Further announcements in the Autumn Budget that affect individuals.
Consultation on (1 percent) stamp duty ‘Overseas Buyers Levy’ to launch in January 2019
The Government has announced that the consultation for the introduction of an additional stamp duty charge for the purchase of residential property by non-residents will be launched in January 2019.
The Budget confirms that the amount of the levy will be 1 percent; however, no further details, such as when the new rate will be introduced or what tests will be used to determine residency, have been released.
The levy will likely apply in addition to the current 3 percent surcharge that applies to purchases of ‘additional’ dwellings by individuals and purchases of dwellings by companies. Accordingly, where a foreign buyer already holds a dwelling anywhere in the world, they will face paying a total stamp duty surcharge or levy of 4 percent on top of the tax payable in accordance with the standard rates.
An overseas buyers levy exists in a number of countries around the world, notably Canada. Taking into account the total amount of tax payable on the purchase, ownership and sale of residential property, the tax regime in England and Northern Ireland (the only countries so far affected by the proposed change) compares surprisingly well to equivalent overseas tax regimes. A levy of 1 percent on the purchase of dwellings will not change that. Until today the levy was expected to be between 1 percent and 3 percent. The levy is expected to fund efforts to reduce homelessness.
Stamp duty – first time buyers
The Government will extend first-time buyers relief in England and Northern Ireland so that purchasers of shared ownership property who are first-time buyers can benefit from the relief on qualifying purchases.
First-time buyer’s relief was introduced last year. The relief applies to full-time buyers purchasing their first interest in a residential property for £500,000 or less. Where the price is not more than £300,000, the relief is a full exemption. Where the price is more than £300,000, but is not more than £500,000, the relief is a partial exemption: tax is payable at 5 percent on the amount above £300,000. Where the price is more than £500,000 no relief is available. In order to be a first-time buyer a purchaser cannot previously have held an interest in a dwelling in anywhere in the world.
First-time buyers relief was, until the announcement, restricted for buyers of shared ownership properties. Only buyers who elected to be taxed on the market value of the property were eligible. The change means that all buyers of qualifying shared ownership properties can claim the relief. Those that were not eligible (because they did not make a market value election) will be able to reclaim the tax.
This change will apply to relevant transactions with an effective date on or after 29 October 2018, and will also be backdated to 22 November 2017, the date first-time buyer’s relief was originally introduced.
Minor changes to the stamp duty land tax (SDLT) 3 percent surcharge (reclaims and undivided interests)
The period within which the 3 percent SDLT surcharge on the purchase of ‘second homes’ can be reclaimed has been extended.
Where an individual purchases a replacement main residence before they (or their spouse or civil partner) have sold their old main residence, the surcharge is payable but can be reclaimed if the old main residence is sold within three years of purchasing the replacement.
Where the old main residence is not sold within a year and 30 days of purchasing the replacement, individuals had to make the reclaim within three months of the sale. For sales of old main residences on or after 29 October 2018, this three month time limit is extended to 12 months from the sale of the old residence.
Clearly this a welcome extension of a taxpayer deadline. We understand that a number of buyers had assumed (in error) that they could make the reclaim within three years and because they had not made the reclaim within three months were time barred from reclaiming the tax.
The surcharge legislation will also be amended to make it clear that the surcharge applies to dwellings purchased (or held) by two or more individuals. This amendment takes effect from 29 October 2018 but HMRC are of the view that this was always the case and hence the amendment is for clarity rather than to correct a defect.
This measure is unlikely to have a practical impact on taxpayers, given HMRC do not consider the position on this point has changed.
Clarification of inheritance tax trust settlement definition
The Government will introduce legislation in Finance Bill 2019-20 to reflect HMRC’s established legal position in relation to the inheritance tax (IHT) treatment of additions to existing trusts such that additions of assets by UK domiciled (or deemed domiciled) individuals to trusts made when they were non-domiciled are not excluded property. The legislation will apply to IHT charges arising on or after the date on which Finance Bill 2019-20 receives Royal Assent, whether or not the additions were made prior to this date.
In the absence of draft legislation, this appears to be a clarification of HMRC’s view as several leading commentators had previously argued that once a trust had been created by a non-domiciled individual and hence was an excluded property trust, it remained so even if the settlor then added property once they were UK domiciled.
Legislative amendments will also be made to ensure that transfers between trusts made after the date on which Finance Bill 2019- 20 receives Royal Assent will be subject to additional excluded property tests. As no draft legislation has yet been published it is not possible to speculate at this time as to what the impact of this measure is.
Voluntary Tax Returns
Legislation will be introduced to confirm HMRC’s existing policy of treating tax returns sent in voluntarily as legally valid returns. This measure affects individuals, partnerships, trust and companies who submit tax returns voluntarily without having received a notices to deliver a return from HMRC.
In practice HMRC has exercised discretion to accept and treat Income and Corporation tax Self-Assessment returns received from taxpayers voluntarily, on the same basis as tax returns received under a statutory notice to file. This practice has been adopted by HMRC and taxpayers since Self-Assessment was introduced in 1996 to 1997. As a result of recent legal challenges to the practice and the potential penalty implications arising from the validity of returns received voluntarily, legislation will be introduced with retrospective effect to put the practice onto a statutory basis. This removes any doubt for taxpayers that voluntary tax returns have and will continue to be accepted as valid returns.
As the measure formalises the current practice the vast majority of taxpayers will not experience any impact. HMRC believe a very small number of tax avoiders will be impacted. The reason for this has not been explained but it is likely that they were anticipating challenges to the validity of enquiry notices and other actions taken by HMRC in respect of voluntary returns in tax avoidance cases.
Insolvency related matters
Tax abuse and insolvency
New legislation will allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency. This change will have effect from Royal Assent to Finance Bill 2019-20.
Protecting Taxes in Insolvency
From 6 April 2020, the Government will change the rules so that when a business enters insolvency, HMRC has a degree of priority over other creditors in respect of certain taxes. This will only apply to VAT, PAYE income tax, employee National Insurance contributions and Construction Industry Scheme deductions which the Government describes as “taxes collected and held by businesses on behalf of other taxpayers”. The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer National Insurance contributions. No further details have yet been published and it is unclear whether this legislation will be similar to the preferential period rules which applied until 2003. This will be legislated for in Finance Bill 2019-20.
Conditionality: Hidden economy
Following earlier consultation, the Government will consider legislating at Finance Bill 2019-20 to introduce a tax registration check linked to licence renewal processes for some public sector licences. Applicants would need to provide proof they are correctly registered for tax in order to be granted licences. The aim of this measure is to make it more difficult to operate in the hidden economy, helping to level the playing field for compliant businesses.
Stamp Duty anti-avoidance: listed share transfers
From Budget Day (29 October 2018) transfers of listed securities to connected companies will be subject to stamp duty or stamp duty reserve tax (SDRT) on no less than their full market value at the time the charge is triggered, subject to meeting the conditions for existing stamp duty and SDRT reliefs and exemptions.
The draft legislation does not contain any exceptions that are a feature of the equivalent rule for transfers of land to connected companies (e.g. purchases by trustees in certain circumstances and corporate distributions made in specie). However, provision is made to add exceptions by regulation.
Whilst the measure should combat what HMRC have billed as “contrived arrangements being used to avoid tax” it is likely to have practical implications particularly for brokers and others with primary responsibility for accounting for SDRT on listed market transactions. They will need to have systems and processes in place to identify connected party transactions and to calculate the market value charge.
The changes are unlikely to stop there as a consultation, due to be published on 7 November 2018, was also announced which will look at the alignment of the stamp duty and SDRT consideration rules (currently the scope of chargeable consideration for stamp duty is more limited) and introducing a general connected party market value rule. Those changes are not the type that had been proposed by the Office of Tax Simplification last year and appear to have been driven by perceived tax avoidance rather than a desire to simplify the rules.
Changes to the definition of permanent establishment
Under UK domestic law, a non-resident company is generally only subject to UK tax where it is trading in the UK, either under corporation tax (if such trade is carried out through a permanent establishment (PE) as defined under domestic law) or otherwise through the income tax provisions. However, where there is an applicable double taxation agreement a non-resident company trading in the UK is generally liable to UK corporation tax only if it has a PE in the UK, typically through a fixed place of business or a dependent agent. Certain preparatory or auxiliary activities, such as storing the company’s own products, purchasing goods, or collecting information for the non-resident company, are however specifically excluded from the definition of PE under domestic law and most tax treaties.
Under BEPS Action 7, the OECD proposed an anti-fragmentation rule to address the fragmentation of activities between closely related parties in order to artificially avoid creating a PE. The UK has chosen to apply this provision through its ratification of the OECD’s Multilateral Convention (MLI), which is due to enter in to force in 2019. The Government will legislate in Finance Bill 2018-19 to give full effect to this treaty change by updating the domestic law definition of PE to ensure treaties impacted by the MLI are subject to corporation tax rather than income tax, making the MLI changes fully effective.
This measure will therefore primarily impact multinationals resident in treaty jurisdictions with a presence currently exempt through the preparatory or auxiliary exemption under the terms of a double taxation agreement. If no double taxation agreement applies then, to the extent a non-resident is trading in the UK, such activities should remain taxable through the income tax regime even if no PE is established under the revised provisions.