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Summer Budget 2015: Your guide to the key measures

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9 July 2015
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Key announcements that were new for Summer Budget 2015 include:
  • reducing the main rate of corporation tax from 20% to 18% by 2020;
  • a new permanent level of £200,000 for the annual investment allowance for capital allowances;
  • CGT treatment for investment fund managers in respect of the full amounts received in respect of carried interest, taking effect from 8 July 2015;
  • removing corporation tax relief for the cost of future acquisitions of goodwill and ‘customer-related intangible assets’ taking effect for accounting periods beginning on or after 8 July 2015, but not in respect of acquisitions made before 8 July 2015;
  • changes to the bank levy to reduce the rate and restrict its scope to UK operations from 2021, and a new corporation tax surcharge of 8% for banks with effect from 1 January 2016;
  • wide-ranging reform of the non-dom rules;
  • wide-ranging changes to the taxation of dividends for individuals;
  • further changes to pensions tax relief and consultation on wider reform;
  • consultation on sanctions for serial avoiders and the introduction of measures to strengthen the GAAR, including a new penalty; and
  • confirmation that the Summer Finance Bill will include measures for HMRC powers on direct recovery of tax debts.

Your guide to the tax measures.

Background

 
The chancellor of the exchequer, George Osborne, delivered his first all-Conservative Budget on Wednesday 8 July 2015. Against a backdrop of stable growth predictions and an upward trend in both employment and wage levels, the chancellor described this Budget as focusing on economic security, with the stated aim of the UK becoming a higher-wage, lower-tax, lower-welfare economy.
 
This first Budget of the new government can be divided into three broad categories:
  • stall-setting – long term plans for the government’s approach over the whole parliament, such as the election pledge to lock in tax rates; establishing the Office of Tax Simplification (OTS) as a permanent office of HM Treasury; setting its next targets as the alignment of income tax and NICs and the taxation of small businesses; and promises to publish tax roadmaps for:
    • tax administration for small businesses and individuals (by the end of 2015);
    • banking; and
    • business tax (by April 2016).
  • unpopular measures (depending on your point of view) – measures that will either save money or raise revenue and which will be unpopular to some elements of the electorate, including:
    • sweeping changes to tax credits and other working benefits;
    • changes to reduce the tax benefits for buy-to-let individual landlords; and
    • wide-ranging changes to the taxation of dividends for individuals, which are expected to be a significant revenue raiser.
  • crowd-pleasers (again depending on your point of view) – including:
    • continued focus on ‘combatting tax evasion, avoidance and aggressive tax planning’ with the aim of raising an additional £7.2bn a year;
    • some further bank bashing, with the introduction of a supplementary charge of 8% on banking profits;
    • a reduction in the headline rate of corporation tax to 18% by 2020;
    • increases to the personal allowance and higher rate tax thresholds, alongside the introduction of the national living wage; and
    • changes to the inheritance tax regime to remove many homes from the scope of inheritance tax.
Some advisers may have been rather alarmed by the rather cryptic and vague announcements of a review of company distributions in autumn 2015 and a consultation on ‘new measures to increase compliance and tax transparency in relation to large business tax strategies’.
 
The Overview of Tax Legislation and Rates (OOTLAR) contains useful tables at the beginning of the document detailing proposed measures, the date of their announcement and the proposed means of implementation.
 

Business and enterprise

Corporation tax rates and payments

 
Legislation will be introduced in Summer Finance Bill 2015 to reduce the main rate of corporation tax for all non-ring fence profits to:
  • 19% for financial years 2017, 2018 and 2019; and
  • 18% for financial year 2020.
Draft legislation will be produced for a future finance bill to bring forward the instalment payment dates for companies with annual taxable profits in excess of £20m (with such threshold divided between group members), with effect for accounting periods starting on or after 1 April 2017. Affected companies will be required to pay corporation tax in quarterly instalments in the third, sixth, ninth and twelfth months of their accounting period.
 
See: Summer Budget 2015, paras 2.117, 2.118 and TIIN: Corporation Tax Main rate.
 

Intangible fixed assets: abolition of relief for purchased goodwill

 
In a major reform of the rules for taxing corporate intangibles, the government is removing corporation tax relief for the cost of future acquisitions of goodwill and ‘customer-related intangible assets’. Companies will no longer be able to claim tax deductions for the amortisation or impairment of these assets, and debits arising on their realisation will no longer be relieved as trading losses. The change is described as reducing distortion, in that tax deductions for the amortisation of goodwill are available where a business is acquired via an asset purchase, but not where it is structured as an acquisition of shares.
 
Under current rules, companies can claim a tax deduction for the amortisation of expenditure on intangibles based on their treatment in the company’s accounts. Accounting rules do not generally permit amortisation of goodwill, but a company can instead elect to take a fixed deduction for the cost of purchased goodwill at the rate of 4% per year. Tax deductions are also available for accounting debits arising as a result of an impairment review. Goodwill that is acquired after the new rules take effect will no longer be eligible for these deductions.
 
The rules will also be amended so that any debits arising on a realisation of goodwill will be relieved as non-trading debits rather than as trading losses. This is to limit how the debits can be relieved.
 
The new measures apply both to goodwill and to customer-related intangible assets. Customer-related intangible assets include customer information, customer relationships and unregistered trade marks. These are regarded as closely related to goodwill and so are included within the changes.
 
This is a significant change that removes one of the tax advantages for a buyer of structuring a business acquisition as a transfer of assets rather than of shares.
 
The measure applies to accounting periods beginning on or after 8 July 2015, but not in respect of acquisitions made before 8 July 2015.
 
See: Summer Budget 2015, para 2.124, and policy paper and draft legislation, Corporation Tax: restriction of relief for business goodwill amortisation.
 

CFC loss restriction

 
The controlled foreign company (CFC) legislation levies a charge on a UK company in relation to profits generated by its controlled foreign companies (CFCs) which have been diverted from the UK. Under the existing rules, certain UK tax losses, including brought forward, current year and group relieved losses and management expenses, can be used to reduce the amount of the CFC charge. This is achieved by deducting the tax value of the available losses from the CFC charge.
 
It was announced at Summer Budget 2015 that TIOPA 2010, s 371UD, which provides for this offset of losses, will be repealed, so that the losses will no longer be available for use in this way. 
 
This measure has immediate effect, applying to profits generated on or after 8 July 2015. For accounting periods which straddle this date, CFC profits should be apportioned on a just and reasonable basis to ensure that losses and management expenses can still be offset against profits arising prior to the commencement date. Interestingly, the apportionment is not carried out on a time apportionment basis, which could allow some degree of flexibility for companies which see seasonal fluctuations in profits.
 
In addition changes will be made to ensure that the rules that prevent tax avoidance using carried forward losses and were introduced by Finance Act 2015 will apply equally to avoidance or reduction of the CFC charge. This measure has effect for accounting periods which start on or after 8 July 2015. For straddle periods, the profits will be allocated between the before and after periods on a time apportionment basis unless that would be unjust or unfair.
 
See: Summer Budget 2015, para 2.177, TIIN: Corporation Tax: Controlled Foreign Companies - loss restriction.
 

Capital allowances: annual investment allowance

 
The annual investment allowance (AIA) for capital allowances purposes will be set at a new permanent level of £200,000 for qualifying investments in plant and machinery made on or after 1 January 2016.
 
The AIA was introduced in 2008 and since that time has been set, at different times, at five different levels, sometimes increasing and sometimes decreasing. It is currently £500,000 and was due to be reduced to £25,000 from 1 January 2016. Businesses will welcome the fact that the reduction will now be less dramatic, but will also be grateful for the AIA being set at a stable level as the fluctuations have led to considerable complexity in calculating allowances in the many accounting periods that have straddled a change.
 
See: Summer Budget 2015, para 2.120, and TIIN: Annual investment allowance – permanent increase to £200,000.
 

Research and development: universities and charities

 
The government will change the rules on research and development (R&D) tax credits for large companies so that the credits are not available to universities and charities. R&D tax credits (also known as ‘above the line’ credits) are replacing large company R&D relief and were not intended to apply to universities and charities. HMRC has received a number of claims from universities so is changing the legislation so that this will not be possible in future.
 
The measure affects a university’s or charity’s own independent research, and R&D they carry out as sub-contractors. It does not affect university spin-out companies.
 
The change applies to expenditure incurred from 1 August 2015. It will still be possible to make claims for expenditure incurred before this date.
 
See: Summer Budget 2015, para 2.121, and TIIN: Corporation tax: R&D tax credits – universities and charities.
 

Oil and gas taxation

The government has announced that it will broaden the application of the basin-wide investment and cluster area allowances to support investment on the UK Continental Shelf.
 
See: Summer Budget 2015, para 2.132.
 

Consortium relief

As previously announced at Autumn Statement 2014, all requirements relating to the location of the ‘link company’ for consortium claims to group relief will be removed for accounting periods beginning on or after 10 December 2014. Legislation was included in the original draft of Finance Bill 2015 but deferred to Summer Finance Bill 2015.
 
See: Summer Budget 2015, para 2.160 and TIIN: Corporation Tax: simplifying ‘link company’ requirements for consortium claims.
 

Future developments

 
  • Distributions:  the government will consult on the rules on company distributions in Autumn 2015, see: Summer Budget 2015, para 2.122.
  • Apprenticeships levy: The government will introduce a levy on large UK employers to increase the number of apprenticeships. Details, such as the meaning of ‘large’, the rate of the levy and when it will start, have not been announced and are expected in the Spending Review. The chancellor’s speech suggested that there may be consultation with business on the details. It is expected that employers who appoint apprentices will be able to use some of the funds raised by the Apprenticeships Levy to support the apprenticeships. See: Summer Budget 2015, para 2.201.
 

Funds

 

Taxation of carried interest

 
Legislation will be included in Summer Finance Bill 2015 to ensure that all sums received by investment fund managers in respect of carried interest will be subject to capital gains tax.
 
Carried interest is broadly a right to participate in the profits of a fund where the fund has performed successfully. The government is concerned that fund managers are benefitting from arrangements that result in a low effective rate of capital gains tax on their carried interest, so they are not paying capital gains tax on their true economic profit. This is due to the application of Statement of Practice D12 (SP D12) which clarifies how the chargeable gains legislation applies to a disposal of a chargeable asset by a partnership. SP D12 operates to allow managers who receive carried interest effectively to share some of the base cost of the investors in the fund, with the result that the amount of the managers’ chargeable gain is reduced. This is known as the base cost shift.
 
The measures announced in the Summer Budget 2015 will apply to individuals who perform investment management services for a collective investment scheme through an arrangement involving one or more partnerships. The entire amount of any sums received by that individual in respect of carried interest under that arrangement will be subject to capital gains tax, regardless of the items notionally applied to satisfy the carried interest at the level of the partnership or other entity in the fund structure. A deduction will only be allowed for any consideration actually given in return for the carried interest rather than the amount that would be allowed under SP D12. Carried interest will be defined by reference to the disguised investment management fees legislation. The government has announced that the measure will not affect genuine investments in funds made on an arm’s length basis, known as ‘co-invest’.
 
The measures, which are likely to have a significant impact on fund managers, will have effect on all carried interest arising on or after 8 July 2015, whenever the arrangements were entered into. They do not include any grandfathering provisions, which is surprising as HMRC has known about and acknowledged this beneficial treatment for a while. 
 
See: Summer Budget 2015, para 2.179, TIIN: Investment managers Capital Gains Tax treatment of carried interest.
 

Future developments in funds

 
The government announced at Summer Budget 2015:
  • Limited partnerships: a consultation will be published on technical changes to limited partnership legislation in the context of the private equity and venture capital sector. No further information has been provided other than that the changes will enable private equity and venture capital funds to use the limited partnership structure more effectively. See: Summer Budget 2015, para 2.184.
  • Performance linked rewards paid to asset managers: a consultation has been launched alongside Summer Budget 2015 on the circumstances in which fund managers’ performance linked rewards should benefit from capital gains treatment. There are currently no relevant tax rules specific to the asset management sector and applying normal investment/trading principles can be difficult. The consultation proposes statutory tests to clarify the position and to set out when performance fees arising to fund managers from their fund management activities may be treated as capital in nature. According to the consultation, the default rule will be that such fees will be charged to tax as income with capital treatment given in certain circumstances. Although private equity carried interest is expected to be taxed as capital gain, this is not certain and will be dependent on the investment strategy of the fund. The consultation closes on 30 September 2015. See: Summer Budget 2015, para 2.179 and consultation document: Taxation of performance linked rewards paid to asset managers.
 

Finance

 

Bank levy

 
In a much anticipated and lobbied for move, the chancellor announced that the bank levy, introduced in the wake of the credit crunch, will be reformed and reduced over the next six years. 
 
Although only increased to its current rate in March Budget 2015, the main rate of the bank levy will fall from 0.21% to 0.18% with effect from 1 January 2016. It will then drop to 0.17% in 2017, 0.16% in 2018, 0.15% in 2019, 0.14% in 2020 and 0.10% in 2021. Proportionate and corresponding annual reductions will also be made to the half rate.
 
In a further reform, although the bank levy is currently calculated by reference to a bank’s worldwide balance sheet, the government has announced that from 1 January 2021 it will be restricted to apply to UK operations only. The chancellor will hope that winding the bank levy down in this way will be enough to see major global banks (eg HSBC) decide to remain in the UK.
 
See: Summer Budget 2015, paras 1.201-1.204 and 2.127 and TIIN: Bank Levy: rate reduction.
 
In a separate but related development, the government has announced that a bank will be able to claim relief against the bank levy for any payments it has to make to the European Single Resolution Fund which forms part of the Single Resolution Mechanism (SRM). The SRM was set up after the financial crisis to establish an efficient ‘resolution’ process for European banks that encounter serious financial difficulties.
 
The new relief, which will be enacted by statutory instrument, will be available from 1 January 2016.
 
See: Summer Budget 2015, paras 1.205 and 2.128.
 

Bank corporation tax surcharge

 
It was not, however, all good news for banks. Summer Budget 2015 includes proposals to introduce a new supplementary tax on banking sector profits intended to ‘maintain a fair contribution from the banks’.
 
From 1 January 2016, an 8% surcharge – to be treated as an amount chargeable as if it were corporation tax – will be applied to a bank’s corporation tax profit as calculated, crucially, before it has utilised any existing carried-forward losses and with any group relief surrendered from non-banking companies added back. Where a company’s accounting period straddles 1 January 2016, the period will be split and the surcharge will apply to the profits of the notional period commencing on 1 January 2016.
 
The new provisions will also include a targeted anti-avoidance rule (TAAR).
 
Although the new surcharge will not apply to the first £25m of group profit, the government expects the surcharge to more than offset – by some £2bn in total – the reduction to the bank levy (outlined immediately above).
 
See: Summer Budget 2015, paras 1.201-1.204 and 2.126 and TIIN: Bank Corporation Tax surcharge.
 

Banking tax definitions

 
Summer Finance Bill 2015 will include provisions that change how ‘banking companies’ are defined for the purposes of the bank levy and bank loss-relief restriction legislation (CTA 2010 Pt 7A, announced at Autumn Statement 2014, included in FA 2015, and having effect for accounting periods beginning on or after 1 April 2015).
 
The definition of a banking company will be updated and aligned with recent changes to relevant regulatory standards, used by the Prudential Regulatory Authority and the Financial Conduct Authority. There is no intention, however, for the amendments to materially impact the operation of the bank levy (or the bank loss-relief restriction).
 
The new definitions are back-dated and so take effect from 1 April 2014 (for the bank levy) and 1 April 2015 (for the loss restriction legislation).
 
See: Summer Budget 2015, para 2.130 and TIIN: Updating bank definitions.
 

Banks’ compensation payments

 
As announced in March Budget 2015, and following consultation on the proposal by HM Treasury, Summer Finance Bill 2015 will include provisions to ensure that compensation expenses arising in relation to a bank’s misconduct, management failures or mis-selling of products are not be allowable as a deduction in calculating the bank’s profits for corporation tax purposes.
 
Before this change, large compensation payments made by banks in relation to, for example, the mis-selling of PPI and interest rate hedging products, were tax-deductible and, due to the huge figures involved, had a significant impact on UK corporation tax receipts after the financial crisis. The government considered that the existing rules were ‘unsustainable’ and that it was ‘not acceptable that corporation tax receipts continue to be depressed by banks’ past misconduct’. The new provisions are designed to address the anomaly and protect the exchequer.
 
The measures have immediate effect and so will apply to expenses incurred on or after 8 July 2015.
 
See: Summer Budget 2015, paras 1.206 and 2.129 and TIIN: Restricting tax relief for banks compensation payments.
 

Modernisation of the taxation of corporate debt and derivative contracts

 
In a welcome move, the government has confirmed that Summer Finance Bill 2015 will include the measures previously announced in Autumn Statement 2014, but omitted from Finance Bill 2015, to complete the latest efforts to update, simplify and rationalise the regimes for the taxation of loan relationships and derivative contracts.
 
The ‘wide-ranging’ changes include:
  • with effect for accounting periods commencing on or after 1 January 2016, clarifying the relationship between tax and accounting – measures will include removing the ‘fairly represent’ requirement and basing the calculation of taxable loan relationship profits solely on accounting entries in a company’s income statement (and so not in reserves or equity);
  • with effect from the date Summer Finance Bill 2015 receives Royal Assent (although originally intended to apply from 1 April 2015), the addition of a new regime-wide anti-avoidance, ‘main purpose’, rule in each of the loan relationships and derivative contracts rules; and
  • also from the date of Royal Assent of Summer Finance Bill 2015 (although it was originally intended to apply from 1 January 2015), a new ‘corporate rescue’ rule providing tax relief where loans are released in cases of debtor companies in financial distress with a view to ensuring their continued solvency.
With the exception of the changes to the operative dates, the proposals appear to be identical to those announced in Autumn Statement 2014. The government has, however, also announced that updates to the rules on the tax treatment of:
  • FOREX hedging;
  • convertible instruments; and 
  • property-based derivatives
will be introduced by secondary legislation during the course of 2015.
 
For background information, see: Consultation: Modernising the taxation of corporate debt and derivative contracts (6 June 2013), Draft Clauses & Explanatory Notes for Finance Bill 2015 (10 December 2015).
 
See: Summer Budget 2015, paras 2.123 and TIIN: Corporation Tax: modernisation of the taxation of corporate debt and derivative contracts.
 

Employment taxes

 

National insurance contributions

 
The following NICs announcements (to come into effect in April 2016) were made in Summer Budget 2015:
  • following the introduction of a £2,000 NICs employment allowance in April 2014 (as announced in the Budget 2013), the government announced in Summer Budget 2015 that the NICs employment allowance will be increased to £3,000. This allowance will enable an employer to hire four employees on the newly proposed national living wage of £7.20 per hour (effective from April 2016) without paying any NICs. As a result, up to 90,000 employers will see their employer NICs liability reduced to zero. See: Summer Budget 2015, paras 1.127 and 2.61; and
  • companies where the director is the sole employee will no longer be able to claim the NICs employment allowance. See: Summer Budget 2015, paras 1.198 and 2.62.

Measures pre-announced

 
The following employment taxes measures were previously announced and will be implemented unchanged, or with the minor changes described:
  • statutory exemption for trivial benefits: as previously announced in Autumn Statement 2014 and March Budget 2015, the statutory exemption for trivial benefits in kind costing less than £50 will be effective from April 2016 and will be introduced in Finance Bill 2016. For details of these measures, see Summer Budget 2015, para 2.161;
  • benefits in kind and expenses: as previously announced in FA 2015 (following recommendations made by the OTS) the following measures will be effective, from the 2016/17 tax year:
    • abolition of the £8,500 threshold for benefits in kind;
    • allowing employers to voluntarily report and deduct tax on benefits in kind in real time; and
    • introduction of an exemption for qualifying business expenses.
    • The draft regulations required to deliver these changes were released alongside Summer Budget 2015. See: Summer Budget 2015, para 2.161;
  • travel and subsistence expenses: following a report by the OTS and as previously announced at Budget 2014, the government will review the rules underlying the tax treatment of travel and subsistence expenses. The consultation can be found here. The deadline for the review has been extended several times, the most recent of which extended stage 1 of the review until 1 May 2016. A discussion paper will be published shortly outlining a potential framework for the new rules. See: Summer Budget 2015, para 2.165;
  • ordinary commuting: as previously announced in March Budget 2015, the government has published a consultation document detailing proposals to restrict tax relief for ordinary commuting (in general home-to-work travel and subsistence expenses) for workers who are supplying personal services engaged through an intermediary (including umbrella companies, certain employment business and personal service companies) and who are working under the supervision, direction or control of any person. The proposed change is to ensure that individuals, whose relationship with their engager is such that they look and act as employees, cannot claim relief on the everyday cost of travelling to work, when employed through an intermediary. The consultation can be found here. The consultation is open for comments until 30 September 2015 and the changes will take effect from April 2016. See: Summer Budget 2015, para 2.182; and 
  • NICs reform: as previously announced at March Budget 2015, the government will consult in Autumn 2015 on the abolition of Class 2 NICs and to reform Class 4 NICs for the self-employed. See: Summer Budget 2015, paras 1.246 and 2.16.

Future developments

 
Pursuant to the Summer Budget 2015, the government has announced that it will:
  • actively monitor the growth of salary sacrifice schemes that reduce employment taxes and their effect on tax receipts. See: Summer Budget 2015, paras 1.197 and 2.66
  • commission the OTS to review:
    • the closer alignment of income tax and NICs; and
    • the taxation of small companies.
    • (the terms of reference for the OTS reviews on the closer alignment of income tax and NICs and the taxation of small companies will be published shortly. See: Summer Budget 2015, paras 1.245 and 2.158-2.159)
  • consult on the tax and NICs treatment of termination payments, to make the system simpler and fairer. See: Summer Budget 2015, paras 1.246 and 2.164; and
  • engage with stakeholders on how to improve the effectiveness of the existing intermediaries legislation (IR35) which is designed to protect against disguised employment. A discussion document will be published shortly as the government has admitted that IR35 (the current anti-avoidance legislation introduced to ensure that individuals choosing to work through their own limited company (but who would have been employees if they were providing their services directly) pay the same tax and NICs as employees) is ‘not effective enough’. In addition, the government has asked HMRC to start a dialogue with business on how to improve the effectiveness of existing IR35 legislation. See: Summer Budget 2015, paras 1.180-1.181 and 2.182.

Incentivised investment

 

Venture capital schemes

 
Summer Budget 2015 announced further changes to the rules for enterprise investment schemes (EIS), seed enterprise investment schemes (SEIS) and venture capital trusts (VCT). Changes to the legislation governing these schemes were originally announced at March Budget 2015 but were deferred until after the general election. Since then, the government has analysed the responses to its consultation on this topic and made further amendments to the draft legislation.
 
The changes can be summarised as follows:
  • New measures in Summer Budget 2015: new rules to prevent EIS and VCT funds from being used to acquire existing businesses, whether through a share purchase or asset sale;
  • Minor changes in Summer Budget 2015:
    • new qualifying criteria to limit eligibility for companies receiving their first risk finance investment (SEIS, EIS or VCT). The limit will be 10 years after the first commercial sale took place for ‘knowledge intensive’ companies and 7 years (originally 12 years) for other qualifying companies (except where the total investment represents more than 50% of turnover averaged over the preceding five years);
    • a new cap on the total investment a company may receive under EIS and VCT at £20m for ‘knowledge intensive’ companies and £12m for other companies (originally £15m); and
    • an increase in the employee limit for ‘knowledge intensive’ companies to 500 employees (originally 499 employees).
  • Implemented measures:
    • EIS and VCT will be amended to require all investments to be made with the intention to grow and develop a business, and require all investors to be ‘independent’ from the company at the time of the first share issue;
    • the removal of the requirement that 70% of SEIS money must be spent before EIS or VCT funding can be raised;
    • the establishment of a stakeholder forum to allow investors to raise queries and concerns about the operation and use of venture capital schemes;
    • as announced at the Autumn Statement 2014, the government will introduce a new digital process for companies and investors using SEIS, EIS and the Social Investment Tax Relief (SITR) by the end of 2016; 
    • the government also intends to work with VCTs to develop a standard format for the annual VCT returns. This will be discussed at the new stakeholder forum. 
These provisions will take effect from the date of Royal Assent of Summer Finance Bill 2015, subject to state aid approval, except for the 70% SEIS spending requirement which will take effect from 6 April 2015.
 
See: Summer Budget 2015, paras 2.71-2.72 and TIIN: Income tax – amendments to tax-advantaged venture capital schemes.  
 

Real estate taxes

 

Restricting finance cost relief for individual landlords

 
The chancellor announced a number of measures which will impact on residential landlords in Summer Budget 2015. The most significant of these is a measure which will restrict the amount of income tax relief individual landlords can receive in respect of residential property finance costs (e.g. interest on mortgage payments). This measure will exclude those properties that meet all the criteria of a furnished holiday letting. The rationale for this measure is that the ability to use this relief puts individual landlords investing in a rental property at an advantage to ordinary homeowners and also to curb the rapid growth of buy-to-let mortgages.
 
Legislation will be introduced in Summer Finance Bill 2015 to restrict finance cost deductions on residential property income for individual landlords and to introduce a new tax reduction at the basic rate of income tax. Individuals will be able to claim a basic rate tax reduction from their income tax liability on the portion of finance costs not included in calculating the profit. Any excess finance costs may be carried forward to following years if the tax reduction has been limited to 20% of the profits of the property business in the tax year.
 
This measure will be phased in from April 2017 over 4 years. Relief will be calculated as follows:
 
 
The rationale behind this change is that the existing income tax relief puts individual landlords investing in a rental property at an advantage compared with ordinary homeowners. The measure is also intended to curb the rapid growth of buy-to-let mortgages. 
 
See: Summer Budget 2015, paras 1.190-1.191 and 2.59; TIIN: Restricting finance cost relief for individual landlords; and OOTLAR, p 67.
 

Reform of wear and tear allowance

 
Currently a wear and tear allowance is permitted when residential landlords replace furnishings. This does not always allow the full cost of the replacement.
 
Summer Budget 2015 has announced a new relief to replace this allowance. From April 2016, residential landlords will be permitted to deduct the actual costs of replacing furnishings. Given the possibility of abuse of this relief, the details will not be finalised until after a technical consultation, expected to be published shortly, with a view to including legislation in Finance Bill 2016.
 
See: Summer Budget 2015, para 2.58.
 

Rent a room relief increase

 
Secondary legislation will be introduced to increase the level of rent-a room relief, which provides for tax-free income that can be received from renting out a room or rooms in an individual’s only or main residential property, from £4,250 to £7,500 with effect from 6 April 2016.
 
See: Summer Budget 2015, para 2.60; TIIN: Rent a Room relief increase; OOTLAR, p 64.
 

SDLT and authorised property funds

 
As initially announced at Autumn Statement 2014, it has been confirmed that the government still intends to introduce a seeding relief for property authorised investment funds (PAIFs) and co-ownership authorised contractual schemes (CoACSs) and also to make changes to the SDLT treatment of CoACSs investing in property so that SDLT does not arise on transactions in units, subject to resolving potential tax avoidance issues. Provisions implementing these measures are intended to be included in Finance Bill 2016. 
 
See: Summer Budget 2015, para 2.154.
 

Business rates review

 
Further to the announcement made at Autumn Statement 2014, the government is conducting a review of the structure of business rates and has now published an update outlining progress made to date on the review and setting out the government’s proposed next steps. These include:
  • consulting further with stakeholders on the proposed appeals system ahead of enabling legislation being considered in parliament in the Enterprise Bill;
  • incorporating provisions on improved information sharing between the Valuation Office Agency and local authorities as part of the Enterprise Bill; and
  • continuing to work across government to reduce the taxpayer burden of sharing the same information with multiple government bodies.
See: Summer Budget 2015, para 2.55.
 

Indirect taxes

 

VAT use and enjoyment rules

 
The government will extend VAT ‘use and enjoyment’ provisions from next year in order to ensure that all UK repairs made under UK insurance contracts will be liable to VAT in the UK. The government will also consider implementing a wider review of offshore based avoidance in VAT exempt business sectors, with a view to introducing additional use and enjoyment provisions for services such as advertising in the following year. These changes will be introduced in order to combat perceived VAT avoidance schemes, such as the scheme used by the taxpayer in Ocean Finance [2015] All ER (D) 298 (Jun) to avoid payment of VAT on advertising services.
 
See: Summer Budget 2015, para 2.136.
 

VAT refunds for shared services

 
As announced in March Budget 2015, the government will legislate in Finance Bill 2016 to enable eligible public bodies to reclaim VAT under the VATA 1994 s 33 VAT refund scheme for certain shared expenses. 
 
See: Summer Budget 2015, para 2.137.
 

IPT standard rate increase

 
The standard rate of IPT will increase from 6% to 9.5%. It is predicted this increase will raise an additional £1bn in tax revenue per year.
 
The increased rate will have effect for insurers using the IPT cash accounting scheme with effect from 1 November 2015. For insurers using the special accounting scheme, there will be a 4 month concessionary period from 1 November 2015 to 29 February 2016. During this period premiums received before 1 November 2015 will remain liable to IPT at 6%. The new 9.5% rate will apply to all premiums received by insurers from 1 March 2016 regardless of when the policy was entered into. Provisions implementing these measures will be included in Summer Finance Bill 2015.
 
See: Summer Budget 2015, paras 1.209 and 2.133.
 

Private client 

 

Income tax

 
Tax lock: The government will legislate to place a ceiling on the main rates of income tax, the standard and reduced rates of VAT and employer and employee (Class 1) national insurance contribution (NICs) rates. This follows the Conservatives’ election pledge to fix the rates. The purpose of this measure is to ensure that these rates cannot rise above their 2015/16 levels. Specifically:
  • the higher and additional rates of income tax applicable to earnings income in England, Wales and Northern Ireland and UK wide savings income (see ITA 2007 s 6(1)) will not increase above 20%, 40% and 45% for the duration of the current parliament;
  • Class 1 NICs rates payable by employers (13.8%) and employees (main rate 12%, additional rate 2%)(see Social Security Contributions and Benefits Act 1992, s 8(2) and s 9(2)) will not be increased for the duration of this parliament; 
  • the upper earnings limit (UEL) for class 1 NICs (currently £815 per week) will not exceed the higher rate tax threshold (HRTT) – the UEL (reg 10(b) of the Social Security (Contributions) Regulations 2001) is the point at which employee’s earnings no longer count toward contributory benefits and they start to pay NICs at 2% and the HRTT is the sum of the personal allowance (currently £10,600 and the basic rate limit (£31,785) equating to £42,385 (reg 11(2A)(b) of the Social Security (Contributions) Regulations 2001) in 2015/16;
  • for the duration of this parliament, the standard rate under VATA 1994 s 2 can be no higher than 20% and the reduced rate under s 29A can be no higher than 5%.
These measures, for income tax and VAT, will have effect on the date that the Summer Finance Bill 2015 receives royal assent and for NICs after Royal Assent of the National Insurance Contributions Bill.
 
See: Summer Budget 2015, para 2.53; TIIN: Tax lock: Income Tax, National Insurance contributions and VAT; and OOTLAR, page 16.
 
Personal allowance: Legislation will be introduced in the Summer Finance Bill 2015 to set the personal allowance for 2016/17 at £11,000 and for 2017/18 at £11,200, and the basic rate limit for 2016/17 at £32,000 and for 2017/18 at £32,400 in accordance with the following table:
 
 
The NICs upper earnings/profit limits will remain aligned to the higher rate threshold and will therefore also increase for 2016/17 and 2017/18.
 
Note: the effect is that, from 2016/17, everyone, regardless of their date of birth, will be entitled to the same personal allowance.
 
See: Summer Budget 2015, para 2.54; TIIN: Income Tax: personal allowance and basic rate limit for 2016 to 2017; and OOTLAR, page 22.
 
Personal allowance indexation: With the objective that individuals working 30 hours a week at the national minimum wage will not pay income tax, legislation will be introduced in Summer Finance Bill 2015 to change the indexation of the personal allowance to increase in line with the annual equivalent of 30 hours a week (at the national minimum wage rate that individuals over the age of 21 are entitled to).
 
The change will only be effective when the personal allowance reaches £12,500.
 
See: Summer Budget 2015, para 2.55; TIIN: Income Tax: personal allowance indexation; and OOTLAR, page 19.
 
Higher rate threshold limit: The government proposes to increase the HRTT in accordance with the table under ‘Personal Allowance’ above.
 
The NICs UEL will also increase to remain aligned with the HRTT. See: Summer Budget 2015, para 2.56.
 
Dividend taxation: The government will abolish the dividend tax credit with effect from April 2016 and replace it with a new dividend tax allowance of £5,000 a year.
The new rates of tax on income above that allowance will be:
  • basic rate taxpayers: 7.5%
  • higher rate taxpayers: 32.5%
  • additional rate taxpayers:38.1%
See: Summer Budget 2015, para 2.57.
 
Personal savings allowance: From 6 April 2016, a new personal savings allowance will reduce the tax payable by basic and higher rate taxpayers on interest earned on savings. Basic rate taxpayers will not have to pay tax on the first £1,000 of interest received on savings while higher rate taxpayers will not have to pay tax on the first £500 of interest received. Additional rate taxpayers are not eligible for the allowance.
 
Banks and building societies currently automatically deduct 20% income tax on non-ISA savings and the government has announced in Summer Budget 2015 that this practice will cease from 6 April 2016.
 
It has also been announced that the government will publish a consultation on whether changes are required to the deduction arrangements currently applicable to other savings income. 
 
See: Summer Budget 2015, para 2.76.
 

Bad debt relief for peer-to-peer (P2P) industry

 
At Autumn Statement 2014, the chancellor announced a package of measures to support P2P and crowdfunding platforms by removing barriers to their growth. One of these measures was a new tax relief for lending through P2P platforms. This relief will operate so that, if a P2P loan is not repaid, the loss that the lender suffers on that loan will be set against the income that they receive on other P2P loans before that income is taxed.
 
HMRC published a technical note at March Budget 2015 setting out the proposed technical criteria for the relief including who should be able to benefit, when the relief can be obtained and the amount of relief to be made available. Draft legislation is expected later this year to be included in Finance Bill 2016.
 
See: Summer Budget 2015, para 2.74.
 

P2P withholding tax

 
At Autumn Statement 2014, the government also announced plans to introduce a withholding tax regime for income tax to apply across all P2P lending platforms from April 2017 so that P2P lending platforms would be required to withhold tax on interest earned at the basic rate.
 
The government will consult on these proposals with the industry over Summer 2015 to ensure that these proposals will work in practice. Legislation is expected to be introduced in Finance Bill 2016.
 
See: Summer Budget 2015, para 2.75.
 

Anniversary Games

 
Between 24 and 26 July 2015 at the Queen Elizabeth Olympic Park, the Sainsbury’s Anniversary games will be held. This will attract not only UK athletes but others of international standing. The government will exempt from UK income tax, non-UK resident sports people on any income received as a result of their performance at the games. The exemption will also apply to a UK resident for whom this activity is performed in an ‘overseas’ part of the year.
 
See: Summer Budget 2015, para 2.69; TIIN: 2015 London Anniversary Games; and OOTLAR, page 77.
 

Individual savings accounts (ISAs)

 
Extending ISA eligibility: The government announced the introduction of the ‘Innovative Finance ISA’, for loans arranged via a peer to peer (P2P) platform to enable P2P loans to benefit from the tax advantages within an ISA.
 
As announced at Budget 2014 and Autumn Statement 2014, a consultation was published on 17 October 2014 and updated on 8 July 2015, on the proposed approach to including P2P loans as ISA qualifying investments. The government’s aims are stated to be supporting savers, increasing the choice of investments to ISA investors and encouraging the growth of the P2P sector.
 
The government intends to use the proposed definition of ‘relevant agreements’ in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, article 36H for which P2P loans, including debt securities and equity offered via a crowdfunding platform, will be eligible for inclusion as ISA qualifying investments.
 
It’s worth noting that the government has confirmed its intention for P2P loans to become a regulated activity although the Financial Conduct Authority has chosen not to include P2P platforms within the scope of the Financial Services Compensation Scheme. However, this decision is due to be reviewed in 2016. 
 
See: Autumn Statement 2014, para 2.63; March Budget 2015, para 2.83; and Summer Budget 2015, para 2.77.
 
Making ISAs more flexible: The government will change the ISA rules to allow ISA savers to withdraw and replace money from their cash ISAs, within the tax year, without the replacement counting towards their annual ISA subscription limit.
 
The changes, which were announced at March Budget 2015 (para 2.85), will take effect on 6 April 2016 and will include cash held in stocks and shares ISAs. The changes will mean that ISA savers who need access to their ISA cash are not penalised if they then want to save more later in the tax year. ISA savers will need to replace any money withdrawn in the tax year the withdrawal was made, otherwise the replacement will count towards the following tax year’s ISA subscription limit. 
 
See: Summer Budget 2015, para 2.78.
 

Pensions

 
Taxation of pensions at death: As announced at Autumn Statement 2014, the government will reduce the 45% tax rate that applies on lump sums paid from the pension of someone who dies aged 75 and over to the marginal rate of the recipient from 2016/17.
 
From April 2015, lump sum death benefits paid from a registered pension scheme or non-UK pension scheme are taxed at 45% where the owner of the pension rights dies aged 75 or over. If the deceased was under the age of 75, from April 2015 these lump sum death benefits are not taxed unless they are paid out more than two years after the scheme administrator became aware of the death. The two-year rule does not apply to the pension protection lump sum death benefit of the annuity protection lump sum death benefit.
 
The government has confirmed that taxable lump sum death benefits will be subject to tax at the recipient’s marginal rate of income tax. Where the recipient is, for example, a trust or a company and so does not have a marginal rate the 45% charge will continue to apply.
 
These measures will be legislated in Summer Finance Bill 2015, to be published on 15 July 2015 and will apply from April 2016. 
 
See: Summer Budget 2015, para 2.79; and OOTLAR, page 57.
 
Unfunded employer financed retirement benefit schemes: The government will consult on tackling the use of unfunded EFRBS to obtain a tax advantage in relation to remuneration. 
See: Summer Budget 2015, para 2.80.
 
Lifetime allowance for pension contributions: The government will reduce the Lifetime Allowance (LTA) for pension contributions from £1.25m to £1m from 6 April 2016. Transitional protection for pension rights already over £1m will be introduced alongside this reduction to ensure that the change is not retrospective. The LTA will be indexed annually in line with CPI from 6 April 2018. These measures will be legislated in Finance Bill 2016. 
 
See: Summer Budget 2015, para 2.82.
 
Reduced annual allowance for top earners: The government will restrict the benefits of pensions tax relief for those with incomes, including pension contributions, above £150,000 by tapering away their Annual Allowance to a minimum of £10,000.
 
The measure will restrict pensions tax relief by introducing a tapered reduction in the amount of the annual allowance for individuals with income (including the value of any pension contributions) of over £150,000 and who have an income (excluding pension contributions) in excess of £110,000. In order to facilitate the taper, legislation will also be introduced to align pension input periods with the tax year as well as transitional rules to protect savers who might otherwise be affected by the alignment of their pension input periods.
 
These measures will be legislated in Summer Finance Bill 2015, to be published on 15 July 2015 and will come into effect from April 2016.
 
See: Summer Budget 2015, para 2.83; OOTLAR, page 60.
 
Pensions tax relief: The government will consult on whether and how to undertake a wider reform of pensions tax relief (PTR): Strengthening the incentive to save: a consultation on pensions tax relief.
 
PTR is designed to provide an incentive for individuals to defer their income until their retirement. However, the gross cost of PTR is significant. Including relief on both income tax and NICs, the government missed out on nearly £50bn of tax revenues in 2013/14. Consequently, the government is interested in considering suggestions on whether and how the current system of PTR could be reformed to strengthen the incentive to save for retirement.
 
The principles the government believes any reform should meet are:
  • it should be simple and transparent;
  • it should allow individuals to take personal responsibility for ensuring they have adequate savings for retirement;
  • it should build on the early success of automatic enrolment in encouraging new people to save more;
  • it should be sustainable.
The consultation will close on 30 September 2015.
 
See: Summer Budget 2015, para 2.84.
 
Pensions Wise: The government is extending access to the successful Pension Wise advisory service to those aged 50 and above, and launching a new comprehensive nationwide marketing campaign. This will ensure more people can access high-quality, impartial guidance on making the most of the new pension flexibilities.
 
See: Summer Budget 2015, para 2.85.
 
Equitable Life payment scheme (ELPS): The ELPS will close to new claims on 31 December 2015. As part of this, the government will undertake a further effort to trace remaining policy holders due £50 or more.
 
The ELPS was set up by the government to make payments to Equitable Life policyholders who suffered financial losses as a result of government maladministration which occurred in the regulation of Equitable Life. Once Britain’s oldest mutually – owned insurance company, Equitable Life was forced to close in 2000 after losing a £1.5bn court case, losing almost a million pension policyholders a total of £4.3bn. 
 
The government will also make a further payment to Equitable Life policyholders on Pension Credit who received 22.4% of their relative loss. This payment will be for an additional 22.4% and will be made in early 2016.
 
See: Summer Budget 2015, paras 2.86–2.87.
 

Inheritance tax and trusts 

 
Increased IHT nil rate band for main residence: The Chancellor confirmed in his Budget speech the pre-announced proposal to introduce an additional IHT nil rate band (NRB) for the main residence. It will be available with effect from 6 April 2017 when a residence is passed on death to one or more direct descendants, such as children or grandchildren. Direct descendants include a step-child, adopted child or foster child. The extra allowance will be phased in as follows:
 
 
The basic NRB will now remain at £325,000 until 5 April 2021, and thereafter the two elements of the NRB will increase together in line with the Consumer Price Index.
 
The main residence NRB will be transferable to a surviving spouse or civil partner, in the same way as the existing NRB. Hence the Chancellor was able to claim that the effective IHT threshold for a couple will rise to £1m in 2020/21. It will be ‘transferable’ even where the first death occurs before 6 April 2017, and the second death occurs afterwards. It appears that where the family home has been left to the spouse or civil partner on the first death at any time before 6 April 2017, the additional NRB is effectively backdated.
 
The sting in the tail, which was not pre-announced, was that the additional NRB will be progressively withdrawn for estates valued at more than £2m. It will be tapered away by £1 for every £2 by which the net value of the estate exceeds £2m (after deducting liabilities but before reliefs and exemptions). This relief is therefore aimed squarely at the moderately wealthy, who hold a large proportion of their wealth in their home, and will be of little benefit to the very rich.
 
The proposals as outlined in the TIIN introduce some interesting details and raise a number of questions too.
 
The relief applies to the deceased’s interest in a residential property which has been his or her residence at some point and is included in the estate at death. Where more than one residential property qualifies, the personal representatives will be able to choose which one should attract the additional NRB. Clearly the choice will be governed by the comparative values of the properties and who the beneficiaries are. Case law relating to CGT private residence relief on what constitutes a ‘residence’ will be persuasive.
 
It is not clear from the information available whether the residence in question must be the subject of a specific gift to direct descendants, or whether the value can be included as part of a residuary gift to them. If a specific gift is required, most people hoping to benefit from the relief will need to draft or re-draft their wills. If, as is more likely, a gift of residue will qualify, the calculation of the NRB could be complicated where other beneficiaries, such as an unmarried partner, take a share of the estate.
 
It has been argued that the proposal to focus the increased NRB on the family home will encourage people to retain their wealth in their home and this could have a detrimental effect on the property market. As a result, the government is proposing to include measures which preserve the relief even if the testator has downsized to a less valuable residence, or ceased to own a residence after 8 July 2015. The aim is to apply the additional NRB to the value of the former home. In recognition of the technical challenge inherent in such a solution, the government will publish a consultation on the proposals in September 2015.
 
As proposed, the additional NRB will only be available on death. It will not apply to lifetime transfers that become chargeable on death. This is a strange detail which will, if enacted, work against the downsizing principle as it will tend to deter parents from making lifetime gifts to their children for fear of being caught by the ‘seven year rule.’ They may downsize because they need a smaller home, but they will be encouraged to keep the excess proceeds to benefit from the additional NRB.
 
The published proposals do not address the potential issue of ‘upsizing.’ By singling out one particular asset for special relief, parents and grandparents will be encouraged, as far as practicable, to concentrate as much as they can afford in the value of their home, if only temporarily.
 
Initial legislation will be included in the new Finance Bill 2015, but the adjustments relating to downsizing and possibly other refinements will be deferred until Finance Bill 2016 after consultation.
 
See: Summer Budget 2015, paras 2.88 and 2.89; and OOTLAR, page 32.
 
Tax avoidance through multiple trusts: As announced at Autumn Statement 2014 and March Budget 2015, the government will introduce new rules to target tax avoidance through the use of multiple trusts and simplify the calculation of IHT on trusts rules, with the new rules to be introduced in a future Finance Bill.
 
The government had initially announced plans at Autumn Statement 2013 to allow just one nil rate band per individual, to be split across all relevant property trusts to simplify the calculation of IHT charges on relevant property trusts where property is settled into multiple trusts on the same day and by the same person with the value comprised in them not presently being aggregated when determining the rate at which IHT is charged. The purpose of the government’s proposed future amendment is to prevent the leakage of IHT through the use of multiple trusts by the same settlor. There are no proposed changes following the legislation that was published in draft on 10 December 2014.
 
See: Autumn Statement 2014, para 2.73; March Budget 2015, para 2.95; and Summer Budget 2015, para 2.93.
 
IHT changes to support the new IHT digital service: The government will amend existing legislation dealing with interest to support the introduction of the new IHT digital service as part of its new digital and online services strategy for agents and taxpayers.
 
As announced at Autumn Statement 2014 and March Budget 2015, as part of the government’s digital strategy to improve the process for customers and the administration of IHT, an online service will be provided in 2015/16 for the submission of IHT returns. The new rules will be introduced in the Summer Finance Bill 2015.
 
The amendments made by this clause are part of those changes and will ensure that the relevant provisions relating to late payment interest are updated and apply consistently when the new online service becomes available in 2015/16.
 
See: Autumn Statement 2014, para 2.74; March Budget 2015, para 2.92 and Summer Budget 2015, para 2.92.
 

Non-domiciliaries (non-doms)

 
At Summer Budget 2015 the government announced wide ranging reforms to the taxation of individuals domiciled outside the UK (non-doms). The changes relate to income tax, capital gains tax (CGT) and inheritance tax (IHT).
The changes to the taxation of non-doms will take effect on 6 April 2017 and will, broadly, be as follows:
  • IHT will be payable on all UK residential property owned by resident or non-resident non-doms regardless of whether the property is held directly or indirectly through an offshore structure. 
  • Non-doms who have been resident in the UK for more than 15 of the past 20 tax years will be deemed to be domiciled in the UK for all tax purposes.
  • Individuals who have a UK domicile of origin will no longer be able to claim non-dom status while they are resident in the UK.
See: Summer Budget 2015, paras 2.63, 2.64, 2.65, 2.90 and 2.91; and Technical briefing on foreign domiciled persons/Inheritance Tax residential property changes.
 
From 6 April 2008 a remittance basis charge (RBC) is payable if a non-dom is 18 or over, has to make a formal election to claim the remittance basis and is a long-term resident in the UK. The RBC is currently an annual charge but at Autumn Statement 2014 the government announced that it would consult on making the claim to pay the RBC apply for a minimum of three years to prevent non-doms from arranging their tax affairs so as to pay the charge occasionally. The consultation opened on 22 January 2015 and closed on 16 April 2015. The government has now confirmed that it will not introduce a minimum claim period for the RBC.
 
See: Summer Budget 2015, para 2.65.
 
Changes to the IHT treatment of enveloped UK residential property: The government announced that all UK residential property held directly or indirectly by non-doms will be subject to IHT from 6 April 2017.
 
Background: UK residential property can be held in many different structures. A common structure, even following the introduction of the Annual Tax on Enveloped Dwellings (ATED), is putting the company into an offshore company, whose shares are held by a non-dom or held by an offshore trust from which the non-dom can benefit (i.e. enveloping the property).
 
The principal benefit of such a structure is the IHT protection it affords by virtue of the non-dom effectively converting the UK residence to excluded property for IHT purposes. In the case of property held through an offshore company, the residence is protected from IHT on the death of the non-dom on the basis that non-doms are only subject to IHT on their UK situated assets and the shares in the offshore company are not located in the UK (i.e. the shares are excluded property). In the case of a trust, the trust will be holding the excluded property shares and so ten year and exit charges will not apply to the value of the UK residence. 
 
References below to ‘shares’ are to the excluded property shares in the offshore company which owns the UK residential property.
 
The new IHT charge: In order to bring such UK residential properties within the scope of IHT, the government will amend the excluded property provisions. The changes will ensure that offshore companies and other structures cannot be considered excluded property if they derive their value directly or indirectly from UK residential property (and consequential amendments to the relevant property regime will be made). 
 
The main features of the charge are:
  • all UK residential property will be subject to the charge, whether the property is occupied or let;
  • the charge will apply to UK residential property of any value;
  • the charge will be imposed on the occasion of a chargeable event, including:
    • death of the shareholder, wherever resident;
    • a gift of the shares into trust;
    • the trust’s ten year anniversary;
    • a distribution of the shares out of the trust;
    • death of the donor within 7 years of gifting the shares; and
    • death of the donor or settlor who benefits from the gifted UK property or shares in the 7 years prior to death;
  • any borrowing taken out to purchase the UK residential property will be deductible when calculating the charge (although note the restrictions on deductibility of debt for IHT purposes);
  • the same reliefs (e.g. the spouse exemption) will apply as if the shares were owned directly by the non-dom (although such reliefs may not be available if the shares are held by a trust); and
  • the gift with reservation of benefit rules will apply similarly to the shares as they do to UK residential property held directly by non-doms and UK domiciled individuals.
Complications will arise in less straightforward situations, such as if the offshore company owns other assets (UK or foreign) or where groups of companies are in a structure. The government will consult on the detail of proposals to ensure only the value of UK residential property is brought within the new charge.
 
Interaction with the non-residents CGT charge on disposal of UK residential property and ATED: The same properties as those covered by the non-residents CGT legislation will be subject to the charge. Consequently, diversely held vehicles holding UK residential property will not be subject to the charge.
 
Furthermore, the IHT charge will be based on the ATED rules but with important differences:
  • the new IHT charge will apply to UK residential property of any value (although the nil rate band may be available in the case of low value property) whereas ATED currently only applies to properties worth in excess of £1m; and
  • there will be no exemption from the new IHT charge for let properties as there is with ATED.
Further points: The new charge does not affect UK domiciled individuals or trusts which are not excluded property trusts and also does not apply to assets other than UK residential property. Enforcement, liability and reporting obligations will be addressed through consultation. Anti-avoidance legislation in this area will be reviewed and any planning may come within the scope of the strengthened DOTAS (FA 2015, Sch 17) regulations.
 
This measure, like the introduction of ATED, is designed to encourage de-enveloping of UK residential property. However, de-enveloping may come with other tax costs which the government has said it will consider during the consultation process.
 
The changes are intended to be effective from 6 April 2017 through Finance Bill 2017, following a consultation to be published in early autumn and a later consultation on draft legislation.
 
See: Summer Budget 2015, para 2.90.
 
Deemed domicile for income tax, CGT and IHT: Individuals who have been resident in the UK for more than 15 of the past 20 tax years but are foreign domiciled under general law will be deemed domiciled for all tax purposes in the UK (the 15 year rule) from 6 April 2017.
 
Background: Currently an individual may be domiciled in the UK under general law or, for IHT purposes only, under the deemed domicile rules. There are two separate rules in Inheritance Tax Act 1984 s 267 that can apply deemed domiciled status for IHT:
  • the individual was domiciled in the UK under general law at any point in the last three years (the three year rule);
  • the individual has been resident in the UK for not less than 17 of the last 20 years (the 17 year rule).
In addition, IHTA 1984 s 267ZA allows someone who is married or in a civil partnership and not domiciled in the UK to elect to be treated as if they were domiciled in the UK (a domicile election). 
 
The 3 year rule continues to attach a deemed UK domicile to an individual who has left the UK and taken sufficient steps to lose their UK general law domicile. The deemed domicile continues for three years after the general law domicile has been lost. This three year period does not refer to tax years.
 
The 17 year rule applies to individuals who have come to the UK and remained resident here for a prolonged period, but without otherwise acquiring a UK domicile under general law. It also continues to apply for three complete tax years to an individual who leaves the UK after acquiring a UK deemed domicile. This means that they can only lose their deemed domicile under the 17 year rule by being non-resident for four tax years (the 4 year rule).
 
Both the 3 year rule and the 17 year rule need to considered when an individual leaves the UK. 
 
Where a double tax treaty in relation to UK IHT and a foreign equivalent has been entered into between the UK and a foreign territory, double tax relief for IHT may apply. The treaties with India, Pakistan, France and Italy were in place before 1975 during the estate duty era and have different rules to eliminate double taxation than more recent treaties and can, in some circumstances, override the 3 year rule and the 4 year rule.
 
The 15 year rule: The 15 year rule will apply as follows:
  • The government will consult on whether split years of UK residence will count towards the 15 years or whether complete tax years of UK residence are required. 
  • From the 16th tax year of UK residence:
    • a non-dom will no longer be able to access the remittance basis of taxation and will be taxed on an arising basis on their worldwide personal income and gains; and
    • IHT will be paid on the non-dom’s worldwide personal assets.
  • The £90,000 RBC currently payable by a non-dom who wants to access the remittance basis and who has been resident in at least 17 of the last 20 tax years will cease to be relevant from 6 April 2017 since a non-dom will be taxed on an arising basis after 15 years. The £30,000 and £60,000 RBCs will remain.
  • The government will consult on the need to retain a de minimis exemption beyond 15 years where total unremitted foreign income and gains are less than £2,000 per year (ITA 2007s 809D(2)).
  • The new rules will be effective from 6 April 2017 irrespective of when someone arrived in the UK, and there will be no grandfathering rules for those already in the UK.
  • The present rules will apply to those who leave the UK before 6 April 2017 but would nevertheless be deemed domiciled on 6 April 2017 under the 15 year rule.
  • A non-dom who leaves the UK after becoming deemed domiciled under the 15 year rule has to spend more than five tax years outside the UK to lose their deemed domicile (the five year rule). This is consistent with the requirement to be non-resident for five years under the temporary non-residence rules.
  • The government will also consult on whether other provisions need to be changed such as the domicile election and the effect of the change in relation to the old estate duty treaties.
  • To ensure that UK domiciliaries (UK doms) and non-doms are treated the same under the new rules, UK doms who leave after 5 April 2017 having been here for over 15 years will also be subject to the 5 year rule even if they intend to emigrate permanently and settle in a particular place on the day of their departure. The government will consult on the detail of the various interactions between the 5 year rule and the existing 3 year and 4 year rule.
  • If an individual spends more than five tax years abroad and then returns to the UK, while remaining non-dom under general law, the 15 year clock will restart. This will not apply to returning UK doms (who will be subject to different rules below).
  • The deemed domicile of the long-term resident non-dom has no effect on the domicile status of the non-dom’s children whose actual and deemed domicile position is looked at independently.
  • Once deemed domiciled under the 15 year rule, non-doms will not be able to claim reliefs such as the remittance basis for overseas chargeable earnings under ITEPA 2003 s 22. There will be consultation on the employment-related securities provisions. 
  • Non-doms who have set up an offshore trust before becoming deemed domiciled in the UK under the 15 year rule will not be taxed on trust income and gains that are retained in the trust and such excluded property trusts will have the same IHT treatment as present (subject to the proposals referred to in Changes to the IHT treatment of enveloped UK residential property).
  • Non-doms who are deemed domiciled in the UK under the 15 year rule will be taxed from 6 April 2017 on any benefits, capital or income received from any trusts on a worldwide basis. The government will consult on the necessary changes to the transfer of assets regime and CGT trust provisions. 
  • Transitional rules relating to trusts were introduced for non-doms in 2008 (e.g. rebasing provisions). The interaction of these rules with the new regime after the non-dom becomes deemed domiciled in the UK will be subject to consultation.
See: Summer Budget 2015, para 2.63, 2.64 and 2.91.
 
UK doms returning to the UK: The government will introduce a rule from 6 April 2017 which means that UK doms returning to live in the UK, having acquired a domicile of choice elsewhere, will be treated as UK domiciled (for all tax purposes) as soon as they become UK resident again. This measure applies to UK doms (i.e. those with a UK domicile of origin, not a UK domicile of choice) and ‘UK doms’ in this context refers to individuals with a UK domicile of origin only.
 
Background: A UK dom can acquire a domicile of choice in another country if they live abroad and have the intention to settle there permanently or indefinitely.Domicile is a matter of general law, and tax treatment has so far been determined by an individual’s domicile position under general law (except in the case of IHT, where an individual can be deemed UK domiciled under IHTA 1984 s 267).
 
For IHT purposes, under IHTA 1984 s 267(1)(a), a person who had an actual UK domicile will remain UK domiciled for three years once a domicile of choice elsewhere has been established (the three year rule referred to above). The clock on the three years can start running as soon as an individual leaves the UK (if they also have the necessary intention to settle permanently elsewhere) or only once the decision has been taken not to return to the UK, which may happen many years after leaving the UK. Similarly, if a UK domicile of origin is revived at any stage, the three year rule will again come into effect.
 
Having acquired a domicile of choice elsewhere, a UK dom who returns to live in the UK can maintain that foreign domicile of choice, if they continue to have the intention of settling abroad. Acquiring and maintaining a domicile of choice outside the UK can enable the individual to undertake IHT planning (such as setting up excluded property trusts). This will no longer be possible under the changes being introduced.
 
Returning to the UK: A UK dom will from 6 April 2017 become UK domiciled as soon as they become UK resident again.
 
Leaving the UK again: A UK dom will lose their UK dom status again in the tax year after departure only if both of the following are satisfied:
  • the UK dom did not spend more than 15 tax years here; and
  • they did not acquire an actual domicile in the UK under general law when they were in the UK (i.e. their domicile of choice, as a matter of general law, remained in place).
If neither of these conditions are satisfied (i.e. the UK dom spent more than 15 tax years and became actually domiciled in the UK), the 3 year rule and 5 year rule both apply and UK domicile will only be lost on the later of those events.
 
On the other hand, if the UK dom has returned to the UK for more than 15 tax years but not become actually domiciled, the 5 year rule will apply. If the UK dom has become actually domiciled but came back to the UK for less than 15 years, the 3 year rule will come into effect again, and it will take another three years before they lose their UK dom status again.
 
Timing and scope of new measure: Although the new measure is framed by reference to the IHT rules, the rule will apply for all tax purposes.
 
This measure will apply to returning UK doms even if they returned prior to 6 April 2017. UK doms who leave after 5 April 2017 will be subject to the 5 year rule.
 
The measure will also affect trusts set up by UK doms (while they were non-doms) who become UK resident on or after 6 April 2017. The same tax rules apply for those trusts (for income tax, CGT and IHT purposes) as they would for any other UK dom.
 
As mentioned above, further consultation on the interaction of various deemed domicile rules for UK doms and non-doms will take place. The consultation will be published in the early autumn.
 
See: Summer Budget 2015, paras 2.63, 2.64 and 2.91.
 

Administration and anti-avoidance

 

Common Reporting Standard developments

 
The government will legislate to require financial intermediaries (including tax advisers) to notify their customers about the Common Reporting Standard (CRS), the penalties for evasion and the opportunities to disclose.
 
The CRS is a global standard for the automatic exchange of financial account information in tax matters, developed under the auspices of the Organisation for Economic Cooperation and Development (OECD). Under the CRS, jurisdictions obtain financial information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.
 
HM Treasury will be given the power to make regulations to impose customer notification obligations on financial institutions, tax advisers and other professionals. This may include obligations to notify customers or clients of certain information relating to information HMRC will receive under international agreements to improve tax compliance, the law relating to offshore tax evasion and associated criminal and civil penalties, and opportunities that HMRC will make available to individuals to disclose their tax affairs. These measures will be legislated in Summer Finance Bill 2015 and are expected to take effect in early 2016.
 
See: Summer Budget 2015, para 2.168; and OOTLAR, page 112.
 

Additional resource to target non-compliance by wealthy individuals

 
In a continued crackdown on tax avoidance and evasion, the chancellor announced that the government will provide additional resource to HMRC to allow it to identify and tackle tax evasion and other non-compliance among wealthy individuals by extending HMRC’s Customer Relationship Model to individuals with net wealth between £10–20m. The Customer Relationship Model, run by HMRC’s High Net Worth Unit, currently only applies to individuals with wealth in excess of £20m.
 
It was announced that additional resource will also be committed to pursuing more criminal investigations against wealthy individuals evading tax. This is part of a wider plan to increase funding to HMRC by a total of over £60m by 2020/21 to allow HMRC to step up criminal investigations into serious and complex tax crime, focusing on wealthy individuals and corporates.
 
The government will also consult on enhancing the information reported to HMRC by wealthy individuals and trustees. 
 
See: Summer Budget 2015, para 2.180.
 

Additional specialist personal tax (SPT) resource

 
The government will invest an additional £36m over five years from 2016 to tackle serious non-compliance by trusts, pension schemes and non-domiciled individuals.
 
See: Summer Budget 2015, para 2.181.
 

IR35 reform

 
The government has announced that it will engage with stakeholders on how to improve the effectiveness of existing intermediaries legislation (IR35).
 
See: Summer Budget 2015, para 2.183.
 

Interest on tax-related judgment debts

 
The rules on the rate of interest on tax-related debts owed to or by HMRC will be changed so that there is no longer a different rate if the debt follows a court action.
 
Under current rules, the interest rate on debts arising from court judgments is set by the Judgments Act 1838 and County Courts Act 1984 at 8%. This rate will be disapplied where the debt relates to a tax matter to which HMRC is a party. Instead, the late payment interest rate will apply where HMRC is the creditor, and the Bank of England base rate plus 2% (subject to future changes) will apply where HMRC is the debtor.
 
See: Summer Budget 2015, para 2.167 and TIIN: Simplification of HMRC debtor and creditor interest rate.
 

Large business tax compliance

 
The government is investing further resources into large business tax compliance, as part of its efforts to tackle tax evasion and avoidance. In addition it will legislate ‘to improve transparency of tax strategies’. There will be a consultation on ‘special measures’ for businesses that persistently engage in aggressive tax planning, and a voluntary Code of Practice setting out the standards large businesses should meet in their dealings with HMRC.
 
See: Summer Budget 2015, paras 1.175 and 2.176.
 

HMRC information powers: tackling the hidden economy

 
HMRC will be empowered to acquire data from online intermediaries and electronic payment providers with the aim of finding those operating in the hidden economy. The government will consult on this measure with the intention of introducing legislation in FB 2016. 
 
See Summer Budget 2015, para 2.172.
 

Disposal of stock other than in trade

 
Legislation will be included in Summer Finance Bill 2015 to ensure that the tax rules applying to transfers of trading stock or intangible fixed assets between related parties bring into account the correct value.
 
Market value rules that typically treat the transfers as taking place at market value can be overridden by the transfer pricing legislation so they do not apply. The proposed revisions, which have effect for transfers made on or after 8 July 2015, ensure that transactions between related parties that are subject to the transfer pricing legislation can still be further adjusted under the market value rules so that overall, disposals are brought into account for tax purposes at full open market value.
 
See: Summer Budget 2015, para 2.178, TIIN: Corporation Tax and Income Tax: disposal of stock other than in trade, and corporate intangibles and policy paper and draft legislation: Disposal of stock other than in trade, and corporate intangibles.
 

Measures pre-announced

 
The following anti-avoidance measures were previously announced:
  • Serial avoiders: The government will publish a further consultation on sanctions for serial users of defeated tax avoidance schemes, following an earlier consultation on this topic that was published in January 2015. The proposed measures include a special reporting requirement, a surcharge, and ‘naming and shaming’ serial avoiders. In addition, the promoters of tax avoidance schemes (POTAS) regime, also known as the ‘high-risk promoters’ regime, would be widened by bringing in promoters whose schemes are regularly defeated. Legislation to implement these measures will be in Finance Bill 2016. See: Summer Budget 2015, para 2.174
  • GAAR penalty: The government will consult on introducing a general anti-abuse rule (GAAR) penalty and new measures to strengthen the GAAR. A previous consultation on introducing a penalty where arrangements are counteracted under the GAAR was published in January 2015. The measures would be included in Finance Bill 2016. See: Summer Budget 2015, para 2.175
  • Direct recovery of debts: Summer Finance Bill 2015 will include measures originally proposed in Budget 2014, to increase HMRC’s powers to recover tax and tax credit debts directly from taxpayers’ bank accounts. This measure has been widely criticised, and the government has promised that there will be ‘robust safeguards’ including a county court appeal process and a face-to-face visit to every taxpayer before they are subject to this form of debt recovery. Draft legislation was published in Finance Bill 2015 but was dropped as part of the ‘wash up’ to enact the Bill before the general election. The draft did not include a requirement for a face-to-face meeting and it remains to be seen whether this will be placed on a statutory footing. See: Summer Budget 2015, para 2.170.

This summary was provided the LexisPSL and private client teams, and includes some commentary from Tolley Guidance. LexisPSL provides tax lawyers with practice notes and precedents, with links to trusted sources. See www.lexisnexis.com/uk/lexispsl/tax/home. 

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