This is a real Frankenstein's monster of a Budget. Made up of the spare parts of Lib Dem and Tory economic policy and welded together by a crazy but brilliant Chancellor, this ugly and ill-fitting monster will tramp across the countryside, destroying all in its path, only to be finally confronted by a band of angry peasants, led by a growling Ed Balls, wielding pitch forks and rolled-up copies of the Daily Express. OK, I know I've gone too far again. The point I am trying to make is that this Budget is a confused mess. Let's look at the details (continuing the B-Movie analogy a little more....).
We have had some headline rate cuts for high earners (50% down to 45%) and UK companies (down to 24%). The personal allowance has been raised, but not if you earn more than £100,000. There have been some modest improvement for non-domiciled spouses in the IHT regime (the exempt amount being raised from £55,000 to £325,000) and we are told that the statutory residency test will be in place for 2013. We are also promised new rules to amend our income tax and CGT anti-avoidance in 2013, opening the door for more EU based tax planning. The concept of ordinary residence (which no-one understood anyway) will be abolished. Finally, there have been a few policies aimed at businesses which are generally good (like better R&D tax credits). I will leave other people to explain the details of those. Apart from the CT reduction, all of the good news is deferred until 2013. That's what they call 'jam tomorrow'.
We are going to get a general anti-abuse rule (GAAR) which will give HMRC the power to tramp all over your back-yard. My views on this initiative will be well known to regular readers. There will be further Disclosure of Tax Avoidance Schemes (DOTAS) rules. We still have a marginal income tax rate of 60% for people earning just over £100,000 (due to the effect of the withdrawal of the personal allowance) and I think that 45% (which will be 47% for employed persons) is still too high for those earning over £150,000. To add to that, the government will now restrict access to approved tax reliefs for high earners. So, if you are a regular investor in EIS and VCTs, for instance, then you will undoubtedly scale back your investment activity (which surely isn't good for UK business).
This Budget will probably spell the death of the offshore SPV in UK property transactions. We were all expecting the rise in SDLT to 7% for properties over £2m but a super-rate of 15% for companies was a genuine surprise. This would have been bad enough on its own, but there is more pain to come. The government will introduce an annual tax on properties owned by offshore companies (which will probably be a French style 3% per annum). However, the government will run into difficulties here if this is applied to all offshore companies as EU regulation will get in the way. Expect a lot of transfers from the BVI to Cyprus in the coming year....
The final nail in the coffin comes in the form of an extension of the CGT regime to 'non-natural persons' which own UK property. That means that when your BVI company sells its property in Chelsea it will have to pay CGT. This won't come into effect until 2013 so I expect that there will be a huge amount of corporate re-basing going on from now until then. The challenge will be achieving this without triggering a 15% SDLT charge. Fortunately, I think I know how to achieve this.
What is clear is that this Budget will affect almost every offshore trust and company structure which holds UK property (which is most of them where there are UK resident beneficiaries). This should prompt an urgent and thorough re-examination of these trusts and their tax efficacy. Fortunately, there are things which can be done to mitigate the harsher effects for the new rules and despite the Chancellor's best efforts, there is still a place for UK property within offshore trusts.
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