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Budget 2017 - What's new for private clients?

Yesterday's Budget was a low-key affair for private clients, perhaps the quietest for over a decade. Few tax measures were mentioned in the speech itself and only a random selection of interesting items appeared in the supporting documents.

Are we becoming even more xenophobic?

We have already had two Finance Acts this year, following an hiatus after the unexpected June election result. The Finance (No 2) Act became law last week, introducing a sea-change to the taxation of non-doms, "backdated" to 6 April 2017. In summary:

  • Non-doms will become deemed domiciled for all tax purposes once UK resident for 15 out of the previous 20 tax years. So they will acquire a deemed domiciled for IHT a little earlier than before and, more fundamentally, will no longer be able to claim the remittance basis for income tax and CGT indefinitely.
  • Those born in the UK with a UK domicile of origin who have subsequently acquired a domicile of choice elsewhere but then become resident in the UK again will be treated as UK domiciled from the date of their return (for income tax and CGT) or their second year of tax residence (for IHT) broadly for the duration of their stay.
  • Trusts established by resident non-doms before they become deemed domiciled can roll up income and gains offshore tax-free until the trust is "tainted", eg. by funds being added (directly or indirectly) after the settlor has acquired a deemed domicile.
  • UK residential properties held indirectly through overseas companies and associated loans are within the scope of IHT.

Yesterday's Budget confirmed that further anti-avoidance measures aimed at offshore trusts will be introduced from April 2018. These measures had already been announced and, in essence, provide that: it will no longer be possible to 'wash out' trust gains by payments to non-residents; capital payments made to a close family member of a UK resident settlor will be taxed to CGT and income tax on the settlor; and, where a non-resident beneficiary receives a distribution from a trust and then makes an onward gift (directly or indirectly) of all or part of it to a UK resident, the original payment will be taxed as if received by that UK recipient.

Compliance and transparency reign supreme

The net continues to tighten for non-compliance, particularly in relation to offshore avoidance and evasion. In conjunction with the OECD and EU, the government plans to require designers of offshore structures which could be misused to evade taxes to notify HMRC of both the structures and the clients using them. The PSC (Persons with Significant Control) register for companies was introduced in June 2016, legislation was recently put in place for the new Trusts Register (requiring HMRC to be notified of the "beneficial owners" of UK express trusts and non-UK trusts that incur UK tax liabilities) and the Stock Exchange is busily attributing LEIs (Legal Entity Indentifiers) to all trusts in order to facilitate a global reference system for parties to financial transactions. There really is "no place to hide" now, which perhaps reflects some of the fallout from the Panama and Paradise Papers.

HMRC will also consult in the Spring on extending Assessment time limits for non-deliberate offshore tax non-compliance, enabling them to assess at least 12 years of back taxes without needing to establish deliberate non-compliance.

UK trusts are destined to be in the limelight again

There is a huge wave of "populism" and trusts have been an easy target for journalists. Perhaps we should not therefore be surprised by an intriguing announcement yesterday, in just two lines of text in the overview document: "The government will publish a consultation in 2018 on how to make the taxation of trusts simpler, fairer and more transparent". Until we see the consultation we can only speculate on what more is in store for trusts and it is not even clear which taxes might be in point, although IHT may well be a candidate. Indeed, this might explain the House of Commons briefing paper on IHT issued to MPs in July 2017 which covered the structure, history, rationale and proposals to reform IHT over the last 20 years. That said, the government had a look at IHT trust simplification only a few years ago by launching two back-to-back consultations which eventually led to only minor changes.

Any proposals for making tax on trusts fairer would of course be welcome. For example, there is no rationale for subjecting trusts to an income tax rate of 45% above the first £1,000 when individuals only pay the additional rate on income exceeding £150,000. But the reference to transparency again sounds ominous.

Real property is immoveable and so an easy target

One radical development was the launch of a consultation on proposals to tax gains realised by non-residents (individual owners, trusts and companies, including those widely held) from disposals of all UK property, bringing commercial property owned by non-residents into the CGT net from April 2019. Maybe this should not have been surprising because, in the last few years, the tax treatment of UK residential property owned by non-residents has been increasingly aligned to that of UK residents. But the government is also now planning a tax charge if non-residents sell property-rich vehicles, so tax will bite if the vehicle (often a non-resident company) sells the land or if a shareholder sells his shares. This is a big change and will have a wide impact. The new tax (whether on disposals of non residential land or disposals of shares in property-rich vehicles) will apply to gains arising on or after April 2019, effectively a rebasing of commercial property to that date so historic gains will not be caught

A crumb of comfort perhaps?

Some hope on the horizon is that IHT reliefs for agricultural and business property might be left alone. An independent research paper, published alongside the Budget, looked at the influence of these reliefs on estate planning. It concluded that the reliefs are not being abused, the public's understanding of them is quite limited and they are not generally used for IHT avoidance. Instead, they prevent the break up of family farms and businesses which is, of course, exactly what they are intended to do.

But HMRC want their money up front!

Finally came a surprise announcement that certificates of tax deposit (CTDs) will be abolished with almost immediate effect. No new CTDs can be purchased on and after 23 November but existing certificates will continue to be honoured until 23 November 2023. Any then remaining should be submitted promptly to HMRC for a refund. So it will no longer be possible to hedge one's bets and buy a certificate to cover a possible tax liability without any risk of an interest charge.

 

This article first appeared in the Tax Journal Budget Special on 23rd November 2017

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