The Chancellor of the Exchequer, George Osborne, delivered his fifth Budget 2014 speech on 19 March 2014. Here is a round-up of the more significant announcements as they impact upon the offshore finance industry.
Residential Property Owned by Non-Natural Persons
Annual Tax on Enveloped Dwellings (‘ATED’)
The scope of charges on UK residential property held by non-natural persons – companies, collective investment schemes and partnerships with a corporate partner – is to be extended. An annual charge of £7,000 will be introduced for property valued in the range of £1m to £2m for 2015/16 onwards; with a further extension of scope with effect from 2016/17 for properties valued between £500,000 and £1m, which will be charged at an annual rate of £3,500.
Stamp Duty Land Tax (‘SDLT’)
There is no phased introduction of the SDLT charge. With effect from 20 March 2014, the 15% SDLT charge that applies to properties within the ATED regime is extended to residential properties valued at £500,000 or more.
Capital Gains Tax (‘CGT’)
The CGT charge on residential properties within the ATED regime is similarly extended to property disposals for a consideration in excess of £500,000.
In the 2013 Autumn Statement, the Chancellor announced that CGT would be charged on gains made by non-residents on disposal of UK residential property. Although the legislation has not yet been published, it appears that the two new CGT charges will operate alongside each other, with those property disposals which are not caught by the charge under the ATED regime automatically being within scope of the newer CGT charge.
Changes have already been introduced to limit, in certain circumstances, the deductibility of loans in the estate of persons who are not domiciled in the UK. A new measure will seek to exclude loan balances as a deduction from the value of the death estate, if the funds are then deposited in a foreign currency bank account. The balance on the foreign currency account is itself excluded property.
Dual Employment Contracts
Following on from the announcement in the Autumn Statement, new legislation will target the artificial use of dual contracts by non-domiciliaries to avoid UK taxation. If the dual contracts are with the same employer, or associated employers, and the effective tax rate on the overseas contract is less than 65% of the higher rate of UK income tax, the earnings from the contracts will be treated as arising on one single contract of employment, and most likely taxable in the UK.
Remittances and Split Years
An oversight in relation to capital gains realised by non-domiciliaries in the earlier part of a split tax year, prior to becoming UK resident, is to be corrected. Capital gains, in the part of the year when the individual was not resident in the UK, will no longer be charged to Capital Gains Tax.
The Chancellor announced sweeping, radical reforms to defined contribution pension schemes. There will be a relaxation of certain rules from 27 March 2014, with the more significant changes being introduced from April 2015.
The changes which take effect from 27 March 2014 include:
- Reduction in minimum income requirement in flexible drawdown from £20,000 to £12,000;
- Maximum income limit in capped drawdown increased from 120% to 150% of GAD; and
- The trivial commutation is increased from £18,000 to £30,000.
The more significant changes which will take effect next year include:
- No requirement to purchase an annuity;
- Access to the entire pension fund from age 55;
- The tax-free lump sum of 25% of the fund continues, with any excess withdrawals taxed at marginal rates of income tax, rather than the 55% rate that currently applies to unauthorised payments charges; and
- Income can be taken without limit, and similarly this will be taxed at the marginal rate of income tax, rather than the unauthorised payments charge rate.
The 55% charge on a pension fund on death is considered punitive and will be subject to consultation. The Lifetime Allowance remains in place, but is reduced from £1.5m to £1.25m. Tax relief on pension contributions is also reduced. The first £40,000 of annual contribution will now be tax relieved; down from £50,000.
These changes will allow complete flexibility to the pensioner without the punitive charges imposed for unauthorised payments.
The Government also announced that is to consult on Qualifying Non-UK Pension Schemes, with a view to giving them equivalent treatment to UK pension schemes, and more specifically “…remove opportunities to avoid inheritance tax”. It is unclear at this stage how this might be achieved, whether by a mechanism which brings the scheme within the scope of inheritance tax or, more likely, a limit on amount that can be invested in such schemes.
Non-Residents & Personal Tax Allowances
The government will consult on changes to the availability of personal tax allowance to certain non-residents, including residents of the Isle of Man and Channel Islands and EEA nationals. The suggestion is that there will be a restriction on availability to non-residents who do not have strong economic connections with the UK. It is not clear what the connection will be or how any changes might align with EU Law.