|
Speaker
|
Transcript
|
|
Tim Williams, Partner
|
[Music] Hello and welcome back to Death and Taxes a Private Wealth Podcast from Burges Salmon. My name is Tim Williams and I'm delighted to be joined by my colleagues from our Tax and Trusts team, John Barnett and Edward Hayes.
|
|
Edward Hayes, Director
|
Thank you very much Tim. When we were thinking of what to say here we were conscious that just going through a list of what's been announced probably isn't the most productive for our listeners, there's plenty of commentary online from us and others and you can see what has been announced by the treasury's own publications, but there were several things that came out of the more detailed documentation, in particular, things like the technical consultations, the notes and the draft legislation that won't have been in some of the news coverage and haven't been picked up by everyone. So we thought if we run through some of the more important aspects that we've come across in our analysis and from there we'll move on to John Barnett's much more informed view on the context and wider implication of this Budget.
So Tim, if you're happy to start with the CGT and then maybe the BPR and APR rules what did you think was particularly important to flag from those?
|
|
Tim
|
Well, thanks Ed, you've read all about the rate changes to CGT, but I think the interesting bits were around anti-forestalling and there was some, there were sort of three elements to this, there was a sort of main measure, which I'll talk about in a moment, and then some specific draft legislation in relation to business asset disposal relief, entrepreneurs relief that was, and investors relief as well. I won't get into the detail of those, but the main measure was to counteract attempts to take advantage of the rate change by accelerating the tax point of a particular contract to capture the rate of tax enforce at the point before the changes took place, in this case before the 30th of October.
And what the rules say, and there is draft legislation on this, is that where you have a transaction where the contract was entered into before the 30th October, but the transfer happens later, the effect of this is going to be to put the tax point for the for CGT at the point that the transfer happens. Unless that is, you can show that there was no purpose of that transaction to achieve a tax advantage. So there's a few points to note in there, one is that transfer is not really very clear what that means. I mean, is this designed to catch the traditional sort of exchange of contracts and later completion, because that's very common in, you know, lots and lots of arms length transactions. So it's not very clear whether it's meant to be as far-reaching as it sounds, and the other is the no purpose test is very limited, we often have a main purpose test, or main purposes test in tax legislation, but for there to be a no purpose test is quite far-reaching. So it remains to be seen I think whether the draft legislation that we've got gets revised and how those rules look when they are eventually brought in.
|
|
Ed
|
That's very interesting on CGT, thank you Tim, how about on IHD, what have you noticed in the new BPR and APR rules?
|
|
Tim
|
Yes thanks ED, so the APR and BPR rules, the big change is that there is now for most BPR and APR property going to be a cap of a million pounds of value over which you can claim 100% relief and values of APR and BPR property above that are going to be the relief is going to be capped at 50% so quite a lot less generous there, but AIM shares, which currently qualify for BPR at 100%, will now only qualify for 50% relief and there will be no million pound allowance there for the 100% relief, as there is for other APR and BPR property.
The interesting points to note there are, there is an opportunity still for people to look to use the 100% relief before April 2026, when these new rules come in. But do note that transfers of value from the 30th October, so transfers of value I mean gifts to individuals, or gifts into trust now, will be taxed on the current rate when the gift is made. So if you've got 100% relief now you will keep that at the point you make the transfer, but if the person making the gift were to die after April 2026, but within 7 years of making their transfer. The clawback of that tax will be calculated under the new rules, so that million pound cap and the 50% relief thereafter. So whilst there is that opportunity now to potentially move some assets down a generation or into trust with the full allowances, there is a bit of a sting in the tail there for people who are maybe less likely to survive for that full period.
Other interesting points to note is that million-pound allowance is a one-off lifetime allowance when it's not transferable between spouses so it's a use it or lose it type allowance so really important for clients who've got wills at the moment that currently leave everything to their spouses to make sure that those are updated to capture that 1 million pound allowance to make sure it's fully utilized. So that's enough from me about the general IHT changes. Ed, over to you to talk about the non-dom changes.
|
|
Ed
|
Thank you, and again, like you've just done there I think we won't go through everything but we'll pull out some of the bits and pieces that not everyone would have picked up on.
So on the four-year FIG regime that's obviously coming in with effect from 6 April 2025 and replacing the remittance basis. One thing I've been particularly interested in there is this need to claim it, so the remittance basis did sometimes apply automatically, the new four-year FIG regime will always have to be claimed and actually if you look at the mechanics of that you can really think of it as making one or more of three possible claims. You can claim the four-year FIG regime in relation to foreign income in a tax year, you can claim it in relation to foreign gains in a tax year and you can claim overseas workday relief in relation to employment income in a tax year and you can mix and match between those depending on your circumstances.
Now, any of those claims has a number of implications such as losing you personal allowances and so forth, but an important difference between the type of claim you'll make here, as compared to what we used to do for the remittance basis, is you will need to specify the foreign incoming gains that you are relieving using the claim and that is a big difference because under the remittance basis you just said I'm opting into a remittance basis and you didn't have to work out what you are actually shielding with that. This new claim will only be effective to the extent you specify what you were relieving with it and that was quite a big difference in terms of clients kind of reporting and accounting obligations. There's also a much shorter period in which to make that claim, so clients will need to be better advised I think and be more proactive in understanding when it is applicable to them because they will run out, or the option to make it, will run out sooner than it would have otherwise.
Then in relation to one of the transitional rules, which is the temporary repatriation facility, I think it's really important to stress that this facility, which is going to allow people to remit foreign income and gains in the three tax years beginning '25/26 at a flat rate you, only need to designate funds for use with the temporary repatriation facility, you don't need to work out what they actually are, i.e. are they actually foreign income gains, or are they a mix, or is this some capital in there whatever is in there, you just choose and say I'm designating this amount, you pay the charge, whether it's 12% or 15% depending on the year, on that amount and then you can bring it in tax-free. So actually, theoretically it's quite a simple process which will hopefully quite practical for people to use.
On Inheritance Tax for non-doms there's all sorts we could go into there, but I think one point that's causing a little bit of confusion that's worth clarifying is this transitional tail for those who are non-domiciled as of the 30th October 2024 and become non-UK resident by the tax year '25/26 at the latest. And I think when you read that rule the way it's described in the technical note and the draft legislation it can be a bit confusing as to what the actual practical impact is, but when you work it out it's relatively straightforward. So if you have a client who is non-UK domiciled on the 30th October 2024 and their first year of non-UK residence was the 2022 or the 2022/23 tax year or earlier, they will never be caught by the new IHT rules, as long as they stay outside of the UK. If they're someone who was non-domiciled as of 30th October 2024 but their first year of non-UK tax residence is '23/24 or later, then their position is going to depend on how many tax years they were resident in the 20 before they left. So we won't go through all the detail there, but it's just worth knowing that's the kind of dividing line, it's whether you became non-UK resident in '22/23 or earlier or '23/24 or later, that's quite a big divide.
Then on the manner in which IHT kind of relates to trust, or will do so going past 6 April 2025, really important to stress this new exit charge that's been introduced, that will catch a lot of current non-doms who are looking to leave the UK either this tax year or next tax year. Lots of those, because of the way that tail I just described works, will find that actually they acquire this new status called long-term resident, for one, two, or three tax years and that any trust they've established will be exposed to UK Inheritance Tax in that period. Now it might be straightforward to avoid a charge in that period, but when the individual loses that long-term residence status, which will happen as I say probably at a maximum of three years after 6 April 2025, their trust will be subject to an exit charge and the level of that exit charge might be relatively small, might be 0.6%, 1.2%, 1.8%, that kind of region, but on a big number that can be quite a lot of money.
So it's important for anyone caught by that to have a think about their position, how they might fund it, any steps they can take to mitigate the impact. I also want to stress the difference in treatment between trust created before the Budget, and trust created on or after the date of the Budget, because there is some limited grandfathering. So you may have heard that trusts were not grandfathered in terms of RHD treatment, that is true in the sense that even existing trusts are going to be subject these new Inheritance Tax rules, but there is an element of grandfathering because actually trusts that existed on or before the 29th of October, they will have some additional protections from some of the IHT rules, so again worth looking into that in more detail.
A final point before we get on to John's wider thoughts, just in terms of trust beneficiaries, not many people are kind of talking about the changes in terms of trust beneficiaries because conceptually trust beneficiaries didn't really see their treatment change, but actually the increase in Capital Gains Tax means that anyone who's receiving a capital payment from a trust, if that's going to match to gains, first of all obviously your your main rate of Capital Gains Tax is now going to be 24% on those rather than 20%, but if the supplemental charge is relevant, which is this extra tax which can apply when gains arise in a trust and then do not match to distributions for some years, that might mean that your effective rate as a beneficiary goes up to 38.4%. So that headline rate could be quite a lot higher. Now that's enough of me and Tim saying what's happened, John over to you for your thoughts on the impact and kind of the context here.
|
|
John Barnett, Partner
|
Yeah, thanks very much Ed. so I think it's obviously been one of the biggest Budgets we've seen for a while. I remember three changes of government over the time I've been doing this '97, 2010 and this one, and this has certainly been in one sense the biggest change we have seen over any of those three big Budgets when there's been a change of government, and it's a big Budget no doubt, as everybody knows in terms of raising the highest burden of tax that the UK has ever faced adding another 40 billion to the overall tax burden. So in that sense it's a big Budget.
What was slightly surprising in some ways though was that in other respects it was quite a small Budget, and by that I mean if you look back at some of the reforming Budgets in the past Nigel Lawson in '88 Gordon Brown in '97 even George Osborne in 2010 they actually really grasp the nettle, made some big changes to the UK tax system. When you look at this Budget, I think Rachel Reeves has largely bottled that, there are some big changes for non-doms that we knew about, there's VAT on private school fees, and after that where is the big change here? You know Inheritance Tax in the UK is in a mess. There was a real opportunity here for a new government with a large majority, probably 10 years in power, to say actually we're going to do some - have a consultation, have a proper reform of Inheritance Tax. Inheritance Tax at the moment. you know, is unusual in international terms in that we have very high rates and very generous reliefs. Well she's done something with one of those, made the very generous reliefs less generous, but she hasn't done anything about the high rates. I think there was a real opportunity missed here. Now I think a lot of that is down to the office of Budget responsibility and the role it now plays. The OBR insists on having all the Budget measures, I think it's something like, 12 weeks before the Budget in order to cost them and the chancellor is absolutely petrified about doing anything that might cause market turmoil, particularly after what happened to Liz Truss. That means that actually their scope for doing radical things, changing them at the last minute, is pretty limited. It has also led to the, I think it's, 118 day gap between the General Election and this Budget, that's been one of the longest periods we've had after a new government comes in before their first Budget.
And what we've seen in the meantime is lots and lots of speculation, pressure groups putting forward their latest ideas and then being batted back and forward in the press. Almost a bit of a game really just to see, you know, whether the - you put out a proposal in the press, if the government don't immediately say oh no that's not happening well then that's usually a pretty good hint that it is. So there's a bit of a game been been going on over the last few weeks here. The one good thing I would say this time is that the professional bodies have had quite a lot, that's STEP and the Chartered Institute of Tax in particular, have had quite a lot of influence on some of the technical detail, and the Revenue and the Treasury have listened to quite a lot of that technical detail, which we see particularly in the non-dom proposals, and although it doesn't make the headlines, indeed probably a good thing it doesn't make the headlines, there's quite a lot there that we can see that has changed and has improved on a technical level as a result of that impact.
|
|
Tim
|
So could we say, John, that one of the areas that the where the government has listened to the professional bodies is on the temporary repatriation facility?
|
|
John
|
Yeah absolutely, that was the professional bodies put in a very detailed 35-page submission on that behind the scenes and most of that is now captured in the legislation, which is quite pleasing to see that they have listened to a lot of that. So Ed's mentioned a number of those points earlier. The fact that you can just designate amounts, pay your 12% tax, you don't have to remit them straight away, and those amounts won't get all tied up with the mixed fund rules, they've cut through a lot of that. You need to be exact about the amount you remit or you designate and so on. So lots of very good stuff there.
I think possibly one opportunity missed, while we're talking about the temporary repatriation facility, is they did originally say there were going to be some sticks as well as some carrots because they didn't want these remittance rules hanging around forever. Actually there are very few sticks in this, going up to 15% for the third year of it and the fact that after 3 years you won't be able to make business investment relief claims anymore, those seem to be the only sticks that I can see there. And what that leads to, I had a conversation with a client quite recently about this and I said to them look, you would have been paying 45% income tax, you'll now only be paying 12% that's good isn't it? that's a 73% reduction. To which my client's response was, well what if I don't bring that money ever to the UK what's my rate of tax then? To which I had to say well 0% and he said well it's not a 73% reduction then is it, it's an infinite percent increase in my tax rate from 0 to 12. My slight counter to him, I needed some sort of counter to him at this point, was to say actually that's fine if you never remit something but if you look at the definition of what is a remittance there are 101 ways you can mess that up by borrowing against the security of things, by buying flights on the wrong credit card, there's lots of real technical detail in here and if you don't take advantage of the 12% you may well find yourself inadvertently remitting things in the future.
One point I do note on that is that the government have extended the definition of remittance in two very minor ways, so they clearly think these rules are going to be hanging around for a while. Although I guess we'll wait and see, there's a sort of hint there that there might be some more sticks to come in the future if you don't take advantage of the temporary repatriation facility while you can.
|
|
Tim
|
And John, do you think it's fair to say that actually we had a number of journalists and people calling us to say how are clients taking this as a Budget? And in my experience it's entirely down to what the clients thought was going to happen as a comparison, because those that want you know hoping for full grandfathering for example in is treatment on trust are are understandably very disappointed, those who were really worried about things like, you know, a GROB in relation to their trust and being exposed to 40% IHT on those, actually are quite relieved. I mean have you kind of seen any trends in particular amongst people in their responses?
|
|
John
|
Yeah, I think you're absolutely right. I think it depends what your comparator was and I think we've been warning clients for a while not to expect wholesale changes to what was already announced. The message I go into every meeting with over the last few months has been we know 90 - 95% of what's going to happen anyway, all that's going to change are some tweaks at the edges of this, and on speaking to clients who' had that message actually they're quite pleased with those tweaks and they can see a way to work with it. I think you're right if you had a client who was expecting you know some complete grandfathering or them to abandon the proposals entirely they are still going to be very cross about it.
|
|
Ed
|
And John, you might be too modest to say this yourself but you were pretty much bang on with your predictions ahead of time as to what was going to be in there.
|
|
John
|
Yes I obviously through my role at Chartered Institute of Tax, in particular, I have been quite involved in some of the behind the scenes discussions and nothing confidential that wasn't out there, so, but, actually from speaking directly to the people at the Revenue and the Treasury who deal with this, while they quite correctly didn't give anything away, you sort of got a sense of what might eventually land, and it did eventually land.
|
|
Tim
|
Well we're lucky to have your inputs. Anything else John before we before we wrap up in terms of just big points to talk about?
|
|
John
|
Yeah I was I was going to talk about Inheritance Tax as well. Inheritance Tax was the big issue for lots of non-doms. I think again as another client said recently, you know, I can afford to live in the UK under these new rules but I can't afford to die in the UK under these new rules.
|
|
Tim
|
And of course no non-dom should be dying here should they John, because they wouldn't be non-dom, or may -
|
|
John
|
Well that is probably right, they could die unexpectedly here maybe. But Inheritance Tax is a big issue 40% on your worldwide assets a lot of which may have come from family or a group before you came here, a very high rate internationally, that has been the real big issue for a lot of clients. A lot of people thought they can't possibly do this, they're going to grandfather it, they're going to delay it. Actually I think what I thought, and is what has happened, is that there are going to be a number of technical tweaks behind the scenes so that politically the government can still say they're taxing people in the same way, but actually when you list all of the tweaks there are to Inheritance Tax they will potentially make a big difference.
So as you've discussed, you know, the fact that the tail is now between 3 and 10 years, not just 10 years. The fact that for existing trusts you won't have both 6% and 40%, you'll only have 6%. And certainly for older clients, so speaking to one client in their 70s who said well you know I don't mind paying one lot of 6% that'll, you know every 10 years, that'll probably see me through. Younger clients obviously see 6% slightly differently.
The fact we have this transitional rule for people who have already left the UK, or leaving '25/26. The fact that you can make a gift today and the existing rules will still apply even if you die within 7 years under the new rules. The fact there's no changes to treaties. The fact that they've extended the temporary repatriation facility so you can use it to wind up your trusts. The fact that if the settler of the trust has already died the existing rules will apply, and so you can go on.
Actually I counted about nine different Inheritance Tax points, which taken together I think might just about do the job. Now, I think the big question in all of this is will this be enough to keep enough non-doms in the UK that it either raises them a bit of money, or at least it doesn't cost them any money. I think my overall view on that is still sceptical. I sense, and I've only got this anecdotally again from speaking to lots of clients and individuals, that there will be more people leaving than they estimate and that it will have an overall cost to the UK. But I think what you can say about what they've done in the Budget compared to what was previously announced, is they've done just about enough in the technical changes at least to make that a valid question for people to ask, you know, do I have to leave or is there a way I can stay in the UK? And although I think lots of people will answer that, no I need to leave, I think there are enough things to keep some people in the UK and if non-doms do decide to stay in the UK I think there's going to be enough for them to do.
So if they don't have a trust already there's obviously plenty of wrappers, life insurance bonds, private unit trusts, family investment companies, and so on, they could potentially use to save Income Tax and CGT on an annual basis.
And then there's still lots of things you can do in terms of gifting, or life insurance to cope with the Inheritance Tax position. I think for those with trusts there's particularly existing trust there's a lot more opportunities. Particularly for Inheritance Tax around those, and also potentially excluding settler and spouse might get you out of an Income Tax charge for instance, so more that can be done there. So I think overall impression, there is enough to make a valid question for people to ask here as to whether they can stay in the UK or not, and I hope enough of them choose to do so.
|
|
Tim
|
Yes we're slightly I suppose bias on that front, we would we would like some of that client base to remain and of course, you know, you've said in the past John about there are, what, 200,000 non-domicile individuals we think maybe, but there are far far more British expats who actually suddenly have a regime that is open to them as well. Whereas previously remittance basis wasn't and many of the kind of non-dom rules didn't so we might see I suppose a different category of person being attracted to move to the UK than we had previously.
Thank you again for listening to this episode of Death and Taxes the Private Wealth podcast from Burges Salmon. You can listen to previous episodes and get in touch with the team at BurgesSalmon.com or via our LinkedIn page. We'll be publishing new episodes of Death and Taxes every Friday between now and Christmas, discussing the implications of the Budget for non-doms, trustees and trust companies, land owners and entrepreneurs, and business owners. So don't forget to subscribe and thank you again for listening. [Music]
|