There have recently been a wide range of taxation reforms impacting individuals (particularly around the non-dom regime, anti-avoidance, and property taxation), and a summary of these measures is set out below. However, since the beginning of 2020, there have been no significant other changes.
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. However, with the impact of COVID-19 and the subsequent exceptional economic impact, it should be borne in mind that changes could happen outside of the normal timescales.
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. The United Kingdom left the European Union on 31 January 2020 and has now passed the end (on 31 Dec 2020) of the transition period.
Impact of COVID-19 on tax residency
The Statutory Residence Test legislation states that days spent in the United Kingdom due to exceptional circumstances, which prevent an individual from leaving the United Kingdom, can be disregarded when calculating days spent in the United Kingdom. The COVID-19 pandemic has impacted where many employees have lived and worked during 2020/21, and this, in turn, may affect an individual’s UK residence position and liability to UK taxation. The normal Statutory Residence Test rules will continue to apply but with some modifications. For example, Her Majesty's Revenue and Customs (HMRC) have published guidance as to whether days spent in the United Kingdom can be disregarded for the purposes of some Statutory Residence Tests. Examples of such 'exceptional circumstances' include being required to self-isolate or being unable to leave the United Kingdom due the closure of international borders. In addition, HMRC have issued guidance on the taxation of non-residents who work in the United Kingdom as a result of COVID-19, and the Organisation for Economic Co-operation and Development (OECD) has advised on how to apply double tax treaties (DTTs) where COVID-19 has impacted where employees are living and working.
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 one-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 or asset rebasing as set out below.
HMRC are increasingly enquiring into a claim by individuals 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 HMRC to demonstrate their intention to leave the United Kingdom and provide evidence to show in what circumstances they will 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 / deemed 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.
Excluded property trust changes - Finance Bill 2020
The Finance Bill 2020 contained IHT provisions that, in summary, confirm that additions to a trust or a transfer between two trusts the settlor created when they were non-UK domiciled, at a point the settlor is UK domiciled or deemed domiciled, will result in the loss of excluded property status in respect of the assets added or transferred. The trust assets would then be within the scope of UK IHT, including every ten years, when assets leave the trust, and on the death of the settlor if they continue to benefit from the trust assets. This is a complex area, and the legislation is not clear on a number of aspects. HMRC are discussing these issues with the UK professional tax and accountancy bodies.
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.
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 25,000 pound sterling (GBP) 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.
Trust register - 5th Anti-Money Laundering Directive (5MLD)
On 23 January 2020, the UK government launched a technical consultation and provided draft regulations in respect of the Trust Registration Service (TRS). The final regulations were laid in Parliament on 15 September 2020 and came into force on 6 October 2020. These regulations will implement the 5MLD and will amend the Money Laundering and Terrorist Financing (Information on the Payer) Regulations 2017. These regulations expand the previous rules introduced under 4MLD where there were 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 trust, and
- for HMRC to maintain a register of beneficial owners (and potential beneficial owners) of taxable relevant trusts
The key changes proposed will widen the scope of the trusts required to register on the TRS and extend access to the information provided beyond law enforcement agencies.
Which trusts are to be included in the TRS?
The 5MLD removes the previous link between the TRS and taxation. It is proposed that all express trusts will be required to register under the TRS unless they are specifically defined as ‘out of scope’. In addition to UK resident trusts, HMRC envisages that any trust deemed to be administered in the United Kingdom will now be required to register. Their view is that a trust will be ‘deemed to be administered in the United Kingdom’ if:
- they have one UK trustee, or
- where a trust is not required to register in another EU member state and enters into a business relationship with an ‘obliged entity’ in the United Kingdom or acquires real estate in the United Kingdom.
There is a wide definition of ‘obliged entity’ for these purposes. It includes banks, accountants, and law firms.
What information is required?
The 5MLD provides a distinction between the information required for trusts with an obligation under 5MLD and ‘taxable trusts’ (which would have been required to register under 4MLD). All trustees required to register under the TRS must provide the following for the relevant trust:
- Its name.
- The date it was settled.
- Its tax residence.
- The place it is administered and a contact address.
- The value of assets at the time of registration.
Trustees required to register that are not ‘taxable trusts’ must provide the following information to HMRC in respect of individuals who are defined as ‘beneficial owners’. The definition of beneficial owner includes settlors, trustees, and beneficiaries in certain circumstances (i.e. the recipient of a distribution from a discretionary trust and, for an interest in possession trust, the income beneficiary):
- Their full name.
- Month and year of birth.
- Country of residence.
- Nature and extent of the individual’s beneficial interest (to include a note of whether the individual is a settlor, trustee, or beneficiary).
Taxable trusts will also be required to provide the following in respect of individual ‘beneficial owners’:
- Their full name.
- Date of birth.
- National insurance number or UTR, or, if the individual’s usual residential address is not in the United Kingdom, the individual’s passport number or identification card number.
- Nature of the individual’s relationship to the trust.
It is expected that the TRS will be ready for trusts to register in 2021, and it is proposed that:
- trusts in existence at 10 March 2020 must register by 10 March 2022
- trust created after 10 March 2020 must register within 30 days or by March 2022 (whichever is later), and
- trusts created on or after 10 March 2022 will have 30 days to register.
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 apply 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 looks at the gross assets of the entity being disposed of. Where a number of entities are disposed of in one arrangement, their assets are 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.
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. The annual ATED charge still remains.
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 (e.g. 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 are limited to 50% 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 to taxation of non-UK resident landlord companies
Also from 6 April 2020, the taxation of non-UK resident landlord companies is within the scope of corporation tax instead of income tax. Companies are still required to file an income tax return for the tax year ended 5 April 2020 and then register for corporation tax. HMRC (the UK tax authorities) have advised that companies will be registered automatically for corporation tax and that HMRC will set a default accounting period for the first corporation tax return for the year to 5 April 2021. As corporation tax returns are based on accounting periods rather than tax years, if the non-resident company has an accounting end date that is different to this, HMRC will need to be notified in writing.
From 6 April 2021, certain changes were made to the taxation of termination payments. The changes include aligning the treatment of post employment notice pay (PENP) for individuals who are non-resident in the year of termination of their UK employment with the treatment of UK residents. From 6 April 2021, earnings that are due to PENP are subject to tax and national insurance contributions (NICs) to the extent that the individual would have worked in the United Kingdom during the notice period.
Off-payroll working in the private sector
From 6 April 2021, the off-payroll working rules that already applied in the public sector were extended to the private sector, although small private sector businesses have been excluded from the reforms.
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).
Under the reforms, all businesses subject to the new rules are now 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 NICs 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.
Business asset disposal relief (BADR) - formerly entrepreneurs' relief (ER)
BADR applies to an individual’s gain in respect of a disposal of certain assets and provides a 10% rate of CGT on qualifying lifetime gains rather than the main CGT rate (normally 20%/28%). From 11 March 2020, the limit of gains per individual that can qualify for BADR has been reduced to GBP 1 million from GBP 10 million. BADR 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'. A personal company is a company in which an employee or director owned at least 5% of the share capital and votes and:
- for disposals after 6 April 2019, all the relevant conditions have been met for a two-year period prior to disposal (prior to this it was 12 months), and
- with effect from 29 October 2018, two further tests were 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.
Main residence relief and CGT reporting changes
The Finance Bill 2020 contained various changes to the CGT principal private residence (PPR) relief from 6 April 2020.
The most important of these is the reduction to 9 months (from 18 months) of the final period of ownership being able to qualify for PPR, provided, broadly, that the property at some point was the individual's main residence.
Further changes include the requirement that from 6 April 2020 certain disposals of UK residential property by UK residents must be reported and any CGT must be paid within 30 days. Broadly, these rules apply to disposals that result in a CGT charge. This is to bring UK residents into line with non-UK residents who have had to report all UK residential property disposals from 6 April 2019, regardless of whether a gain arises.
Higher rate threshold
The 40% higher rate threshold is GBP 50,270 in 2021/22.
The personal allowance is GBP 12,570 in 2021/22.
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 GBP 1,055,000.
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.