Draft Finance Bill 2016 Clauses | KPMG | IM

Draft Finance Bill 2016 Clauses

Draft Finance Bill 2016 Clauses

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-DOM”) 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.

1000

Key Contact

Senior Manager: Tax

KPMG in the Isle of Man

Contact

Also on KPMG.com

man-looking-out-window

We are, though, still awaiting draft legislation on certain key measures, such as the reform of the tax treatment of non-DOM 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.

Reforms to the taxation of non-DOM

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:

  1. those resident in the UK for at least 15 out of the past 20 tax years will be deemed UK domiciled for all UK tax purposes;
  2. individuals born in the UK with a UK domicile of origin at birth who have left the UK and acquired a domicile elsewhere, and who subsequently return and become UK resident (referred to as “UK returners”), will be deemed UK domiciled whilst so resident.  However, for IHT purposes at least, there will be an additional requirement that a UK returner was UK resident in at least one of the immediately preceding two tax years before they are deemed domiciled. This latter proviso is to be welcomed as it provides a “grace period” such that circumstances of short temporary residence in the UK, such as to visit a sick relative or to obtain high quality medical care, will not cause an individual to be deemed domiciled for IHT, which could result in drastic and unfair results.  This new rule gives greater importance to identifying place of birth when considering an individual’s domicile, although the application of the rules to future generations will potentially be manageable in some situations by planning ahead when having children; and
  3. excluded property trusts (“EPTs”) settled by UK returners whilst they have a non-UK domicile for IHT purposes will cease to be EPTs if and when the UK returner becomes deemed domiciled for IHT under the new rules above for UK returners.  Accordingly, the new provisions for EPTs add even more intricacy to the already complex rules for 10 year charges.  The rules may present trustees with difficulties in knowing whether they have a liability to a 10 year charge as well as record keeping challenges.

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.

Wear and tear allowance for replacing furnishings in residential property

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”.

CGT and disposals of UK residential property

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:

  • a non-UK resident corporate will not pay tax on the same capital gain under the ATED- CGT regime and the Non-Resident CGT (“NRCGT”) regime;
  • there is neither double counting nor under-counting when calculating the element of the gain that can be taxable under the CGT anti-avoidance legislation.

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).

IHT: Main residence nil-rate band and downsizing

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.

Taxation of Dividends

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.

Annual Tax on Enveloped Dwellings and 15% rate of Stamp Duty Land Tax

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:

  • for accommodation by employees of a property-rental business;
  • for caretaker accommodation by tenant-run flat management companies;
  • by authorised providers of home reversion plans (equity release schemes); and 
  • for conversion into non-residential use for the purposes of a trade or demolition in preparation of using the land for the purposes of a trade.

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.

Offshore Tax Evasion/ Avoidance Measures

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:

  • clamping down on tax avoidance and ensuring multinationals pay their fair share of tax by stopping the use of hybrid mismatch arrangements;
  • introducing a new tougher anti-offshore tax evasion regime, which will include:
    • a new criminal offence where an individual fails to notify HMRC of their liability to pay tax, fails to submit a return or submits an inaccurate return and which does not require the prosecution to demonstrate the taxpayer intentionally sought to evade tax;
    • increased civil sanctions (such as financial penalties and so called “naming and shaming”) for offshore tax evaders  and including the introduction of a new asset-based penalty for those who evade their tax responsibilities using offshore transfers and structures;
    • a new financial penalty and new naming power for those who have deliberately assisted tax evaders to hide assets and taxable income and gains outside the UK.
  • introducing new measures to improve large business tax compliance, including a new requirement that large businesses publish their tax strategies and special measures to tackle a minority of large businesses that persistently engage in aggressive tax planning.

Bad Debt income tax relief for Peer to Peer (“P2P”)

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 and we will be happy to help.

Connect with us

 

Request for proposal

 

Submit