Taxing times ahead for the UK: how to advise clients
- To understand what tax changes have been brought in.
- To list the various measures affecting the advice process when it comes to tax.
- To ascertain how to advise clients about property disposals.
The UK has been expanding the tax exposure and compliance burden of overseas investors in UK property.
November and December 2017 saw the announcement and implementation of numerous tax changes affecting many high-net worth individuals (HNWIs).
By way of reminder, we had the following:
- On 16 November 2017 the Finance (No. 2) Act 2017 received Royal Assent (“Finance Act”).
- On 22 November 2017 the Chancellor of the Exchequer, Phillip Hammond, delivered the Autumn Budget (“Autumn Budget”).
- On 1 December 2017 the Government published a new Finance Bill due to become law in 2018 (“Finance Bill”).
Between them they contained numerous changes, some retrospective to 6 April 2017 (in the Finance Act), some taking effect immediately (in the Autumn Budget) and some only due to come into force in either April 2019 or April 2020.
In this note we summarise some of the key changes and announcements for HNWIs and then consider what the changes mean for overseas investors in UK property.
The Finance Act implemented changes to the UK tax domicile rules and introduced inheritance tax on the shares of overseas companies which own UK residential property from 6 April 2017.
These changes have been in the pipeline since the Government’s announcement in the summer of 2015 but the official guidance from HMRC on their interpretation of the rules have not, as at 11 December 2017, been published.
This is deeply unsatisfactory as the rules introduced:
- A new inheritance tax charge which, if an individual had died in late April 2017, an estate would have had to be paid by the end of October 2017.
- A transitional measure for those who have lent on beneficial terms to an offshore trust to restructure the loans in place by 5 April 2018.
- A temporary transitional measure for users of the remittance basis allowing them to cleanse mixed funds prior to 5 April 2019 which would allow UK resident individuals to bring additional funds to the UK.
The Government has recognised that the retrospective implementation of legislation is undesirable and this has been part of the rationale for the shift to an Autumn Statement, whereby changes to the tax code were announced in the latter part of the calendar year so they can be debated prior to their implementation by April.
Sensibly, the government can choose to depart from this new practice when they make changes that, if not implemented immediately, are likely to cause negative distortions to the market.
This was the case for the major headline in the Autumn Budget, the relief from stamp duty land tax (“SDLT”) for first time buyers of residential property.
Few HNWIs will be directly affected by this change although it is likely to affect purchases where the “bank of mum and dad” is involved. The other changes of note focused on property.
One change was the freezing of indexation allowance on chargeable gains for corporation tax purposes from 1 January 2018.
Although it applies to all capital disposals by companies the change is likely to have the largest impact on property investment companies.
Two other changes
Two other changes are aimed at bringing the taxation of offshore investors in UK property into line with that of UK resident investors:
- The extension of corporation tax to property income and certain gains of non-UK residents.
- Taxing all gains made by non-residents on UK property. These are explained further below.
As far as UK tax resident HNWIs are concerned the Autumn Budget takeaway was a case of no news was good news. The tax reliefs on pensions were unchanged and the government maintained the ISA annual limits. Furthermore, income tax and capital gains tax rates remained the same.
The Finance Bill contained the legislation changing the SDLT rules and indexation rules announced in the Budget as well as further previously announced changes to the taxation of offshore trusts.
The new rules amend the existing anti tax avoidance measures in relation to offshore trusts. They set out that capital payments to non-resident beneficiaries from an offshore settlement cannot be taken into account for the purposes of matching gains to UK resident beneficiaries.