The changes to non-dom taxation and to pension freedoms announced by the last government will go ahead as planned.
A new Finance Bill will appear in the autumn to replace the Bill that was dropped when the general election was called in April. It will include the tightening up of non-dom rules first unveiled in 2015, and the cut in the post-withdrawal pension contribution allowance announced in Chancellor Philip Hammond’s March budget.
“Those affected by the provisions should continue to assume they will apply as originally announced,” the Treasury has said. It means the changes will still apply from the start of the current tax year.
Under current rules you are domiciled in the UK for inheritance tax purposes if you have spent 17 out of the last 20 years in the UK. That will be cut to 15 years and the concept of deemed domicile after 15 tax years’ residence will be extended to income tax and capital gains tax.
UK residential property held through a non-UK corporate entity owned by a non-dom or certain types of trust were formerly protected from inheritance tax. With effect from 6 April 2017, this has stopped: the shares will be treated as UK inheritance taxable assets, as will loans and security for loans used to buy UK residential property.
Both changes will be backdated to 6 April 2017 and according to the Treasury will raise almost £1billion over four years but according to a report commissioned by Irwin Mitchell Private Wealth earlier this year, if the reforms prompted two-fifths of those affected to leave the UK it would reduce tax revenue. The report by the Centre for Economic and Business Research found that those claiming non-dom status are likely to fall sharply – by 12% in 2017-18 - under the new regime.
Alex Ruffel, tax partner at IM Private Wealth, said: “After 5 April 2017, non-doms who have lived in the UK in 15 out of the previous 20 tax years will be ‘deemed domiciled’ in the UK for income tax, capital gains tax and inheritance tax purposes.
“The Bill will also radically alter the UK tax treatment of ‘formerly domiciled residents’: those who were originally UK domiciled but moved abroad to make their permanent home in another country and are UK resident in the short term, such as a work secondment. While they remain non-UK domiciled for all other purposes, they will be treated as UK domiciled for tax purposes while UK resident.
“The backdating of the effect of the new legislation to 6th April 2017 will be welcomed by non-doms who took steps to utilise rebasing relief and plan for the mixed fund rules in reliance upon the original Finance Bill. However, there may be others who acted in reliance upon the current law who will face tax liabilities as a result.
“The changes also raise some interesting practical questions. For example, if a trust appointed shares in a non-UK company owning UK residential property on 7 April 2017 will they have any leeway on time limits for submission of an inheritance tax account, given that it was not clear whether one was needed until over three months later?
Another major measure in the Bill is the introduction of Making Tax Digital, which proposes a modern system for businesses to keep their tax records as well as report to HMRC. Following criticism on the original proposals, businesses will not have to use the new system being introduced until April 2019, where they will then only need to meet VAT tax obligations providing they are above the current VAT threshold. Businesses will be able to opt in for other taxes, “benefitting from a streamlined, digital experience”. Any further extension of “MTD” will not be before April 2020 to allow time to “test the system fully and for digital record keeping to become more widespread”.
Meanwhile on the pensions front, the much-criticised further changes to the money purchase annual allowance (MPAA) will also go ahead.
It means savers over 55 who have already withdrawn any pension will see the amount they can plough back into pension saving slashed from £10,000 to £4,000 for the 2017/18 tax year.
Commentators have pointed out that pension freedoms have encouraged people to make a more flexible transition to retirement. Yet those who reduced their working hours, topped up their income with a retirement fund, then later made contributions during periods of work could now be punished by the steeply reduced annual allowance.
It was also noted that a major Financial Conduct Authority study has just reported that people “withdraw their savings partly because they have limited trust in pensions”, and that this was due to continual tinkering with the rules.
Consultants Hymans Robertson said: “The Government is clearly trying to stamp out recycling pension savings - whereby people could get a double hit of pensions tax relief by withdrawing money from their pension and then re-investing it. However, retirement is no longer the cliff edge event seen in previous generations and is now often a process that continues over a number of years.” The move was “contradictory to the ethos of pension freedoms” and anyone who had already contributed more than the £4,000 allowance would feel the full force of the proposal given its retrospective enforcement.
Pensions provider Aegon said few who had accessed their pension would realise the “sting in the tail”, and many might have “inadvertently harmed their future pension saving potential or ruled themselves out of benefitting fully from valuable employer contributions, which are part of their remuneration package”.
Published: 20 July 2017
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