- From Royal Assent of Finance Bill 2013, some debts will not be deductible in calculating an individual's liability to inheritance tax on their death - this will impact non-UK domiciled individuals (and their trusts) who take out borrowings secured on UK assets to reduce their value for inheritance tax, and entrepreneurs.
- No further changes have been announced to the new taxes on £2m+ residential property due to come into effect in April 2013.
- The Channel Islands and the Isle of Man have all agreed to enter into 'mini-FATCA' agreements with the UK. The agreements will provide for the automatic exchange of information in relation to accounts held by UK resident individuals. The reporting of accounts held by UK resident, non-UK domiciled individuals will, however, be subject to special rules. Disclosure facilities, allowing UK resident individuals with undeclared UK tax liabilities to disclosure those liabilities to HMRC on beneficial terms, will run alongside the information exchange agreements.
Envelopes come unstuck! (and so do entrepreneurs)
The Government is to disallow the deduction of some debts in calculating an individual’s liability for inheritance tax on their death, where the debt was incurred as part of arrangements to obtain a tax advantage or where the individual acquired an inheritance tax exempt asset with the loan. The rules will also apply to borrowings by trustees.
In particular, the measure is targeting:
- schemes where there was no intention to repay the debt;
- arrangements where a non-UK domiciled person incurs the liability to acquire non-UK assets which are outside the scope of inheritance tax;
- arrangements where anyone incurs a liability to acquire tax relieved assets such as business property or agricultural property. In this case, the debt will be deductible from the relieved assets, rather than from the individual’s general estate.
This measure will have a particular impact on:
- non-UK resident and non-UK domiciled individuals who own, or whose trust owns, a “high value residential property” (worth over £2m) through a company. New rules announced last year, which come into effect on 1 April, were introduced to encourage the “de-enveloping” of such properties, i.e. removal from the company. Companies which continue to own such properties will face a punitive annual tax of between £15,000 and £140,000 a year, as well as a future capital gains tax charge on the value of the property when sold. Those who do de-envelope will be exposed to an inheritance tax charge. To mitigate this, there were many arrangements involving borrowing, whether from a trust or a bank, secured on the property to reduce its value for inheritance tax. It now seems that these new proposals will disallow such borrowings, so subjecting the owners to a charge to inheritance tax on the full value of the property.
- entrepreneurs who wish to set up a new business and borrow money in order to finance it. At present, once the trading company has been owned for two years, it will be exempt from inheritance tax and the borrowing would be deductible in calculating inheritance tax on the individual’s estate, if he died. Under the new rules, the debt will be deducted against the (exempt) business assets, increasing the inheritance tax payable on the estate. Effectively, the debt is disregarded.
Normal commercial loans taken out to acquire property should still be deductible in valuing that property for inheritance tax purposes; these provisions are intended to apply to refinancing, rather than the original purchase.
£2m+ residential property
No further changes have been announced to the new taxes on £2m+ residential property due to come into effect in April 2013.
In particular, despite lobbying, the relief from the 15% stamp duty land tax (SDLT) rate for property developers, traders and property lettings businesses acquiring properties through a corporate vehicle will still not apply until Finance Bill 2013 receives Royal Assent in July 2013. To recap the key changes are:
- an increased rate of SDLT of 7% - this is effective already;
- a new 15% rate of SDLT on the acquisition of properties bought by companies, partnerships (with a corporate member) or collective investment schemes, whether onshore or offshore - this is also already effective;
- from 6 April 2013, a new charge to CGT on gains accruing post-5 April 2013 will apply at 28% on disposals of properties by UK & non-UK resident companies, partnerships (with a corporate member) or collective investment schemes. The charge will not apply to trustees (corporate or individual); and
- from 1 April 2013, an annual charge will apply to properties owned by companies, partnerships (with a corporate member) or collective investment schemes (UK or non-UK) at rates from £15,000 to £140,000, depending on the value of the property.
Disclosure facilities & automatic exchange of information
The Channel Islands and the Isle of Man have all agreed to enter into 'mini-FATCA' agreements with the UK. The agreements will provide for the automatic exchange of information in relation to accounts held by UK resident individuals. The reporting of accounts held by UK resident, non-UK domiciled individuals will, however, be subject to special rules.
Disclosure facilities, allowing UK resident individuals with undeclared UK tax liabilities to disclose those liabilities to HMRC on beneficial terms, will run alongside the information exchange agreements. The disclosure facilities will:
- run from 6 April 2013 until 30 September 2016;
- be open to individuals with an interest in relevant assets in the Channel Islands or the Isle of Man between at any time between 6 April 1999 and 31 December 2013;
- settlors and beneficiaries of trusts and foundations and shareholders of companies with undeclared UK tax liabilities will also be able to take advantage of the disclosure facilities;
- fixed penalties of the underpaid tax will apply;
- individuals who are already under investigation by HMRC will not be able to use the facilities.
The main rate of corporation tax will fall to 21% from April 2014 and then to 20% from April 2015, bringing it in line with the basic rate of income tax. Once again the banks will not benefit from these reductions, with the Bank Levy being increased to offset them.
A raft of measures to boost home building and buying were announced, including:
- opening up the First Buy equity loan scheme to allow more buyers of new build homes to get a loan of up to 20% of the value on purchase; and
- a new Help to Buy mortgage guarantee scheme, which will provide Government mortgage guarantees to lenders who offer 80-95% mortgages to buyers of new or existing homes.
Both schemes will be available for homes worth up to £600k and neither has an income cap constraint.
The Treasury and the Bank of England are also “actively considering” whether there are potential extensions to the Funding for Lending Scheme that will boost lending further.
SMEs and entrepreneurs
In addition to the cut in corporation tax, small and medium-sized businesses and entrepreneurs will benefit from:
- extension of the Seed Enterprise Investment Scheme;
- improvements to the new tax reliefs for employee shareholders - employees who give up some employment rights will now benefit from some income tax, NICs and CGT relief;
- an annual NICs allowance worth £2k;
- most of the recommendations of Lord Heseltine’s review of economic growth being accepted, including devolving significant funding to Local Enterprise Partnerships;
- improvements to the Business Bank;
- expansion of the small business research initiative;
- a new CGT relief for the sales of businesses to employees; and
- proposed abolition of stamp duty on shares quoted on AIM and other alternative markets.
Something to watch out for is the proposal to remove the presumption that members of an LLP are self-employed. This is aimed at preventing employment relationships being disguised through LLPs to avoid NICs.