The Finance Act passed into law as expected on 17 July 2013, and is perhaps best summed up as an anti-avoidance bill. There are some positives, however, and we have sought to draw out the good and the bad in some of the main areas below.
Statutory Residence Test
After much tweaking, a codified set of rules to determine an individual's UK tax residence is now finally with us.
This should provide some welcome certainly but, as might be expected, the challenge of condensing the extensive case law principles into a practical test has proved a challenge for the law-makers. As such, we have ended up with 55 pages of legislation to tackle this area!
The result is a set of admittedly complicated rules, but these should give a clear outcome in all but the most extreme cases. Working through the legislation to arrive at that "right answer" can be tricky, however, and the unexpected results can arise so care is still needed in this area.
Alongside the residence test, the temporary non-resident rules which can catch those leaving the UK for less than 5 years (normally 5 complete UK tax years) have also been extended to cover more categories of income and gains. This had been widely expected and those planning to establish non-UK residence for tax savings will at least have some certainly around their residence position to counter-balance this.
IHT Deduction for Debts
This is one of the more disappointing new areas of legislation, which puts a stop to the general rule that all debts owed by a deceased persons estate should be recognised as a liability. In short, the new rules deny a deduction for certain debts against an individual's estate for UK inheritance tax (IHT) purposes.
This would seem to be aimed at certain schemes which sought to achieve a deduction on the one hand alongside an equally valuable relief on the other, i.e. “double dipping”. Perhaps unsurprisingly, the legislation generally sets aside loans which are not discharged on the event of the borrower's death, but it also goes further in certain areas.
In particular, disallowing loans taken out by non-UK domiciled individuals who might choose to invest outside the UK seems particularly unjust. Existing arrangements should be grandfathered, and financing the purchase of a property in the UK via mortgage arrangements is still an option, but alternative structures (particularly life insurance) may prove more attractive as a result of the changes.
Annual Tax on Enveloped Dwellings
Another regime that has been long in the making, the "ATED" changes are worthy of fuller coverage as found in our "Home is Where is the Charge is" article in this Newsletter. Again, non-UK domiciled and/or non-UK resident individuals may be the main losers here, at least without careful planning.
Close Company Loans to Participators
The rules which can tax loans made to individuals in certain closely-held company scenarios have been tightened up quite considerably, notably in the context of corporate members of LLPs. Further extensions to the close company loan rules and the tax treatment of LLPs more generally are subject to ongoing HMRC consultation, and are likely feature heavily in these pages in the coming months.
General Anti-Avoidance Rule
The UK's "GAAR" has been long in the making and sounds the death knell for most (if not all) off-the-shelf tax avoidance schemes. The separate £50,000 per annum limit on various other tax reliefs in the Finance Act is a further obstacle to more aggressive arrangements.
By contrast, most conventional tax planning should not be affected and HMRC's published list of Frequently Asked Questions in respect of the GAAR indicates the same. This is logical taking into the wording of the GAAR in the Act.
At its most basic, the GAAR applies a "double-reasonableness" test: would a reasonable man perceive a particular course of action with a particular tax outcome as reasonable? In most commercial or real-life circumstances, we would expect the answer to be "Yes"', and the GAAR not to apply. That said, the GAAR is another tool in the taxman's armoury and may mean that something sounding too good to be true is precisely that!
Seed Enterprise Investment Scheme (SEIS)
On a brighter note, it was pleasing to see to a capital gains tax break extended for those making qualifying SEIS investments in the 2013-14 tax year. In summary, those with gains to reinvest in the 2013-14 tax year could halve the amount of the gain that is chargeable to tax to the extent that they re-invest those gains in SEIS eligible investments.
Alongside the other available reliefs, particularly the income tax rebate of up to 50% of the amount invested, SEIS remains very attractive from the tax perspective. The investment risk is key of course, but we hope to see SEIS meeting its aim of stimulating investment and growth in the economy.
Anyone considering making an investment of any size into a new business venture should speak to one of our team about whether a modest restructure might ensure that SEIS would apply. The benefits are very significant, not least of all having the taxman fund half of your investment cost through tax relief.