Happy Christmas and a prosperous New Year from everybody at Trident Tax
Whilst we look forward to the Christmas break and spending some time away from work we are left pondering the changes to the UK tax system that await us in 2014/15. The Chancellor’s autumn statement announced significant new initiatives that will need to be monitored as HMRC enters into consultation and releases further guidance.
Capital Gains on property owned by Non-residents
The headline grabber from the statement was undoubtedly the announcement that gains made on sales of UK residential property by non-UK residents after April 2015 will be liable to UK capital gains tax. HMRC will consult on this extension to the capital gains tax regime in the New Year but some of the features of the new rules have been announced;
- The new legislation will apply to gains arising after April 2015.
- The charge will apply to all residential property irrespective of value unlike the ATED rules that operate only for properties worth more than £2million.
- The charge is restricted to residential property and so commercial property will be unaffected.here are some important issues that are yet to be resolved:
- Will the full gain on any disposal be taxed or will the historic gains to date be “grandfathered”?
- Will the new rules apply to property held by a non-resident company or trust? If so, this will have significant impact for the offshore trust and financial services industry, affecting all current and future structures that hold UK residential property.
- At what rate will it be charged? It does not follow that the rate will be the same as for UK resident taxpayers and may be charged at a capped rate in the same way as for UK rental income received by a non-resident.
- Will there be any exemptions for a commercial property business? The rules for the ATED regime originally applied to all property with a limited exemption for developers but were widened to exclude commercial rental businesses.
We will follow the consultation on this new tax charge and send a more detailed analysis in due course.
New rules to tax the profit split in partnerships with mixed members
Another significant change was the announcement of legislation that will change the way partnerships, LLPs in particular, will be taxed. Until now it was possible to set up an LLP that was made up of individuals and companies. A typical structure would involve a number of individuals in partnership with a company to carry on a business. The individuals would also be shareholders in the company.
In the past it has been possible to organise the partnership agreement to allocate the greater part of the profits to the company. This would mean that the individual members would pay income tax on a low share of profits whilst the company paid tax on the majority of the income. The difference in tax rates and the ability to gift shares to spouses could mean that much lower tax was paid overall.
HMRC has announced new anti-avoidance legislation to address such situations. Where an individual receives a lower share of profits than a company in a partnership and it is reasonable to suppose it is because the individual will be able to enjoy the company’s share, the new legislation will tax the individual on an increased share based on the profits deferred but with corresponding provisions to prevent the company also being taxed on the same profits.
The legislation will be in place from April 2014 but with special provisions effective from 5 December 2013 to prevent any specific avoidance entered into ahead of the new legislation being introduced. The rules are complicated as they need to avoid disturbing the tax treatment for partnerships set up on normal commercial terms but this means greater care will be required when advising any partnerships with mixed members. Current partnership agreement will need to be studied in order to understand whether it is vulnerable to this new legislation.
We will write with a more detailed review of these changes once we have HMRC’s guidance and interpretation on the draft legislation.
Disguised employment relationships through a partnership
In addition to the new rules affecting mixed partnerships, HMRC has also moved to close down UK based structures where businesses seek to avoid operating PAYE by entering into a partnership with its staff. The new draft legislation treats income paid to “partners” who in other circumstance would be considered to be employees, as disguised salary. The disguised salary will be subject to PAYE.
Other anti-avoidance initiatives
HMRC has identified a number of situations and arrangements where it has identified a loss of tax. Some of these situations may affect your clients. We will be following up with more information in the New Year as details of the planned changes become available.
- Offshore employment intermediaries – HMRC has extended the scope of the legislation that deals with offshore employment agencies. The new legislation extends the meaning of an employment to cover situations where the individual working for the UK business is engaged by an offshore agency but on terms other than an employment. The UK business will be required to operate PAYE.
- Artificial split employment contracts for non-domiciled individuals – HMRC will be introducing legislation to prevent non-UK domiciled individuals artificially splitting an employment into two employments so that part of the income arises offshore. The new rules will prevent the remittance basis being used to avoid tax on the non-UK employment income.
- Onshore employment intermediaries using false self-employment – New legislation is planned to widen the scope of the PAYE legislation in respect of agencies to avoid the exploitation of a weakness in how an employment is defined. This will prevent agency staff being described as self-employed in circumstances where PAYE would ordinarily apply.
If you wish to discuss any of the above issues any further then please do not hesitate to contact us.