Technical Special: A Budget In Blue With Old Mutual Int’l

In the first 100% Conservative Budget in nearly two decades, chancellor George Osborne has introduced a raft of changes, including significant revisions to UK non-dom status.

On 8 July, chancellor George Osborne delivered the first Conservative Government Budget for 19 years. Many headlines had already been flagged up in advance, meaning there were no immediate surprises. There were a number of changes affecting UK non-domiciles but also other key areas of financial planning, such as pensions and inheritance tax (IHT).

Offshore tax and non-doms

Offshore tax evasion has been a hot topic in recent years. In the Budget, the chancellor again showed his intent to target those who evade paying tax and to ensure those who come to this country from overseas pay their way. Specific changes include:

Disclosure. HM Revenue & Customs will open a time-limited disclosure facility in early 2016 to allow non-compliant taxpayers to correct their tax affairs under certain terms, before it starts to receive data under the Common Reporting Standard. HMRC’s new facility will be on tougher terms than its previous offshore disclosure facilities.

If non-compliant taxpayers continue to conceal their tax affairs, HMRC will enforce tough penalties for offshore evasion through the existing offshore penalty regime, new civil penalties for tax evaders and the simple criminal offence of failing to declare taxable offshore income and gains.

The UK will begin to receive information on offshore accounts in 2017 and at the same time will begin to share information with other tax authorities on accounts held in the UK.

Marketed avoidance schemes. The Government will publish a consultation to crack down on serial tax avoiders who persistently enter into tax-avoidance schemes that are defeated. It will also publish a consultation on the General Anti-Abuse Rule (GAAR) penalty to consider introducing a GAAR penalty and new measures to strengthen the GAAR further.

GAAR will be consulted on this summer  and the legislation will be issued in the Finance Bill 2016.

Deemed domicile. From 6 April 2017, anyone who has been resident in the UK for 15 of the past 20 tax years (the 15-year rule) will be treated as deemed UK-domiciled for all tax purposes. It is currently 17 out of 20. This means they will no longer be able to use the remittance basis of taxation after 15 years and will be deemed domicile for IHT purposes.

The Government will consult on whether split years of UK residence will count towards the 15-year rule.

Once a non-domicile has become deemed domicile under the 15-year rule and spends more than five years outside the UK, at that point they will lose their deemed domicile status (the five-year rule). This is likely only to be relevant for IHT purposes. However, there is an increase in the ‘inheritance tax tail’ from 6 April 2017, as currently this would only be relevant for four years.

Those who had a domicile in the UK at the date of their birth will revert to having a UK-domicile for tax purposes whenever they are resident in the UK, even if under general law they acquired a domicile in another country.

Domicile of choice changes. To align the treatment of UK domiciles and non-doms, UK domiciles who leave after 5 April 2017, having been in the UK for more than 15 years, will also be subject to the five-year rule even if they intend to emigrate permanently and settle in a particular place on the day of departure. The Government will consult on the interaction between the new five- and existing three- and four-year rules.

Excluded property trusts and non-doms. The Budget confirms that excluded property trusts can continue to be used by non-domiciles. Excluded property trusts enable a non-domicile to place property that meets the definition of ‘excluded property’ into a trust where it will be free from any future UK IHT charges once that individual becomes domiciled in the UK.

However, from 6 April 2017, once they become UK-domiciled, capital or income received from the trust will be subject to tax. It will no longer be possible to put UK residential property into the trust.

The Government recognises this is a significant change to the current rules and that changes to trust taxation are complex. It will therefore consult on the necessary details. We await the detail of these proposals.

We may see offshore bonds rise in popularity following these changes, as offshore bonds essentially defer any income tax and capital gains tax liability until the bond is encashed, so there is no tax to declare on an annual basis. An offshore bond meets the definition of ‘excluded property’.

Non-doms/UK domicile consultation. The Government intends to consult further on the interaction of the various deemed domicile rules for both UK domiciles and non-domiciles and also in relation to the tax treatment of trusts. No date has been indicated for when these consultations will be issued but it is proposed that the measures are to be introduced from 6 April 2017 and legislated in the Finance Bill 2016.

Non-domicile IHT residential property changes. From April 2017, non-UK-domiciled individuals will be liable to UK IHT on UK residential property that is held in an offshore company/partnership or offshore trust. This applies to all UK residential property, whether it is occupied or let, regardless of its value.

This change applies to UK residential property only. The change will not apply to any other UK assets, nor will it change the rules regarding non-UK assets.

Best of the rest

Other key changes from the Budget that could affect you and your clients include:

£1m IHT allowance on property. An additional nil-rate IHT band will apply when a residence is passed on death to a direct descendant: children – step, adopted or fostered – or grandchildren. The headline rate of £1m is based on the £325,000 nil-rate band of both spouses plus a new additional property IHT band for both spouses. The additional nil-rate band will be £100,000 in 2017-18; £125,000 in 2018-19, £150,000 in 2019-20 and £175,000 in 2020-21. This will then rise in line with the Consumer Prices Index from 2021-22 onwards. Any unused additional nil-rate band will be transferable to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015.

There will be a tapered withdrawal of the additional nil-rate band for estates with a value of over £2m, at a withdrawal rate of £1 for every £2 above this threshold.

Personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property that was never a residence of the deceased, such as a buy-to-let, will not qualify.

This detail was published in the Finance Bill on 15 July and includes 10 new pages of legislation, adding further complexity to the estate-planning process.

Nil-rate band frozen until the end of 2020-21. The existing nil-rate IHT band will remain at £325,000 until the end of 2020-21. It has been frozen since April 2009.

Simplifying charges on trusts. The Budget and subsequent Finance Bill (on 15 July) confirmed that multiple trusts can continue to benefit from multiple nil-rate IHT bands provided they are set up (and topped-up) on different days. If each trust is less than £325,000 then there is no IHT to pay.

The recent changes made to trusts to help simplify the periodic charge calculation will also remain in place and will help to make life easier for those approaching their first 10-year anniversary.

Dividend taxation. From April 2016, Dividend Tax Credit will be abolished. To replace this, a Dividend Tax Allowance of £5,000 per tax year will be introduced. The new rates of tax on dividend income will be 7.5% for basic-rate taxpayers, 32.5% for higher-rate taxpayers and 38.1% for additional-rate taxpayers.

Immediate change to the annual allowance for 2015/16. From 2016/17, pension input periods will be aligned with tax years. To make this happen, the Government is making changes to the annual allowance for 2015/16 with effect from 8 July 2015.

Annual allowance changes for April 2016/17. The Government is pushing ahead with its manifesto pledge to reduce the tax relief on pension contributions for people with an income of more than £150,000. Their annual allowance will reduce by 50p for every £1 of income in a range between £150,000 and £210,000+, so that someone with an income of £210,000 or more will have an annual allowance of £10,000.

The definition of income is not the same as taxable income but will include the value of pension savings to ensure salary sacrifice arrangements cannot be used as a method to avoid the restriction.

Taxation of lump-sum death benefits. There is currently a 45% tax charge on pension lump-sum death benefits paid after two years, or in respect of a member who died after age 75. From April 2016, the tax payable on lump sums paid after two years or post age 75 will be based on the marginal rate of the recipient, with the exception of lump sums paid to non-individuals, such as trusts or companies, for which the rate will remain at 45%.

This is also relevant for pension money held in a QROPS, where the member dies within five years of leaving the UK.

The chancellor is continuing to look at the UK pension industry and has launched a Green Paper to consult on the future of pension tax relief. Pension contribution rates are the biggest driver in generating retirement income, so the consultation is arguably more significant than the pension freedoms that came in this year.