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. This pattern is disrupted in years of a general election. So, a truncated Finance Act 2017 became law in April 2017 ahead of the June 2017 general election. A second, and more extensive, Finance Act become law on 16 November 2017. This second Finance Act enacted a range of reforms previously announced. Several of those reforms are effective from 6 April 2017 as outlined below.
In a referendum on 23 June 2016, voters in the United Kingdom 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. 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 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 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 UK with a UK domicile of origin who have acquired a domicile of choice elsewhere, but who return to the UK (‘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 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.
HMRC are increasingly enquiring into a claim to be non UK domiciled especially where the individual has been resident in the UK for many years. The individual must be able to demonstrate their intention to leave the UK to remain non UK domiciled.
The gains and non-UK source income of a protected trust will not be attributed to the 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 must remain non UK domiciled under general law.
HMRC are increasingly enquiring into the domicile status of individuals especially those who have resided in the UK for many years.
The rules prior to 6 April 2017 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’. Protected foreign source income is not attributed to the settlor; it is added to the general pool of trust income which is available to match to distributions to either the settlor or other beneficiaries, regardless of whether they are UK domiciled or not.
Capital gains tax rebasing
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 have a two year period from 6 April 2017 during which they can ‘tidy up’ their mixed funds held in overseas bank accounts.
This will enable them to rearrange their offshore bank accounts and separate mixed funds into their constituent parts (in respect of the elements that can be identified) - e.g. they can move their clean capital, foreign income and foreign gains into separate accounts, and then remit from those accounts as they wish.
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 inheritance tax (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 one owned by 5 or fewer shareholders) or partnerships holding UK residential property have been brought within the charge to UK inheritance tax (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 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 (MRNRB, 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 MRNRB of GBP 500,000, when the main residence nil rate band 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 is 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 UK 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.
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 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 £25,000 in any tax year
- Potential “naming and shaming” where over £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 applies 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
- Anyone with offshore interests should review their affairs to ensure they have been and will continue to be fully tax compliant.
- Advisers should be discussing these developments with their clients to make them aware of the potential penalties.
- Where errors are identified, a disclosure should be made to HMRC as soon as possible.
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 which has a relevant tax liability.
Both requirements also apply to any non-UK express trust which either: receives income from a source in the UK 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
Buy-to-let investment properties
Previously, landlords who were individuals could deduct certain expenses, including mortgage interest, from their rental profits in order to calculate their taxable rental profit. This means that higher rate taxpayers received tax relief at 40%, or 45%, on their expenses. A restriction in tax relief in respect of finance costs, which includes mortgage interest, is being phased in over four years starting 6 April 2017. The relief will be restricted to 20% for all individuals by April 2020.
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.
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.
Changes have been made to the income tax treatment of termination payments, which will take effect from 6 April 2018. This includes making all payments in lieu of notice (PILONs) subject to income tax and employer/employee National Insurance Contributions (NIC). Pay which would have been received during a notice period will be reclassified as general earnings i.e. subject to income tax and employer/employee NIC. Employer NIC will also be charged on termination payments in excess of £30,000, from 6 April 2019.
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 existing UK statutory residence test will be used to determine whether employees are UK resident in the tax year they receive their termination payment. These changes will impact terminations of employment occurring on or after 6 April 2018.
Off-payroll working in the private sector
The Government has announced it will consult in 2018 on how to tackle non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector. IR35 ensures individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a company or some other intermediary. A possible next step would be to extend recent public sector reforms (introduced in April 2017) to the private sector. The consultation will draw on the experience of the public sector reforms, and external research already commissioned by the Government (due to be published in early 2018).
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.
Tax on dividends
Dividend tax credits have been abolished and replaced by a GBP 5,000 tax-free dividend tax allowance, effective from 6 April 2016. Tax rates on dividend income in excess of the GBP 5,000 allowance are 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.
The dividend allowance is not a tax-free allowance like the main personal allowance; it is, in fact, a nil rate band. The dividend allowance will not reduce total income for tax purposes. Dividend income that is within the ‘allowance’ will still count towards an individual’s basic and higher rate limits.
From April 2018, the dividend allowance fell from GBP 5,000 to GBP 2,000.
Higher rate threshold
The 40% higher rate threshold was GBP 45,000 in 2017/18 and is GBP 46,350 in 2018/19.
The personal allowance was GBP 11,500 in 2017/18. This increased to GBP 11,850 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. Since 5 April 2016, the lifetime allowance has been GBP 1 million but this will increase to £1.03 million from 6 April 2018.
Tax avoidance and evasion
The Treasury has committed to increased spending across Her Majesty’s Revenue and Customs (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.