UK: In The Spotlight - Highlighting Tax Issues Which May Affect You - Spring 2016

Last Updated: 24 March 2016
Article by Smith & Williamson

1. Income and capital gains tax changes for non-doms

Draft legislation and policy paper on non-doms

On 2 February 2016 the Government published proposed income tax and capital gains tax changes for non UK-domiciled individuals (non-doms) with draft legislation to be included in Finance Bill 2016.

Headlines

Confirmation of deemed UK domicile test

Those claiming a domicile outside the UK will be deemed to be UK domiciled for income tax and capital gains tax purposes from 6 April 2017 if:

  • they were born in the UK with a UK domicile of origin and are resident in the UK in a particular tax year; or
  • they have been resident in the UK for at least 15 of the 20 tax years before the year in question

Settlor Rules

Settlors who settle trusts before becoming deemed UK domiciled will "not be taxed on trust income and gains that are retained in the trust". This may only apply to trusts settled by longer- term UK residents rather than trusts settled by those with a UK place of birth and domicile of origin. We await confirmation.

Planning

Some non-doms may wish to consider utilising the remittance basis in 2015/16 or 2016/17 and where possible rebasing offshore assets or restructure offshore holdings. Non-UK structures holding UK residential property should also be reviewed given that the inheritance tax protection currently provided is expected to be withdrawn.

Timing

We expect the new law will come into force from 6 April 2017.

The Proposals – further detail

UK domicile of origin

Those born in the UK with a UK domicile of origin will need to be non-UK resident for six complete tax years in addition to acquiring a domicile of choice overseas in order to lose their UK domicile. Their UK domicile will revive immediately on a resumption of residence in the UK.

Those with a UK domicile of origin who were born outside the UK, and have acquired a non-UK domicile of choice, will not be deemed to be UK domiciled until they have been UK resident for at least 15 out of the last 20 tax years.

Deemed UK domicile for long-term UK residents

15 out of the past 20 years

Any individual who has been UK resident for at least 15 of the previous 20 tax years (including arrival and departure split years) will be treated as UK domiciled for income tax, capital gains tax and inheritance tax. The £90,000 remittance basis charge will therefore disappear.

Example

An individual who moved to the UK in, say, September 2002 would be deemed to be UK domiciled from the start of the 2017/18 tax year (i.e. from 6 April 2017).

Offshore trusts

In most cases, non-UK property in trusts established before a settlor becomes deemed UK domiciled will remain outside UK inheritance tax as 'excluded property'.

This may not apply if the settlor had a UK domicile of origin. Here, a trust could go from being fully outside the scope of UK inheritance tax on 5 April 2017 to being fully within it the following day. In some cases, it may be appropriate to make distributions prior to 6 April 2017 while these can still be made without inheritance tax applying, although income tax and capital gains tax need to be considered.

The rules for taxing income and gains within offshore trusts have yet to be confirmed, but the Government has said that settlors will not be taxed on income and gains that are retained in a trust. We await further details on how this will work and whether the existing rules will still apply in some cases.

Comment

Planning discussions are already in progress for many. Final decisions may turn on the publication of the remainder of the legislation which is expected later in 2016. Please speak to your usual Smith & Williamson contact to discuss further.

2. Buy-to-let tax relief changes for landlords

Tax relief on finance costs to be limited

Many landlords will no longer be able to claim the same relief on their finance costs as they do now. Instead, the relief will be limited to a tax credit at the basic rate of income tax. Much attention has been given to the fact that this will restrict the ability to offset mortgage interest against profits, but other finance costs, such as lending fees and early repayment charges will also be affected.

As the finance costs will no longer be deducted from the rental income, those affected will see their total taxable income increase. This could mean exposure to higher tax bands, higher levels of dividend tax, trigger a high income child benefit charge or even the loss of personal allowances, potentially turning a money-generating business into a cash-absorbing liability. The new rules, which are being phased in from 2017/18, are not due to apply to companies, so those with larger property portfolios may want to consider incorporation. Similarly, commercial properties are not affected, which may provide some opportunities for planning.

Buy-to-let landlords and second home owners face further squeezes

From 1 April 2016, the Chancellor intends to introduce higher rates of stamp duty land tax (SDLT) on the purchases of additional residential properties that cost more than £40,000. Rates will rise by 3 percentage points above current rates, increasing the SDLT on a £250,000 property from £2,500 to potentially £10,000. This will also affect those buying second homes as well as companies and institutions, which have previously been shielded from many of the changes. As currently drafted, the proposals may mean many property development businesses could face higher acquisition costs; however, discussions continue on whether and how any exemption from the extra charge can apply.

New rules for replacement expenditure and wear and tear

Currently, many landlords are allowed to deduct 10% of the rents less certain expenses to cover wear and tear, irrespective of what they spend. From April the wear and tear allowance will be abolished; instead relief can be claimed on the actual cost of replacing items. Many landlords could be worse off as a result.

3. Changes to taxation of savings and dividends

From 6 April 2016, far reaching changes to the taxation of savings and dividends will be introduced.

Savings

A new personal savings allowance will mean many individuals pay no tax on the first slice of their savings income. So, from 6 April 2016:

  • basic rate (20%) taxpayers will not pay tax on the first £1,000 of savings income;
  • higher rate (40%) taxpayers will not pay tax on the first £500; however,
  • most additional rate (45%) taxpayers will not qualify for an allowance.

Because so many people will no longer pay tax on their savings, any automatic deduction of 20% income tax from interest by banks and building societies will cease from April 2016.

Dividends

The dividend tax credit will be abolished and replaced by a dividend tax allowance together with changes to the income tax rates applied to dividends above the allowance.

Currently, a 10% notional tax credit attaches to a dividend paid by UK and some non-UK companies. This reduces the effective rate of income tax on the dividend to 0% for a basic rate taxpayer, 25% for a higher rate tax payer and 30.56% for an additional rate taxpayer.

However, from 6 April 2016, a new dividend tax allowance will mean there is a zero rate of tax on the first £5,000 of dividend income a year. But anyone receiving dividend income in excess of £5,000 a year will see an increase in the rate of tax they pay on dividends above this threshold:

  • basic rate (20%) taxpayers will be taxed at 7.5%
  • higher rate (40%) taxpayers will be taxed at 32.5%
  • additional rate (45%) taxpayers will be taxed at 38.1%

Beware

Although income received as dividends and savings may be taxed at 0% under the new rules, the income will still count towards total income for other tax purposes, such as when assessing whether, for example, the high income child benefit charge applies.

4. Technical corner

4.1 Counting the costs of the recent bad weather

Farmers and landowners in flood hit areas are again counting the cost of the recent bad weather. For many, the financial cost of the damage will be covered by their commercial insurer. Depending on the circumstances, insurance compensation could be taxable as trading income or a capital disposal or part disposal. HMRC has announced it will allow certain leeway to flood victims, such as:

  • agreeing tax instalment arrangements
  • agreeing a practical approach when individuals and businesses have lost vital records in the floods
  • suspending debt collection proceedings
  • cancelling penalties when the taxpayer has missed statutory deadlines.

4.2 Inheritance tax penalties

Failure by personal representatives to report all relevant gifts made by the deceased in the seven years before their death, as a result of the recipient of the gift failing to inform the personal representative of any such gifts will now be considered primarily as deliberate behaviour under HMRC's new operational approach. As a consequence of this change of approach by HMRC, penalties between 50-100% of the tax undeclared could be levied upon the recipient of the gift. This therefore highlights the importance of good record keeping, ideally by both the donor and recipient, and appropriate reporting of any such gifts in order to avoid these penalties.

4.3 Pension legislation changes

There will be two major changes to pension legislation taking effect from 6 April 2016.

1. Annual allowance (the maximum you can contribute each year) - this will gradually reduce to £10,000 per annum from £40,000 per annum for those individuals whose 'adjusted income' exceeds £150,000.

2. Lifetime allowance (the maximum amount you can build up in pension funds) - this will reduce from £1.25m to £1m.

Protection will be available to those who have already built up pension funds close to or above the new limit.

Smith & Williamson LLP: Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. The word partner is used to refer to a member of Smith & Williamson LLP

The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.

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