It is clear that the Government considers tackling tax avoidance as one of its key priorities as we see a number of measures (both anticipated and unexpected) that were both announced in the Budget and introduced in the Finance Bill 2013 (the Bill).
UK Residential Property Taxes
These measures were confirmed in the Budget and the provisions included in the Bill.
As outlined in the previous update, the annual property tax charge (which will now be known as the annual tax on enveloped dwellings (the ATED)) was introduced from 1 April 2013, meaning that, from that date, subject to the availability of one of the number of reliefs set out in the Bill, high value UK residential properties held by ‘non-natural persons’ will be within the scope of the ATED (which, depending on the value of the property in question as at 1 April 2012, range between £15,000 and £140,000 annually).
From 6 April 2013, gains realised on a disposal of a property within the scope of the ATED (and not subject to relief from the ATED) will be subject to UK capital gains tax at a rate of 28% (although a CGT charge will only arise on the gain that has arisen since 6 April 2013 - effectively achieving a rebasing up to the April 2013 value for the purpose of this charge). UK ‘non-natural persons’ holding such properties will also be within the scope of CGT (as opposed to the lower corporation tax rate of 20% or 24%) on gains triggered.
From the date of Royal Assent of the Bill (which is expected to be in July this year), provided that a property is subject to relief from the ATED, acquisition of such a property by a ‘non-natural person’ will be subject to a stamp duty land tax charge of 7% as opposed to the current 15% rate (which has applied since 21 March 2012).
Inheritance tax: limiting the deduction for liabilities
The Government announced that a measure will be introduced in the Bill which will impact on the deductibility of certain debts for deaths and chargeable transfers on or after the date that the Bill receives Royal Assent.
Broadly speaking, these measures provide that:
- liability will only be deductible to the extent that it is repaid to the creditor (unless there is a ‘commercial reason’ for not doing so and it is not left unpaid as ‘part of arrangement to secure a tax advantage’);
- a liability will not be deductible to the extent that it has been incurred directly (or indirectly) to acquire or maintain ‘excluded property’ for IHT purposes; and
- where the liability has been incurred to acquire or maintain assets which are relievable for IHT purposes (ie qualifying business and agricultural property), the liability will be taken to reduce the value of those assets that can qualify for the relief (as opposed to other, perhaps non-relievable assets).
These provisions are also intended to apply to settled property (with the exception of calculating ten year charges).
The Bill includes the much debated provisions for the general anti-abuse rule, which is intended to counteract tax avoidance schemes and will apply to schemes affecting income tax, NICs, corporation tax, CGT, IHT, SDLT and the ATED. These provisions will apply to ‘abusive’ tax arrangements entered into on or after the date of Royal Assent.
Isle of Man, Jersey and Guernsey disclosure facilities
The Government announced in the Budget that the UK had reached FATCA (Foreign Account Tax Compliance Act - a US Act) style agreements with the Isle of Man, Jersey and Guernsey and disclosure facilities (similar to the Liechtenstein and Swiss facilities) would run from 6 April 2013 to 30 September 2016 with respect to undisclosed funds in those jurisdictions.
The Bill contains provisions to implement international agreements ‘to improve tax compliance’ and draft regulations have now been published regarding the implementation of the UK-US FATCA agreement.
Avoidance involving partnerships
The Government announced in the Budget that it will consult on measures to:
- remove the presumption of self-employment for partners in limited liability partnerships to combat the ‘disguising of employment relationships’ through LLPs; and
- counter the ‘artificial’ allocation of profits or losses to partners in LLPs and other partnerships (including using a company, trust or similar vehicle) to secure a ‘tax advantage’,
with the intention to introduce legislation in the Finance Bill 2014.
Statutory residence test and the abolition of ordinary residence
The statutory residence test has finally come into effect as of 6 April 2013, putting much of what has been longstanding HMRC guidance on a statutory footing (such as split year treatment), although it is worth noting that:
- that the UK home element of the automatic UK test may cause issues for individuals either having no overseas home or being present at their overseas home/s for a limited amount of time each year; and
- the limited amount of days (and hours on each day) on which an individual who is non-UK resident by virtue of overseas employment can work in the UK without falling foul of the automatic overseas test.
Furthermore, the concept of ordinary residence was abolished and overseas workday relief was also put on a statutory footing from 6 April.
Exemption for non-dom spouses
As outlined in the previous article, changes were introduced regarding the IHT treatment of transfers between couples with mismatched domiciles and enabling non-domiciled spouses to elect to be domiciled in the UK for IHT purposes.
Transfer of assets abroad provisions and attribution of gains rules
In response to a request by the European Commission, the Bill includes provisions intended to exempt ‘genuine’ transactions conducted on arms length terms from the scope of certain anti-avoidance legislation which, broadly speaking, brings the following within the scope of the UK tax net:
- income generated on assets transferred offshore by a UK resident (previously ordinarily resident) person; and
- gains generated in non-UK resident close companies (namely companies with five or fewer participators) on UK assets.
Furthermore, the attribution of gains provisions mentioned above will only be triggered where a participator has a 25% (as opposed to the previously required 10%) interest in the relevant company. These provisions will apply retrospectively from 6 April 2012.
The Bill includes provisions amending the legislation on vulnerable beneficiary trusts, changing the definition of a disabled person for tax purposes (in line with the new disability benefits regime) and unifying the terms of those trusts which qualify for income tax and CGT relief with those which qualify as vulnerable beneficiary trusts for IHT purposes. As regards existing vulnerable beneficiary trusts, the Bill takes into account that pre-existing trusts will have provisions that may be in breach of the new restrictions and provides that funds added after 8 April 2013 (in the context of qualifying trusts for IHT purposes) or 6 April 2013 (for income tax and CGT purposes) to pre-existing trusts will be subject to the old rules.
The Bill includes provisions whereby the allowances available for active members of registered pension schemes will be further restricted from 6 April 2014, with lifetime and annual allowances being reduced from £1.5 million to £1.25 million and from £50,000 to £40,000, respectively from that date.
Broadly speaking, this will mean that:
- an individual will be subject to tax charges of 55% (on a lump sum payment) or 25% (on pension drawdown) on amounts drawn from their pension in excess of the lifetime allowance; and
- with respect to the annual allowance, tax relief will not be available on an individual’s annual contributions in excess of that threshold.