Unusually, most of what the Chancellor announced in the Budget yesterday had already been covered in detail by the media over the last few weeks, but there was (as always) a good deal in the detailed announcements which may be of direct relevance or interest to individuals and families, private banks and trustees.
Holding properties through non-UK companies
A number of announcements were targeted at UK residential property held through offshore companies and other structures. Overall, the Government’s message is that it wants to prevent individuals structuring their private property ownership through companies and other structures with immediate effect.
A new penal Stamp Duty Land Tax rate of 15% has been introduced with immediate effect on residential property purchases by "non-natural persons". The Government will also consult on the introduction, in April 2013, of an annual charge on residential properties over £2 million held in certain structures.
In addition, from April 2013, when an offshore holding company (or anyone other than an individual) disposes of UK residential property, capital gains tax will be imposed. The mechanics of this are not yet clear, and the Government is going to consult on this over coming months.
There is a window until April 2013 to restructure current arrangements, but there are likely to be stamp duty charges associated with any reorganisation (as a new rate of 7% for residential properties over £2 million applies from 22 March 2012). Whilst the best option in future is likely to be personal ownership, this does give rise to an inheritance tax risk (which can be limited to some extent, for example by borrowing or life insurance).
The 50% "additional rate" of income tax is to be reduced to 45%, with effect from April 2013. The additional rate for dividend income - currently 42.5% - will reduce to 37.5%. There may be planning opportunities for those who wish to defer taking income until April 2013 (as the Government acknowledges they are free to do).
The income tax rates for trusts (which match the top rate for individuals) will drop in the same way as the rates for individuals, and again, trustees may wish to explore opportunities to defer taking income where possible.
From 6 April 2013, there will be a universal cap on any currently-unlimited income tax reliefs. Whilst reliefs which already have an upper limit (such as the Enterprise Investment Scheme) are not affected, this will affect relief on other reliefs such as gift aid on charitable donations. The cap operates to prevent anyone claiming reliefs in excess of 25% of their income for the year (or £50,000, which ever is greater). It seems that this could have an adverse effect on charities who rely on large individual donations, and the Government has accordingly indicated that it wishes to "explore with philanthropists" ways to address this concern.
One positive proposal is that the government will increase the IHT-exempt amount that a UK-domiciled individual can transfer to their non-UK domiciled spouse or civil partner (currently subject to a lifetime limit of £55,000 which was last reviewed in 1979). In addition, individuals who are domiciled outside the UK and who have a UK-domiciled spouse or civil partner will be able to elect to be treated as domiciled in the UK for the purposes of IHT. Such individuals benefit from the rules relating to excluded property and will want to weigh that advantage carefully against the benefit of not paying IHT on gifts or inheritances from their UK domiciled spouse.
Residence and Domicile
The Government has confirmed that the new "investment safe harbour" will take effect from 6 April 2012. This will permit non-UK domiciled individuals to remit foreign income and gains to the UK without paying tax, providing they invest in specified categories of UK investments. Initial drafts of the legislation provided for very narrow classes of investment and the consultation process led to several changes being recommended. We hope to see the final form of this legislation shortly.
From April 2012 the new £50,000 charge for non-domiciliaries who have been UK resident for 12 or more years will be introduced, as the Chancellor announced in the autumn budget statement. The current charge of £30,000 will continue to apply to those who have been UK resident for 7 years or more, and will increase once they reach the 12-year point.
The proposed statutory residence test is to be introduced on 6 April 2013, as announced last Autumn. We expect to see revised draft legislation shortly, incorporating changes made in response to criticisms and concerns raised on the first draft. The intention is that the test will replace the current unsatisfactory guidance for determining the tax residence of individuals.
Further technical reforms
The Government has announced that it will consult on changes to some complex areas of the UK's anti-avoidance legislation where income and gains arise to entities outside the UK. This is likely to be an area of interest for UK residents who have set up foreign asset-holding structures, and we will be reviewing any proposals with interest.
A General Anti-Avoidance Rule
The Government has accepted Graham Aaronson QC's recommendation that the UK should introduce a general anti-avoidance rule (GAAR). The rationale behind the introduction of a GAAR – which would apply to income tax, CGT, corporation tax, petroleum tax and national insurance contributions – is to target contrived and artificial schemes but without giving carte blanche to the revenue authorities to prevent ordinary tax planning. A consultation paper will be issued in the summer with a view to introducing the regime from April 2013. In practical terms, the intention is that clients who engage in responsible tax planning should not face interference (as, on Mr Aaronson’s recommendation, HMRC would have to show that the taxpayer’s planning was unreasonable, and HMRC’s use of the GAAR would be monitored by an independent panel to prevent excessive use). In principle, any measure that permits legitimate tax planning and which discourages HMRC from fishing expeditions and aggressive investigations, ought to be welcomed.
If you would like to discuss any of the issues addressed here, or any other matter in relation to the Budget, please get in touch with your usual contact at Maurice Turnor Gardner LLP.
Related in depth posts
HMRC has launched a consultation on a review of the government's principles for taxing trusts. Fiona Poole examines the review in more detail.
In a bid for ever-increasing transparency, the UK government intends to continue the trend with the introduction of a further beneficial ownership register.
Eesha Arora and Sophie Wettern offer some ideas for navigating intergenerational conflicts in wealthy families