CGT Proposals

Details of the plans to impose Capital Gains Tax on gains arising to non-UK residents on the disposal of UK residential property have been published.

The proposals are wider than anticipated and also have unexpected consequences for UK resident second home owners.

CGT will be charged on gains accruing from April 2015 to non-resident individual owners, trusts, companies and partners on disposals of residential property regardless of the value of the property.

CGT will also be levied on gains arising on the disposal of investment properties, in contrast to the Annual Tax on Enveloped Dwelling (ATED) regime introduced in April 2013.

The tax payable by non-corporate sellers will be at the normal CGT rates (18% or 28%) with the benefit of the annual CGT exemption (£11,100 for 2015/16) and, if applicable, principal private residence relief (PPR).

A surprising aspect of these proposals is that both UK and non-UK resident owners of multiple homes may, in future, be denied the ability to elect which of their homes should benefit from PPR.

Instead, only the property which is, as a matter of fact, a taxpayer’s main residence or the property that qualifies as such in accordance with a proposed new fixed rule would be eligible for relief.

The rationale behind this is a concern that, if PPR is available on the sale of a non-resident’s home, the non-resident can simply elect their UK home as their main residence (rather than their non-UK property on which no CGT is payable).

Nevertheless, the proposed extension of this change to UK residents is unexpected.

That said, the Government’s dislike of “flipping” is well known and, to this end, the final period of ownership exemption for PPR has already been reduced from 36 months to 18 months for disposals on or after 6 April 2014.

The new proposals also suggest a new method of collecting CGT.

The detail here is sketchy but the idea is that non-resident sellers would have an option either to pay the tax due themselves or have the tax collected by withholding (carried out by the solicitor acting for the purchaser).

The tax would have to be paid within 30 days of completion, this could be quite onerous for the purchaser’s solicitors and it would further complicate the conveyancing process.

The application of the new CGT charge to disposals by non-resident companies will be more convoluted. Companies paying ATED will pay the related CGT charge on all or part of the gain at the usual rate of 28%.

By contrast, all other non-resident companies will be subject to a tailored CGT charge at a rate to be confirmed.

Enveloped properties

Another unexpected announcement in the recent Budget was the immediate extension of 15% SDLT to corporate purchasers of residential properties worth more than £500,000, (previously £2million).

The scope of ATED will be similarly extended but not with immediate effect. From 1 April 2015 a new band of ATED will apply, with an annual charge of £7,000 on residential properties worth more than £1m but less than £2m.

From 1 April 2016 residential properties worth between £500,000 and £1m will be charged £3,500.

The bands will otherwise remain unchanged and the current reliefs/exemptions (including those for commercially let residential property and development and trading businesses) will continue to apply.

The ATED related CGT charge will be extended from 6 April 2015 to properties worth more than £1m and will apply to that part of the gain that accrues on or after this date; and to properties worth more than £500,000 from 6 April 2016.

The balance of the gain will be treated as at present and, where the company is non-resident and part of the gain is not ATED related, the latter may also be subject to the proposed new tailored charge from April 2015.

A Mansion Tax?

Press speculation about a mansion tax grows ever more fevered whilst actual proposals remain elusive. That said, both ATED and the new CGT proposals described in this Newsletter illustrate how soft a target property is and house price inflation will surely tempt our politicians further.

Current possibilities, whether from academics or politicians, include: a progressive property tax (on houses but with relatively low values); increasing Council Tax on dwellings worth over £2m, being the latest idea from Danny Alexander; and a far more radical land value tax which would apply to all types of land.

The debate seems likely to intensify between now and May 2015. We are monitoring developments and will publish specific briefings as soon as there is something concrete to report.

Other Budget news

• Pensions: Far reaching reforms were announced to remove the requirement to purchase an annuity from pension funds and to relax the tax charges that apply to the withdrawal of funds. Some transitional measures were introduced on 27 March but the full reform will take effect from April 2015 following consultation.
• Savings: From 1 July 2014, the ISA will become a “new ISA” (NISA) with a limit of £15,000 for 2014/15 and will be able to hold any combination of cash and shares. From the same date both the Junior ISA and child trust fund limit will also rise to £4,000. From 1 June 2014, the premium bonds subscription limit will rise to £40,000; it will rise again to £50,000 in 2015/16.
• The IHT debt rules introduced from April 2013 will be amended so that foreign currency bank accounts will be treated as if they were ‘excluded property’. Therefore a liability (whenever incurred) will be disallowed for IHT purposes if borrowed funds have been deposited in a foreign currency account in a UK bank (either directly or indirectly) in respect of deaths after the date of Royal Assent of Finance Bill 2014.
• IHT Exemptions: The Government will consult on extending the existing IHT exemption for members of the armed forces who die on active service to all emergency service personnel who die in the line of duty.
• CGS: The annual cap on the total tax deductions that can be claimed under the Cultural Gift scheme & Acceptance in Lieu (for donations of pre-eminent objects to the nation) has been increased to £40m with effect from 6 April 2014.
• Accelerated tax payments: As from Royal Assent of the Finance Act 2014 HMRC will be able to require taxpayers who have used a tax avoidance scheme to make an accelerated tax payment where it considers that there is judicial ruling which has defeated the same (or a similar) scheme.

Similarly, taxpayers will be required to pay disputed tax ‘up front’ if they have claimed a tax advantage by the use of arrangements that fail to be disclosed under DOTAS; or where HMRC invokes the GAAR.

• The Government is consulting on some potentially quite alarming proposals to allow HMRC to seize money from bank accounts from anyone who owes more than £1,000 in tax or tax credits, although this will apparently be subject to certain safeguards.
• Charity definition: HMRC is proposing to amend the definition of charity for tax purposes by introducing a new ‘purpose of establishment condition’.

This aims to prevent charities being set up to abuse charity tax reliefs and is not intended to catch genuine charitable organisations.

However one of the proposed tests would deny charitable status for tax purposes if one of the main purposes for which it was established was to secure a tax advantage.

This could potentially impact on private and corporate charitable foundations as it is arguable that one of their main purposes is to obtain a tax advantage such as Gift Aid and other reliefs on donations.

Inheritance tax news

• Revised proposals to divide the nil rate band available to trusts between all trusts created by the same settlor will be published later this year and legislation introduced in Finance Bill 2015.
• The National Audit Office is launching an investigation into the possible misuse of agricultural and business property relief from IHT, as their use has almost doubled in five years.
• The Conservative Party have indicated they would consider raising the IHT nil rate band to £1m, should they be re-elected.

FATCA’s impact on trusts

The UK and US government have reached an agreement to implement a US law, the Foreign Account Tax Compliance Act (FATCA) in the UK. FATCA was designed to combat tax evasion by US residents using foreign accounts and it requires institutions outside the US to pass information to US tax authorities. A surprising range of institutions are affected by FATCA including some private trusts.

Corporate trustees and trusts which delegate the management of investment portfolios will generally need to register with the IRS by 25 October 2014, in the latter case if more than 50% of their income derives from investments.

Alternatively they may be able to enter into an agreement with a third party (e.g. the investment manager) to register on their behalf.

Thereafter they must report any US connections annually to HMRC, who will pass the information on to the IRS.

Other trusts will not need to register but may have annual reporting requirements if they have any US beneficiaries, trustees, protectors or settlors.

All trustees should consider their status and obligations under FATCA as soon as possible. For full details please see our flyer entitled ‘FATCA: What trustees need to know.’

Public register of beneficial owners

It has been clear since last November that companies will be required to make greater disclosure of their beneficial owners, but it had been assumed that trusts would be excluded as David Cameron has argued that they should be treated differently.

However, the European Parliament has recently approved an amendment to the Fourth Money Laundering Directive, which will, if implemented, make information about the individuals behind trusts publicly available for the first time.

Each EU member state would have to keep and make available a public register listing the ultimate beneficial owners of privately owned companies, foundations and trusts. There would be provisions to protect data privacy and to ensure that only the minimum information necessary is on the register.

Whilst it is appreciated that greater transparency may help to prevent criminal activity and tax evasion, many feel that these proposals go beyond what is required to achieve this aim.

Although they do seem rather worrying, they are still at a relatively early stage: final negotiations within the EU on the Directive will not begin until later this year and then each individual Member State has to incorporate the result into domestic law before the provisions take effect.

Further, the UK government has confirmed that it will oppose the mandatory registration requirement for all trusts and will seek to negotiate a compromise.

Same Sex Marriages

Since the Marriage (Same Sex Couples) Act 2013 came into force on 13 March 2014, same sex couples are able to marry in England and Wales. Civil partners should also be able to convert their legal relationship to a same sex marriage later this year, once the mechanism to do this has been introduced.

The intention is that same sex marriages should have virtually identical tax and legal consequences and effects to opposite sex marriages.

Therefore, from 13 March 2014 all legislation using marriage terminology will be read as encompassing both same sex and opposite sex marriage. The default position for interpreting legal instruments will depend upon whether or not that instrument was in existence on 13 March 2014.

Pre-existing private legal instruments will generally be read as referring only to opposite sex marriages; and new instruments from that date will be read as encompassing both opposite and same sex marriages. The position may be reversed by inclusion of specific provisions to the contrary.

Art used in a business

The Court of Appeal has confirmed that a painting used in Castle Howard’s house opening business was a wasting asset which attracted no CGT on its disposal, upholding the Upper Tribunal decision covered in our newsletter last Spring (HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278).

The painting in question was not owned by the business operator, but informally permitted to be used in the business, and the Court of Appeal has confirmed that the CGT legislation does not limit the exemption to assets owned by the trader.

This is potentially a very useful decision but it may not be relevant to many cases because the CGT exemption does not apply if capital allowances have or could have been claimed on the asset. It is also possible that the law could be changed.

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

Calls to harmonise the private international law governing succession across the EU, were enthusiastically welcomed ten years ago.

When finally enacted on 17 August 2012, the rather heftily titled “Regulation (EU) 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European

Certificate of Succession” (“the Regulation”) or “Brussels IV”, creates ambiguities and complications that may have implications for anyone with assets in countries within the EU where the Regulation is to apply. It will apply to the estates of people who die after 17 August 2015.

Regulations are the most direct form of EU law. They have binding legal force throughout every member state, on a par with national laws. As opposed to EU directives and court decisions, national governments do not have to take action themselves to implement EU regulations.

They can, however, opt out, and somewhat frustrating the purpose of the legislation, the UK, Denmark and Ireland have opted out. Even so, it will affect anyone with assets in states which have opted in, so called “Regulation States”, and it has the potential to override Wills and succession agreements.
The Regulation applies a single national law of succession to a person’s moveable and immoveable property upon death ad applies to both testate and intestate succession (i.e. whether or not the person made a Will). The applicable law is that of the country of the deceased’s habitual residence at the time of death, unless:

• The deceased was manifestly more closely associated with another state; or
• The deceased elected in their Will for their national law to apply, regardless of whether the state of their nationality is Regulation State or not.

Broadly, the Regulation does not apply to lifetime gifts and says little about trusts.
This may prove awkward where the assets of a testator fall within a jurisdiction which does not fully recognise trusts and the devolution of assets under their terms, such as France.

It is important for those who could be affected by the Regulation to revisit their Wills. This is because there may be an opportunity for those who die after 17 August 2015 to avoid local forced heirship rules where these currently apply, by electing for their law of nationality.

Conversely, where local laws of an EU state allow assets to pass in accordance with a deceased’s national law, the effect of the Regulation and other private international law rules may be to impose local forced heirship rules that previously did not apply.

Family law update: company’s assets taken into account in Prest v Petrodel

On 12 June 2013, the Supreme Court reversed the controversial ruling of the Court of Appeal in the family law case of Prest v Petrodel Resources Limited.
Mrs Prest sought financial relief from Mr Prest, who claimed he was £48 million in debt.
Throughout the proceedings, Mr Prest failed to adhere to court orders for financial disclosure of information and was found to be an unreliable witness.

At first instance the Judge determined that Mr Prest had ultimate control over a company structure, of which he was not formally a shareholder, having used it as his “money box”.

This finding enabled the Judge to conclude that he could make an order to transfer the companies’ properties to Mrs Prest.

The companies appealed successfully to the Court of Appeal arguing that the established legal position was that a company had a separate legal personality to its shareholders and its assets belonged to the company and not the shareholders.

It was held that, as a matter of company law, unless there had been impropriety (which was not present in this case) the company’s assets could not be used to satisfy Mr Prest’s personal obligations.

On appeal, the Supreme Court found in the wife’s favour.

They concluded that the companies’ properties were held on trust for the husband and on that basis could be transferred to the wife. To reach this decision they drew adverse inferences against the husband as he could provide no evidence or explanation to rebut the inference that he was the beneficial owner of the properties.

This was despite Mr Prest’s contentions that pursuant to an order of the High Court in Nigeria, he was prohibited from disclosing any information concerning the accounts or affairs of one of the companies, PRL Nigeria or from asserting or disclosing information showing that he was the sole owner of that company.

The Court of first instance had decided that this Nigerian order posed no genuine obstacle to Mr Prest in complying with the terms of the order for disclosure of the English Court at the time.

While on the specific facts of this case, the Supreme Court were able to find in favour of the wife, the concern is that the arguments advanced on behalf of the companies, which were based on the structure of corporate law and which were in fact upheld by the Supreme Court, will be relied upon in the future by unscrupulous spouses who try to hide assets behind a corporate structure in order to defeat their spouse’s financial claims on divorce.

However, the Supreme Court’s decision does reinforce the importance of proper disclosure; Mr Prest and his companies suffered for his non-compliance with the court orders for disclosure.

Excluded Property: IHT debt relief restricted

In the March 2013 Budget, the Government unexpectedly announced, without any consultation, a package of measures restricting the circumstances in which liabilities can be deducted for Inheritance Tax (“IHT”) purposes, which may in particular impact on the tax arrangements of individuals who own homes in the UK but are not domiciled here.

Non-UK domiciled individuals are generally only liable to IHT, whether on their death or on a lifetime transfer, on their UK property. Their foreign assets are excluded from the charge to IHT and are therefore “excluded property”.

Similarly foreign assets of a trust, which was set up by a non-domiciled settlor, are outside the scope of IHT trust charges regime and so are not subject to 10 yearly charges or exit charges when the property leaves the trust.

IHT is generally charged on the net value of a non-domiciliary’s UK assets after deducting all liabilities, such as debt or loans on property outstanding at the date of charge, although certain exclusions, exemptions and reliefs may also be available.

However, from 17 July 2013, there are restrictions on which debts are deductible against IHT.

Notably, no deduction will be allowed for a liability to the extent that it is attributable to financing (directly or indirectly) the acquisition of any excluded property, or the maintenance or enhancement of the value of any such property.

These restrictions will also apply to trusts with excluded property.

These changes may in particular affect non-domiciliaries who are considering taking homes worth more than £2million out of corporate ownership to avoid the recently introduced Annual Tax on Enveloped Dwellings (“ATED”) and the associated CGT charge on the disposal of such properties.

Some owners were seeking instead to borrow against the value of these UK properties to mitigate the resulting IHT exposure on their UK homes.

However, under the new rules, if funds are borrowed by a non-domiciliary to reduce the value of their UK home are deposited or invested offshore the debt will not be deductible, as the loan will be attributable to financing the acquisition of excluded property.

The full value of the UK property would therefore remain within the UK tax net.

More complex arrangements involving debt, for instance involving a trust structure, may also be affected. However, straightforward arrangements where a non-domiciliary takes out a commercial mortgage in order to purchase UK property will not – such liabilities should remain fully deductible.
In addition the deductibility of debts will also be restricted where the liability has been incurred to acquire assets on which a relief such as business property, agricultural property or woodland relief is due and on liabilities owes by the deceased at the time of death, which are not actually repaid from the estate after the death.

There are a few limitations to the new rules and HMRC Guidance provides some examples of how they may be applied in practice.
Any existing or proposed arrangement involving excluded property which also relies on the deduction of a debt should be reviewed and the purpose for which borrowings are acquired and applies will need to be examined closely.

In addition, if steps are taken to circumvent the new debt rules, it will be necessary to check those arrangements are not caught be the general anti-abuse rules which also came into force on 17 July!

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com.

Download our eBook “Moving To The US”

Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.