Please find a recording below from our recent breakfast seminar 'planning for your private clients'. Speakers are private client partners Caroline Le Jeune, Susan Spash and Nimesh Shah.
As discussed in the seminar, with the forthcoming Budget and the General Election around the corner, the coming year is likely to see significant changes to the UK tax landscape. In particular, we expect tax policy to be one of the main points of debate at the General Election.
We thought it might be interesting for you to hear the thoughts of some of our partners on recent changes and what they think might (and/or should) be in store for the year ahead.
Caroline Le Jeune, Partner, Private Client
“When the Coalition Government came to power, they immediately reviewed the taxation of non-domiciled individuals (“non-doms”) and several new measures were announced. A new £50,000 remittance basis charge was introduced for non-doms who had lived in the UK for more than 12 years. The Business Investment Relief was brought in, which allowed non-doms to bring overseas monies to the UK for investment in UK businesses, and this was a positive measure.
However, the Coalition Government had made a commitment to ‘no further substantive changes for the rest of this Parliament’ to the taxation of non-doms. It was therefore disappointing that unexpected changes were announced in the 2014 Autumn Statement to increase the £50,000 remittance basis charge to £60,000 and to introduce a new £90,000 charge. In addition, a consultation was announced which proposes to ‘lock-in’ a non-doms into the remittance basis charge for a minimum of three years. These latest announcements go against the Coalition Government’s pledge to provide certainty and consistency over the rules for non-dom taxpayers and could lead to non-doms leaving the UK.”
Frank Nash, Partner, Private Client
“I think this year will present a unique ‘crossing’ in that tax avoidance will be the second or third biggest General Election story and, of course, the Budget will be seen as linked to the General Election on that particular count. All parties must step away from the brink of hitting those who individually contribute the most – non-doms, foreign inward investors and the small and medium-sized entrepreneurial sector. For the internationally mobile investor, tax is definitely price-elastic.
In particular, the Government needs to assess the contribution of a non-doms coming to live in the UK – how much Stamp Duty Land Tax (“SDLT”) they pay, VAT on property refurbishment, PAYE on businesses they establish, etc. My inkling is that a non-dom, even if only paying the remittance basis charge would be in the top 5% of income taxpayers.
Any move to tinker and uplift taxes on UK residential properties could potentially be the last straw. As SDLT and VAT are the fastest growing taxes, it is a danger to rely too much for the recovery of UK tax revenues on the ability to continually extract from a small number of high value houses in central London. The story here needs to be ‘steady as she goes’ I think.”
Paul Smith, Partner, Corporate Tax
“Only one capital gains tax (“CGT”) please!
CGT was first introduced in the UK in 1965 and on 6 April 2015 it will be 50 years old.
For the first 48 years it did not apply to non-UK resident companies at all. However, in 2013 the Government introduced the Annual Tax on Enveloped Dwellings (‘ATED’), and with that, the ATED-related CGT. Essentially, a company that is subject to the ATED has to pay CGT at 28% on the subsequent sale of the property. When ATED was originally introduced, it only applied to residential properties valued over £2 million but from April 2016, it will apply to properties valued over £500,000.
From 6th April 2015, a further CGT charge will take effect for all non-doms selling UK residential properties. For this new CGT, the usual personal and corporate rates of tax will apply. Unlike ATED-related CGT, there is no minimum property value and the tax will apply to all UK residential properties.
For almost 50 years, there was no CGT on non-UK resident companies and now there will be two different rates imposed on the same companies on the same transaction. There are complex rules to determine which tax should take priority over the other.
If the Government wants to extend CGT to non-UK resident companies irrespective of the value of the property they should abolish the ATED-related CGT at the same time. Please do not produce unnecessary tax legislation that leads to confusion and an even more complex UK tax regime.”
Nimesh Shah, Partner, Private Client
“The UK’s tax code is one of the longest in the world and the raft of legislative changes (in particular over the last few years) has resulted in uncertainty for taxpayers, but more importantly UK businesses. The Office for Tax Simplification was established to streamline the UK’s tax code but we have not seen much in the way of simplification. If anything, measures introduced to target tax avoidance have created more complex provisions and, whilst tax avoidance needs to be addressed, reactive legislation is not necessarily the answer. We may not be far away from yet another complete re-write of the UK’s tax legislation.”
Alan Pearce, Partner, VAT
“Personally, I don’t think there will be any major announcements on VAT in this pre-election Budget (or anything too dramatic regardless of who is in power after the General Election).
There are two on-going campaigns for VAT reform at the moment:
VAT on tourism – this is essentially a campaign to reduce the VAT rate to 5% on hotel accommodation and admissions to events in order to stimulate expenditure in tourist areas around the UK and encourage more overseas visitors. The claim is that the reduction in VAT revenue would be more than compensated for by the increase in spending and associated employment. This has been an on-going issue for a number of years but I don’t see any change being introduced in the near future.
VAT on restaurants and catering services – this is a campaign largely instigated by the pub and restaurant trade (championed by Weatherspoons) for a reduction in the VAT rate to 5% on meals. There is a suggestion that there is unfair competition with supermarkets paying no VAT on food and pubs and restaurants paying 20%. I don‘t wholly accept this as they are not comparing like for like. Again I can’t see any changes on this front being announced anytime soon, especially after the “pasty tax” fiasco a few years ago.”
Susan Spash, Partner, Private Client
“When the Coalition Government came to power in 2010, they pledged to increase the personal allowance to £10,000 to help hard working families. The personal allowance was increased to £10,000 for the tax year 2014/15 and, in the 2014 Autumn Statement, the Chancellor announced the personal allowance would be increased to £10,600, exceeding the Coalition Government’s pledge.
However, whilst the point at which a person starts to pay income tax is higher now, corresponding reductions in the basic rate tax band have brought more people into higher rate tax.
In 2009/10 (the last tax year of the Labour Government), the basic rate tax band was £37,400, albeit the personal allowance was only £6,475. A person would need to earn over £43,875 before they paid income tax at 40% i.e. personal allowance of £6,475 plus the basic rate tax band of £37,400. In the current tax year 2014/15, a person starts to pay income tax at 40% on earnings over £41,865. This simple illustration shows how the reduction of the basic rate tax band over the last 5 years is likely to have dragged more people into the 40% tax bracket.
In addition to the reduction in the basic rate tax band, the Coalition Government also introduced the “High Income Child Benefit” charge, which affects individuals who have income over £50,000. For every £100 of extra income over £50,000, you repay 1% of the Child Benefit payments, until you reach £60,000 when the Child Benefit payments are completely clawed back.
Take the following example of a typical family of two children where only one parent works, earning £62,000, comparing their position in 2009/10 to now –
||Tax year 2009/10
||Tax year 2014/15
£6,475 personal allowance
£37,400 at 20% = £7,480
£18,125 at 40% = £7,250
Total income tax = £14,730
£10,000 personal allowance
£31,865 at 20% = £6,373
£20,135 at 40% = £8,054
Total income tax = £14,427
£5,715 - £40,040 at 11% = £3,776
£21,960 at 1% = £220
Total National Insurance = £3,996
£7,956 - £41,865 at 12% = £4,069
£20,135 at 2% = £403
Total National Insurance = £4,472
|Child benefit payments received
In this situation, the family is almost £2,000 worse off.
With particular regard to the “High Income Child Benefit” charge, every £100 of extra income over £50,000 equates to tax of £17.71 i.e. £34.05 Child Benefit multiplied by 52 weeks at 1%. The person’s effective rate of tax on the extra £100 income is almost 60% (an anomaly that again arises in income between £100,000 and £120,000 with the withdrawal of the personal allowance) - 40% income tax, 2% National Insurance and 17.71% “High Income Child Benefit” tax.
It is clear from the above that the various changes have hit middle earners and the Government should be considering tax policy measures to redress this unfortunate position to help hardworking families who have been squeezed in recent years.”