The Chancellor's Autumn Statement
The Chancellor delivered the 2013 Autumn Statement (one of the two yearly statements made by the Treasury to Parliament, and so named despite the fact it is invariably delivered in winter) on 5 December.
Private client and property practitioners were focusing in particular on rumoured changes to capital gains tax for non-resident individuals disposing of UK residential property. Prior to yesterday's announcements, there had been much press speculation. Whilst it is now clear that the capital gains tax rules will be changed, it is encouraging that the amendments will not take place until April 2015 - and, then, only following a period of industry consultation.
This is greatly to be welcomed. Indeed, much of the Autumn Statement (including, for example, proposed changes to the detail of the gift aid rules, and certain anti-avoidance provisions) recognises the importance of consultation before introducing sweeping new changes.
This is encouraging, given previous Chancellors' tendencies to introduce rules without prior consultation. Key highlights included the following:
Capital Gains Tax ("CGT") for Non-Resident Persons
In April this year, the Government introduced a range of tax charges where UK residential property is held through "non-natural persons". These included the Annual Tax on Enveloped Dwellings, and wide-ranging CGT charges. The Government has now gone a step further. From 6 April 2015, non-resident persons (who, under current rules, can usually dispose of UK property entirely free of UK tax) will be exposed to CGT on any gain made after that date. It is clear from the wording of the Autumn Statement that it is only future gains that will be brought into the charge to tax. In most cases, therefore, it will be unlikely that the proposal will generate an immediate pressure to sell UK residential property. Moreover, the initial market reaction appears to suggest that this change is likely to be regarded as broadly reasonable, and that it will not discourage investment in UK residential property. We shall review the detail of the consultation proposals with care when they are announced in the New Year.
CGT Private Residence Relief – Final period rule
On a related note, the Government is introducing a technical amendment to the "principal private residence" relief rules. Currently, it is possible (in certain circumstances) for the final three years of a taxpayer's ownership of residential property to be exempt from CGT - even if the taxpayer did not occupy the property as their principal private residence during that time. The Government has recently become concerned about the aggressive exploitation of this rule. As a result, this "free" final period of relief will be halved with effect from 6 April 2014 - from 3 years to 18 months.
Partnerships with mixed membership
Partnerships frequently comprise both individual partners and corporate partners. There may be a variety of commercial reasons for this. In Budget 2013, published earlier this year, the Government expressed concern that in some cases the existence of both corporate and individual partners can be improperly exploited for tax purposes. It announced a review of partnerships, focused primarily on: countering the use of limited liability partnerships to disguise what are, in reality, employment relationships; and countering the tax-motivated allocation of business profits to corporate partners (which generally suffer tax at a lower rate than individuals) or business losses to individual partners (who can offset them against profits suffering higher rates of tax than corporate partners). The Government has now confirmed that these proposals will be taken forward.
It has long been Government policy to tax self-employed individuals working through genuine personal services companies in a relatively favourable way, on the basis that the tax system should recognise the additional risk assumed by a person who is genuinely self-employed. New measures will however be introduced to prevent "employment intermediaries" and "contrived contracts" from being used to give the appearance that a person is self-employed when, in real i ty, they have the characteristics of an employee. From April 2014, new rules will strengthen the existing legislation to ensure that the correct tax and national insurance contributions are paid where the worker is in reality an employee.
It is common practice for UK resident but non-UK domiciled individuals, who work both in the UK and overseas, to work under separate employment contracts known as "dual contracts". The aim of this is to ensure that they are properly taxed on the UK and overseas parts of their work, respectively. Perhaps understandably, the Government is concerned that some employers "artificially" split employment, so as to shift a larger part of the employment income outside the scope of UK tax. Accordingly, legislation will be introduced in Finance Bill 2014 to prevent such abuse. The precise scope of the Government's proposals will have to be reviewed with care to ensure that they do not catch genuine split employment arrangements.
Charity avoidance vehicles
There have been a number of recent high-profile scandals involving the abuse of charities to obtain personal tax advantages - notably the "Cup Trust" saga. This has, understandably, caused a great deal of media and public concern. In response to this, the Government has indicated that the definition of "charity" for tax purposes will be amended - effectively, so that charities that are merely designed as tax avoidance vehicles cannot qualify for reliefs. Whilst this may sound sensible in principle, we will be reviewing the proposed drafting with care. Many existing "abusive" schemes would be vulnerable under tax law as it currently stands. It will be essential to ensure that the Government's proposals do not strip genuine charities of tax relief.
If you would like further information on any of these items please speak to your usual contact at Maurice Turnor Gardner LLP.
These are outline notes only. They describe various legislative proposals, the precise scope of which is currently uncertain. They do not contain or constitute legal advice, and no reliance should be placed on them.
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