Capital Gains Tax charge on foreign owners of UK real estate
This looks likely to feature in the Autumn Statement, and the central questions are:
- Will the changes take effect on 6 April 2014, or immediately?
- Will there be provision for rebasing the property’s value? If it has been held for a long time, the consequences of the charge could be severe.
- What mechanisms will be used to ensure compliance?
- Will estate agents or solicitors dealing with conveyancing be obliged to withhold a share of the proceeds of sale to ensure payment of tax?
- Will there be special dispensation to allow non-resident owners to elect for principal private residence (‘PPR’) relief in relation to their main residence, despite being outside the usual two year time limit to do so? If non-resident owners are not permitted to select their UK second home as their main residence, then that would presumably be discriminatory and in breach of EU treaties.
The government has sent out warning signals on misuse of partnership rules to avoid national insurance contributions (i.e. by promoting employees to junior partnership) and the manipulation of profit or loss allocations by some partnerships to achieve a tax advantage.
Exactly how HMRC plans to prevent the manipulation of profit allocation is unclear. The perceived mischief is that profits are allocated to partners with lower rates of tax, usually a corporate, either providing for deferral, or allowing for a later reallocation of those profits to other partners, who would have paid higher rates of tax had they received the allocations directly.
There are disguised dividend rules in the UK, but these are usually circumvented by holding the corporate partners through offshore purpose trusts. So these rules could be tightened. However, our guess is that new rules will track the ‘disguised remuneration’ rules from 2011 and introduce a concept whereby profits allocated to a corporate partner but notionally earmarked for a future distribution to another partner, either by way of dividend or capital reallocation, will be immediately taxed in the hands of that individual.
Abolition of inheritance tax
On Chris Groves’ wish list: abolish inheritance tax and replace it with capital gains tax on death.
This would accomplish:
- Widening the number of people who pay, but spreading the burden
- There are existing CGT reliefs that reflect the IHT reliefs (for businesses etc). The real difference is that this change would take primary residences out of a charge on death (through principal private residence relief), which plays to the conservative heartland without requiring a radical rewrite of the law
- Replacement by CGT means little loss to the Exchequer
- Instant savings in costs at HMRC. A whole department could be redeployed to combat tax avoidance/evasion
- This could be coupled with a wealth tax to keep the Liberal Democrats happy