UK: Switzerland UK Budget 2014 Analysis

No surprises, but some significant changes

Despite the usual rumours, today's UK Budget was, at least in tax terms, one of the more uneventful Budgets in recent years. Nevertheless, there were a few headline-grabbing announcements (including changes relating to pensions and the introduction of a new GBP1 coin) and also some significant announcements hidden in the fine print. We set out below the personal tax highlights which are primarily relevant in an international context.

UK real estate

ATED (annual tax on enveloped dwellings)

The ATED currently imposes an annual tax charge on residential property worth GBP2,000,000 or more which is 'enveloped' (i.e. held in a company). Today the Chancellor announced that the charge is to be extended to a broader range of residential property. As of April 2015, all enveloped residential properties worth GBP1,000,000-2,000,000 will be subject to the ATED, and from April 2016 the charge will be further extended to residential properties in the GBP500,000 -1,000,000 price bracket.

More immediately, the 15% rate of SDLT that applies to purchases of residential property by companies will be extended to properties worth GBP500,000 or more as of 20 May 2014.

Given that the Budget papers reveal that the ATED has raised 5 times the amount forecast for 2013-14, it is hardly surprising that it is being extended across a greater band of properties. However, there are a number of points arising. First, non-residents selling UK real estate will be subject to capital gains tax as of April 2015, so anyone wishing to restructure out of an existing enveloped structure will need to focus on doing so in good time before next April. Second, given the apparently ever-increasing rise in central London property prices and the continuing allure of such properties for international investors, those investors will face a stark choice between the ATED charges and an exposure to inheritance tax on their UK properties.

Capital gains tax for non-resident UK property owners

As mentioned above (and as announced in the Pre-Budget Report last December), the intention is that non-UK residents will become subject to capital gains tax on disposals of UK residential property as from April 2015. We were promised a consultation on this change, but this did not materialise in today's Budget, although we have now been told that it will be published 'shortly'. In the meantime, the precise scope of the changes remains unclear and we will of course monitor the consultation closely and issue regular updates.

Principal private residence relief for main residences

As also announced in last December's Pre-Budget Report, the principal private residence exemption is to be restricted. At present the exemption applies automatically to the proportion of the capital gain on sale which relates to the last three years of ownership if the property has at any time been the seller's main residence (even if it no longer is). The final exemption period will be reduced from 36 months to 18 months as of 6 April 2014. Current sellers will therefore need to finalise contracts in the next two weeks or so if they are to avoid a capital gains tax charge.

Dual contracts and non-domiciled UK residents

Yet another announcement last December was that legislation would be introduced to prevent non-domiciled resident taxpayers from using dual employment contract arrangements artificially to assign part of their employment income to an overseas employment contract to avoid tax liabilities in the UK. Draft legislation was then published for consultation in January and today further details were announced about the proposed new rules.

In broad terms, the rules will restrict the advantage of dual contracts where the foreign earnings are subject to less than 65% of the UK additional tax rate. Based on the current additional rate of 45%, this means foreign income taxed at a rate less than about 29% will be treated as subject to income tax on the arising basis.

However, the 'overseas workday relief' remains unaffected. This relief allows non-domiciled employees who have been resident in the UK to claim the remittance basis for duties performed outside the UK in the first three tax years of UK residence. The change announced today, combined with the fact that dual contracts are already often ineffective to avoid tax (e.g. because the employee's onshore and offshore roles are too similar) suggests that Overseas Workday Relief will become increasingly important, especially for shorter term relocations.

Inheritance tax on foreign currency bank accounts

The Finance Bill 2014 will contain provisions which will mean that a liability will be disallowed as a deduction from the value of an estate where the borrowed funds have been put into a foreign currency bank account in a UK bank, either directly or indirectly, so that the funds are not chargeable to inheritance tax on the death of a non-resident non-domiciled individual. This is intended to close a loophole enabling foreign currency bank accounts to be used to circumvent the recent new rules restricting deductions from the value of an estate.

The new provision will apply whenever the liability was incurred but only where a death occurs on or after the date of the Royal Assent of Finance Bill 2014 (likely to be in mid-July).


From April 2015, pensioners with defined contribution schemes will have a greater degree of flexibility in how they deal with their pension on retirement and the requirement to buy an annuity will be removed. The 25% tax-free lump sum will continue to be available, but pensioners will have three choices for the balance of their pension; (i) to withdraw their entire pension on retirement (such withdrawal to be taxed at income tax rates, rather than 55% as currently); (ii) to purchase an annuity; and (iii) to flexibly drawdown benefits over time. Defined benefit scheme members will not have the same flexibility, but consultation will take place as to whether the rules could be extended.

Interestingly, while this measure is expected to be popular with pensioners, it is also anticipated that it will raise substantial amounts of tax revenue, as once funds have been withdrawn from a pension they will become taxable.

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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Lindsay Brown
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