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Some you win, some you lose

Money Marketing offers a round-up of key changes to financial services regulation introduced by the Chancellor in the pre-Budget report. Matthew Taylor, insurance tax partner at Ernst & Young, considers the implications of proposed changes to Capital Gains Tax, Skandia head of tax and financial planning Colin Jelley looks at IHT, and Mike Warburton, senior tax partner at Grant Thornton, gives an overview of changes to the tax treatment of non-domiciles

Matthew Taylor:
Wide reaching simplification of the taxation of capital gains was announced in Wednesday’s pre-Budget report. Under the proposals, due to come into force from April 2008, taper relief and indexation relief for individuals will be scrapped and instead the capital gains tax rate will reduce to 18 per cent. However, if introduced with no amendments, the changes could result in a shift in the competitive balance between life insurance savings products and those held directly by investors, such as unit trusts and Oeics.

Investment products have traditionally been in competition with life insurance saving products in attracting investors’ money. Funds and life bonds are taxed in different ways, both during the investment period and on crystallisation of the investment.

The different tax treatment is particularly highlighted when products are sold or realised by the investor, as the gains arising on direct investment products are taxed as capital gains, while those arising on life bonds are taxed as income. The tax regime for life insurance companies is intended to create a level playing field with direct investment products by taxing gains arising on the underlying investments within the company.

If an individual sells shares after April 6, 2008, they will be subject to tax at 18 per cent on the gain instead of a minimum of 24 per cent after 10 years in the case of a higher rate taxpayer with full taper relief.

However, these changes will only apply to individuals – there is no extension of the rules to corporates. In this case, if shares are sold within a life fund they will still be subject to tax at 20 per cent with indexation, with potential further charges to the investor when they eventually dispose of their policy.

The last time there was such a flat rate of capital gains tax in 1987 it applied to life company gains as well. The relative positions of direct investment and investment through a life policy have shifted, and serious consideration will need to be given as to how to redress the balance.

Mike Warburton:
Non-UK domiciled individuals are in the tax firing line after the Chancellor announced a new scheme to charge them an annual fee of £30,000, higher than the £25,000 proposed by George Osborne at the Conservative Party conference last week. While the Government only plans to charge non-doms once an individual has been resident in the UK for seven years, the clock is already ticking and anyone who became resident in the UK before April 5, 2001 will pay the fee from April 5, 2008.

The Chancellor unveiled a number of other changes which will affect offshore trusts and offshore companies held by non-domiciled individuals. Detailed legislation is expected before the end of the year, and will be effective from April 6, 2008. It is likely that many non-doms will have to undertake a significant review of all of their affairs before April 6, 2008 to ensure that the impact of the changes is minimised as far as possible.

It is not simply a question of whether or not to pay the £30,000 charge. Many non-domiciled individuals may have established company holding structures and family trusts outside the UK, and these may now contain hidden tax charges. In addition, non-UK resident individuals face a change in the way the number of days per year spent in the UK is calculated, which means that many individuals who currently limit their time in the UK to avoid a full tax charge will have to check their calculations very carefully in future.

Countries such as Australia, New Zealand and Canada already offer individuals the opportunity to negotiate a lump sum payment as an alternative to paying tax on all their overseas income. This used to apply in the UK, but was ruled illegal after the Al Fayed case. The number of non-doms likely to pay any charge has been hotly debated by political parties over the past few days.

The truth is that no one has a definitive answer because the Treasury does not have the required data, as non-doms do not need to provide information on their overseas income unless that income is brought into the UK.

Colin Jelley:
The changes announced by the Chancellor in last week’s pre-Budget report mean that the estates of some widows and widowers will be subject to less inheritance tax. Widows and widowers with estates worth more than £300,000 whose deceased spouse did not fully utilise their inheritance tax threshold will benefit from the changes. The reduction in the tax bill for these individuals could be as much as £120,000 – good news for those individuals and we welcome that.

For married couples and civil partners, before the PBR it was possible with planning to make use of the inheritance tax nil rate bands of both individuals. The Chancellor’s announcements have created another method for these people to achieve this.

However, the IHT threshold has not doubled. People who have never been married and those who are divorced will see no change to their situation. Nor will those married couples who have already taken advice in ensuring that their inheritance tax nil rate bands are fully utilised.

The changes mean that some families may suffer less inheritance tax, but the need for careful planning and tax administration has not gone away. To benefit from these changes, a claim will need to be made after the second death, which will rely on accurate records being kept of financial circumstances at the first death.

The need to put protection policies in trust also remains. Trusts are a simple way to ensure assets are outside the estate and that probate is avoided. Setting up a trust means families can be sure their assets will go to the people they intend when they need it most. We believe that nearly £1bn of insurance policies could be subject to IHT this year, but this might be easily avoided using trusts.

In recent research we found that only one in 10 people in their 50s and 60s, who were either approaching retirement or had just retired, had sought advice on IHT. However, the need for advice in this area now the rules have changed again still remains important.

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