Following a very difficult year, Chancellor Rishi Sunak presented the 2021 Budget against a backdrop of economic uncertainty caused by the pandemic.
Our Budget Summary provides an overview of the key announcements arising from the Chancellor’s speech. Changes for businesses include a corporation tax rise to 25% from 1 April 2023 whilst individuals see no major changes to the income tax and capital gains tax rates.
Additionally, throughout the Summary you will find informative comments to help you assess the effect that the proposed changes may have on you personally.
If you would like more detailed, one-to-one advice on any of the issues raised in the Chancellor’s Budget speech, please do get in touch.
Gifting Assets Into Trust To Plan Against Future CGT Increases
On 11th November 2020, The Office of Tax Simplification (OTS) published two proposals of recommendation to closely align the rates of CGT with income tax rates and also to reduce the annual CGT allowance.
Due to the current economic climate, there lies continued uncertainty in relation to the likely rises in CGT. However, there may be an opportunity to safeguard one’s asset from any future CGT changes if you were to gift assets into trusts.
Gifting assets into trusts before 6 April 2021
A donor who has gifted assets into a discretionary trust before 6 April 2021 will have until January 2022 to decided whether to let the CGT charge crystallise or hold over the gain to the trustees to pay CGT when they dispose of the asset.
The donor can review the position, also taking into consideration all the circumstances at the point the gain becomes reportable (i.e. in January 2022) rather than making a definitive decision now, in uncertain circumstances; this seems to be favourable as this sort of planning is valuable, particularly where CGT changes are anticipated.
Donors should be made aware that gifting into a trust may also come with other tax implications. A transfer of an asset from an individual into trust is a chargeable transfer for the purposes of inheritance tax (IHT) for the value above £325,000 per person, however, in some cases this can be mitigated if for example Business property relief is available. However, where you may wish to undertake some IHT planning anyway, this CGT planning may be an interesting additional consideration right now.
For those concerned about potential CGT rises this year, it is worth considering whether now might be the right time to consider making such gifts into trust. This is a good strategy in order to preserve a certain amount of flexibility and certainty when heading into this uncertain future.
As we are fast approaching the 5 April 2021 fiscal year end, now is a good time to consider your circumstances for both general year-end tax planning as we well as if you are close to the 15 out of 20 tax year horizon and thus becoming deemed domicile for Income, Capital gains and Inheritance tax.
For those individuals that have become deemed UK domiciled as of 6 April 2017, as a result of being UK resident for 15 out of the last 20 tax years, there are various statutory reliefs available that can be extremely valuable and lead to significant tax advantages. Therefore, our advice is to consider these reliefs carefully as time limits exist on these provisions.
In addition to the above there are other actions you may want to take before the end of the tax year. Detailed below are the main issues to consider for all taxpayers at this time of year: –
Becoming Deemed Domiciled, resident for 7 out of the last 9 years or 12 out of the last 14 years
If you are approaching the date where you will be deemed domicile, having been UK resident for 15 out of the last 20 years, 12 out of the last 14 years or 7 out of the last 9 years, you may need to take urgent action before 05 April 2020.
Important note – Part tax years count as full tax years for this purpose.
Example 1 – Deemed Domiciled
“A” arrived in the UK in the tax year ended 5 April 2007 for the first time (the 2006/07 tax year), “A” will have been UK resident for 15 out of the last 20 years as of April 6 2021 and will become deemed domiciled for Income, Capital gains and Inheritance tax in the UK.
Example 2 – Resident 7 out of the last 9 years
“B” arrived in the UK in the tax year ended 5 April 2015 (the 2014/15 tax year),“B” will have been UK resident for 7 out of the last 9 years as of 06 April 2021 and will need to pay the £30k remittance basis charge in order to claim the remittance basis for the tax year 2021/22.
Excluded Property Trust
• Establish an excluded property trust and settle assets into it before you become deemed domicile for IHT. This is most relevant for people who are close to becoming deemed domicile in the UK for tax purposes. Although can be appropriate for individuals who have been in the UK for shorter periods for a variety of reasons.
• A trust can lead to Income, Capital gains and Inheritance tax benefits based on your circumstances.
If this is something that you would like to consider we would advise you contact us as soon as possible, as typically at least one month lead time is required to consider and establish such an engagement.
• If you have paid the remittance basis charge in any of the previous years you can rebase your foreign assets as of 5 April 2017. If you have not paid the RBC, there may still be an opportunity to rectify this.
• The assets must have been located outside the UK throughout the period from 16 March 2016 or, if later, the date you acquired the asset, to 5 April 2017.
• If necessary it may be possible to make an election for a prior year and claim the remittance basis and pay the charge in order to enable the rebasing opportunity
• Please note this election is not applicable if you become deemed domiciled after 6 April 2017
• In addition you will be able to make tax-free remittances of any gains realised on disposals on non-UK assets after 5 April 2017 to the extent such gains are attributable to the pre-April 2017 period depending on your residence position prior to April 2017.
Business Investment relief
• This allows the remittance of income taxable on the remittance basis.
• It is possible to invest into EIS or SEIS companies using this relief.
• It is possible to invest into your own business.
• It is possible to make investments into a property rental business.
• We are able to obtain HMRC advance clearance on transactions, thus attaining certainty on the non-taxation of remittances to the UK
If you are interested in further tax planning then the following tax-efficient investments are also available.
Please do not hesitate to contact our team here at Frontier Group and we are happy to arrange a consultation.
A large bill was unveiled on December 21 that would provide tax and direct spending relief for businesses and individuals affected by the coronavirus pandemic and extend dozens of expiring tax deductions, credits, and incentives. One of the reliefs that would be useful to individuals is the charitable donation deduction.
In 2020 there will be a universal deduction of up to $300 for cash gifts made by an individual directly to a charitable organisation. This deduction will apply to all taxpayers and includes those who do not itemise their deductions and claim the standard deduction. This legislation has been extended up to the end of 2021 and the deduction for married filing joint taxpayers has increased from $300 to $600. For those who will want to itemise their deductions this year and next, the usual limitation for cash gifts made to public charities will be suspended and a deduction of cash donations will be allowable of up to 100% of their AGI.
Please note that these changes only apply to cash contributions made directly to public charities and do not apply to contributions made to private foundations, donor advised funds or supporting organisations.
In November 2020, the Treasury Department and IRS issued final regulations relating to section 1031 like-kind exchanges. These final regulations address the definition of real property under section 1031 and also provide a rule addressing the receipt of personal property that is incidental to real property received in a like-kind exchange.
The 2017 Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property. As of January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges. Also, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. An exchange of real property held primarily for sale does not qualify as a like-kind exchange.
Under the final regulations, real property includes land and generally anything permanently built on or attached to land. In general, real property also includes property that is characterised as real property under applicable State or local law. In addition, certain intangible property, such as leaseholds or easements, qualifies as real property under section 1031. Property not eligible for like-kind exchange treatment prior to enactment of the TCJA remains ineligible.
The Financial Crimes Enforcement Network (FinCEN) has announced that, currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. Accordingly, a foreign account holding virtual currency would not be reportable on the FBAR (unless it is a reportable account because it holds reportable assets besides virtual currency). However, FinCEN announced that it intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account. Therefore, it is likely that very soon Virtual currency accounts will need to be reported on the FBAR, although currently there is no such requirement.
The Wealth Tax Commission has released a study which calls for a one-off tax of 5% on assets above £500,000. This wealth tax could raise £260bn for public finances hard hit by the COVID-19 pandemic. The tax would also apply to all residents (including non-doms) on an individual basis rather than as a household.
The wealth tax would be based on the open market value of all of an individual’s assets, except for low value personal items (worth less than £3,000) on the basis there would disproportionate administrative costs for such assets.
The key points of the report are:
Tax would be calculated on the market value of an asset on predetermined dates of:
– The Primary Home
– Minus any debt, such as mortgages
Payment of the tax in five equal instalments over five years
Spouses or partners could pool their allowances effectively giving households more than £1M net wealth
The Commission was founded in April 2020 and, despite its name, is not a government-appointed body. The report considered a one-off wealth tax and an annual wealth tax. It concluded that a one-off tax would be fair, efficient and very difficult to avoid. It is unknown whether this is an option the government will take, however individuals should give this due consideration.
It has been forecasted that the government will need to find up to £40 billion a year to recover from the mass deficit created by the unprecedented levels of government spending during the ongoing pandemic. Inevitably, the recuperation of £40 billion a year will derive from substantial cuts or additional revenue; and possibly various forms of tax changes introduced by Rishi Sunak in the upcoming Budget due March 2021 – with a potential target being Capital Gains Tax. Following a request from the Chancellor, Rishi Sunak, the Office of Tax Simplifications (OTS) published its first report, on 11th November, into the review of capital gains tax (CGT). The main recommendations from the OTS are:
Aligning CGT rates with income tax.
Lower the annual exemption on CGT
Taxing share incentives as income rather than capital gains
Removal of the uplift to market value on assets inherited on death relief
Reducing or eliminating entrepreneurs’ relief/business asset disposal relief.
It would be wise for investors, private equity executives and owner-directors (amongst others) as well as anyone else holding assets standing at a significant gain, to take the contents of the report into consideration and take advice on their options over the next few months.
In HMRC v Development Securities, the Court of Appeal has overruled the Upper Tribunal and agreed with the First-tier Tribunal that the relevant Jersey incorporated subsidiaries of a UK parent were resident in the UK for tax purposes by reason of being centrally managed and controlled in the UK.
While of considerable interest, it should be remembered that the question of where a company is centrally managed and controlled is principally one of fact and so different facts might yield a different conclusion.
What the Court of Appeal’s decision shows is that the line between non-UK and UK residence can be a fine one when it depends on whether the overseas company’s directors gave due consideration to the transaction as a whole or just to a small element of it, and that, accordingly, non-UK company boards should always make sure that they give proper consideration to the transaction as a whole, albeit informed by advice or recommendations that they might have received from the UK, to minimise the risk of being treated as UK resident.
The decision has yet to be appealed to the supreme court.
It has been forecasted that the government will need to find up to £40 billion a year to recover from the mass deficit created by the unprecedented levels of government spending during the ongoing pandemic.
Inevitably, the recuperation of £40 billion a year will derive from substantial cuts or additional revenue; and possibly various forms of tax changes introduced by Rishi Sunak in the upcoming Budget due March 2021 – with a potential target being Capital Gains Tax.
Following a request from the Chancellor, Rishi Sunak, the Office of Tax Simplifications (OTS) published its first report, on 11th November, into the review of capital gains tax (CGT).
OTS Recommendations to the Treasury:
Aligning CGT rates with income tax.
Due to the difference in rates of income tax and CGT, taxpayers try to convert their income into capital gains; therefore, by aligning the rates of income tax and CGT it would simplify the tax rules and there would be no need to complex anti-avoidance provisions that have been implemented to police the boundary between income and capital gains.
However, a concept that needs to be taken into consideration is that if these two rates were to be aligned, there would be a need for consequential changes due to potential factors if may affect:
There would be a possibility of averaging gains over the holding period of an asset. This would mean that a basic rate taxpayer does not have to pay tax at a higher rate due to a large gain that has realised in a particular tax year
Making some allowance for inflation
Allowing more flexible use of losses
Discouraging people from using companies as asset holding vehicles in order to access the lower rates of corporation tax compared to any increased rate of CGT
Lower the annual exemption on CGT; and therefore, almost doubling the amount of people who become liable to pay tax annually
Currently, the annual exemption on CGT is set at £12,300. If Rishi Sunak were to agree with the OTS’ recommendation, the exemption would be lowered to £2,000 to £5,000 which consequentially results in an increase of revenue between £500 million to £900 million as 300,000 to 400,000 more individuals would need to pay Capital Gains Tax.
Taxing share sales as income
As the rates of income tax and CGT are not aligned at present, the Office of Tax Simplicity has suggested that it may be less complex if certain share sales were taxed as income; in particular share incentives for employees and retained earnings in small owner-managed businesses.
The OTS has recommended that the government should consider taxing more share-based rewards from employment as income rather than capital gains as a method to help close the £40 billion deficit gap that has been created due to the COVID-19 pandemic.
In regards to owner-managed business, the OTS believes that it must be determined whether an individual who accumulates trading profits within a company and then sells the company; which consequentially means that they will be paying capital gains on the profit on the sale, will be in a better position that someone who carries on a business in their own name and/or receives the profit as salary or dividends.
The main argument in this circumstance is that as the profits relate to the individual’s labour, they should be made subject to income tax rather than CGT.
Lifetime gifts and gifts on death
Removal of the “uplift on death relief – which currently allows beneficiaries to inherit an asset at market value on the date of death as opposed to the value on the date of purchase. Alternatively, an amendment of this relief so that assets are re-based to 2000, for example, rather than the date of death.
The Office of Tax Simplicity has recommended further reductions (or potential elimination) of mistargeted BADR (business asset disposal relief, formerly known as entrepreneur’s relief). Following on from this, they believe that it should be replaced with retirement relief (which was abolished in 2003 due to its complexity) as a method of business owners and managers to build up the value in their businesses as a form of pension arrangement.
Abolishment of Investors’ Relief
With support of the minimal evidence that individuals are utilising Investor’s Relief since it was introduced in 2016. The OTS have recommended that it should be abolished.
Although it remains unknown whether Rishi Sunak will implement these recommendations suggested by the OTS, it would be wise for investors, private equity executives and owner-directors (amongst others) as well as anyone else holding assets standing at a significant gain, to take the contents of the report into consideration and take advice on their options over the next few months.
As the government will most certainly be looking for methods to raise revenue that are politically acceptable; this will inevitably include targeting the wealthy as CGT is a pathway that can be used as a way to raise tax revenue without breaking the government’s manifesto agreement.
If you require any further information on this, please do not hesitate to contact our team for further information.