Autumn Statement 2016: Private Client
Amid a rather vanilla Autumn Statement from the new Chancellor, some welcome changes for private clients included increases to the minimum wage, the personal allowance, and the savings limits through ISAs. In addition, there was clearly a desire to make the UK an attractive place for non-doms to invest by making business investment relief more attractive. The introduction of the dramatic changes to the UK non-dom regime from April 2017 will see the taxation of long term UK residents aligned with those born in the UK, despite lobbying to delay the commencement of the changes. The further squeeze on pensions ensures that there is no advantage to non-doms or wealthy individuals who work offshore for periods of time and have foreign pension arrangements that might be taxed favourably in the UK.
The Government has committed that by the end of the current Parliament the income tax allowance will increase to £12,500 and the higher rate tax threshold to £50,000. In line with this, from April 2017, the personal allowance will increase to £11,500 (from £11,000) and the higher rate threshold to £45,000 from (from £43,000).
KS Comment: These changes will give modest – but welcome – reductions in the overall tax bills for earners at all income levels. The 60% tax bracket widens to being between £100,000 and £123,000 so individuals with earnings in this bracket should consider pension contributions as gift aid payments to avoid the 60% tax rate.
It was disappointing, however, that there was no move towards simplification of the bewildering array of various tax rates and reliefs that currently exist at the lower end of the tax system.
Pensions and Tax Savings
The continued encouragement of a savings ethic sees confirmation of the proposed increase in the ISA allowances to £20,000 and confirmation that the nil rate band for savings will remain at the current £5,000 limit. There was an announcement of an alignment of foreign pensions with the UK domestic pension regime, taking away potential tax advantages enjoyed by non-doms or those who work overseas for a period of time. In addition, the amount that can be put back into a pension scheme by those who are already drawing them will be significantly reduced, with the Money Purchase Annual Allowance being reduced from £10,000 to £4,000 from April 2017.
KS Comment: The generous increase in the ISA limit from £15,240 to £20,000 from April 2017 is countered by the continued restrictions on pension investment and tightening of rules where some earners were able to secure double pension relief by recycling contributions. The Government’s intention to reduce the attractiveness of pensions, with their associated tax relief, and to encourage savings via ISAs, is clear. The attack on the tax treatment of foreign pensions is an extension on the desire to tax all long-term UK residents, whether non-doms or not, on a similar basis. Wealthy non-doms and those senior executives who have had an opportunity to work overseas for a period of time have often transferred UK pension benefits offshore, or contributed to offshore pension schemes. The intention now is to bring foreign pensions and lump sums into the UK tax system on the same basis as domestic schemes for UK resident beneficiaries.
Reforms to the taxation of non-domiciled individuals from 6 April 2017
The Government has confirmed that the proposed changes to the taxation of non-domiciled individuals from 6 April 2017 will proceed as planned. From that date, non-UK domiciled individuals will become deemed UK domiciled if they have been UK tax resident for 15 out of the previous 20 years.
KS Comment: Despite speculation to the contrary, the widely publicised changes to the taxation of non-domiciled individuals will go ahead as planned on 6 April 2017. Individuals likely to be affected by these changes should take personal advice to ensure they fully understand the implications and possible opportunities. Notably, there are opportunities in relation to treating non-UK assets as if they were purchased on 6 April 2017 for capital gains tax purposes and cleaning up mixed bank accounts.
Taxation of UK residential property held through non-UK structures
It was confirmed that from 6 April 2017 the transfer of UK residential property will always be subject to inheritance tax, even when held indirectly through an offshore structure.
KS Comment: Changes to the tax treatment of offshore structures holding UK residential property have been a regular feature of recent Budgets and Autumn Statements, and this measure is a further attempt to crackdown on these structures. The Government recently consulted on the precise way in which this measure would be introduced and it will be interesting to see the final format of these changes.
Update – 5 December 2016: In response to representations from Kingston Smith and others, the Government has now abandoned plans to charge IHT on any property which had been used as a dwelling at any time within two years preceding a transfer, and instead the new charge will be based on the nature of the estate at the point the transfer of value is made.
Business Investment Relief
The rules governing business investment relief – under which non-domiciled individuals can remit non-UK income or gains into the UK without incurring a tax charge – will be widened from 6 April 2017 with a view to increasing its usage.
KS Comment: Business investment relief is a generous and comparatively flexible relief available to UK resident non-domiciled individuals. It is not yet clear exactly how the relief will be widened, although currently the relief is restricted to investments in UK limited companies and it is hoped that a wider variety of investments may qualify in the future.
Update – 5 December 2016: The Government has now confirmed that there will be a number of minor – but welcome – changes to various definitions relating to qualifying investments, and to the anti-avoidance rules. The Government has said that it is prepared to consider further some of the suggestions that were made for widening the scheme as part of the consultation exercise, but will not have time to do so before the legislation is changed with effect from April 2017.
New Tax Allowance for Property and Trading Income
As announced in the 2016 Budget, two new income tax allowances of £1,000 each for trading and property income will be effective from 6 April 2017. Where individuals have trading and/or property income below this level, the income will not need to be declared to HMRC and can be regarded as tax-free. It was announced today that the trading income allowance will be extended to miscellaneous income for the provision of assets or services – the precise type of income this extension will cover is unclear but will no doubt become evident as the details emerge.
KS comment: These new allowances are intended to simplify the reporting requirements for individuals with small levels of property or trading income, although for some they could raise more questions than answers.
Update – 5 December 2016: It has now been confirmed that those with higher amounts of income will have the choice as to whether they deduct the allowance from their income, rather than actual allowable expenses.
Tackling disguised remuneration for the self-employed
As part of the usual raft of anti-avoidance measures the Government is proposing to counter perceived avoidance by the self–employed through disguised remuneration schemes.
KS Comment: This is an extension of similar counter avoidance measures against schemes used by employers and employees. The Government and HMRC claim most such schemes don’t work, but this proposal should put the matter beyond any doubt; it is reflective of the ever-increasing attention to countering avoidance schemes and the Government’s desire to see a level playing field between taxpayers, so that everyone pays their fair share of tax and NIC.
Life Insurance Policies
The Government will legislate in next year’s Finance Bill to mitigate the disproportionate tax charge that can arise in some circumstances from the part-surrender and part-assignment of certain life insurance policies.
KS Comment: This is some welcome news. In a recent tax case the Upper Tier Tribunal managed to find a way around the strict technical analysis of the way in which a particular “chargeable event” was taxed, but in other cases disproportionately high tax charges can arise. Whilst this change won’t affect a large number of taxpayers, it is a welcome recognition of economic reality for those taxpayers that invest through life insurance-related products. It will also mean the judiciary will not now have to try to find an escape route to reach a reasonable outcome!
Update – 5 December 2016: Following publication of the draft legislation, we now know that where individuals have inadvertently generated a wholly disproportionate tax charge, they will have the opportunity to apply to HMRC to have the charge recalculated on a just and reasonable basis.
Abolition of Class 2 National Insurance Contributions
The Government has confirmed a previous announcement that Class 2 NICs will cease after 5 April 2018. For self-employed individuals (including those in partnership) the contributory element towards certain benefits will be maintained either from reformed Class 4 NICs or through voluntary Class 3 NICs.
KS Comment: With Class 2 NICs now being collected along with Class 4 NICs through the annual tax return, this will be a small but welcome simplification for most of those affected. However, it remains to be seen how the Government plans to reform Class 4 NICs to bring in the contributory element and whether there will be any change to the Class 4 rates. In addition, there are some who are currently able to pay Class 2 NICs, to protect their benefit position, that may in the future be required to pay Class 3 NICs, which are higher and which do not give entitlement to all of the same benefits.