On 21 March 2013 the Chancellor of the Exchequer, George Osborne MP, delivered the UK Government’s Budget which included a number of significant changes to the UK tax regime. The draft legislation containing these changes obtained Royal Assent, and so became law, as the Finance Act 2013 last week on Wednesday 17 July 2013.
The following is a summary of some of the key changes to the UK personal tax regime implemented by the Finance Act 2013.
*1. Annual Tax On Enveloped Dwellings (‘ATED’)
*ATED came into operation on 1 April 2013 and applies where a UK residential property worth more than £2 million is owned via a ‘non -natural person’ such as a UK or non-UK company. It applies to freehold and leasehold interests in residential properties and also to other rights over residential property, for example an option to acquire one; it can apply even where the property has more than one owner.
The ATED charge falls on the ‘non-natural person’ owner of the property and is payable on an annual basis. At present, the charge ranges from £15,000 per annum to £140,000 per annum depending on the value of the residential property. ATED charges will be reviewed annually and increased in line with the UK Consumer Prices Index.
There are reliefs from the ATED charge for properties used for certain purposes including as a commercial lettings business. To claim one of the reliefs, the owner of the dwelling will need to submit a return annually. The ATED filing deadline (to pay ATED or to claim a relief) for the 12-month period beginning on 1 April 2013 is 1 October 2013. HMRC has now published draft ATED returns.
*2. The new statutory residence test for individuals
*The Finance Act 2013 contains the UK’s new statutory residence test and the revised rules relating to split year treatment. HMRC has also now published guidance on the application of the statutory residence test.
*3. Rules restricting liabilities that can be deducted for inheritance tax (‘IHT’) purposes
*In the Budget, the Chancellor announced new provisions to restrict the deduction of ‘artificial’ liabilities for IHT purposes. The transitional provision in relation to these new rules makes them (potentially) relevant to existing debt arrangements and advice should be taken on liabilities which would have been relevant in IHT planning.
These measures can apply not only to individuals but also to trustees. A deduction for a liability may, generally, now only be allowed to the extent that the debt is actually incurred to fund the acquisition of assets outside the scope of IHT and, in the case of loans to individuals, is repayable on death. This rule may preclude the deduction of debts incurred by non-UK domiciliaries in respect of existing UK assets, which had been a relatively common IHT planning strategy. It may also impact on the IHT position of trusts directly holding UK real estate assets as part of strategies to mitigate against ATED liability.
There are also new provisions limiting the use of debt to fund the acquisition of assets which qualify for IHT reliefs such as shares in trading companies that qualify for Business Property Relief.
*4. The General Anti-Abuse Rule (the ‘GAAR’)
*The GAAR is a new, overarching anti-avoidance rule which came into force in the UK on the Finance Act’s grant of Royal Assent on 17 July 2013. It is intended to act as a deterrent to aggressive tax avoidance planning in relation to UK taxes. The GAAR (which applies to all of the main UK taxes) will empower HMRC to counteract tax arrangements that it deems highly abusive, contrived or abnormal as well as those that look to exploit legislative ‘loopholes’. If an arrangement is considered ‘abusive’, and so within the scope of the GAAR, HMRC can (subject to a number of safeguards designed to protect taxpayers) adjust the tax payable to a level it considers just and reasonable in all the circumstances. No UK tax planning should now be undertaken without bearing in mind the scope and potential effect of the GAAR.
*5. Transfer of assets abroad
*The UK’s ‘transfer of assets abroad’ provisions are relevant in considering the UK tax treatment of non-UK trusts and offshore companies. These provisions are a core component of the UK’s offshore anti-avoidance rules. There was an existing (narrow) exemption from these provisions for transfers with no tax avoidance motive. There is now an exemption for ‘genuine’ economic activities where freedoms under the EU Treaty or EEA Agreement are engaged. This exemption may further facilitate the use of non-UK trusts by UK based non-UK domiciled indivdiuals.
*6. Provisions implementing changes to the taxation of trusts for vulnerable beneficiaries
*The UK has an IHT preferred regime for trusts for certain vulnerable beneficiaries. A number of amendments have been made to this regime, including one to clarify the types of trusts that are still able to qualify for vulnerable beneficiary status.