There continues to be a wide range of taxation reforms impacting individuals. A summary of these measures is set out below. Recent reforms have focused on residential property and real estate, pensions, income tax, domicile and residence, and anti-avoidance.
Most of the reforms to tax rules are typically announced in November/December and March each year before becoming law in the Finance Act, usually in the following July.
In a referendum on 23 June 2016, voters in the United Kingdom (UK) chose to leave the European Union (EU) (so-called ‘Brexit’). The United Kingdom invoked Article 50 of the Treaty on the Functioning of the European Union (TFEU) in March 2017, and this triggered a two year exit procedure, although this has now been delayed until 31 October 2019. The implications will depend to a substantial extent on the terms on which exit is agreed and, therefore, remain unclear at this stage. The information included below assumes, for now, the continuance of the UK’s membership in the European Union.
From 6 April 2017, where a non-UK domiciled individual ('non-dom') has been resident in the United Kingdom for more than 15 of the last 20 tax years, they will be deemed domiciled in the United Kingdom for all taxes. This means they will no longer be able to claim the remittance basis from this point onwards. Individuals who have previously claimed non-dom status will, therefore, pay tax on their worldwide income and gains, as well as be subject to UK inheritance tax (IHT) on their worldwide assets, in the same way as UK domiciled individuals. It also means a child who lived with non-domiciled parents in the United Kingdom can be deemed domiciled by adulthood.
Individuals born in the United Kingdom with a UK domicile of origin who have acquired a domicile of choice elsewhere, but who return to the United Kingdom (‘formerly domiciled residents’), have a two-year grace period on resuming UK residence before their worldwide assets become subject to IHT, but they will be subject to income and capital gains tax (CGT) on the arising basis for any tax year they are UK resident.
Any trusts set up by formerly domiciled residents whilst they were non-UK domiciled are now within the scope of UK IHT. In addition, formerly domiciled residents will not be able to benefit from the trust protections, asset rebasing, or cleansing relief for mixed fund bank accounts, as set out below.
Her Majesty’s Revenue and Customs (HMRC) are increasingly enquiring into a claim to be non-UK domiciled especially where the individual has been resident in the United Kingdom for many years and/or cannot demonstrate the circumstances in which they will leave the United Kingdom. The individual must be able to provide strong evidence to demonstrate their intention to leave the United Kingdom to remain non-UK domiciled.
The gains and non-UK source income of a protected trust will not be attributed to the non-dom settlor unless the settlor (or in some cases the spouse or minor child of the settlor) receives a distribution or benefit from the trust. A protected trust is broadly a non-UK resident trust where no property or value is added once the settlor becomes deemed domiciled. To benefit from trust protections, the individual, even though deemed domiciled, must remain non-UK domiciled under general law. If the settlor adds value/property to the trust once deemed domiciled or becomes UK domiciled under general law, all the trust income and gains will be taxed on them on the arising basis.
The rules (transfer of assets abroad), which attributed the income of both the trust and its underlying companies to the settlor where they could benefit from the trust, have been amended to introduce the concept of ‘protected foreign source income’, which arises to a protected trust as outlined above. Protected foreign source income is not attributed to the settlor; it is added to the general pool of trust income that is available to match to distributions/benefits to either the settlor or other beneficiaries.
Individuals who became deemed domiciled from 6 April 2017 under the 15/20 year test will be able to rebase their directly held foreign assets to their market value as at 5 April 2017, subject to various conditions being met.
Cleansing of overseas mixed fund bank accounts
Non-doms who are taxed on the remittance basis had a two year period until 5 April 2019 during which they can ‘tidy up’ their mixed funds held in overseas bank accounts.
This enabled them to rearrange their offshore bank accounts and separate mixed funds into their constituent parts (in respect of the elements that can be identified), and then remit from those accounts as they wish.
IHT and UK residential property owned by non-resident companies and other non-UK resident structures
Previously, non-doms, or excluded property trusts, that owned UK residential property through non-UK companies were not subject to IHT on the value of the property, as the relevant asset for IHT purposes was the non-UK situs shares.
From 6 April 2017, ‘closely’ held non-UK companies (broadly ones owned by five or fewer shareholders) or partnerships holding UK residential property have been brought within the charge to UK IHT.
Most loans provided by individuals, trusts, closely held companies, or partnerships for the acquisition, maintenance, or enhancement of UK residential property have also been brought within the charge to IHT in the hands of the lender, as well as security provided for such loans.
This means that IHT will be chargeable in a number of additional circumstances, for example, where the individual dies whilst owning such a company's shares, where such a company's shares are gifted into or out of a trust, and on the ten-year anniversary of the trust if the trustees own shares in a non-UK resident company that in turn owns a UK property.
Inheritance tax (IHT) on family homes
Measures designed to remove all or some of the value of the family home from the IHT net, where the residence is left to children or grandchildren on death, have been introduced in the form of an additional 'main residence' nil rate band (NRB), effective from April 2017. This additional NRB was initially at a maximum rate of 100,000 pound sterling (GBP) per person in 2017/18, increasing by GBP 25,000 each year to a maximum GBP 175,000 from 2020/21, at which point spouses/civil partners will each have a total NRB of GBP 500,000, when the main residence NRB is combined with the existing IHT NRB of GBP 325,000. Post 2020/21, the amount will be increased in line with the consumer price index (CPI). This additional element of the NRB starts to be reduced where the net value of the estate is over GBP 2 million and is reduced to nil for estates worth more than GBP 2.35 million.
The current NRB of GBP 325,000 is frozen until 2020/21.
Any part of the NRB, including the main residence NRB, that is not used on the death of the first spouse/civil partner can be carried forward (if a claim is made) and used on the second death, provided the second death occurs post 6 April 2017. This is the case even if the first spouse/civil partner has died prior to 6 April 2017.
The requirement to correct (RTC) and failure to correct (FTC)
The requirement to correct was designed to compel taxpayers to review their offshore interests and correct any UK tax errors by 30 September 2018. An error could include, for example, an individual who has been taxed as a non-UK domiciled individual for many years and HMRC successfully argue the individual had a domicile of choice in the United Kingdom and the remittance basis was not available so additional tax is due.
After 30 September 2018, taxpayers (including non-UK resident trustees and non-resident landlords) that have ‘failed to correct’ will be subject to a range of significant penalties in respect of any errors that come to light.
Taxpayers should review their offshore tax affairs now to ensure they are compliant, as these measures will apply even where there was no intention not to comply
Where a taxpayer fails to correct an error within the statutory window, the new regime post September 2018 will impose the following penalties:
- A penalty of between 100% and 200% of the tax. The penalty will apply regardless of the reason for the error.
- Potential asset-based penalty of up to 10% of the value of the relevant asset where the tax at stake is over GBP 25,000 in any tax year.
- Potential 'naming and shaming' where over GBP 25,000 of tax per investigation is involved.
- A potential additional penalty of 50% of the amount of the standard penalty if HMRC could show that assets or funds had been moved to attempt to avoid the RTC.
- The RTC and FTC apply to any tax error arising from offshore financial interests; it is not limited to those who have deliberately failed to pay the right amount of tax. The regime applies to anyone who has UK tax liabilities, which would include non-UK resident trustees and non-resident landlords.
As at 26 June 2017, the 4th anti-money laundering directive (4MLD) was enacted into UK law by the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017.
Contained within these regulations are requirements:
- for trustees to maintain accurate and up-to-date records, in writing, of all of the beneficial owners (and potential beneficial owners) of a relevant trust, and
- for HMRC to maintain a register of beneficial owners (and potential beneficial owners) of taxable relevant trusts.
This will be done using the Trust Registration Service (TRS). The first of these requirements is for internal trust record-keeping purposes, but the records can be requested by law enforcement agencies at any time and should be provided if the trustee enters into a ‘relevant transaction’ (broadly any transaction with a third party where the third party undertakes customer due diligence measures).
The regulations are widely drafted and apply to many trusts, including employment related trusts such as employee benefit trusts (EBTs). The first requirement under these regulations (to maintain records) applies to any UK express trust. The second requirement (for HMRC to maintain a register) applies to a UK express trust that has a relevant tax liability.
Both requirements also apply to any non-UK express trust that either receives income from a source in the United Kingdom on which it pays a relevant tax or has UK assets on which it is liable to pay a relevant UK tax. The application of these rules to non-UK trusts is not straightforward, and if this might apply to you it is recommended advice be taken to confirm filing requirements.
Anti-avoidance regarding trading in and developing UK land
Since 5 July 2016, gains arising on the sale of land is now much more likely to be treated as trading income than as capital gains (see ‘Trading in and developing UK land’ section above).
Here is an abbreviated list of some of the groups that could be affected:
- Profits realised by property investors following a change of intention. For example, getting planning permission on land may mean that clients fall into trading rather than investment tax treatment on disposal in respect of part of the profit.
- Sales of shares in UK or offshore companies holding property for trading or investment may be taxed as trading income rather than capital gains where the main purpose was to realise a gain on the sale.
- Many UK tax resident companies fund the development of land with loans affiliates. Interest on these loans may now be disallowed. UK resident Joint Venture (JV) companies will often be affected.
- Overseas companies trading in or developing UK land did not always previously have taxable UK permanent establishments (PEs). These companies will now be taxed when they make disposals. Group relief will not be allowed to reduce this charge.
The sale of property or property rich shares is more likely to be treated as investment rather than trading. Where capital gains treatment does not apply indexation allowance, substantial shareholder exemption and entrepreneurs' relief will not be available.
These rules are very wide and complex. Professional advice should be sought if there is a possibility these rules could apply.
Gains on disposal of UK Property by non-UK residents
Prior to April 2019, only direct disposals of UK residential property were subject to UK tax for non-UK residents. However, from April 2019, UK tax is charged on capital gains made by non-residents on direct and certain indirect disposals of all types of UK immovable property.
The indirect disposal rules applies where a person makes a disposal of an entity in which it has at least a 25% interest (or any interest in certain collective investment vehicles) where that entity derives 75% or more of its gross asset value from UK land.
The 25% ownership test looks for situations where the person holds at the date of disposal, or has held within two years prior to disposal, a 25% or more interest in the property-rich company. This holding may be directly, or through a series of other entities, or via connected persons.
The 75% 'property richness' test will look at the gross assets of the entity being disposed of. Where a number of entities are disposed of in one arrangement, their assets will be aggregated to establish whether the 75% test is met.
There is a trading exemption, so that disposals of interests in property-rich entities where the property is used in a trade are excluded from the charge. This is likely to apply where, for example, a non-UK resident disposes of shares in a retailer that owns a significant value of shops.
All non-UK resident companies are charged to corporation tax rather than CGT on their gains. The provisions relating to annual tax on enveloped dwellings (ATED)-related CGT on UK residential property have been abolished.
Existing reliefs and exemptions available for capital gains continue to be available to non-UK residents, with modifications where necessary. Those who are exempt from capital gains for reasons other than being non-UK resident continue to be exempt (for example, overseas pension schemes and certain charities).
Losses arising to non-UK residents under the new rules are available. However, from April 2020, the offset by companies of carried forward capital losses will be limited to 50% only of the capital gains arising in a later accounting period.
There are options to calculate the gain or loss on a disposal using the original acquisition cost of the asset or using the value of the asset at commencement of the rules in April 2019.
Special rules apply to Collective Investment Vehicles.
Changes have been made to the income tax treatment of termination payments, which took effect from 6 April 2018. This included making all payments in lieu of notice (PILONs) subject to income tax and employer/employee national insurance contributions (NICs). Pay that would have been received during a notice period is now subject to income tax and NICs.
In addition, employees who are UK resident in the tax year their employment is terminated will generally not be eligible for foreign service relief on their termination payment. The UK statutory residence test is used to determine whether employees are UK resident in the tax year they receive their termination payment. These changes apply to terminations of employment occurring on or after 6 April 2018.
Employer NIC will also be charged on termination payments in excess of GBP 30,000 from 6 April 2020 (this change has been delayed from 6 April 2019).
Off-payroll working in the private sector
The government has announced it will be extending the current off-payroll working rules in the public sector to the private sector, although small private sector businesses will be excluded from the reforms. The changes are due to be implemented from 6 April 2020.
The changes relate to the taxation of off-payroll workers (i.e. contractors) who fall under the 'IR35' rules. These rules apply to any contractor who works for an end-user business via an intermediary such as their own personal service company (PSC). The IR35 rules currently operate differently depending on whether the engaging business is a public or private sector organisation, and the government has opted largely to align the rules with those currently in place for the public sector.
Under the reforms, all businesses subject to the new rules will now be required to undertake an employment status assessment in respect of any of their contractors operating through a PSC, whether they work directly with the business or via an agency. Where the result of that assessment shows that the arrangement is in substance one of employment, then pay-as-you-earn (PAYE) and NIC withholding will need to be operated. The responsibility for this rests with whichever entity is paying the PSC, be that the business itself or an agency.
Globally mobile employees
The government has announced its intention to make the terms of the UK’s short-term business visitor (STBV) annual payment scheme more generous. From 6 April 2020, it will be possible to include employees with 60 or fewer UK workdays in a tax year under these arrangements, up from 30 UK workdays currently. In addition, the existing reporting and tax payment deadlines will be extended from 19 and 22 April to 31 May to align them to the well-established annual Appendix 4 'STBV reporting' that many UK employers undertake.
Changes to entrepreneurs' relief (ER)
ER applies to an individual’s gain in respect of a disposal of certain assets, and provides a 10% rate of CGT on the first GBP 10 million of applicable lifetime gains, rather than the main CGT rate (normally 20%). It is often relevant to employees owning shares, as it applies, subject to meeting the qualifying conditions, to shares acquired on exercise of Enterprise Management Incentive (EMI) options as well as to shareholdings in a 'personal company' (which, in summary, before the changes, was a company in which an employee or director owned at least 5% of the share capital and votes). The changes include:
- The one year time limit prior to a disposal throughout which the relevant conditions must be satisfied has been extended to two years for disposals from 6 April 2019.
- With immediate effect from 29 October 2018, two further tests have been added to the definition of personal company, which require a 5% interest in distributable profits and net assets of the company, as well as nominal share capital and votes.
The changes affecting 5% shareholdings are not relevant to shares acquired on the exercise of EMI options, as the 5% tests do not apply, but the change of holding period from one year to two years does apply in all circumstances.
The government is to publish a discussion paper as part of the response to a recent government commissioned review of employment practices in the modern economy, exploring the case and options for longer-term reform to make the employment status tests for both employment rights and tax clearer. The government has stated that it recognises that this is an important and complex issue, and so will work with stakeholders to ensure that any potential changes are considered carefully.
Higher rate threshold
The 40% higher rate threshold is GBP 50,001 in 2018/19.
The personal allowance is GBP 12,500 in 2018/19.
Since 6 April 2015, the starting rate for savings income is 0% (previously 10%), and the maximum amount of savings income that can qualify for this rate is GBP 5,000.
Since April 2016, those earning more than GBP 150,000 have a reduced annual pension contribution allowance, effectively restricting their tax relief on pension contributions. The size of the annual allowance is being gradually reduced from GBP 40,000 to GBP 10,000 for those earning GBP 150,000 a year or more. The lifetime allowance for 2019/20 is £1.055m.
Tax avoidance and evasion
The Treasury has committed to increased spending across HMRC, allowing it to focus on tackling tax evasion, avoidance, and non-compliance. In particular, spending will allow HMRC to create specialist personal tax units to enquire into individual's domicile status and target serious non-compliance by trusts, pension schemes, and non-doms, as well as a more general extension of the customer relationship model for individuals with wealth between GBP 10 million and GBP 20 million.