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Baker Tilly gives it verdict on the Chancellor’s Autumn Statement
AS part of his Autumn Statement the Chancellor announced that despite the UK growing faster than any other major economy, the road to recovery was still some way off.
So despite the austerity theme recurring throughout the statement, were there any real winners?
Baker Tilly gives its verdict…
Capital Gains Tax on sale of property held by non-UK resident individuals
The scope of Capital Gains Tax (CGT) has been extended to cover gains arising on the sale of UK residential property held by non-UK resident individuals.
Although Treasury forecasts suggest that little extra tax will be raised, this looks like a vote winner, as until now non-UK residents have not been liable for CGT on the disposal of such properties, unlike UK residents.
It brings the UK into line with other countries such as France and Spain, and is consistent with measures being introduced such as the Annual Tax on Enveloped Dwellings (ATED) and CGT on foreign corporates owning residential property. However there are various issues that will need to be addressed, including: Like ATED, this tax will only apply to individuals that own properties. But unlike ATED we do not know what the threshold will be - i.e. properties above £2million.
If a non-UK resident sets up a company abroad to buy residential property in the UK, would this company escape paying CGT as it isn’t an individual, or would it be liable for CGT on the sale?
How would this tax affect property developers who don’t actually live in the residences they purchase, or buy-to-let landlords?
Also, what will the situation be regarding non-doms, and how will it interact with capital gains on foreign corporates or Principal Private Residence Relief?
Many individuals pay CGT in the country where they reside, and so the introduction of CGT in the UK may not impact them too heavily where double tax relief is available. However, for those who are resident in low tax jurisdictions, the new measure could drive overseas investors away from the UK.
CGT relief on sale of main residence
Sales of property are ordinarily subject to CGT. However a gain on the sale of an individual's only or main residence may be wholly or partly exempt from tax.
Previously, tax exemption on the sale of an individual’s main residence was extended to include the final two years of ownership, whether or not they were still occupying it.
This allowed homeowners reasonable time to sell their home after moving out, without having to pay CGT, and this was later increased to three years during the recession. From April 2014, the final CGT-free period is to reduce from three years to 18 months.
If the housing market picks up it should be easier to sell property within 18 months and benefit from full relief.
The Chancellor was expected to announce action on the perceived abuses of the international tax system by multinational companies, and although some minor amendments to the corporate tax regime were announced, there were no fundamental changes.
This was perhaps an acknowledgement by the Chancellor that knee-jerk reactions are not the answer, and that current work to address these issues should be allowed to continue in order to get the system properly fit for purpose.
There was more welcome news for business that the government will not be proceeding with further changes to the regime for loans made by private companies to their shareholders. Amendments made last year are still bedding down, and so further changes would have added further confusion and complication. Proposals were also announced that film tax relief will be increased, and this could be extended to touring theatres. The tax system has previously been used with great effect to help the UK film industry, and it is sensible to use that that experience to support live theatre. But as ever, the detail will be important as some previous attempts to use the tax system to help the creative industries have run into problems over tax avoidance, and it would be disappointing if this new relief were to be ‘avoidance proofed’ to such an extent that it became unusable in practice.
One of the biggest package of measures to clamp down on tax avoidance was announced, which could raise over £9bn.
There is currently a backlog of 65,000 unresolved tax avoidance cases mostly dating back to before 2010, and so to tackle this, the Government has introduced follower penalties.
This means that if an individual loses an appeal in a similar tax-avoidance case, then every taxpayer that has used that type of scheme will have to pay the tax, and will only get it returned if they are successful in their appeal.
The government believes this will generate around £800m of tax which might otherwise not have been payable for many years.
This is a sensible measure that should reduce the pressure on the court system, but the detail will be extremely important as it could result in people paying tax that is not legally due.
Other anti-avoidance measures include a proposal to block tax relief on gift aid contributions where a charity had been set up for tax avoidance purposes.
Although abuse of the charitable sector in this way is extremely rare, there have been some high-profile cases recently which show that the existing law is not strong enough in this area.
Employee ownership share structures
The Government will introduce three new tax reliefs to encourage and promote indirect employee ownership.
The Government has been keen to encourage employee participation schemes, and this so-called John Lewis model is likely to be more attractive than the previous shares for rights scheme.
From April 2014, disposals of shares that result in a controlling interest in a company held by an employee ownership trust will be exempt from CGT.
Transfers of shares to employee ownership trusts will also be exempt from Inheritance Tax, and from October 2014, bonus payments made to employees of employee-owned companies, will be exempt from income tax up to a cap of £3,600 per annum.
The Government has already announced a review of partnerships primarily to counter the tax-motivated allocation of business profits to corporate partners, which are generally taxed at lower rates than individuals.
The Chancellor confirmed that he will take forward these proposals and the expected yield from the measure has now increased to £3.27 billion from 2013-14 to 2018-19.
The Chancellor confirmed that tax relief for investment by individuals in Social Enterprises will be introduced from April 2014, and will be available for equity and certain debt investments in charities, community interest companies and community benefit societies to help them become self-sustaining.
The inclusion of debt investments is particularly welcome as many Social Enterprises don’t have share capital, and so would otherwise not be able to use the scheme to attract funding. In addition to this, a new tax relief on investment in social impact bonds structured through a company limited by shares is also to be introduced.
Tim Smith, Baker Tilly’s tax partner for the South, said: “Much like the optimism in the South of the country, this Autumn Statement highlighted improved growth estimates and employment figures. There was a continuing trend towards lowering business taxes and increasing taxes paid by individuals. There’s no doubt that today’s proposals will mean the bottom 30 per cent of households and the top 10 per cent will be worse off as a result.
“There were few surprises, but any questions raised by the statement will be answered when draft legislation giving force to the proposal is published on December 10.”
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