As the UK Coalition Government puts the final touches to its first scheduled Budget, we examine the prospects of changes in the UK tax system to be announced on 23 March. As is customary, speculation is building as to what measures may or may not be included in George Osborne’s speech, from possible changes to the UK’s residence rules to a further crackdown on non-doms.
The UK Government has recently made a commitment ‘in most cases’ to publish draft clauses to be included in a Finance Bill at least 3 months before the Bill is introduced to Parliament. However, there is still scope for immediate changes to be made, and many individuals worried about potential changes may therefore be considering taking action now. We will only be able to judge the efficacy of any such action with hindsight and it may prove to be unnecessary or imprudent. However, there are sensible steps that can be taken and we have identified some of these below.
In the 2010 Emergency Budget last June, it was announced that the rules on the taxation of ‘non-doms’ (individuals who are resident but not domiciled in the UK) would be placed under review and since then there has been occasional press speculation as to possible changes. We believe that if any change is forthcoming it is likely to occur in one of the following ways:
- A change to the application of the remittance basis charge. This could apply so that all non-doms are subject to the annual £30,000 charge if they wish to claim the remittance basis, rather than only those who have been UK resident for more than seven years.
- A change to the deemed domicile rules. This could apply so that all long-term residents of the UK are taxed as UK domiciliaries. This is already the case for inheritance tax (after 17 tax years of UK residence) and could be extended to income and capital gains tax. Identifying when the line would be drawn (7, 10 or 17 years) is a matter of guesswork.
- If a shorter period of residence is introduced for the deemed domicile rules, this could subject many more individuals to inheritance tax on their worldwide assets. Therefore it could be prudent for individuals who have been resident in the UK for some time to set up excluded property trusts now, to preserve their inheritance tax exemption in future years.
- Non-doms who are beneficiaries of foreign trusts may want to take steps to ensure that all past distributions and capital gains are fully matched, to avoid the possibility of a future gain (taxable on a worldwide basis) being matched with a past distribution.
- Even if no changes are made, non-doms who are in their first seven years of UK residency and who do not intend to pay the £30,000 charge could usefully consider realising non-UK source capital gains in the current tax year, to avoid having to do so in a future year when they are taxed on a worldwide basis.
For further details on the possible outcomes of this review please see our articlehere.
UK residence rules
In light of some high profile cases, speculation has been rife for a number of years about the possible introduction of a new statutory UK residence test that would clarify the circumstances in which individuals would (or would not) be treated as resident in the UK. Government statements indicate that the topic will be dealt with as part of the non-dom review. Until further proposals are put forward, there would seem to be little that can be done in anticipation of any change, but non-residents who spend time in the UK and taxpayers who are thinking of emigrating should ensure that they are fully conversant with the steps that need to be taken to ensure that they are treated as non-UK resident. They should also be aware that the rules which apply now may not apply in subsequent years, so that if their planning involves a number of years of non-residence they may have to change their lifestyle during the period.
Individuals who have been non-resident for less than five years and are contemplating returning to the UK should bear in mind that 5 April 2011 is the last date by which they can return and have all capital gains made while they were non-resident taxed at the 18% rate which applied prior to 23 June 2010 (when the rate was increased to 28%).
EU challenge to transfer of assets rules
On 16 February 2011, the EU Commission formally requested that the UK amend its rules on the attribution of the income and gains of foreign companies and trusts to UK residents. These rules are the mainstays of the UK’s anti-avoidance provisions, and this challenge could therefore have a significant impact on the use of offshore structures by UK residents.
However, the UK is unlikely to simply give up its anti-avoidance regime. It has two months to respond, which makes it unlikely that any response will be announced with the Budget. Instead this is likely to be a longer term issue, the full ramifications of which will not be known for some time. We believe it is unlikely that any change will open up significant new opportunities for planning.
Changes to the taxation of remuneration, and in particular Employee Benefit Trusts (EBTs), were announced on 9 December 2010. These changes have already been discussed in our earlier Stop Presses and will have full effect from 6 April 2011.
Since then a further HMRC Spotlight has been issued seeking to prevent a scheme that allowed beneficiaries of EBTs to receive distributions tax-free. Regardless of the efficacy or otherwise of these anti-avoidance rules, these continued announcements serve to illustrate that HMRC and the Government no longer consider EBTs (or similar structures) to be valid planning tools except in very limited circumstances.
For more details please see:
- The Employee Benefit Trust (‘EBT’): Down but not out?
- Is the employee benefit trust (‘EBT’) dead?
- Finance Bill 2011 – the EBT is dead, long live the pension?
UK real estate
Stamp duty land tax (SDLT)
The acquisition of UK real estate through an offshore holding company currently avoids the 4% charge to SDLT that would apply on a purchase of the property itself. This practice has long been regarded with suspicion by the Liberal Democrats and the introduction of rules to charge such acquisitions to SDLT looks increasingly likely. Whether any such rules will be subject to the full consultation period or be introduced with immediate effect remains to be seen.
In the meantime, it is worth noting that SDLT will rise to 5% for sales of residential properties for more than £1,000,000 after 6 April 2011. Where possible purchasers looking to avoid the extra 1% charge will need to finalise their purchases before then.
Capital gains tax – non-UK residents
Under current rules, capital gains tax is payable only by UK residents. However, it has recently been rumoured that the Liberal Democrats are seeking to extend the tax to sales of UK real estate by non-residents (or alternatively impose some form of wealth tax on them). It remains to be seen whether the forthcoming Budget will introduce any immediate changes, but if a non-UK resident is currently selling a UK property and is in the happy position of being able to finalise the sale before 23 March 2011, then it may make sense to do so.
Capital gains tax – the principal private residence relief
This relief exempts taxpayers from capital gains tax on the sale of their principal residence. It has recently attracted some adverse publicity because of the provisions that allow taxpayers to choose which residence is their main one. There are suggestions that this complex relief should be simplified, and this could result in the introduction of anti-forestalling measures (such as restricting the ability to swap between residences). Taxpayers in a position to make a main residence election should therefore make sure that they do so before 23 March 2011.
The UK inheritance tax system has recently been identified as requiring a full review. However, this is an area which might expose further differences between the Coalition partners (the Conservatives and the Liberal Democrats), so any such review may be deferred for the short term. In the longer term, the Conservatives’ stated aim is to increase the nil rate band to £1,000,000, although any change seems unlikely during the current Parliament.