Confirmed and Unsaid: Looking at the 2014 Finance Bill

Wendy Walton

For private client/trust practitioners, the draft 2014 Finance Bill clauses published on 10 December 2013 contained no great surprises, and were mainly interesting for what they did not include. We will have to wait until early next year for details of the proposed capital gains tax (CGT) charge on the disposal of UK residential property by non-UK residents, and there will be further consultation on HMRC’s controversial proposal to split a settlor’s nil rate band between all the trusts he or she has created.

The confirmation that the new CGT charge for non-UK residents will not come into effect until April 2015 will allow affected individuals time to consider their position and take any appropriate action. The Autumn Statement wording, implying that only gains accruing from the effective date would be taxed, was also encouraging.

Various alternative suggestions have been made to HMRC in relation to the splitting of the nil rate band between trusts, so the exact fate of ‘Rysaffe’ planning, using multiple trusts, remains uncertain, but it is to be hoped that the chosen solution will avoid the administrative complexity that would have resulted from the original proposals.

The proposed inclusion of income that has been accumulated for at least five years (instead of only two years) in the amount subject to the ten yearly inheritance tax (IHT) charge is obviously an improvement on the original proposals. However, it still falls far short of the much longer accumulation period proposed by practitioners, and it will result in increased ten yearly charges, particularly as tax will be charged at the full rate, irrespective of how long the income had actually been accumulated.

The extension of the CGT uplift provisions on the death of a vulnerable beneficiary with effect from 5 December 2013, and the extension of the range of vulnerable beneficiary trusts that qualify for special income tax, CGT and IHT treatment from 6 April 2014 are, of course, welcomed.

The halving of the current 36 months final period of ownership CGT exemption on disposal of a main residence for property disposals after 6 April 2014 may mean that some individuals who left a property before 6 October 2012 and who have not yet sold it will have a larger chargeable gain than anticipated. There are also anti-forestalling measures so that the 18 month final period will also apply where a sale is agreed before 6 April 2014 but not completed until after 6 April 2015.

The introduction of a new transferable personal allowance of up to £1,000 between spouses and civil partners who are not higher rate taxpayers, while better than nothing, will be of very limited benefit, and will add another administrative chore to employers, with the transfer being given effect via PAYE codes in most cases.

Wendy Walton is the Chair of the STEP UK Technical Committee and is a Partner and Head of Private Client at BDO LLP.

Is financial privacy coming to an end?

In recent years, we have seen almost daily developments chipping away at long-established boundaries of financial privacy. Before the global recession gave this process real impetus, who would have thought that offshore financial centres would sign automatic exchange of information agreements?

The UK’s proposed public registry of company beneficial ownership may prove to be a game changer if, as the UK hopes, it becomes a de facto global standard. Whether each jurisdiction makes such data publically available, as the UK plans, or ‘consultable by request’ as planned for the new register of French trusts, is arguably less important than the fact that the data is collated at all. The Cayman Island authorities have already announced a consultation on a similar company registry and that they will ‘adopt standards that are practiced worldwide’.

These developments are driven by the goal of preventing tax evasion and limiting avoidance to raise additional revenue. Yet many clients coping with sensitive personal circumstances may have genuine reasons for fearing that their financial privacy is rapidly coming to an end.

Fortunately, the UK registry will allow ‘Limited exemptions from public disclosure … where it is necessary to protect individuals whose safety might be put at risk.’ While this is essential, it is unlikely to help those who seek privacy because personal family relationships are ‘complicated’.

The UK’s proposal to force disclosure of trustees that are beneficial owners of companies (and in some cases the trust beneficiaries) could also be significant if it signals the start of disclosure of trust relationships beyond corporate structures.

Advisors can still direct their clients to jurisdictions where privacy can be maintained but this is now a moving target. However, it is likely to be more productive to work with clients on addressing the underlying reasons for the need for privacy rather than to chase privacy to the ends of the earth.

Identifying the best global locations for clients is about more than seeking out the highest level of privacy. Striking a balance between attractive tax rates, quality of life and cost of living issues is a highly personal decision but advisors can, and should, support clients through the process. A recently published Global Opportunities report compares the benefits of key jurisdictions to illustrate the many options available.

Wendy Walton TEP, Chair of STEP Technical Committee for England and Wales

On HMRC’s Charges on Trusts consultation

Reading HMRC’s on-going consultation ‘Simplifying Charges on Trusts’ does not give much hope for simplification.

Of the key proposals, ignoring previous lifetime transfers and non-relevant property in relation to trust exits and ten year charges, is clearly attractive. However, while the idea of splitting the nil rate band between every trust a settlor creates -even insurance trusts- may be simple in abstract, but it would be a nightmare for trustees in practice. Even if only trusts created after, say, April 2014 are to be taken into account, in future life would become increasingly complicated for trustees.

Whilst the current rules are complex, they are prescriptive and trustees have the option of asking HMRC to calculate the tax due. Under the proposals, the onus will be on the trustees to do the calculation and to file the necessary return by 31 October, following the tax year as there will be no option to file online. It would be preferable to bring the position wholly into line with self-assessment, as it applies for income and gains tax purposes, so that trustees would have the option of filing before 31 October following the end of the relevant tax year with HMRC calculating the tax or by 31 January, with the trustees calculating the tax.

STEP is completely supportive of simplification but these proposals do not appear to meet that objective.

Wendy Walton TEP, Chair of STEP Technical Committee for England and Wales