Pre-Budget Report 2007
Significant changes to capital gains and inheritance taxes.
11.10.2007
Significant changes to capital gains and inheritance taxes.
All capital gains made on or after 6 April 2008 will be taxed at a flat rate of 18%. This is irrespective of the marginal income tax rate of the taxpayer concerned. This rate will apply to individuals and trusts. Legislation will be enacted in Finance Bill 2008 to bring the new regime into force from that date. No draft legislation is currently available. More
Changes to tax for non domiciliaries
After spending many years reviewing the tax treatment of non domiciled individuals, the government appear to have decided that the advantageous treatment afforded to non domiciled individuals, which helps to attract them to the UK, is beneficial to the UK economy and should continue.However, they have also decided that the time is right to introduce a charge for this benefit. More
Changes to IHT
While the proposed amendments to inheritance tax have been "warmly welcomed" by the Society for Trusts and Estate Practitioners as introducing a long wished for transferable nil rate band for spouses and civil partners, there may be some surprises for those who have prudently planned ahead. More
Important changes to capital gains tax
In his autumn statement yesterday, the Chancellor announced significant changes to the UK capital gains tax regime for individuals, trustees and personal representatives for gains made on or after 6 April 2008. Legislation will be enacted in Finance Bill 2008 to bring the new regime into force from that date. No draft legislation is currently available.
The existing capital gains tax rules will apply for disposals made up to 5 April 2008. Companies liable to corporation tax are not affected by these proposals.
In brief Download our CGT factsheet
The proposed changes are as follows:
- All capital gains made on or after 6 April 2008 will be taxed at a flat rate of 18%. This is irrespective of the marginal income tax rate of the taxpayer concerned. This rate will apply to individuals and trusts.
- The current system of taper relief will be abolished.
- The system of indexation allowance, which was in place prior to the introduction of the taper relief rules, will also be abolished.
In addition, certain other rules will be amended or abolished including, compulsory use of market value at 31 March 1982 for assets held at that date, abolition of 'halving relief' and simplification of share identification rules. It should be noted that the annual exemption for capital gains tax, i.e. the amount that can be earned before paying capital gains tax, will remain in place.
In more detail
The proposed changes are as significant as those in 1998 when the taper relief rules were introduced. Those anticipating paying capital gains tax at a certain rate, whether 10%, 40% or some rate in between, will find a significantly different rate applying to their capital gains.
Those individuals whose assets currently fall within the non-business asset taper relief regime are likely to be significantly better off under the new rules. Subject to any antiavoidance provisions (see below) it would appear better to delay a disposal until after 6 April 2008 and benefit from the new 18% rate.
People who are expecting to achieve gains with an effective rate of 10% (under the business asset taper relief regime) are likely to be worse off in respect of any disposals of those business assets after 6 April 2008. Consideration should be given to action to improve this potential situation, in particular if a sale is in progress or envisaged in the near future, as it may be possible to protect the 10% rate.
The loss of indexation allowance may have a significant impact for those who have held their
assets for a significant period prior to 1998 and therefore accrued a significant amount of
indexation, as no indexation allowance at all will be available from 6 April 2008.
The compulsory use of market value at 31 March 1982 may affect a minority of taxpayers whose capital gains tax asset was held at that date and whose value at that date was less than cost acquisition.
Since no legislation has yet been issued in respect of the proposals, it is not clear whether there will be anti-avoidance provisions to prevent people taking advantage of their situation by ensuring their gains are taxed under either the current or new regime.
In summary
The proposed changes will have a significant impact on the capital gains tax regime in the
UK for individuals, trustees and personal representatives.
Action may need to be taken prior to 6 April 2008, if possible, in order to ensure that you
are not adversely affected by the new rules.
For more information contact us or speak to the partner responsible for your affairs.
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Changes to tax for non domiciliaries
After spending many years reviewing the tax treatment of non domiciled individuals, the government appear to have decided that the advantageous treatment afforded to non domiciled individuals, which helps to attract them to the UK, is beneficial to the UK economy and should continue.However, they have also decided that the time is right to introduce a charge for this benefit.
In brief Download our Non domiciliaries factsheet
The principal features of the new proposals are as follows:
- The introduction of an additional tax charge for individuals using the remittance basis, to be set at £30,000 per annum.
- The withdrawal of personal allowances for individuals claiming the remittance basis, which is likely to cost at least £2,000 per annum.
- Ending traditional methods of capitalising income, such that funds could be remitted without a tax liability arising, and to extend the scope of certain anti-avoidance provisions.
- For individuals claiming non residence, the number of days spent in the UK is to now include both the days of arrival and departure.
Only limited information is available in respect of these new proposals, and action should not therefore be taken on the basis of this brief synopsis. Draft legislation is promised for later in the year, and the changes apparently do not take effect until 6 April 2008.
There may, therefore, be a window of opportunity to make some rearrangements prior to 5 April 2008.
The additional tax levy
UK resident non domiciliaries can currently use the remittance basis of taxation. While this is optional, it is generally favourable. It means that offshore investment income and capital gains (and in some cases offshore earned income) is only taxed if and when remitted to the UK.
It is proposed that non domiciliaries can continue to claim the benefit of the remittance basis until they have been resident here for seven years. However, non domiciliaries who have been resident for more than seven years out of the previous ten years can only continue to claim the benefit of the remittance basis if they pay an additional levy of £30,000 for the privilege.
From the announcement it appears that the additional £30,000 tax charge applies after seven years of residence, i.e. in the eighth and subsequent years. For example, for an individual for whom 2007/08 is the fourth year of residence, 2011/12 will be the eighth year of residence and the first year in which the £30,000 levy could be payable.
The remittance basis also applies to individuals who are resident but not ordinarily resident in the UK (irrespective of their domicile status). It appears from the details provided so far that such individuals can continue to claim the benefit of the remittance basis whilst not ordinarily resident, without having to pay the additional £30,000 levy.
Personal allowances
An individual who is resident in the UK is entitled to a personal allowance. However, it is proposed that anyone claiming the benefit of the remittance basis (because they are not UK domiciled or not ordinarily resident) will be unable to claim the personal allowance as well.
Personal allowances reduce an individual?s tax liability by about £2,000 per annum (for a top rate/40% tax payer). Hence, for the non domiciliary who has been resident for seven years or more the additional tax charge, including the new levy, is some £32,000 per annum.
There is a de minimis limit, which allows an individual claiming the remittance basis to retain the benefit of the personal allowance without paying the £30,000 levy, if their unremitted foreign income is less than £1,000 per annum.
Anti-avoidance measures
Other changes affecting the remittance basis include:
- Although unusual, it is possible for an individual who is entitled to use the remittance basis to do so some years, but not others (in which he is assessed on the normal arising basis for world wide income). It is proposed that this will be prevented in future.
- At present, offshore investment income, which is taxed on the remittance basis, is taxable in the year of remittance, but only if the source of that income is in existence in the tax year in which the remittance arose. Hence, by closing a bank deposit account one tax year, the accumulated interest from that account could be remitted in a subsequent tax year, without being subject to UK tax. This 'source ceased' principle is to be abolished.
- There are proposals to extend what is to be regarded as a remittance or constructive remittance. These may include provisions for tracing non UK income and gains subsequently enjoyed in the UK, via offshore company or trust structures.
- Certain anti-avoidance measures which currently do not apply to individuals using the remittance basis may be amended, so that in future they can apply.
Residence
An individual who is present in the UK for 183 days or more in a tax year is regarded as resident. Alternatively an individual can be resident if visits to the UK amount to an average of more than 90 days per annum.
It has been normal practice to treat the day of arrival in and day of departure from the UK as being days of absence for this purpose. It is proposed that from 6 April 2008, the days of arrival and departure will be regarded as days of presence.
For visitors who come for one or two relatively lengthy visits in the UK, this change has minimal impact. However, for visitors with multiple visits to the UK, the change is of major significance.
Consultation
The above is only a summary of the proposals. Draft legislation, which should provide further details will be published later in the year, following which there will be a period of consultation. One of the matters up for consultation is whether individuals who have been in the UK for more than ten years should pay a greater levy.
For more information contact us or speak to the partner responsible for your affairs.
While the proposed amendments to inheritance tax have been "warmly welcomed" by the Society for Trusts and Estate Practitioners as introducing a long wished for transferable nil rate band for spouses and civil partners, there may be some surprises for those who have prudently planned ahead.
The current law Download our IHT factsheet
Presently each taxpayer has an allowance, currently £300,000 for 2007/8, at which inheritance tax is payable at zero per cent (the nil rate band) on their death. As between spouses and civil partners it is common on a first death for the entire estate to be left to the survivor under the spousal exemption with the resultant effect that on the second death only one nil rate band will be available. Previously, careful estate planning was necessary to utilise both nil rate bands.
The proposals
Under the proposals as contained in the Finance Bill 2008 the new rules will allow the unused proportion of the nil rate band of the first dying spouse or civil partner to be used on the death of the widow/er or civil partner at the rate applicable at the time of the second death.
For example, Mr X dies leaving £50,000 chargeable and the remainder of his estate to his wife. At that time, the nil rate band is £200,000, so he has not used 75% of the nil rate band. When Mrs X dies, the nil rate band is £300,000. Mrs X, therefore, benefits from an enhanced nil rate band of £525,000 (£300,000 plus 75% of £300,000).
The Finance Bill also makes provision for the utilisation of the unused nil rate band against any alternatively funded pension scheme charges. A claim for the transfer of the unused nil rate band from a deceased spouse or civil partner (irrespective of the date of their death) may be made by the estate of their surviving spouse who dies on or after 9 October 2007.
The claim should be made by the personal representative or, failing them, the person liable to the inheritance tax charge within two years of the date of the second death.
What the proposals mean
The proposals have been widely reported as being an increase in the nil rate band for couples to £600,000. This is not in fact the case. What it represents is another method of ensuring that a couple jointly enjoy the benefit of two nil rate bands. While the principle behind the proposal is welcomed, caution must be exercised in the case of people with existing nil rate band trust wills who may not obtain the benefit of the uplift to the nil rate band value at the date of the second death.
This change in the rules may pose a dilemma for a person who may still wish to ring-fence their nil rate band for the ultimate use of the children, but at the risk of not receiving an uplift in the nil rate band value at time of second death, assuming that the surviving spouse has not remarried.
The proposals become complicated and do not fully address the complexities of what happens on re-marriage of the surviving spouse, save to suggest that on a surviving spouse's death only one nil rate band is transferable.
Potentially then, where a surviving spouse remarries, a nil rate band may still be lost. It is anticipated that further discussion will follow the publication of the Pre-Budget Report and further guidance should follow.
