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Autumn Statement and 2014 Finance Bill

George Osborne delivered a rather predictable Autumn Statement on 5 December followed a week later by the publication of a plethora of consultation responses and draft legislation for inclusion in the 2014 Finance Bill. The main headlines for private clients and trustees are discussed below. In addition the tax rates and allowances for the 2014/15 tax year were announced and the introduction of a married couple's income tax allowance confirmed. There was also, once again, an emphasis on tackling tax avoidance and evasion.

Capital Gains Tax (CGT): Non- UK residents

As widely rumoured, CGT will be introduced on "future" gains made by non-residents disposing of UK residential property. Currently non-residents are not generally subject to CGT in the UK and it is curious that the tax is only to apply to UK residential property. However, this change will not take effect until April 2015, which is a more generous timescale than anticipated.

No further details are available at present and a consultation on the proposals will be published "early in the New Year". We will be particularly interested to see whether re-basing will be available (as is implied), how the new provisions will apply to non-resident trustees and how they will interact with existing tax provisions such as the ATED-related CGT charge (which applies to 'non-natural persons' disposing of 'enveloped' UK residential property worth more than £2m). It will also be interesting to examine the interaction with principal private residence relief since there may be some cases where a person has their main residence in the UK for PPR purposes despite the fact that they are non-resident under the residence rules.

CGT: principle private residence relief (PPR)

A surprise announcement was the reduction in the final period of exemption for PPR from 36 to 18 months for disposals made on or after 6 April 2014. Currently, the final 36 months of ownership of a property automatically qualifies for the PPR exemption from CGT provided that the property has been the taxpayer's only or main residence at some point (however briefly), irrespective of the factual position and even if the taxpayer is claiming PPR on anther property. From April, this period will be halved. The rationale is to reduce the incentive for owners to "flip" between multiple homes (i.e. switch an election for PPR from one property to another shortly before sale).

This change won't affect owners who continue to live in their home as their main residence up to the date of disposal but may affect owners who have moved out but then take a while to sell. The draft legislation does contain an exception, where the 36 month period will continue to apply, for individuals (and their spouses) who are disabled or go into a residential care home long-term (for 3 months or more) and who have no other applicable dwelling-house (whether held individually or in a trust under which they have a right to occupy). If this is likely to be an issue for any clients, please contact your usual Boodle Hatfield adviser for further details.

Inheritance Tax (IHT) and Trusts

Regular readers of this newsletter will be aware that, last summer, HMRC consulted on proposals to simplify the calculation of IHT on "relevant property" trusts. These include all discretionary trusts (whenever made) and most lifetime trusts created since March 2006. Currently, these trusts are subject to IHT at 10-yearly intervals and whenever capital is paid out of the trust at a maximum rate of 6%, calculated in accordance with a complicated formula. The main proposals were to levy a 6 per cent flat rate and to change the method of calculation, principally by ignoring lifetime transfers made by the settlor and instead splitting the nil rate band available to the trust between all the trusts made by the same settlor.

The proposals were met by a scathing set of responses. There was widespread condemnation of HMRC attempting to introduce fundamental tax changes under the guise of "simplification". It was therefore announced in the Autumn Statement that HMRC are going to think again and will issue a further consultation on the proposed splitting of the nil rate band between trusts "with a view to delivering this change alongside simplification of trust calculations in 2015." This is welcome news in that the proposals were ill thought out and likely to prove more onerous for trustees than the current rules but unfortunately this does mean that the period of uncertainty will continue for at least another year.


In the meantime, legislation will be introduced with effect from 6 April 2014 on two measures concerning the taxation of relevant property trusts. Firstly, returns will need to be delivered and the tax due paid within 6 months of the end of the month in which the chargeable event occurs. Secondly, a new deeming rule will apply treating income accumulated for more than 5 years as trust capital and subject to IHT on ten year anniversaries (with no proportionate reduction for the fact that it has not been relevant property for the entire period). It is assumed that (rather generously) income held for less than five years over which no decision to distribute or accumulate has been made would retain its character as income and would remain outside the scope of the 10 year charge. There is an exclusion from this new deeming rule for income which is (or is invested in) excluded property.

Disabled beneficiary trusts

With effect from 5 Dec 2013, a discretionary-type disabled trust (which is treated as a qualifying interest in possession trust for IHT purposes) will have the benefit of the CGT 'uplift' on the beneficiary's death (i.e. in the same way as an actual interest in possession trust for a disabled person).

More generally, the definition of "disabled person" is being amended (again) from 2014/15 to include those in receipt of the mobility component of the disability living allowance at the higher rate, or the mobility component of the personal independence payment at either the standard or enhanced rate.

Cultural gifts scheme (CGS) - estate duty

The CGS was introduced from April 2013 to provide income tax and CGT incentives to individuals making lifetime gifts of culturally significant objects to the nation. A collection of original manuscript Beatles lyrics were gifted to the British Library under this scheme last year. However, there was a "technical flaw", in the legislation so that donors of objects on which there was a latent estate duty liability would be better off donating the object under the CGS rather than selling it on the open market, which was not the original intention. Therefore further legislation will be introduced in the 2014 Finance Bill to correct this anomaly so that a gift to the CGS will trigger an estate duty charge (where relevant) limited to the excess estate duty over the maximum rate of IHT (40%).

Social investment tax relief

New income tax and CGT reliefs are to be introduced for investments made and gains accrued on or after 6 April 2014 on certain qualifying assets (broadly shares and debt instruments including simple loans) in "social enterprises", which include community interest companies and community benefit societies which are not charities, as well as charitable bodies for such purposes. The rate of income tax relief will be announced at Budget 2014. If a sum equal to a chargeable gain is invested, holdover relief will be available on making a qualifying investment and CGT will be postponed until the investment is disposed of.

Transfer of Assets Abroad

HMRC have confirmed that there will not now be any legislative changes (as originally proposed in a consultation published in 2012) to the matching rules which match certain income accruing to offshore trusts and/or companies with benefits received by UK-resident individuals so as to impose an income tax charge on the recipient beneficiary. Instead revised guidance to improve clarity and certainty of these rules will continue to be developed although no time scale is given.

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