In this week’s instalment looking at the draft clauses from the Finance Bill 2016, I am going to focus on capital taxes. As in previous articles, I will break my consideration down into the headings used in the HM Revenue & Customs overview of the draft legislation for consultation.
Capital gains tax for non-UK residents disposing of UK residential property
As announced at Autumn Statement, legislation will be introduced in the Finance Bill 2016 to correct the CGT computations required by non-residents on the disposal of UK residential property. One of the corrections will be retrospective to 5 April 2015 and the other to 26 November 2015. Legislation will also give HMRC powers to prescribe circumstances when a CGT return is not required by non-residents and will add it to the list of taxes the Government may collect on a provisional basis.
Amendments to entrepreneurs’ relief following Finance Act 2015 changes
Also announced at Autumn Statement, the Government will consider bringing forward legislation in the Finance Bill 2016 that would amend the changes made to entrepreneurs’ relief in the Finance Act 2015, in order to support businesses by ensuring the relief is available on certain genuine commercial transactions. Officials have been consulting stakeholders on possible amendments.
Despite some concerns about its future expressed by commentators ahead of the Autumn Statement, entrepreneurs’ relief remains very much with us and is incredibly valuable to those who can access it. A 10 per cent CGT rate (compared to 18 per cent/28 per cent) is not to be sneezed at, so preserving qualification for the relief (for example, by not excessively investing) should be an important consideration in relation to planning for SME owners.
Inheritance tax: domicile
As announced at Summer Budget 2015, the Government will introduce legislation to bring the existing deemed domicile provisions for inheritance tax in line with the proposed new deeming rules for non-domiciled individuals who are long-term residents in the UK.
The legislation will also ensure anyone with a UK domicile at birth and who later acquires a domicile of choice elsewhere will be deemed to be UK domiciled for tax purposes if they are resident in the UK in at least one of the previous two tax years.
The consultation on these changes closed on 11 November 2015 and so the published draft legislation does not take into account any of the representations made. HM Treasury is expected to publish a response to the consultation early this year and any necessary amendments to the legislation, including transitional provisions, will be published at that time alongside further draft legislation covering the income tax and CGT aspects of these reforms.
It is worth remembering that non-UK sited assets held in a trust established by an individual while non-UK domiciled will be excluded property and thus outside of IHT, even if the settlor could benefit under the discretionary trust.
Inheritance tax: downsizing and the residence nil-rate band
Also announced at Summer Budget 2015, legislation will be introduced in the Finance Bill 2016 to ensure the residence nil-rate band will also be available when a person downsizes or ceases to own a home, and other assets up to the maximum value of the residence nil-rate band are passed on death to direct descendants.
The value of the former property, the amount of residence nil-rate band lost as a result of the downsizing move or disposal and the value of other assets left to direct descendants will be relevant to the amount of the residence nil-rate band. The change will apply for deaths on or after 6 April 2017 where the deceased downsized or disposed of a property on or after 8 July 2015. A technical note was published in September 2015 and the draft legislation takes into account the issues raised.
This new provision for the residence nil-rate band was announced with great fanfare but has received adverse commentary because of its complexity. The downsizing provisions only add to this. However, the residence nil-rate band is undoubtedly important and advisers must be aware of its main aspects.
Inheritance tax and undrawn funds in drawdown pension schemes
As announced at Autumn Statement, legislation will be introduced in the Finance Bill 2016 to ensure a charge to IHT will not arise when a pension scheme member designates funds for drawdown but does not draw all of the funds before death. This will be backdated to apply to deaths on or after 6 April 2011.
Deeds of variation
As announced at Autumn Statement, following the review announced at March Budget 2015, the Government will not introduce new restrictions on how deeds of variation can be used for tax purposes but will continue to monitor their use. A summary of responses to the call for evidence was published on 9 December 2015.
This confirmation is helpful. However, there is really no substitute for regularly reviewing one’s will and not relying on the “safety net” of a deed of variation.
Tony Wickenden is joint managing director at Technical Connection