As a new tax year gets under way, Robert Maas considers what tax-planning strategies need to be updated and what needs to be scrapped completely
Whatever you may or may not think of George Osborne, he cannot be accused of failing to introduce major reforms to the UK tax system. Whether these reforms are desirable or appropriate remains to be seen however. As we embark on a new tax year, now seems like a very good time to consider whether a change in strategy is required when it comes to some aspects of traditional tax planning.
A close inspection of non-UK domiciled individuals (non-doms) is a good place to start. This group has always had a favoured place in the UK tax system, but this has been chipped away somewhat for inheritance tax (IHT) purposes since the introduction of capital transfer tax in 1975, and now the introduction of the concept of deemed domicile after 17 years of UK residence.
From 6 April 2017, a person becomes deemed domiciled - and thus liable to IHT - if he has been resident in the UK for all (or part of) 15 out of the 20 tax years prior to death or the making of a taxable gift. However, the indications are that excluded property trusts created before a person becomes deemed domiciled will be unaffected by this change. An excluded property trust is one where the settlor was non-dom (and non deemed-domiciled) at the time he created the settlement and which holds non-UK assets.
As a result, a non-dom who has been resident in the UK for less than 17 years but will complete 15 years (or part years) of residence in 2017/18 should consider putting his overseas assets into an excluded property settlement before 6 April 2017. He could also consider putting some of his UK assets into an offshore company, as doing so would transform them into a non-UK asset. It should, however, be noted that this will not work for UK residential property, and a transfer to a company can trigger both CGT and IHT, so this option is unlikely to be attractive if there is a large inbuilt unrealised gain.
It should be remembered that if a person was born in the UK with a UK domicile of birth, the 15-year rule will not apply in any event. From 6 April 2017, such a person will be treated as UK domiciled for any tax year in which he is resident here.
Osborne's other big change has been to extend deemed tax domicile to income tax and CGT. This means that an individual will become taxable in the UK on worldwide income and gains arising after 6 April 2017. Such individuals will no longer be eligible to use the remittance basis (although this will probably remain effective for income and gains arising before that date).
It might therefore, be worth considering gifts now to divert the income away from the individual to someone with a lower tax rate. In particular, if the individual is likely to end up leaving a large part of their assets to a charity on death, why not give them to a charitable trust now?
The assets would continue to grow tax-free after 6 April 2017, the individual can continue to determine the investment policy, and they might even get an income tax deduction for the gift.
Finally, on this topic, if a client spends significant time overseas, he could consider emigrating. The chancellor's statutory residence test takes most of the uncertainty out of emigrating and in most cases, will allow a person to spend three or four months a year in the UK as a non-resident. If the non-dom has a peripatetic lifestyle, this may prove to be less inconvenient than the taxable alternative.
The IHT additional residence nil rate band
Last year, Osborne announced his additional residence nil rate band, which he claimed enables a married couple to leave a house worth £1m to their children free of IHT. Unfortunately, he did not have time to mention that to achieve this, one of the parents has to live beyond 5 April 2020.
The new relief does not apply at all if both parents die before 6 April 2017. After this date, it will only cover an £850,000 house until 5 April 2018, gradually rising after that to the £1m figure. He also neglected to mention that the relief will not apply at all if, when the individual dies, his total assets - not simply the house - exceed £2.35m (£2.2million for the year to 5 April 2018).
Nor did he make it wholly clear that the relief applies only to the extent that a person gifts an interest in their main residence to their children (or other qualifying descendants), and only applies to the extent of the value of each parent's share in the house, less their share of the mortgage.
Loan interest relief on buy-to-let investments
Tax relief for loan interest on a loan to buy residential buy-to-let property is being reduced to an effective rate of 35 per cent from 6 April 2017, 30 per cent from 6 April 2018, 25 per cent from 6 April 2019 and 20 per cent from 6 April 2020. This is causing some people to consider putting their rental business into a company, as a company pays corporation tax at 19 per cent, so can obtain full relief.
Is that a good idea? It may be, but in many cases, it is not. This is partly because the extra tax due when taking money out of a company makes it unattractive if the landlord needs the rental income to live on. There is also the consideration that if the landlord intends to pass the business onto his children, his death will eliminate CGT on the increase in value if he owns the property personally, but it will not eliminate the tax on unrealised gains within the company.
Furthermore, the individual will crystallise CGT to put his properties into a company unless he can show that his activities go beyond investment and amount to a business. It is difficult to know whether in any particular case the person meets this test. But, it's fair to say that the investor is unlikely to do so if the property activities do not amount to a full-time occupation.
The new dividend tax
The system of taxing dividends changed from 6 April 2016. Tax credits (and the effective tax exemption for basic rate taxpayers) have been scrapped. Instead, the first £5,000 of dividends will be taxed at zero per cent, so will be effectively exempt from tax. Where dividends exceed this figure, the excess will be taxed at 7.5 per cent for a basic rate taxpayers, rising to 38.1 per cent for a 45 per cent taxpayer.
This is an extra 7.5 per cent tax at all levels of income. Of course, for many people the change will be beneficial as most do not receive in excess of £5,000 worth of dividends. The main category that does is owners of family businesses, who find it cheaper to take dividends from their company rather than salary. This won't change after 5 April, but the differential will be much narrower.
Robert Maas is a tax consultant at CBW Tax