UK: Private Client Tax: In The Spotlight - A Summary Of Current Tax Issues Affecting Individuals

Last Updated: 16 April 2012
Article by Richard Mannion, David Chismon, Andrew McKenna and Mark Wingate

Budget 2012

By Richard Mannion

In the weeks leading up to the 2012 Budget the rumour mill was working overtime. We had stories about:

  • the 50% top rate first staying and then going
  • pensions tax relief being restricted
  • the personal allowance going up
  • a new mansion tax
  • a new tycoon tax
  • the closing down of SDLT avoidance
  • and on it went.

In part, this was no doubt a by-product of the Coalition Government with the two parties setting out their respective aspirations in public.

However, Budgets under the Coalition Government should be less theatrical than we became used to in the past, with fewer rabbits appearing from the Chancellor's hat. This is because the Government has introduced the Tax Policy Framework which includes a strict timetable for any changes to be announced in a spring Budget, followed by consultation during the summer, leading to the publication of draft legislation in the autumn which will take effect from the following 6 April.

This means that most changes to allowances and tax rates will be fixed a year before they take effect, so we now have a good idea of the allowances and tax rates that will apply from April 2013.

The personal allowance will be £9,205 and this will benefit those with taxable income up to about £41,500, although the change to the higher rate threshold will mean that those with incomes between £116,000 and £158,000 will pay more tax.

The top rate of tax will be 45% which means that taxpayers with incomes exceeding £158,000 will see their tax bill reduce.

The Chancellor is looking to fund the decreases by increases elsewhere in order to end up in a neutral position – some of those increases will come from changes to the SDLT system.

The rate of SDLT will be increased to 7% on the purchase of residential properties where the chargeable consideration exceeds £2m (up from 5%).

A new higher rate of 15% will be applied to the acquisition of high value residential properties by certain types of 'non-natural' persons where the chargeable consideration is more than £2m. These structures were widely used by non-domiciled individuals who wanted to keep the property out of the IHT net rather than to avoid SDLT and those non-domiciled individuals will have to consider how else they can manage their IHT position.

Holiday home businesses should check new tax rules

By David Chismon

Business property relief (BPR) can potentially save IHT relief at 40% so an individual with business assets worth £1m could save tax of £400,000 by ensuring that BPR is available.

However, not all holiday lettings businesses qualify for this valuable tax break. One of the main tests to obtain BPR is that the owner must be conducting a business which is not primarily an investment business. Therefore, a holiday owner has to provide some ancillary services to clients rather than merely the accommodation.

A recent court case considered the distinction between a property used for a qualifying business and a property held as an investment. In the Nicollette Pawson (deceased) v HMRC case, the taxpayer successfully argued that the holiday accommodation did qualify for BPR. The tribunal was convinced that the need to constantly find new occupants, and the fact that additional services were provided over and above the bare upkeep of the property, meant that the property in question was a business asset and definitely not an investment.

As with many court cases the decision turned on its facts but this is a very useful ruling for owners of furnished holiday accommodation. At the time of writing HMRC has not appealed. The key point is to ensure that additional services are being provided compared to an ordinary property letting, but those additional services following this case may not need to be onerous. For example, the additional services in the Pawson case included the fact that the property was cleaned between lettings, it was heated and hot water was turned on before guests arrived. In addition it was fully furnished and the kitchen was fully equipped and these services were provided for each letting. These services are fairly typical and it is welcome news that these are less than HMRC's view, which would require the owner to be much more hands on with their guests.

Owners of holiday lets should be aware that there are a number of other requirements to ensure BPR is available and professional advice should be sought as it is important to have all the necessary conditions in place to protect the potentially substantial IHT savings.

Important: recent changes to the LDF

By Andrew McKenna

HMRC continues to pursue outstanding tax liabilities arising from offshore assets through its recently set up Offshore Co-ordination Unit (OCU). The UK-Swiss tax agreement looms large in 2013, and there have been recent changes to the Liechtenstein Disclosure Facility (LDF).The LDF continues to be the most beneficial facility to deal with outstanding tax issues involving both offshore and onshore matters.

The deadline for participation has now been extended until 31 March 2016. However, the beneficial terms still only apply to the years 1999 to 2009 inclusive.

The Liechtenstein financial community has increased the level of investment required to acquire a relevant asset in Liechtenstein which enables participation in the LDF. Previously, investments as low as £10,000 were acceptable. Now, at least £50,000 of funds or assets will have to be invested. It makes sense to act sooner rather than later as this may rise even further.

As part of the new LDF processes, a certificate of relevance must be obtained from the Liechtenstein intermediary which effectively proves the investment into the asset and the nature of the relationship with the bank. This has slowed down the speed of LDF registration as the certificate is needed pre-registration and will only be issued once the funds have been transferred and all the original account paperwork has been supplied to the bank.

Interestingly, individuals can now self-certify that they are tax compliant in response to a request from a Liechtenstein intermediary about their tax affairs. Previously, this had to be certified by a UK tax practitioner or other similar professional person. In comparison, the Swiss-UK tax agreement will require such professional certification. A word of caution however, the backing for that self- certification may be requested in the future and those found to have incorrectly certified themselves will be open to severe action from HMRC if discovered.

These changes affect the LDF process but they do not detract from its beneficial terms for those non-compliant individuals who wish to put undisclosed matters right. The amount of tax payable under a LDF settlement should invariably be significantly less than would be the case under both the Swiss agreement and the normal HMRC enquiry process.

A tax incentive to encourage philanthropy in the art market

By Mark Wingate

From April 2012 the donors of pre-eminent works of art will achieve significant lifetime tax savings.

The new scheme allows the potential donor to offer to give a pre-eminent object to the nation at a self-assessed value. If the donation proceeds, the donor achieves a tax reduction as a fixed percentage (30%) of the object's agreed value which will be set off against the income tax and capital gains tax payable under the individual's self-assessment. Donations can also come from companies, for which the fixed percentage corporation tax reduction is 20%. The scheme is not available to trustees.

An individual may apply the tax reduction against the tax liability of the year the gift is registered or any of the succeeding four tax years. The tax benefit can be allocated across years in whatever amounts they wish. The gift itself is free of IHT.

Objects or collections may be pre-eminent if they have an especially close association with our history and national life; are of special artistic or art-historical interest; are of special importance for the study of a particular form of art, learning or history; or have an especially close association with a particular historic setting.

The existing acceptance in lieu (AIL) panel of experts will make the first assessment of gifts and valuations. It will agree values and decide where the objects should be located. The donor will make an absolute gift of the object to the nation and the panel will lend it to an appropriate establishment in the UK that is open to the public. That establishment will be responsible for ensuring the object remains in good condition, is available to the public and is fully protected.

The annual fund will be £30m in total for both the AIL and pre-eminent objects regimes – an increase of £10m over the current budget. It has been concluded that acceptance of offers will be on a first come, first served basis in the year. Any interested taxpayer should plan for making an application at the very start of the tax year to maximise their chance of acceptance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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