UK: Best Of The Budget

Last Updated: 11 April 2007

Gordon Brown’s 11th (and probably final) Budget was yet another bumper bundle. We take a look at some beneficial aspects, both home and abroad.

There was some good news for many people who own a holiday home abroad.

In recent years there has been a dramatic increase in the number of UK residents purchasing property overseas for either holiday or retirement use. Many people have acquired the offshore property by purchasing shares in a company that, in turn, owned the property. The main reason for this arrangement was to avoid the impact of ‘enforced heirship’ succession laws in those countries or else to minimise local taxes.

For example, in France the succession laws state that children are automatically entitled to a share of any property left on death. In the US purchasers are recommended to use a Limited Liability Corporation to protect against claims from visitors to the property who may hurt themselves and subsequently sue for damages. One of the latest boom areas for property development is Bulgaria where non-residents cannot own land. So again, it is customary for the purchaser to buy shares in a Bulgarian company that owns the land.

Unfortunately, this type of arrangement resulted in a potential UK tax charge on the basis that the individual was acting either as a director or shadow director, and the company was making a property available to them by virtue of their ‘employment’. The resulting benefit-in-kind had to be calculated by reference to the market rental of the property and could lead to a significant tax charge.

To solve the problem, legislation will be introduced in 2008 to exempt cases where the property fits certain criteria. Namely, the property must be:

  • owned by a company which, in turn, is owned by individuals
  • the only or main asset held by the company
  • not funded directly or indirectly by a connected company.

In addition, the owning company’s only activities should be incidental to its ownership of the property. In the meantime, HM Revenue & Customs (HMRC) will not pursue associated tax liabilities. It is also understood that, once the new legislation is passed, people should be able to reclaim tax paid in previous years.

There was one small area of simplification for individuals who receive dividends from non-UK resident companies, as they will now be entitled to a dividend tax credit from 2008. However, this tax credit will only apply where the person owns less than a 10% shareholding in the distributing non-UK resident company and receives less than £5,000 of dividends a year from non-UK resident companies.

Another helpful relaxation in the rules concerned the pre-owned assets income tax charge. This complicated tax, which took effect from 6 April 2005, applies where assets have been given away and now fall outside the donor’s estate for inheritance tax (IHT) purposes, even though the donor continues to benefit from the asset (for example, where someone had given their home to children before the commencement of IHT, but the individual continues to live in the property). If people wish to avoid the annual income tax charge, donors can elect for the asset to remain within their estate for IHT purposes.

Where the conditions were met at 6 April 2005, an election to stay within IHT should have been made by 31 January 2007. However, many people failed to lodge an election by that date. The 2007 Finance Bill will include draft legislation allowing HMRC to accept elections that missed the deadline and to extend deadlines for future tax years.

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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