In partnership with Bloomberg BNA five leading CIOT members have written analyses of the measures in Autumn Budget 2017. John Barnett of Burges Salmon LLP, a CIOT Council member, looks at Budget changes likely to affect high net worth individuals.
Philip Hammond’s second budget of 2017 – but his first Autumn Budget – fulfilled the expectations from a Chancellor not known for his showmanship. The headline-grabbing announcements were far fewer than in previous years and although there was the usual final flourish, it – Stamp Duty Land Tax reduction for first time buyers – was far less showy than we have come to expect.
However, what the Budget lacked in showmanship, it made up for in detail with many tens of new announcements and promises of consultations to come. Indeed, the consultations to come look to be the biggest headline of this Budget. Given the Chancellor’s well-publicised political difficulties and having been scarred by the abrupt reversal of National Insurance Contribution changes in the Spring, perhaps he found it easier to fill the Budget with possible future changes, leaving very little that his Parliamentary colleagues could criticise in the short-term.
Of the changes which will immediately affect High Net Worth individuals, the introduction of capital gains tax for non-residents on commercial property and on “property rich companies” will perhaps have the biggest impact and was the most unexpected. Capital Gains tax was introduced for residential property held by certain non-residents in 2015. That was, perhaps, understandable in an over-heated housing market (particularly in the South-East of England). Doing the same for commercial property has a certain symmetry to it, but one senses that the same justification is not present. At a time when the UK still needs wealthy foreigners to invest in infrastructure and commercial property generally, there must be a question as to whether a capital gains tax charge will deter foreign investors.
The changes here do not take effect until April 2019, but we are promised anti-forestalling measures effective from today. Sadly those anti-forestalling measures do not look likely to be revealed until the legislation is published on 1 December, giving a period of market uncertainty until then. And, if drafted in the wide terms usually favoured by HMRC, one suspects that there might be a more significant market impact right through until April 2019. Expect more noise on this particular measure.
Alongside the introduction of CGT on commercial property for non-residents, the freezing of indexation for companies (including in many cases non-resident companies) will, over time, also have a significant impact. If the pattern follows that for individuals, an initial freezing of indexation might become an eventual abolition of it. Companies might be well advised to bank indexation while they can, therefore.
Removal of transitional protection for certain types of carried interest is likely to have some impact on those affected, but is not the wholesale change that some feared.
Increases in ATED rates by 3% was expected, but will make this tax – affecting residential property “enveloped” in corporate structures – increasingly unaffordable.
Consultations to come
Most of the remaining measures affecting HNWs in the Budget involve future consultations. Among the more pertinent are the extension of offshore time limits to 12 years from the current 4 or 6, even in cases of non-deliberate behaviour on the part of the taxpayer. While one can understand HMRC’s frustration at becoming time-barred after just 4 years in some offshore cases (which naturally take longer to investigate), one questions why it is necessary to increase this time limit by 300% - particularly at a time when HMRC will have a lot more data through the Common Reporting Standard. A fair balance needs to be struck here between the right of HMRC to investigate and the right of the citizen (acting innocently) to achieve tax certainty after a defined period. In my view 12 years does not achieve anything like that balance. It looks likely that those with offshore affairs will need to make far greater “white space disclosure” of all possible risks and alternative explanations, in order to restrict HMRC to the current 1 year time limit where the tax return gives full information.
Other consultations on the taxation of trusts; on employment status; on Entrepreneur’s relief; and on phoenix companies will need to be looked at carefully once they are published.
The requirement to notify HMRC of certain offshore structures will also need attention, although we already have an idea from the first consultation on this which way HMRC is thinking. We await the response document to that consultation.
Measures already expected
As with all Budgets, the Chancellor – perhaps displaying his green credentials – chose to take full credit for recycling….although here the recycling is of measures already announced in previous Budgets! Why only get political credit for such measures once when you can announce them several times over!
The main such measures affecting HNWs are the outstanding rules on offshore trusts – mainly affecting non-doms – first announced in 2015, but delayed until April 2018. We learn that these rules (preventing washing-out of capital gains to non-residents; and an anti-conduit rule) will go ahead, although the legislation has – apparently – been tweaked since the last draft. We await the detail when the legislation is published on 1 December.
Expected but not announced
Two rumours which were doing the rounds before Budget day have had no mention.
The first of these is the introduction of the DOTAS regime to Inheritance Tax. The DOTAS regime requires promoters of schemes which achieve a tax advantage to notify HMRC of how such schemes work. That itself is unproblematic, but the difficulty has been that many other anti-avoidance rules now hinge on whether or not a DOTAS-disclosure has been made – including in particular the Code of Practice for Banks. The effect has been that a bank will generally not touch anything with a DOTAS number, even if it has only been obtained on a protective basis.
Getting Inheritance Tax schemes within the DOTAS regime has proved problematic as much “normal” planning done by Middle-England could potentially be affected.
HMRC has been consulting on this for a couple of years now and new regulations were expected. Whether the Chancellor has bottled these, or whether they will emerge over the next couple of weeks remains to be seen.
The other big change which many expected were around the inheritance tax reliefs for businesses and agricultural property. A number of high-profile reports have recently suggested that the structure of these reliefs might be looked at. The Chancellor’s silence on these is undoubtedly welcome for those affected.
By John Barnett CTA (Fellow) TEP, Head of Tax and Private Client, Burges Salmon LLP, and a Council member of the CIOT
This article was first published by Bloomberg BNA as part of their Budget 2017 special report