and it is a key policy for Labour’s electoral campaign. It remains to be seen whether Labour’s proposed changes will affect non-domiciliaries’ inheritance tax position or just their income and capital gains tax position, but anyone considering engaging in any planning based on the current regime (e.g. the creation of trusts outside the scope of inheritance tax) should take urgent advice now.
The increases in the remittance basis charge and the annual tax on enveloped dwellings tax and the introduction of capital gains tax for non-residents will require greater consideration for those living or investing in the UK.
From April 2015, pensions became a much more flexible form of tax planning. By way of summary of the changes, if you die before 75 your nominated beneficiary can:
- take the whole premium as a lump sum free of tax;
- continue to drawdown the income and pay tax at their marginal rate; or
- convert the pension into an annuity and pay tax at their respective rates.
- If you die after 75, your nominated beneficiary can:
- take the whole pension as a lump sum subject to tax at 45% (from 2016/17 tax year the rate of 45% is to be replaced by an individual’s marginal rate);
- continue to drawdown the income subject to the beneficiary’s marginal rate of tax; or
- convert the pension into an annuity and pay tax at their marginal rate.
Pensions will now form a more central role in an individual’s estate planning. Preserving the pension pot for the next generation becomes more attractive, and it may be sensible to increase your pot before the lifetime allowance is further reduced from £1.25 million to £1million in April 2016. We will keep an eye on how the pension rules may be affected by the election.
4.) Disclosure Facilities
In the Budget, the government began the process of consolidating their disclosure facilities which permit UK taxpayers to regularise their affairs with HMRC. The Liechtenstein Disclosure Facility and the Crown Dependencies Disclosure Facilities will close early, at the end of 2015.
With the introduction of legislation to increase the deterrent effect of the General Anti-Abuse Rule due in a later Finance Bill and the consolidation of the various disclosure facilities offered by HMRC, it is becoming increasingly important to regularise your tax affairs as soon as possible.
5.) Inheritance Tax, Mansion Tax and Deeds of Variation
With the General Election fast approaching, changes to inheritance tax are regularly mooted. Whilst Labour and the Liberal Democrats remain silent on inheritance tax, the Conservative party have proposed the implementation of a transferrable family home allowance of £175,000 per person in addition to the nil rate band of £325,000. Therefore, the available nil rate band will effectively become £500,000 per person. In contrast, UKIP would seek to remove inheritance tax and the Green party would abolish inheritance tax in favour of an accessions tax which is calculated according to the wealth of the recipient.
The mansion tax was first referred to by Labour long before the announcement of the General Election and it has been a part of their manifesto for some time. Labour and the Liberal Democrats favour a mansion tax and a high value property levy respectively which will be applicable to properties over £2 million. The annual charges for each party differ but they potentially start at between £2,000 to £3,000 per annum and will increase with the value of the property.
In the Budget, George Osborne announced a review into whether deeds of variation should be scrapped. Deeds of variation allow for post-death variations of dispositions made by a Will to be treated for tax purposes as if they were made in the Will. They are often used to correct errors or inefficiently drafted Wills. To class this as “tax avoidance” is questionable. However, the future of this proposal is uncertain if we have a new government which is not Conservative led.
6.) Other developments
- ISAs can now be passed on to your spouse, continuing to be held in a tax-free wrapper.
- New inheritance tax exemptions have been introduced for medals awarded for valour or gallantry and deaths hastened by harm sustained during military, emergency or humanitarian services.
- A consultation on the introduction of a new strict liability criminal offence of tax evasion.
- Entrepreneurs’ relief has been extended so that, on the disposal of qualifying shares, the gain can be rolled into new shares (broadly EIS-qualifying) rather than paying CGT up front.