TAX NEWS - may 2010
UK Tax: Conservative-Liberal Democrat coalition.. Tax threat? Tax opportunities?
Who is likely to be affected?
More detail will be available once the full Coalition Agreement between the two parties has been published, but it is already clear that some taxpayers need to be reviewing their position to see whether there is precautionary or positive planning that they could be considering. These include:
Individuals and trusts with significant unrealised capital gains on non-business assets
The Heads of Agreement states: 'We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities'.
Individuals or trusts with assets currently at a significant gain should seek immediate advice about whether any of the various routes that can be used to crystallise gains at the current low rate may be suitable for their particular circumstances. Possibilities range from transferring assets into or out of trust where appropriate, to more technical arrangements such as the use of uncompleted contracts.
When the capital gains tax rate was reduced to 18% in 2008, the maximum effective rate on trust gains for those benefiting from an offshore trust fell from 64% to 28.8%. Even at 28.8% some offshore trustees may have hesitated to distribute their gains, or they may have been working to a longer term strategy for dealing with gains (for example if they would prefer their beneficiaries to receive assets at a rather older age).
Trustees, settlors and beneficiaries of offshore trusts now need to consider whether, looking at things in the round, they should be taking action in the near future for fear of higher rates. This issue comes into sharp relief when it is remembered that this effective maximum rate of 64% was linked to a capital gains tax rate of 40%. Many trust beneficiaries will in fact come within the new 50% income tax bracket, not just 40%. If the capital gains tax rates are aligned with the new income tax rates, the 64% maximum may be pushed up to an 80% effective rate.
Offshore financial centres
Another area that has been a concern to the Liberal Democrats, and which will currently be in the coalition melting pot, is the loss of tax revenue by the displacement of corporate and personal income to tax havens. They particularly dislike the fact that a number of offshore financial centres are in fact British sovereignties that have been encouraged to develop their financial services industries to reduce their dependence on government subsidies. Again, clients with interests in these areas need to monitor developments closely.
As Chancellor, Alistair Darling gave an assurance that the rules for non-doms would remain settled for the duration of both the last Parliament and the one to follow. He has, of course, now no control over the actions of the current Parliament, but it may be doubted whether the new Government will have an appetite for widespread alterations, given how unsettling change in this area is perceived to be. Nonetheless, any individual whose domicile position is at all uncertain might do well to review their options at this stage.
Anti-avoidance / purchasers of real estate
The Heads of Agreement states that 'The parties agree that tackling tax avoidance is essential for the new government, and that all efforts will be made to do so, including detailed development of Liberal Democrat proposals'.
One Liberal Democrat proposal related to the avoidance of Stamp Duty Land Tax by using offshore business structures or a UK company. They wanted to bring forward legislation to look through any structured transaction so that, where there is any beneficial UK ownership, the purchase of the property would be liable to SDLT. Anyone with an interest in this area needs actively to consider a review.
Detailed decisions on which of the Liberal Democrat antiavoidance proposals will in fact be adopted (and to what extent and in what way) are among the issues currently being thrashed out by the coalition partners.
Individuals who would benefit from inheritance tax planning
The Coalition has agreed that the Liberal Democrats' proposal to increase the income tax personal allowance should take priority over other tax cuts, and that includes priority over the Conservative proposal to raise the inheritance tax threshold to £1 million. Some individuals may already have reckoned that, given the economic situation, this had anyway become little more than an aspiration, but the fact that it has now been formally deferred re-emphasises the importance of good lifetime inheritance tax planning, as this can significantly reduce the estate tax burden on death.
Likely timing for changes
The Conservatives had planned to have a Budget by 24 June. The Heads of Agreement indicates that there will be an emergency Budget within 50 days of the signing of the (yet-to-be-published) detailed Coalition Agreement. This extends the possible timescale for the Budget to early July, but probably not much later.
Will all these changes happen in the Summer Budget?
Conventionally, some tax changes only happen as from the beginning of a new tax year on 6 April, and it has already been announced that the Liberal Democrats' proposal for a substantially increased personal allowance will only be effective from April 2011. Quite apart from convention, at the most basic of practical levels, any other timing for changes of this sort would probably give the HMRC computers total seizure!
Normally a change in the rate of capital gains tax would be a 'new tax year' item, but there may well be a political reluctance to wait that long. Recent experience in the world of pension taxation shows that the practical effect of a mid-year change can be achieved immediately through 'anti-forestalling' legislation, even though the technical rate change waits until the new tax year. So it is certainly far from safe to assume that there is a long planning window to get matters in good order for any change in the capital gains tax rate, or indeed for other changes of this sort. The earlier advice is sought, the better.