Reflections on the 2015 private client tax landscape

 

Perhaps the most important developmen has been the announcement by the government of significant changes to the ways in which non-domiciled individuals will be taxed from April 2017. Once those individuals have been tax resident in the UK for 15 of the previous 20 tax years, they will be deemed domiciled in the UK for all UK tax purposes. 

 

The implications for those affected are hard hitting. At present, the remittance basis allows them to shelter from UK tax their non-UK income and gains,rovided that they do not bring such income or gains to the UK. The remittance basis is viewed by many as being very generous and a major attraction for non-domiciled individuals moving to the UK. From April 2017, affected individuals will no longer be able to benefit from the remittance basis. 

 

Such individuals will be deemed domiciled in the UK for UK IHT purposes. This means that all of their worldwide assets will be subject to IHT on their death, to the extent that their value exceeds the available IHT nil rate band and no exemptions or reliefs apply. This represents a minor change to the existing deemed domicile rule for IHT purposes, simply reducing the period from 17 down to 15 of the previous 20 years.

 

An additional blow to non-domiciled individuals will be a change to the IHT treatment of UK residential property owned indirectly by them or their trusts through an offshore company. Currently, this can allow the value of the property to escape the IHT net; however, from April 2017, the offshore company will be looked through and the individual or trust will be treated as owning the property directly for IHT purposes. 

 

 

The proposed changes to the taxation of non-UK domiciled individuals are significant but not entirely unexpected. For some time, there has been a palpable political appetite for clamping down on long term residents who seek to maintain their foreign domicile status and thereby benefit from a generous system of taxation. Had the Labour Party won the general election earlier in the year, there was a possibility that the remittance basis of taxation might have been abolished altogether. In that light, many non-doms will feel the proposed 15 out of 20 years test is tolerable. The government can now claim it has removed one of the perceived injustices of the system, while maintaining the UK’s attractiveness as a destination for wealthy foreigners. It presumably expects very few long term resident non-doms to leave the UK as they approach 15 years of residence. Similarly, the government probably hopes that those who do leave – the very wealthiest internationally mobile non-doms – will return after six years when they can reset their deemed domicile clock. 

 

The proposed IHT charge on UK residential property held indirectly through offshore companies is likely to have a far wider impact, since it will apply to properties of any value, including those let out commercially. Whether it has an effect on the market remains to be seen. It is likely, though, that non-doms will seek to shelter from the new IHT exposure; for example, by buying in their children’s name to defer the charge, taking out a mortgage on purchase to reduce the net taxable value, or taking out life insurance to fund the tax liability. 

 

 

Finance Act 2015 provided further evidence of the government’s aim to clamp down on generous and beneficial tax treatment enjoyed by individuals with limited connection to the UK. 6 April 2015 saw the introduction of a new CGT charge on non-resident individuals, personal representatives, partners, trustees, foundations and certain companies on the disposal of a UK residential property (FA 2015 s 37 and Sch 7). Affected parties will be liable for CGT on the amount by which the property has increased in value between 6 April 2015 and the date of disposal (FA 2015 Sch 7 para 39). 

 

FA 2015 also included provisions which limited the circumstances in which non-resident individuals can elect for a UK residential property to be their main residence for CGT purposes and thereby benefit from main residence relief on disposal (FA 2015 s 39 and Sch 9). In essence, a non-resident individual has to spend at least 90 nights in the property during the tax year for which the individual wishes to claim main residence relief. This restriction is very much in line with the spirit of the new CGT charge mentioned above. 

 

 

The new CGT charge was seen by many as a measure to tackle the perceived unfairness of allowing non-residents to dispose of UK assets without suffering any CGT liability. Of course, the change has not prevented non-residents from disposing of UK assets other than residential property without exposing themselves to a CGT liability. In the current political and economic climate, the possibility of the new CGT charge being extended to other UK assets cannot be ruled out. 

 

It should not go unnoticed that there are elements of generosity within the new rules regarding the main residence relief election, particularly the fact that time spent by an individual’s spouse in the property in question counts towards the 90 nights which the individual must spend in the property. 

 

 

This year has seen several key IHT developments. Arguably, the most significant was the introduction in Finance (No. 2) Act 2015 of the IHT residence nil rate band for deaths in or after April 2017 (ss 8D-M inserted into IHTA 1984 by F(No. 2) 2015 s 9). Broadly, the estate of an individual who dies from that date onwards owning a residential property will benefit from an additional IHT nil rate band if the property in question passes to the individual’s descendants on death. The availability of this additional IHT nil rate band will be restricted for estates with a net value of more than £2m. The details of how the restriction will operate in practice are being consulted on and will be included in FA 2016.

 

F(No. 2)A 2015 also introduced provisions in IHTA 1984 s 66(4) and s 68(5) which simplify the way in which IHT is charged on ten-year anniversaries of relevant property trusts and on distributions from such trusts. Additionally, it introduced anti-avoidance provisions (IHTA 1984 s 62A and 62C) which mean there is no longer any IHT benefit to be obtained by an individual setting up a series of lifetime pilot trusts on consecutive days, each with a nominal sum, with the intention of larger sums being added in the future (such as through the will of the individual on his or her death). Any individuals who have entered into pilot trust planning in conjunction with will planning must therefore review that planning.

 

In the March Budget this year, it was announced that the government and HMRC would review the use of deeds of variation. HMRC hosted a meeting in September to discuss with practitioners and other stakeholders the reasons for deeds of variation being used, and whether they were being abused in order to obtain tax advantages. The meeting was followed by an open consultation. The outcome of the review has been that the government has decided not to make any changes to the legislation which confers certain tax advantages on deeds of variation. 

 

 

The introduction of the IHT residence nil rate band is a welcome move by the government and is evidence of its commitment to ensuring that married couples and civil partners can pass assets up to £1m on to their families on death without an IHT charge. Nonetheless, the mechanics announced so far have been widely criticised for being overly complicated draft wording for the tapering restrictions for those whose estates are worth just over £2m was published on 9 December 2015 and appears to be no less complicated. 

 

It is to be hoped the government will listen to genuine concerns about over complication and changes in tax legislation generally. Certainly, the climb down on deeds of variation is welcome, as is an acknowledgement that individuals who have entered into pilot trust planning in conjunction with will planning ought to have a grace period (until 6 April 2017) during which they can review and change their wills accordingly. 

 

 

There have been several moves this year by the government to make it less attractive from a UK tax perspective for individuals to buy and operate buy to let residential properties. The moves include a phased restriction from 2017 on the amount of mortgage interest relief which higher rate taxpayer landlords can claim against their taxable rental income, as well as the abolition of the current generous ‘10% wear and tear allowance’ for rented properties which are fully furnished, to be replaced by tax relief for actual expenditure incurred on acquiring replacement furniture and other specified items. 

 

The most recent move involves a new SDLT rate which will apply to purchasers of buy-to-let residential properties (and second homes). This was announced in the Autumn Statement and will involve a SDLT rate which is 3% higher than would otherwise apply if the property being purchased were not a buy-to-let (or a second home). There will be a consultation on the details before the new SDLT rate comes into effect in April next year. 

 

 

It is clear that the government is committed to increasing levels of home ownership nationwide. It is therefore no surprise that it wants to tax more harshly those who purchase buy-to-let properties and who, albeit unwittingly, perpetuate a culture of renting rather than ownership. Presumably the hope is that some landlords will sell up, resulting in more stock and lower prices for prospective owner-occupiers. The risk is that rents will rise further for those who cannot or do not want to buy.

 

Some of the changes do not apply to corporate owners. Why the government wishes to penalise individual landlords compared to corporate and institutional owners of residential investment property is unclear. One suggestion is that it wants to deter those who release cash from their pension following the recent pension reforms from investing in buy-to-let properties and thus adding to demand and fuelling further price rises. 

 

 

There have been continuing signs this year that anti-avoidance is still high on the government’s agenda. HMRC’s four consultations on tackling offshore tax evasion closed on 16 October 2015 and it will be interesting to see their responses. The government’s proposal to make offshore tax evasion a criminal offence even if no criminal intent can be found is controversial and has provoked strong objections. The fact that the draft wording of the Finance Bill 2016 published last week waters down the government’s proposal is therefore seen by many as a step in the right direction. It is now proposed that a taxpayer can only be prosecuted for offshore tax evasion if the tax loss is at least £25,000 per year. Whilst this seems to be a welcome move, many will argue that it does not go far enough. 

 

Finally, it is important to remember that the Liechtenstein disclosure facility (LDF) will close on 31 December 2015. Taxpayers who have undisclosed income or gains and who want to regularise their UK tax affairs under the LDF therefore only have a very short timeframe within which to do so. 

 

 

There remain clear indications that it is the government’s aim to stamp out tax avoidance. Practitioners need to be constantly alive to the general anti-abuse rule, the disclosure of tax avoidance schemes regime and other anti-avoidance rules.