On 9 December 2015, the UK Government published draft clauses for the Finance Bill 2016 for consultation. There were no real surprises contained in the draft clauses, which include details on the reforms to the taxation of the non-domiciliary (“non-DOMs”) in relation to inheritance tax (“IHT”), capital gains tax (“CGT”) on disposals of UK residential property, the taxation of dividends and tougher offshore tax evasion/avoidance measures.
We are, though, still awaiting draft legislation on certain key measures, such as the reform of the tax treatment of non-DOMs in relation to income tax, CGT and offshore trusts, changes to the IHT rules on UK residential property held through offshore structures, and the new rules relating to the additional 3% stamp duty land tax on ‘additional residential properties’ announced in the Autumn Statement.
We have summarised below the areas we believe may be of interest to you and/or your clients.
The legislation in so far as it relates to IHT is now contained, with some amendment and new provisions relating to certain trusts, in draft clause 43 of Finance Bill 2016. The Government has stated that further draft legislation covering the income tax and CGT aspects of the changes will be published in early 2016 alongside HM Treasury’s response to the consultation.
Broadly, with effect from April 2017:
The July 2015 Budget contained proposed changes to the IHT rules on UK residential property. From April 2017 the Government intends to bring the value of all such property held through offshore companies or partnerships of non-UK domiciled individuals, or their trusts, into the scope of IHT in the same way as if the property were owned personally. Legislation to implement this will be included in Finance Bill 2017 and a proposed consultation is still awaited on the details.
The draft legislation confirms that from April 2016, landlords of furnished residential property will no longer be able to claim the ‘wear and tear allowance’ (a flat relief of 10% of rental income). Relief will instead be given for costs actually incurred.
The new relief will be available to both corporate and non-corporate landlords of residential property, and in respect of expenditure on unfurnished or part- or fully-furnished property. The relief will not apply to properties let as ‘furnished holiday lettings’ or to commercial property lets, both of which are eligible for capital allowances on such items.
The draft legislation states that only the net cost of replacement will be allowed (ie proceeds of sale of old items must be deducted from the cost of the new item). In addition, and importantly, the relief will only be available for the cost of “like for like” replacements – any element of improvement in the standard of furnishing would need to be identified and disallowed.
Those landlords who currently claim wear and tear allowance will need to ensure that, from April 2016, they keep records of actual expenditure on qualifying items – potentially a substantial increase in administration, particularly for those who may rent a property temporarily (such as individuals on assignment from the UK). In addition, as the relief is only available for like-for-like replacement and not any element of improvement, a landlord will need to identify any element of improvement and exclude it from a claim to relief. This can be difficult in practice, as technological and pricing changes can mean that it is difficult to distinguish what constitutes an “improvement”.
Three amendments have been made to existing legislation which applies to non-residents who dispose of UK residential property. Primarily the draft legislation seeks to provide clarity and prevent the risk of double tax charges by putting beyond doubt that:
The Government will also give HMRC powers to prescribe circumstances when a NRCGT return is not required by non-residents. This change gives HMRC the power to agree a return is not required. However, we do not know yet in what circumstances the powers will be invoked.
Finally, the Government has taken steps to allow for a change to the tax payment date on disposals of UK residential property by UK residents from April 2019, which will require the tax on any gain arising to be paid within 30 days of completion of any disposal of residential property (as opposed to 31 January following the end of the tax year of the disposal).
Finance (No. 2) Act 2015 introduced an additional nil-rate band (the residence nil rate band or RNRB) on death if the deceased’s interest in his/her home is inherited by a lineal descendant. The value of this additional nil-rate band is limited to the lower of the statutory cap (which increases annually from £100,000 in 2017/18 to £175,000 in 2020/21 and, thereafter, increases with CPI) and the value of the deceased’s net interest in the relevant property on death.
Following the introduction of this measure, the Government issued a consultation document to seek views about its extension to cases where the deceased had either downsized from a more valuable residence, or sold a residence, prior to death. Such an extension was considered appropriate as otherwise, individuals would be disadvantaged by, and dis-incentivised from, such downsizing and/or selling because of the consequent restriction on their available additional nil-rate band.
The draft Finance Bill 2016 includes, in Clause 44, the draft legislation to introduce this measure. The rules are complex and it is recommended that advice is sought if reliance is to be placed on this new measure.
From 6 April 2016 dividend income received in excess of the tax-free dividend allowance of £5,000 will be taxed at rates of 7.5% where this falls within the basic rate income tax band, 32.5% in the higher rate band, and 38.1% in the additional rate band. This will apply to both UK and non-UK source dividends.
Dividend income that is within the dividend allowance will still count towards an individual’s basic or higher rate limits and the rate of tax due on income in excess of the allowance.
UK Dividends will no longer carry a tax credit. However they will continue to be treated as disregarded income for non-UK residents and so there should still be no additional UK income tax liability in respect of the UK dividends received by non-residents.
Legislation will be introduced in Finance Bill 2016 (with effect from 1 April 2016) to relieve companies, partnerships and collective investment schemes acquiring and holding residential properties for certain qualifying business purposes from the “super” (15%) rate of SDLT and ATED. The super SDLT rate and ATED will not apply to residential properties acquired/held:
Notwithstanding the above, gaps still remain in the coverage of the reliefs. Further legislative changes are expected in this area, albeit probably not until Finance Bill 2017.
Finance Bill 2016 continues the UK government’s commitment to stop tax evasion, tackle tax avoidance and ensure companies pay their fair share of tax through:
The introduction of bad debt relief for investors holding P2P loans through a regulated platform will mean that losses realised by way of default on such loans can be offset against interest they receive from other P2P loans. Effectively this will allow investors to consider their overall lending portfolio as a whole when arriving at an amount subject to tax. HMRC have issued guidance to help investors determine when a loan can be considered “irrecoverable” and classified as a bad debt. It is expected that P2P platforms will support this analysis and advise investors accordingly.
Relief will be provided automatically for losses realised after 6 April 2016 but investors will be able to claim relief on losses arising on all eligible P2P loans from 6 April 2015.
The introduction of bad debt relief for P2P loans appears to be a positive step to align the tax treatment of these investments with other similar “collective” investments available in the market where the investor is subject to tax on the broader return of the overall investment. This will be a boost to P2P platforms and may lead P2P investments to be viewed as more attractive by investors as the inherent risk in making such loans will be in part mitigated by the knowledge that tax relief will be available where loans become irrecoverable.
Please let us know if you and/or your clients require further detail on any of the above matters or any other measures covered by the draft clauses published as we will be happy to help.