We have set out below our initial thoughts on the Chancellor's Autumn Statement today and the impact of the key announcements affecting private clients.
Two unexpected announcements are that the Government will consult on (a) a new legal requirement for intermediaries arranging complex structures for clients holding money offshore to notify HMRC of "the structure and the related client lists" and (b) bringing non-resident companies' UK income into the corporation tax regime.
No further details have been given at this stage about the changes to the taxation of non-domiciled individuals from April 2017.
We will be sending out a more detailed note on these and other proposals once the details of the announcements have been published (expected on 5 December), with our considered views on the impact the changes will have and what action you should be taking.
In the meantime, if you have any questions or would like specific advice, please get in touch with your usual contact or those shown at the bottom of this email.
Reform of the taxation of non-domiciliaries - 2017 changes
Disappointingly, there were no further detailed announcements in the Autumn Statement about the proposed changes to the taxation of non-domiciliaries who are long-term UK residents (15+ years out of 20) and those who have a UK domicile of origin (so-called “returning UK doms”). Given the devil is in the considerable detail which underlies these proposals, it had been hoped in some quarters that there would be either a deferral of the proposals or some more specifics on the Government's practical implementation of the new regime. The only news is that the Government plans to abide by the original legislative timetable trailed by the previous Chancellor and bring the measures into force from 6 April 2017, which is only four months away.
Given the long gestation of these measures, a note on chronology is called for. The measures originally announced in outline by George Osborne on 8 July 2015 were consulted on extensively in the Autumn of 2015. Apart from an announcement in March 2016 that assets held by non-UK domiciled individuals who become “deemed domiciled” under the new rules on 6 April 2017 would be up-based for capital gains tax purposes to their value on that date, the Treasury were then silent until the publication of a fresh Consultation Document on 18 August 2016, during the Parliamentary Recess. That new consultation period closed on 20 October. More news is anticipated when the draft clauses for the Finance Bill 2017 and a consultation response are published on 5 December 2016.
By way of a reminder, the additional (previously-trailed) headlines are:
- "deemed" domicile now applies one year earlier than has been the case under the old inheritance tax rules. It is affected further by the statutory residence test and its split year rules;
- the £90,000 remittance basis charge will disappear, because it applied from the 18th year of residence. This leaves only the £30,000 and £60,000 charges;
- non-domiciled individuals who have a non-UK resident trust set up before they become deemed-domiciled in the UK will not be taxed on income and gains arising outside the UK and retained in the trust;
- inheritance tax will be charged on UK residential property when it is held indirectly through an offshore structure, such as a company or a trust (or both). This ends retroactively an old structuring option previously regarded as legitimate to keep UK real estate out of exposure to inheritance tax;
- the complex rules for the Business Investment Relief (BIR) scheme will be altered to make it easier for non-domiciled individuals who are taxed on the remittance basis to bring into the UK offshore money (which would otherwise be taxable) for the purpose of investing in UK businesses. This is part of a government plan to attract more capital investment in British businesses by non-domiciled individuals; and
- the government proposes to allow all non-domiciliaries to "unmix" income, gains, offshore income gains and capital in overseas bank accounts. The detail of this proposal is particularly eagerly awaited.
Bringing non-resident companies into the charge to corporation tax
The government is considering bringing into the UK's corporation tax regime all non-resident companies which receive taxable income from the UK.
There is no detail of this proposal and how it dovetails with the plan to aim for one of the lowest corporate tax rates in the world, of 17 per cent: the government has simply said it will consult in 2017 on the merits of this idea and how it might be implemented. Under the mantra of equality of treatment, the Government makes express reference to limitation of corporate interest expense deductibility and the application of the loss relief rules.
This could significantly increase the UK tax reliefs bills of overseas investment companies with UK source income.
Pensions and savings
Reduction in the Money Purchase Annual Allowance (MPAA)
Before the current regime of flexible access to pensions was introduced on 6 April 2015, individuals who had begun to take pension benefits were no longer able to make tax relievable pension contributions. Since that date, it has been possible to make further contributions even after flexible access to a pension has begun but contributions are capped at the MPAA, which is currently set at £10,000 per year.
The Government now proposes to reduce the MPAA to £4,000 per year with effect from 6 April 2017. A 12 week consultation on this proposal has been launched which closes on 15 February 2017. A final decision will be taken after that date.
The Government has also announced a series of measures aimed at bringing the tax treatment of foreign pensions into line with the tax treatment of UK pensions. Full details have yet to be published but the measures will include amending the eligibility criteria for foreign schemes to qualify as overseas pensions schemes for UK tax purposes, closing specialist pension schemes for individuals employed outside the UK and extending from five to ten years the period in which the UK has taxing rights over lump sum payments received by individuals who cease to be resident in the UK where the funds have benefitted from UK tax relief.
This could affect some tax planning schemes currently being promoted which use offshore pensions.
Life insurance policies
The Government will legislate with effect from 6 April 2017 to address the disproportionate charge to income tax that can arise on the part surrender or part assignment of investment based life insurance policies. This announcement is in line with the consultation document published in April 2016.
The current tax regime for life insurance policies allows the policy holder to make a tax free withdrawal of five per cent of the value of the original premium each year. A withdrawal over and above this cumulative five per cent allowance may be treated as a gain but taxed as income, without reference to the underlying gains in the portfolio. The Government has committed to address this. The April consultation document set out three possible ways of doing so and it remains to be seen which of those options will be adopted in the Finance Bill 2017.
The good news is that taxpayers will be able to have historic charges recalculated on a just and reasonable basis.
The Chancellor confirmed that, as indicated in the March 2016 Budget, the Government will give intermediaries a greater role in administering Gift Aid with a view to simplifying the Gift Aid process for online donors. The aim is to reduce the number of Gift Aid declarations that online donors have to make when making multiple donations through the same online giving portals.
The charity sector has been calling for support to increase the uptake of Gift Aid and the government has responded. This measure is in line with the introduction of the Gift Aid Small Donations Scheme (GASDS) from April 2013 which enables charities to claim Gift Aid on small cash donations. The Chancellor also announced that following a review of GASDS, amendments will be made to the scheme to make it fairer and more accessible.
The taxation of different types of remuneration
The Government will review the tax treatment of different forms of remuneration in a bid to remove certain tax breaks. In particular the Government will:
- consult on phasing out the advantages of salary sacrifice schemes starting from April 2017. The stated intention is that an employee “buying” a benefit via his employer out of his / her pre-tax salary will, from 2017, will be treated as buying it instead out of post-tax income. Certain arrangements, including pensions and childcare, will be excluded from this clampdown and arrangements in place before April 2017 will be protected until 2018 or 2021, depending on the nature of the benefit;
- consult on how benefits in kind (including employer-provided living accommodation as well as other benefits) should be valued, to ensure that arrangements are appropriate and backed by evidence; and
- review the use of income tax relief for employees’ business expenses, including those not reimbursed to the employee by the employer.
Employers will need to pay close attention as the proposals develop.
It is possible that any changes to the valuation of benefits could also apply in other situations - for example benefits from offshore trusts. This could have a significant impact on beneficiaries who have for example received loans from offshore trusts or who have the use of art or other chattels owned by such a structure.
It is unlikely that any changes will take effect until 2018.
Tax avoidance and evasion
Taxpayers with offshore assets
Automatic exchange of tax information on a global basis means that, from 2017 onwards, HMRC will receive large amounts of information about the offshore assets and income of UK taxpayers. There will be many more tax enquiries.
In anticipation of this, legislation is to be introduced which will require taxpayers to review their offshore tax affairs and make sure that they have paid all of the tax which is due. If they fail to do so, there will be much higher penalties which may be up to 200 per cent of the unpaid tax plus an additional penalty of up to 10 per cent of the value of any offshore assets where the underpaid tax is more than £25,000.
The precise details have not yet been announced but further information on the Government’s original proposals can be found here.
In order to avoid the higher penalties, it may make sense to review existing offshore structures, particularly if they were set up some time ago or where proper UK tax advice was not taken at the time the structure was established.
Tax avoidance sanctions
There has been a raft of civil and criminal sanctions introduced over the last two years in order to combat tax evasion and tax avoidance. Some of the measures even penalise simple mistakes.
Two further measures are to be introduced. Both measures relate to complex avoidance schemes which are “defeated”. This may mean that a court finds in favour of HMRC but it may also cover situations where a taxpayer decides (for whatever reason) that they do not want to fight the case and so agree to pay the tax.
The first measure is aimed at those who advise on the arrangements or help the taxpayer put them in place – such as lawyers, accountants, tax advisers, banks, trust and company service providers, IFAs, etc.
These “enablers” will be liable to a penalty if the planning is “defeated”. This is likely to mean (and is certainly intended to ensure) that advisers / service providers will be much more cautious in the advice which they give or the help they provide to taxpayers. More information on this proposal can be found here.
The second measure is aimed at the taxpayers themselves and will make it more difficult for them to claim that they have taken reasonable care when submitting their tax returns where they have used a tax avoidance scheme. In future, taking advice from somebody connected with the promoter of the scheme will not be a “reasonable excuse” for a taxpayer getting his tax return wrong and paying too little tax if the scheme is subsequently defeated. Independent advice should however still provide a "reasonable excuse".
Requirement to report offshore structures
There are already certain reporting requirements for service providers involved in helping clients set up offshore structures. These are however relatively narrow.
The Government intends to consult on the possibility of imposing a more general requirement for intermediaries to notify HMRC of any complex offshore structures which they help a client to arrange.
If introduced, this will of course make it more likely that HMRC will raise enquiries in relation to such structures.
Income tax rates and allowances
As previously announced in the March 2016 Budget, the Chancellor confirmed that, in April 2017, the personal allowance would rise by £500 to £11,500 and the higher rate threshold would rise by £2,000 to £45,000 for 2017 / 18.
The Government reconfirmed its commitment to raise the personal allowance to £12,500 and the higher rate threshold to £50,000 by the end of this Parliament in 2020, after which the personal allowance will rise automatically in line with the CPI.