Budget days are becoming more complicated. In the old days there would be a set of announcements and changes that mostly took effect from the beginning of the next tax year. Nowadays we have a set of announcements which include new retrospective changes to tax rules; previously announced and new changes which come into effect at the beginning of the next tax year; new announcements which come into effect in one or more tax years’ time and new consultations on things to which the government would like to make changes but is unsure how and when to do them.
To gain a proper understanding of the true contents of the budget, therefore, it is necessary to read not just the main budget document but also the supporting press releases, technical notes and tax impact assessments. What follows is a brief summary of a range of some of the planning issues which didn’t make the headlines.
Limited liability partnerships (LLPs)
The government is concerned that LLP structures are being used to avoid employment taxes and obtain other tax advantages. A consultation is to be launched into a presumption of employee status unless the member can pass a self-employed test and further changes to how profits and capital may be attributed.
Quite how this will pan out is anyone’s guess but it is clear that the taxation of LLP structures and their use in tax planning is now firmly in HM Revenue & Customs’s sights and subject to change. If you already use LLPs in business or wealth planning then I suggest you await the outcome of the consultation before making any changes. If you are considering such structures then you should defer making a decision until the new rules become clear.
Consideration is being given to changing the pension investment rules to encourage the conversion of unused space in commercial properties to residential use.
Inheritance tax planning
Measures will be introduced to prevent individuals using borrowing to avoid inheritance tax, for example the acquisition of inheritance tax (IHT) exempt assets, such as business or agricultural assets. In addition, the government intends to restrict the reduction of certain loans as a liability of a borrower’s estate where the loan has been taken for tax avoidance. Quite how these measures will work in practice is not clear but you have been warned that two bites of the same cake is not something HMRC will tolerate.
The IHT-exempt amount which can be transferred from a UK-domiciled spouse to a spouse or civil partner domiciled outside the UK (or treated as such for IHT purposes) will be increased to £325,000 from its current level of £55,000.
Furthermore, with effect from 6th April 2013, a non-domiciled spouse can elect to be treated as UK-domiciled for IHT purposes. The election may be made notwithstanding the death of the UK-domiciled spouse provided that the death occurred post-6th April 2013 and the election is made within two years of the death.
As announced last December, legislation will be introduced in the Finance Bill to enable trustees to switch UK assets held in settlement made by non-UK domiciled individuals to investments in open ended investment companies (OEICs) and authorised unit trusts (AUTs) without incurring an IHT exit charge. The measure will be retrospectively effective from 16th October 2002, the date from which the original changes to the IHT treatment of OEICs and AUTs applied. It will also ensure that no tax will have arisen on those trusts which held OEICs or AUTs when the changes introduced in 2003 came into force. The measure does not constitute a new tax incentive but will allow the legislation to work as originally intended.
Various anti-avoidance provisions will be introduced to prevent exploitation of the corporation tax rules relating to ‘loans to participators’, ‘loss buying’ and other loss-related provisions.
A cap on unlimited income tax reliefs (£50,000 or 25% of income – whichever is the greater) will apply from 6th April 2013 but not to reliefs within their own ‘cap’, such as enterprise investment schemes (EIS); seed EIS (SEIS); venture capital trusts (VCTs); or business premises renovation allowance (BPRA) investments or charitable gifts and gift aid donations.
The disclosure of tax avoidance schemes (DoTAS) provisions will be further strengthened to ensure that aggressive tax planning is brought to HMRC’s attention.
Legislation will be introduced in the Finance Bill 2013 to close down two specific stamp duty land tax (SDLT) avoidance schemes, which abuse the transfer of rights (or ‘subsale’) rules. SDLT disadvantaged areas relief has been abolished with effect from 6th April 2013.
A 15% SDLT rate came into effect for high value residential property acquisitions by non-natural persons (broadly companies, partnerships and collective investment schemes) on 21st March 2012. Changes made to the 15% rules (primarily, the introduction of further reliefs) will come into effect from the day of Royal Assent to the Finance Act 2013.
The Finance Bill 2013 will include legislation to implement a package of taxes that affect residential properties valued at over £2 million and held by certain non-natural persons. These taxes are:
- an annual tax on enveloped dwellings (ATED);
- capital gains tax (CGT) at 28% on any gain on disposal.
ATED will came into effect from 1st April 2013, although returns will not be required until 1st October 2013 with payment required by 31st October 2013. Relief from ATED will be available for genuine businesses carrying out commercial activity.
HMRC approach to tax abuse
HMRC has confirmed that it is trying to pursue a ‘joined up’ approach to tackling tax abuse, evasion and avoidance. Essential components in this strategy are:
- (HMRC/Treasury) understanding of the tax avoidance market;
- influencing behaviours through effective use of official and general publicity so as to change the culture of tax planning in the UK;
- detecting avoidance through a combination of DoTAS and market intelligence.
Then, where an “unacceptable” loophole is encountered it will be acted against quickly by:
- targeted avoidance legislation;
- challenge and litigation and
- the general anti-abuse rule (GAAR).
Special approaches will be adopted for
- large businesses
- very wealthy individuals (through the High Net Wealth Unit)
Through a mixture of targeted task forces, publicity and technology, significant effort has been poured into stemming evasion – a substantial contributor to the ‘tax gap’. There is very special focus on offshore evasion. This includes and has included:
- the Liechtenstein Disclosure Facility;
- agreements with the Isle of Man;
- new arrangements to be made with Guernsey and Jersey (see below) and
- the agreement with Switzerland.
All of these initiatives recognise that evasion is a global issue relevant to most of the developed world.
What you need to do
The key principles that you should take from the new tax regime are:
- avoid evasion;
- avoid ‘aggression’;
- stay within the ‘centre ground of tax planning’;
- ‘Tried and tested’ is the new ‘gold standard’ for planning
There are lots of legitimate planning opportunities available to individuals and companies, provided that you have the time and inclination to join up the various planning dots in the context of your wealth plan big picture. Professional advice has never been more essential.
PS I forgot to mention that you can now obtain a 100% first-year allowance in respect of qualifying expenditure incurred from 1st April 2013 in the purchase of railway assets and ships (real ones, not models!).