Last week's "summer" Budget, the first by a (solely) Conservative government for nearly two decades, included a number of surprises.
Confounding many commentators, the Chancellor's statement was not the dark shade of blue many had predicted. Dressed as a "one nation" Budget, Mr Osborne certainly borrowed a number of ideas from his party's opponents, so decisively defeated at the polls just two months ago.
But do the measures really amount to a "new contract" for the UK, an attempt to appeal to voters not persuaded in May, or (as some have suggested) the Chancellor's first serious move in the contest to become the next party leader.
What is certain is that the following measures are of key interest to the financial services industry:
1. Phasing out of the Bank Levy
Having crept up regularly since its inception in 2011, the Bank Levy is to be gradually reduced until, from January 2021, it will apply at a rate of 0.1% (for short-term liabilities) and from that date only to the UK balance sheets of UK-headquartered banks.
This move will, of itself, be welcomed by the banking sector and – at least in part – seems designed to discourage certain international banks from carrying out their threat to consider leaving the UK.
2. New bank profit "surcharge"
At the same time however, from January 2016 a new 8% corporation tax 'surcharge' will be applied to UK banks and building societies. An annual allowance of £25m per group will be available.
3. Investment managers – "base cost shift" prevention
With immediate effect, individual investment managers operating through partnerships will be required to pay the full, 28%, rate of capital gains tax (CGT) on their "carried interest" returns. This ends the so-called "base cost shift" whereby carried interest holders paid CGT at a lower effective rate through taking advantage of the acquisition cost of underlying investments.
4. Investment managers – "performance linked awards" – consultation
The Government has launched a consultation on proposals to enact a default taxation of all performance-linked rewards paid to investment managers as income. A specific tax regime would then ensure that performance-linked rewards from vehicles undertaking specified (investment) activities would remain eligible for preferential CGT treatment.
The Government's concern would appear to be that performance fees linked to funds that are clearly trading, as opposed to investment, funds are (incorrectly) taking advantage of CGT treatment.
Although the consultation document states the Government's commitment to "maintaining the current tax treatment of some performance related rewards", so that the tax treatment of performance-linked rewards that have historically been subject to CGT "will [not] change as a result of this consultation", the detail of any new rules will be closely monitored by the investment management industry.
As far as private equity rewards are concerned, the consultation document states that "it is expected that private equity carried interest will continue to be taxed as a [capital] gain, though that is dependent upon the investment strategy of the fund".
5. Increase in the standard rate of insurance premium tax (IPT)
The standard rate of IPT will be raised to 9.5% from March 2016 on all in-scope premiums. Between 1 November 2015 and 29 February 2016, premiums on pre-1 November policies will continue to be taxed at 6%, but will otherwise be subject to the new increased rate.
6. Other changes of note:
- corporation tax rate to be reduced to 19% from April 2017, and then 18% from April 2020
- the dividend tax regime is to be reformed. From April 2016 the current dividend tax credit system will be replaced by a flat £5,000 annual allowance for all individuals, with dividend tax rates for basic-rate, higher and top rate taxpayers above current effective rates but still below the relevant headline income tax rates
- a number of changes to the UK's 'non-dom' tax rules, including removing the beneficial tax regime from those who are resident in the UK for 15 out of the last 20 years