Tailoring approval

The Chancellor of the Exchequer, George Osborne, carefully crafted this year's autumn statement to promote one basic message: Britain is successfully pulling itself out of the economic downturn. Yet it was not the boldest we have seen on the eve of an election. This is partly because tax revenues have not been rising as fast as recent economic growth might have led us to expect. Perhaps partly due to this, there were a number of significant changes for the private client world and some that could cause concern.

Residential property

The chancellor did his best to please the electorate with a major stamp duty land tax reform, which is in most buyers' best interests. Any property sold for less than £937,500 will see buyers pay less than under the old system, which amounts to 98 per cent of all transactions.
The reform is also welcome because of the well-known distortions the old slab system created in the market; even on relatively low values, a £1 difference in sale price could yield a £5,000 difference in tax incurred.

The new system, based on progressive rates and in effect as of 4 December 2014, was foreshadowed by the Scottish Land and Buildings Transactions Tax (LBTT). A number of experts predicted this at the time. LBTT was passed by the Scottish Parliament last July, and will come into effect next April.

By contrast, the new SDLT system in the rest of the UK seems to have been rushed through, and suddenly leaves some people in a position where they must reconsider their property transactions, both those they are currently carrying out as well as future ones.

The primary difference between Scotland and England's revised stamp duty systems will be the rate of tax.
At 10 per cent, Scotland's will be double those of England's for properties worth £250,000 and £925,000. Towards the top end, the 12 per cent band comes in at £1m in Scotland and £1.5m in England.

For private clients and their advisers, however, these reforms will hit the top end of the market hard. Houses worth more than £1.5m are now liable to 12 per cent stamp duty on any amount above that threshold. The overall result is clear. A property sold for £5m would have resulted in £350,000 of SDLT and that figure has now leapt to £513,750.

Experts have warned that this poses a risk of stagnation in some prime housing markets. Owners of mid-size family homes in certain areas might be disinclined to upsize because of the amount of tax that they will now incur. The new financial realities may also lead some to change their investment strategies if they involve residential properties. High-end property is certainly less attractive as an asset class than it was,
from a purely financial point of view.

Concerns have also increased in the property market about a future mansion tax (post election) on top of the effects of this SDLT change. Not only would this increase taxes on the highest value properties, but it also raises a question about the level at which the mansion tax would now start given that the highest value threshold for SDLT is £1.5m.

The potential for fiscal drag should not be underestimated with the new system. If the new SDLT tax thresholds remain frozen over the next parliament, rising house prices will gradually increase the effective rates of tax due. However at the top end of the market, which may well be depressed by the overall increased rates, this effect may be less pronounced than on lower value properties. It is important to note that the new rules are only applicable to residential properties.

Savers

It is not surprising that the chancellor was keen to pander to the strong sense that savers, and their surviving families, have faced harsh conditions since the recession. George Osborne has proposed to rectify the anomaly that any investments held in an ISA cease to be eligible for beneficial tax treatment when the owner of those investments dies.

Under his proposal, the spouse or civil partner to whom ISA investments have been left will be granted an extended ISA allowance equal to the value of the ISA assets they receive.
This means that the recipient can place the assets into a new ISA, which will reduce the income tax burden for pensioners and other people who benefit from income on savings left to them by loved ones.

Income tax

Income tax reforms will bring some relief to the so-called 'squeezed middle'; something that has not happened for several years. The increase of personal allowance is indeed minimal, it has only risen by £100, but the extent to which the higher rate threshold has been raised for next year represents a more significant change, rising from £41,865 to £42,385.

The chancellor has pointed out that this will take more than 130,000 out of the tax altogether. Given that recently more than one million have been pulled into the higher rate, this improvement is only modest. However this is set against a background of further personal allowance increases pledged post-election by certain parties, including the Conservatives.

Non-doms

Non-doms face substantially increased costs, now that the chancellor has chosen to raise their annual remittance basis. Those who have been in the UK for at least 12 of the last 14 tax years will now have to pay £60,000 (up from £50,000) while those who have been in the UK for 17 of the last 20 tax years will face a charge of £90,000, up from £60,000.

On top of this, George Osborne has put forward a proposal that instead of an election to pay the charge being assessed on an annual basis, an election could be in force for a minimum of three years. Deciding whether to make that election will be difficult for those trying to predict overseas income three years in advance.

Obviously this will be a steep increase for some, who may well reconsider their circumstances in light if the changes. Future governments would do well to be aware of the risk of deterring wealthy non-doms from using the UK as a base for their financial affairs, and from remitting their overseas incomes here.

ATED

The Annual Tax on Enveloped Dwellings (ATED) applies to high value properties that have been purchased through corporate structures. This has risen by 50 per cent plus inflation for enveloped properties worth more than £2m.
The increase is not surprising given how successful ATED has been so far. It raised £25m more than expected in (2013/14).

This means a sharp rise for those affected. On properties valued between £2-5m, the annual bill rises from £15,400 to £23,350. The highest value properties, those above £20m, will incur a charge of £218,200, which is an increase of £74,450.

When combined with the new rates of SDLT at the upper end, these charges change the dynamics of the super prime property market. Many overseas and local buyers have customarily used corporate structures to purchase UK property for reasons of privacy and to hedge against inheritance tax. These developments could force them to reconsider.

Anti-avoidance

The chancellor stated that over the course of the next parliament, he expects that at least £5bn more will be raised through more aggressive anti-tax avoidance measures. It is important to note, however, that other estimations along these lines have proven unreliable and overly optimistic.

HMRC has made substantial progress in reclaiming unpaid tax in recent years, but it is hard to see how much more progress can be made. The chancellor intends to ramp up DOTAS measures to gain more revenue. However, thanks to concerted efforts by HMRC and the government, abusive tax avoidance schemes are now very thin on the ground and the industry around them is reduced.

The chancellor's proposals also advise stronger deterrents for those guilty of serial tax avoidance. There are also details of higher penalties for abusive avoidance, and the accelerated payments regime has already been set up. The principle that abusive tax avoiders should face consequences is sound, but it is hard to know whether these measures will actually raise the huge sums promised.

Concerns afoot

Behind the rhetoric and aside form a few clever measures, the autumn statement does leave the private client industry with some concerns. The public finances are precarious. What we have seen this time around suggests that certain wealthier groups, such as non-doms and purchasers of high value properties, could be in for more hikes in their tax charges. Meanwhile, we are unlikely to see relief in income tax rates at the higher end,
and actually, the reverse is more likely.

Lucy Brennan is a partner
at Saffery Champness