'As a result of the government's reforms to tax, welfare and public spending across this Parliament, the richest households will make the biggest contribution to reducing the deficit, both in cash terms, and as a proportion of their income.' This statement, set out clearly in the Autumn Statement document, gives a fair indication of the impact of a number of measures announced today. While there is good news for savers, first time buyers and pension holders, others might feel rather hard done by.
Mansion tax by another name – or a general squeeze on property ownership?
The last few months have seen fevered speculation and 'will they/won't they' debates about the possible introduction of a mansion tax. Would it happen? If so, when? At what rate? What should be done?
Well, today George Osborne gave us the answer – yes, and its name is Stamp Duty Land Tax ('SDLT').
One of the most complex and challenging aspects for any administration wishing to introduce a mansion tax (or any other sort of value based property tax) has been the fact that any form of effective implementation of such a measure would require there to be extensive revaluations of properties. Today's measure neatly sidesteps that problem by providing for, in effect, a one time charge.
In a nutshell...
There is to be a radical change to the SDLT system for residential property with effect from midnight tonight. Under the present system, SDLT leads to market distortion because of the way in which a single rate of tax applies to the entire value of a property. Consequently, there is a clear disincentive to buy a property just above the margin for a higher rate.
This changes from tomorrow with SDLT applying so that the purchaser will pay the higher rate for the part of the property within each tax band. However, there will be significant changes to the bands, and high value properties will be subject to significantly higher total SDLT charges. In brief, a 0% rate will apply up to £125,000. From £125,001-£250,000 a 2% rate applies, and from £250,001 – £925,000 a 5% rate applies. In excess of that the rates really jump after that with a 10% rate applying from £925,001-£1.5m and a 12% rate over £1.5m.
The breakeven purchase price is £937,500. Any purchase of a property worth more than that will lead to an SDLT charge higher than was applicable under the previous regime. Hence, rather than simply imposing a tax on properties worth more than £2m (as was expected with mansion tax) now all purchasers of, effectively, an average London house bear a higher up front cost than previously.
The greater the purchase price, the greater the incremental effect, and the figures are striking. For example, a £10m property will now carry a £1,113,750 SDLT charge on acquisition, whereas previously the charge would have been £700,000. Given the recent slow down in sales of high value properties, one has to question the wisdom of the changes to this tax at this point in the market.
Extra ATED charge
Furthermore, the Annual Tax on Enveloped Dwellings ('ATED') is to increase. Encouraged, it would seem, by the fact that this new tax raised 5 times the amount forecast for 2013-14, the ATED rates are set to increase by 50% above inflation. From 1 April next year all residential properties subject to ATED and owned through a company or other 'enveloped' structure will be subject to ATED at £23,350 for properties worth £2-£5m (which would have been £15,400 before today's increase), £54,450 for those worth £5-£10m (this would have been £35,900 before this increase) and £109,050 for those worth more than £10m but less than £20m (this would have been £71,850 before the increased charge announced today). Properties above £20m caught by ATED will pay tax at £218,200 (whereas prior to the increase announced this would have been £143,750).
No doubt, purchasers of high value properties going forward will spend quite some time deciding whether to bear an ATED charge or pay really rather large SDLT costs. Either way, this does not sound an encouraging note to residential property investors or purchasers.
And a bit of CGT on top...
Of course, these measures come on top of the confirmation last week that non-resident owners of UK residential property will be subject to CGT at (generally) 28% on any gains realised on residential property after April 2015.
It goes without saying that this trio of changes will have an effect of the property market. One hopes first time buyers will be assisted, but equally others will bear a disproportionate burden. There has been a huge amount of change to the taxation of residential property ownership since the introduction of ATED. We all know uncertainty is bad for a country and for business. Let us hope this signals the end of any changes for this area of taxation.
Remittance basis – new charges
An extremely encouraging piece of news is that the government remains committed to the remittance basis. However, the annual charge for those who elect to be taxed on the remittance basis is set to increase for those who have been resident for at least 12 out of 14 years, from £50,000 to £60,000. A new level of charge will also be introduced for those who have been resident for 17 out of the last 20 years (mirroring the deemed domicile rules for inheritance tax) which will be set at £90,000.
It is to be remembered that at present these charges can be opted in and out of on a year by year basis, so that one would only opt to be taxed on the remittance basis in a year when tax on offshore income and gains would be more than the charge. However, this may be set to change with the announcement today that there will be a consultation on making any decision to pay the remittance basis charge apply for a minimum of three years.
As may have been predicted given all the rhetoric over recent months, 'fairness' is one of the main themes that runs through the whole Autumn Statement, and a number of the measures contained within it are concerned with tax avoidance and ensuring 'that all businesses and individuals pay their fair share'. We are told that the public has spoken and 'the public rightly expects the government to be firm', and as a result of the government being firm. It is expected that a further £7.6 billion of additional revenues will be generated in 2015-16.
The so-called 'Google Tax' will generate many headlines. This is the introduction of a new Diverted Profits Tax of 25% with effect from 1 April 2015 which will apply to multinational companies who seek to use artificial arrangements to divert profits overseas so as to avoid UK tax. The aim is to ensure that multinational companies pay the 'right' amount of UK tax, though it is not clear what the 'right' amount actually is, especially as this seems to represent a move away from the traditional basis of UK corporation tax.
Individuals who evade tax offshore are being targeted further and, unsurprisingly, can expect no respite, with enhanced civil penalties for offshore tax evasion being introduced with effect from April 2016. Amongst other measures, these will bring inheritance tax within the penalty net and will also introduce a new aggravated penalty of up to a further 50% (which will come into effect upon the Finance Bill receiving Royal Assent in 2015) for moving hidden funds to other jurisdictions to circumvent international tax transparency agreements.
Treats for whistleblowers
In case the tax transparency agreements are not completely sufficient, anyone who provides HMRC with information on offshore tax evaders will receive 'enhanced' financial incentives for doing so (following in the footsteps of various leakers of information over the last few years). This would seem to raise both legal and ethical questions regarding whether it is appropriate for the government to seek to incite individuals to break confidentiality clauses in their contracts of employment and to disclose such information, but such is the government's view of tax evaders, these concerns seem to have been overridden.
Bad news for serial evaders
Closer to home, and presumably predicated on the reasonable belief that no-one wants to find themselves as next week's front page news, the Disclosure of Tax Avoidance Schemes ('DOTAS') regime will be strengthened so as to prevent circumvention of the rules and there will also be greater public disclosure of such DOTAS schemes and their promoters. A new taskforce to police the DOTAS regime will be introduced. There will also be a consultation on further measures that can be taken to deter 'serial tax avoiders' (including naming and shaming them publicly) and also on introducing penalties for cases where the General Anti-Abuse Rule ('GAAR') applies, notwithstanding the fact that no cases have as yet been brought under the GAAR. This is interesting and will be closely watched if only to give an indication of when HMRC considers it should raise the GAAR. It might also be read as confirming that there is a desire to ensure the GAAR is only used as a tool in extreme cases.
Further to the introduction of direct debt recovery, a series of new additional safeguards have been announced, so that this power will only be used in carefully reviewed cases. The additional safeguards include a guaranteed visit from an HMRC agent to every debtor who is considered for debt recovery, to allow HMRC to identify vulnerable debtors, as well as slower implementation of direct debt recovery in the first year in which it is in force. Further, and encouragingly, judicial oversight of the use of this measure will be enacted by allowing appeal to a County Court. It is helpful that account seems to have been taken of some of the concerns raised since this measure was introduced.
Special purpose share schemes or B share schemes
In what has become rather par for the course, there was a focus on targeted anti avoidance for specific structures. These schemes are a method used by some UK companies to return excess capital to shareholders. It gives shareholders the opportunity to receive payments that should be treated as capital rather than as income such as to benefit from the lower rate of capital gains tax. The most common schemes involve a bonus issue of new B shares to existing shareholders which are then repurchased or redeemed by the company.
The government has announced that legislation will be introduced from 6 April 2015 to ensure that all returns made to shareholders through such schemes will be taxed in the same way as dividends.
Operators of B share schemes will wish to consider next steps including possibly winding up any schemes by 5 April 2015. In particular, certain B share schemes provide for the capital payment to be deferred to a fixed date, so the possibility of bringing forward repurchases or redemptions should be explored.
Investment managers' disguised fee income
The government will introduce legislation from 6 April 2015 to ensure that sums which arise to investment fund managers for their services are charged to income tax. However, sums linked to performance, such as carried interest, and returns exclusively from investments by partners, such as co- investment arrangements, will not be caught by the new rules.
It is not entirely clear what arrangements will be caught as most robust arrangements are clearly linked to performance.
Interestingly, the government expects this restriction to raise £160m in 2016/17 tapering down to £55m by 2019/20. Is the government predicting investment managers' income to decrease or for investment managers to find new ways to generate capital receipts?
Good news for trusts
Following the consultation which has been taking place about inheritance tax and trusts, it has been announced that the government will not introduce a single settlement nil rate band. However, new rules (the details of which are not yet available) will be introduced to target the use of multiple trusts and the tax calculations will be simplified.
Measures for savers
In a move clearly advantageous to savers, the Chancellor has announced measures that will make ISAs increasingly attractive as a long term position.
Where an ISA saver dies, his or her surviving spouse or civil partner will enjoy an ISA allowance increased to reflect the value of their spouse's ISA holdings at the date of death thus preserving the tax free status of the spouse's ISA holdings on an ongoing basis.
The government will increase the ISA, Junior ISA and Child Trust Fund annual subscriptions in line with the Consumer Price Index. The 2015/16 ISA limit will be £15,240 and the Junior ISA and Child Trust Funds will be increased to £4,080.
From April 2015 beneficiaries of individuals who die under the age of 75 with remaining uncrystallised or drawdown defined contribution pension funds, or with joint life or guaranteed term annuity, will be able to receive any future payments from such arrangements tax free where no payments have been made to the beneficiary before 6 April 2015.
The tax rules will also be changed to allow joint life annuities to be paid to any beneficiary. Where the individual was over 75 on death, the beneficiary will pay the marginal rate of income tax or 45% if the funds are taken as a lump sum. Lump sum payments will be charged at the beneficiary's marginal rate as of 2016/17.
A series of consultations were today announced, including potentially a further restricting on the personal allowance for non-UK residents, a consultation on introducing further deterrents for serial tax avoiders, as well as penalties in cases where the GAAR rule applies.
Measures not being pursued
Having reviewed the position, the treatment of loans to participators of close companies remains unchanged.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.