Guernsey Budget 2018 Proposals | KPMG | QM
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Guernsey Budget 2018 Proposals

Guernsey Budget 2018 Proposals

The States of Guernsey Policy & Resources Committee published its 2018 Budget proposals on 9th October 2017

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The principal headline is that the States has recorded a budget surplus for 2017 of £9 million. This allows for a transfer of £5million to the Core Investment Reserve (formerly the States Contingency Reserve), which is the first transfer since 2007. There is also a project balanced budget for 2018.

Behind the positive headline there are a number of noteworthy tax proposals for debate by the States on 7th November.

Business Taxes

  • The gradual extension of the intermediate company tax rate of 10% over the last few years continues as it will now include regulated businesses providing investment management services to individuals. This change, when considered alongside the proposals announced in Jersey’s budget last week, mean that the two island’s versions of Zero-10 are now broadly the same.
  • A new category of commercial TRP is to be introduced for law firms, increasing the rates for such businesses by 200%. At the same time, the rest of commercial TRP rates are to increase in real terms by 2.3%.
  • The combined effect of the above proposals is projected to be an increased tax contribution from business of £1.25 million. 

Personal Taxes

Following on from previous budgets, this Budget includes further moves towards a more progressive personal tax regime, with increases in personal allowances funded by withdrawal of all allowances for higher earners.

  • Personal allowances will increase by £500 to £10,500 for a single person.
  • Relief for pension contributions will reduce from £50,000 to £35,000 per individual. It is expected that this will impact around 130 taxpayers.
  • For higher earners, defined as anyone earning in excess of the social security threshold of £142,896, who already start to lose £1 of personal allowances for every £3 of income over that threshold, will now also lose supplemental allowance, mortgage interest relief and relief for pension contributions. The impact of this is that a single taxpayer earning £307,896 will pay an effective income tax rate of 20% on all their income.
  • At the same time, P&R are seeking to increase Guernsey’s attractiveness to high net worth individuals and to give a much needed boost to the Open Market. From 2018, a reduced tax cap of £50,000 for new residents buying in the Open Market will be introduced. For someone moving to Guernsey for the first time or returning after more than three years, providing they have paid document duty in excess of £50,000 on the purchase of a Part A Open Market property, will pay a maximum of £50,000 income tax per year on their worldwide income, in the year of arrival and the subsequent three years.
  • P&R is also proposing to amend an anomaly in the tax treatment of income earned in investment companies held within a trust with a local resident settlor. The effect will be to align the treatment of such companies with those held in a personal capacity.
  • It is proposed to phase in the independent taxation of married couples and couples in a civil partnership. However, the ability of spouses and partners to transfer unused allowances will be retained under the new independent taxation structure. The effect should be to remove an anachronism from Guernsey’s tax regime without adversely impacting couples.
  • P&R have recommended a change in the tax residency rules which determine that where a resident only individual, who has been resident only for more than one tax year, becomes principally resident in Guernsey, they will now no longer be treated as principally resident in Guernsey for the year prior to taking up permanent residence here.

KPMG Channel Islands Comment

While the changes to business taxes of themselves are not significant, we are seeing further tweaking of the Zero-10 regime at a time when international business is seeking stability and certainty. The other effect is that the island’s business tax regime will be very similar to its closest competitor jurisdiction. However, following Jersey’s proposed extension of its 10% rate, the key difference between the two regimes arises from the Guernsey principle of taxing business streams within a company rather than the entire company profit. This difference can benefit companies that generate profits from unregulated activities in Guernsey.

The introduction of a new higher rate of property tax for law firms does not seem to raise material levels of revenue and is somewhat incongruous.

On the personal tax side, it is hard to find fault with making the tax regime more progressive. Even once the full effect of the withdrawal allowances are felt, the maximum income tax rate is still 20%, one of the lowest rates in Europe, and the absence of capital taxes retains Guernsey’s attraction for high net worth individuals. Added to this, the temporary tax cap for new Open Market residents may help stimulate the Open Market. Whilst it looks generous, arguably the combination of the document duty and tax paid means that any new residents will be paying £100,000 in taxes that would not otherwise have been paid.

The proposal to amend the residence rules to enable resident only individuals to take up principal residency without altering their prior year status is welcomed as it would remove an anomaly that has been seen to discourage individuals from spending more time and taking a more active role in Guernsey.

Overall, the P&R Committee’s tax proposals seek to “raise additional revenues as far as possible from individuals and entities most able to bear the burden”. It is important to remember that there will only be higher tax receipts where there is economic growth. There may still be a need to consider other revenue raising measures in future and care should be taken to ensure that such measures do not inadvertently stifle growth and innovation in our local economy. It is welcome that Guernsey is balancing its books but a small economy operating in a turbulent and competitive world can be disproportionately affected by changes in tax policy.

 

Full details of the proposed changes can be found on the States of Guernsey website here.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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