UK Budget Update - March 2014

UK Budget key points: Changes to ATED and Dual Employment Contracts

Earlier this month, the UK Chancellor of the Exchequer George Osborne delivered his annual Budget speech in which there were two announcements that are of particular interest.

1. Taxes on residential dwellings

Annual Tax on Enveloped Dwellings (‘ATED’)

On 1 April 2013 the UK introduced an Annual Tax on Enveloped Dwellings. The tax applied to all UK residential properties with a value of more than £2 million that are owned by ‘non-natural persons’, excluding direct ownership by trustees.

The Chancellor has announced that the ATED will be extended to residential properties owned by non-natural person that are valued at more than £1 million with effect from the 1 April 2015 with the value threshold being reduced to £500,000 from 1st April 2016. In addition, the charge will be increased annually in line with the CPI inflation.

A declaration must be filed annually by the non-natural person and the tax paid on or before the 30th April.

The ATED tax charges can be summarised as follows:

Capital Gains Tax

Introduced at the same time as ATED in 2013, was an increased charge to capital gains tax on disposals by non-natural persons of high value residential properties at a rate of 28% on the part of the gain that accrued after 6th April 2013.Gains prior to that date would be charged under the rules applicable at that time.

In line with the changes to AETD, the 28% capital gains tax charge will be extended to properties valued at £1 million or more from 6th April 2015 and £500,000 or more from 6th April 2016. Gains that accrued prior to the dates will be treated in accordance with the rules applicable at that time.

Stamp Duty Land Tax (‘SDLT’)

In March 2012, SDLT increased to 15% on the purchase for non-natural person of residential property worth £2 million or more.

The 15% rate will now apply to properties where the consideration is £500,000 or more when the ‘effective date of purchase’, that is the ‘substantial completion date’, occurs on or after 20th March 2014.

Reliefs

There are certain reliefs from ATED, CGT and SDLT at 15% including, development property, rental and trading business and residential property for employees.

2. Dual Contracts for Non-Domiciled Individuals

It is not uncommon for UK resident non-domiciled employees who perform duties both in the UK and elsewhere to have two contracts, one in respect of UK duties and the second for non-UK duties. The remuneration under the UK contract being subject to UK tax and charges while the non-UK remuneration if paid by a non-UK employer, can qualify under the remittance basis providing it is paid into a non-UK bank account and retained outside of the UK.

HMRC has spent some time looking at such arrangement, which it considered to be an artificial arrangement, but it has taken until now for the government to act. Changes have now been announced, that will take effect from 6th April 2014. From this date remuneration for services performed outside of the UK under a dual contract will no longer qualify under the remittance basis, if the foreign tax paid on that revenue is less than 65% of the amount that would have been levied had UK tax been charged at the UK’s top rate of 45%. In circumstances where tax has been paid outside of the UK, the tax paid will be credited against UK tax liability.

3. HMRC direct access to recover tax from bank accounts

As announced in the Red Book, with effect from 2015, HMRC will be given new powers to directly access individual and company taxpayer bank accounts to satisfy tax liabilities that they believe are due. Consultation is expected on this proposal which appear to reinstate a Crown preference.

This power is unprecedented in the UK and other than a comment that a minimum of £5,000 would be left in debtors’ accounts; the announcement contains no details of any judicial or other safeguards that could protect taxpayers. As commented by the Tax Faculty of the ICAEW this would be particularly serious for those on low incomes struggling with debt problems. One can imagine that this will have the adverse effect, by encouraging debtors to either hide or move funds to jurisdictions outside the scope of these powers.

HMRC has said it will only use this new power where debtors ‘have the financial means to pay’ and have been contacted multiple times to pay. It will be interesting to know how HMRC will be able to determine whether a debtor has the financial means to pay. Also, many people who are in debt will ignore such demands if they have no money, or they will tend to pay the most pressing debtor at the expense of others, for example to avoid having their electricity disconnected. What will be the “rigorous safeguards” put in place to ensure hardship does not follow such seizure of funds?

4. Other Points

Capital Gains Tax for non-UK Residents

In last year’s autumn statement it was announced that from April 2015 that there would be a charge to UK capital gains tax on disposals of UK residential property by non-UK residents. The Chancellor confirmed that the Government is to consult on the proposed change and the publication of the consultation paper will follow shortly.

Trusts and Inheritance Tax

With effect from 6th April 2014, trust income that has been accumulated for at least the last five years, will be included in the calculation of the capital value for the purposes of the 10 year charge.

It was also announced that there will be a consultation on the proposal to split the nil-rate band for Inheritance Tax applicable to trusts established by the same settlor and measures to simplify charges to trusts.

We will keep you updated on both these consultations.

For more details on tax and estate planning services provided by Rosemont International companies see: http://www.rosemont-int.com/our-skills/tax-planning-/