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UK Taxation Changes

UK Taxation Changes

  • Type of paperEssay (Any Type)
  • SubjectAccounting
  • Number of pages7
  • Format of citationHarvard
  • Number of cited resources10
  • Type of serviceWriting from scratch

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Q1) IHT – UK Main Residence Nil-Rate Band

 

You are employed by a medium size accounting firm in the UK taxation department.

 

HMRC have introduced a series of new regulations applicable to the 2017/ 2018 tax year.

 

One of these is the Main Residence Nil Rate Band from 6 April 2017 relevant to Inheritance Tax.

 

REQUIRED:

Prepare a summary of this new regulation for your colleagues in the taxation department.

 

Your summary should be detailed enough to be a basis for other staff to explain the matter to their clients. It may contain examples if that will improve the clarity of your report.

 

(1,000 words)

 

 

 

Q2) UK Non-domiciled (Non-doms) status – Tax Changes in April 2017.

 

Your accounting firm has been approached by a potential new client (a wealthy international sportsman) who has acquired non-domiciled status for UK taxation purposes.

 

The sportsman has read that changes in the non-domiciled status rules have been introduced in April 2017 and he wishes to be advised in this respect.

 

A partner of your firm has asked you to prepare a report which will enable her to advise the potential new client in this respect

 

REQUIRED:

Write a report as requested by the partner.

 

Your report should contain all relevant background information on the previous rules, the changes introduced in April 2017 and the likely effect for the sportsman who has lived in the UK for 15 of the last 20 years.

 

(22 marks – 1,000 words)

QUESTION ONE:

Residence Nil-Rate Band

The Basics

Residence Nil-Rate Band (RNRB) refers to a taxation change that lets an individual pass on the family home when they die, at the same time hypothetically reducing the Inheritance Tax bill.  The band offers an allowance that is added to the regular nil rate band, however, the band is only applicable to be passed on properties. The taxation change was proposed to take effect for only relevant transfers on death on or after 6th of April, 2017. It was set to deem applicable to the urge of reducing the tax payable by an estate upon death. However, the allowance won’t apply in reducing the tax payable on lifetime transfers that are actionable as a result of death.

The RNRB was introduced in April 2017. It is a £100,000 allowance for passing on the family home to direct descendants, increasing to £175,000 over the subsequent three years. However, the allowance tends to reduce for larger estates. The allowance leads an additional nil-rate when a residence is passed on death to direct descendants and for the next three years its measure will be as follow:

  • £100,000 for the tax year 2017-2018,
  • £125,000 for the tax year 2018-2019,
  • £150,000 for the tax year 2019-2020, and
  • £175,000 for the tax year 2020-2021 and subsequent years (Budget, 2017).

It is also considered that from 2021 to 2022 onwards, the RNRB will increase in line with the Consumer Prices Index (CPI). Within the period, any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner (Rates, 2017).

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million, applicable after deducting expenses but only before any exemptions and reliefs – such as nil rate band, spouse exemption, and business/agricultural relief. This will be at a withdrawal rate of £1 for every £2 over this threshold (Budget, 2017).

However, there exists no provision in the legislation for an actual requirement for the first spouse to die to enable the couple to actually own a qualifying residential interest at the moment of their demise for RNRB to pass on to the survivor.

Beneficiaries Who Qualify

According to the allowance’s guides and rules, it only becomes applicable when the owner of the home passes it on to direct descendants who have an estate – including the main residence. A direct descendant will involve either the child, a stepchild, an adopted foster child or foster child inclusive of their lineal descendants. The RNRB provision also includes spouses or civil partners of lineal descendants and widows, widowers and surviving civil partners of lineal descendants, given that they have not remarried before the death of the donor.

The direct descendant may be regarded as obtaining the inherited property even if the property has been left to a trust, provided that the direct descendant is treated as owning the trust asset or has qualified to gain the interest in the possession of an interest which meets the conditions of the deceased minors or an 18 to 25 trust.

In the case where the property was subjected to a gift with specified reservation rules and principles, then the RNRB will be available as long as the recipients of the property are the individual to whom the original gift was made. Besides, the home doesn’t have to be passed on directly, it can also be left in certain trusts. However, this doesn’t include discretionary trusts (MANSFIELD, 1994).

The Properties Covered by the Allowance

For a property to qualify, the deceased must have an interest in it which was their residence at some point in time and which forms part of their estate. That so said, it, therefore, dictates that as long as the property had been the deceased residence at some point, it will qualify for RNRB even if it was let out at the moment of death. The allowance can be used to pass on one residential property from your estate (Auchmuty, 2009).

In case the individual owned more than one residential properties, at the moment of their death, their personal representatives may elect the property to qualify for RNRB. The election will only be conducted where the property has been the deceased’s residential property at some point before their death. The rules are different for properties that you have never lived in, for instance, buy-to-let properties will not qualify for RNRB.

Downsizing or Sale of Main Residence

In effect, according to Clare (2016), the additional nil-rate band will apply in the situation where the individual downsizes or terminates to own their residence on or after 8th of July, 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants. It will then deem possible for the direct descendant to claim the RNRB in full amount where the downsized property is of a less valued residence or sold their home on or after 8th of July, 2015. In a case where the owner of the property ceased to own their home, for instance, if they gifted it away, the assets of an equal value left to the beneficiaries will also qualify for RNRB, which seems to be specifically liberal.

To conclude, the RNRB is a well-renowned addition to the inheritance tax legislation, encompassing the people whose estates do not exceed the upper taper threshold to pass on the family residence to direct beneficiaries in an inheritance tax friendly approach.  According to the state government, 93% of estates of couples will transfer their properties to the next and subsequent generation at a free Inheritance tax as a result of the proposed taxation change. In the cases of downsizing or ceasing to own a home, the RNRB offers little concern to estate planning and there can yet be further alterations prior to its introduction in April last year.

QUESTION TWO:

UK Non-Domiciled (Non-doms) Status

Relevant Background Information on the Previous Rules

Traditionally, a citizen in the UK has the liability to pay taxes in the country, which has been determined by three components – whether they are UK resident, generally resident, and/or domiciled in the UK. To the best of knowledge, an individual’s domicile is their permanent residence, and the citizens who live in the UK but have a residence in another country qualifies to pay taxes in the UK on overseas income. The overseas citizen gains only to the extent that such funds are either received or remitted in the UK or brought to the country. This process is referred to as the remittance basis of taxation.

In April 2003, the government through the Labor Department issued a debate document as part of a review on reforming the rules and regulations set in the country. The document sustained over the years without any further details being issued by the government. In response to that sustainment, on 9th of October 2007, the then Chancellor Alistair Darling announced that the government would consult on the establishment of a fresh annual £30,000 charge that dictated that the non-domiciles would have to pay if and only if they wished to be taxed under the remittance basis (HM Treasury, 2003).

Moreover, various other alterations on tax were made and executed to the residence and domicile rules. All these changes were set to apply as from 6th of April, 2008. After then, the government established a consultation team on 6th December, requesting for views and opinions on the execution of the reform packages and whether there was a case “for any further changes to the rules on the treatment of non-domiciles to be considered.” HM Revenue & Customs published draft legislation in January and further explanation of the Government’s purposes in actualizing this reform the next month (HM Treasury, 2008).

Lastly, in December 2008, Chancellor Alistair Darling in his speech, set that the new charge proposed would be introduced from April the next year, as much as there would “be no further change to this regime for the rest of this Parliament or the next.” (HM Treasury, 2008).

The Changes Introduced in April 2017

In the UK, the month of April has been renowned with significant tax changes that came into effect. The changes that marked a crucial era just in the month of April in the history of UK taxation system include; the implementation of new rules on off-payroll of workers employed in the public sector, the new apprenticeship charge for business owners with pay bills that surpasses £3m in addition to variety of changes to corporation tax (such changes included a very substantial alteration to losses carried forward, interest deduction restriction, and profits from the exploitation of patients). The apprenticeship levy was set to be payable by every employer who has a pay bill, and the pay bill includes all earnings on which the employer has to pay the secondary class (HM Treasury, 2017). The government also set a limit on interest deductibility as well as the CT rate reduction to 17%.

An asset-based penalty for offshore inaccuracies and failures was introduced in regards to the value of the asset underlying the tax evasion. The SI 2017/277 brought into effect Sch 22 with which, for inheritance tax, in relation to transfers of value made on or after 1 April 2017; and for income tax and capital gains tax in relation to tax years commencing on or after 6 April 2016. The CGT rates were also set to remain at 10% and 20% for assets other than residential properties and carried interest which is taxed at 18% and 28%. The annual exemption is increased from £11,100 to £11,300.

On the individual side, most of these significant changes tend to affect the residential and rental properties. Besides, there is also an increase in the personal allowance and (outside Scotland) the higher rate threshold. A new lifetime ISA is established and implemented and there are variations to the taxation of pensions and the so-called ‘non-doms’. On the indirect tax side, new VAT registration and deregistration thresholds became applicable with which fresh rates for various businesses in the flat rate outline. Lastly, the government also changed the climate change levy (CCL) which increased its rates by RPI as from 1st of April.

The likely effect for the sportsman who has lived in the UK for 15 of the last 20 years

Many UK citizens would have to face various significant tax bills if they tend to return to the country after the new non-dom” tax rules came into effect as from the month April 2017. According to Finance Bill (2017), the new tax change will involve the situation where the people whose permanent residence or domicile are outside the UK, and thus the imposed new limits on their ability to maintain offshore income outside the Britain tax net.

To the sportsman, the new proposed change will definitely affect her since she was born in the UK, started her life journey with a British “domicile of origin,” and later went overseas and put down her roots, maintaining her wealth outside the opportunity of the UK tax net even if she successively returned to the country. If the sportsman wishes to return to the UK, she will be taxed on income and gains from any offshore trusts and companies she owns (HMRC, 1999). Besides, she will also fall into the UK inheritance tax net, which is subjected to one year grace period.

According to HM Treasury (2017), the decision for such a change was significant and understandable. The tax would aim at advancing the quality of life, expand employment opportunities, establish favorable climate change concerns, and a favorable and suitable education system that could be factors to consider before tax. In response to that, the set new non-dom” tax will impose a significant impact on ‘returning UK doms’ with regards to the income, capital and inheritance taxes in the UK.”

References

“Analysis: Finance Bill 2017 – the non-dom reforms”, Tax Journal, 20 January 2017. The piece does not mention the changes to be made to BIR.

Auchmuty, R., 2009. Beyond couples. Feminist legal studies, 17(2), pp.205-218.

Budget, A., 2017. 20I7.

Clare, M., 2016. UK tax update. Trusts & Trustees, 22(1), p.59.

HM Treasury press notice 139/07, 6 December 2007. Responses were invited by 28 February.

HM Treasury, Overview of tax legislation & rates, March 2017 para 1.26. Notably HMRC did not             update the impact assessments published in December 2016.

HM Treasury, Overview of tax legislation & rates, March 2017 para 1.26, para 1.48

HM Treasury/HMRC, Reviewing the residence and domicile rules as they affect the taxation of   individuals: a background paper, April 2003

HMRC, Residents & non-residents IR20, December 1999 para 8.8, 5.12

MANSFIELD, G., 1994. Five ways out of tax: an analysis of avoidance devices. Journal of          Financial Regulation and Compliance, 2(2), pp.133-149.

Rates, I.T., 2017. About your business performance.