Autumn Budget 2021 was very light on tax measures for individual taxpayers. Most notably no changes were made to capital gains tax (CGT) or inheritance tax (IHT). There had been considerable speculation that rates of CGT would rise or that restrictions to certain IHT or CGT reliefs (particularly those for business property) would be introduced; however, no such announcements were made.
The following announcements are worth noting:
- The government confirmed the September announcement of: a 1.25% increase in the rates of tax on dividends from 6 April 2022 - meaning the basic rate of tax on dividend income will increase to 8.75%, the higher rate to 33.75% and the additional rate to 39.35%. These changes will affect the rates of tax for individuals, estates and trusts; and a temporary 1.25% rise in the rates of employee, employer and self-employed National Insurance Contributions from April 2022, followed by the introduction of a 1.25% Health and Social Care Levy from April 2023.
- The deadline for UK residents to report and pay CGT on disposals of UK residential property has increased from 30 days to 60 days. The same increase in deadlines applies to the equivalent obligations for non-UK residents disposing of UK property. The changes apply to disposals on or after 27 October 2021.
- The government launched a consultation to consider proposals to allow companies to move their domicile to, and, therefore, relocate to, the UK. This would allow an existing company to change its place of incorporation, removing the need to create a new UK entity (which is more complicated than the procedure in many jurisdictions). However, this will only be possible where a company is incorporated in a jurisdiction that allows outbound re-domiciliation. The government is also considering whether to allow outbound re-domiciliation from the UK. The tax implications of re-domiciliation are also being considered.
- Residential Property Developer Tax (RPDT) to be introduced in April 2022 will be charged at 4% and the annual allowance (below which profits are not within the scope of RPDT) will be £25 million. Although the RPDT is intended to be time-limited, seeking to raise £2 billion over a decade, the draft legislation does not include a "sunset" provision which would automatically repeal the tax after a set period, or when the £2 billion target is reached.
Interest paid by UK resident on loan is UK source interest
Where UK source interest is paid to a non-UK resident person the person paying the interest is obliged to deduct tax from that interest and account to HMRC for the tax (this is subject to certain exceptions, for example, where interest is paid by a bank, building society or deposit-taker).
So, for example, where interest is paid on a loan made by the trustees of a non-UK trust to a UK resident beneficiary, the beneficiary will be obliged to deduct tax from the interest if it has a UK source.
Whether or not interest has a UK source is determined by applying a multi-factorial test. The factors to be taken into account derive from case law and include:
- the residence of the debtor and the location of their assets
- the place of performance of the contract and the method of payment
- where proceedings to enforce the debt would be brought and the governing law of the relevant legal documents
- the residence of any guarantor and the location of any security for the debt.
In the recent case of Hargreaves Property Holdings v HMRC (2021) the First-tier Tribunal (FTT) held that the interest on a loan was UK source because the debtor was a UK resident and the assets used to pay the interest, and against which any judgement debt would be enforced, were in the UK. Following the leading authority on the point – the Court of Appeal decision in Ardmore Construction v HMRC (2018) – the FTT considered these factors to be determinative holding that the underlying commercial reality "was that this interest was always going to be paid by a UK resident debtor out of its assets situated in, and the profits of activities conducted in, the United Kingdom". These factors outweighed the facts that the loan agreements were governed by non-English law and required payments of interest to be made outside the UK, the loans were made outside the UK and proceedings to enforce the loans were required to be brought outside the UK.
Where loans are made to UK resident beneficiaries who pay interest on those loans using UK source funds it will be difficult to persuade HMRC that interest is not UK source even if all other factors point to it being outside the UK.
Changes to French succession laws – is it still possible to prevent French forced heirship rules applying to French property?
Changes to French succession laws threaten the ability of a British national to prevent the French forced heirship rules from applying to their French assets, using the provisions of the EU Succession Regulation.
The EU Succession Regulation (known as Brussels IV), which came into force in 2015, allows an individual to elect for the law of their nationality to govern the succession to their assets in most EU member states (including France). Since these rules came into force many British nationals with assets in France have made an election in their will for English law to apply to their worldwide estate. This has allowed them to take advantage of the English rule of testamentary freedom meaning they can leave their French assets to whomever they choose rather than them having to pass to fixed heirs in accordance with French domestic forced heirship rules.
However, under a new law, which came into force in France on 1 November 2021, heirs who would be entitled to a portion of a deceased's estate under French forced heirship rules but have been denied their portion, because a foreign succession law applies to the deceased's estate, can claim their portion against any property of the deceased located in France. This will only apply where the deceased, or any child of the deceased, is (at the time of the deceased's death) a national of, or habitually resident in an EU member state. It may not, therefore, impact the planning of some British nationals but many will have children who are resident in, or nationals of, an EU member state and so will be affected by this change and should review their estate planning for their French assets.
Although the EU Succession Regulation allows EU members states to refuse to apply certain provisions of the law of your nationality if they are contrary to local public policy, it is considered that this new French law conflicts with and undermines the EU Succession Regulation. The French law has reportedly been brought to the attention of the European Commission but any enforcement action against France will likely take years.
HMRC issues 'nudge' letters to non-doms claiming the remittance basis
HMRC has recently sent hundreds of so-called 'nudge' letters to non-UK domiciled individuals who it believes have failed to pay the remittance basis charge, or have not correctly declared their income and gains, on their 2019/2020 UK tax return.
Over recent years HMRC has increasingly adopted a strategy of sending targeted communications to taxpayers whose tax affairs it believes may not be fully in order. The nudge letters are a means for HMRC to engage with taxpayers it believes have made errors, outside the formal enquiry process.
In this case, letters are being sent to non-UK domiciled taxpayers who HMRC believe have been UK tax resident for 7 tax years out of the 9, or 12 tax years out of the 14, before the tax year starting 6 April 2019 and who have claimed (or had previously claimed) to be non-UK domiciled. Such taxpayers would have needed to pay the remittance basis charge in order to take advantage of the remittance basis of taxation in 2019/2020; however their 2019/2020 tax returns did not include the charge. The letter requests them to amend their 2019/20 tax return or contact HMRC if they do not consider any amendment is required.
There is no obligation on taxpayers to respond to HMRC nudge letters but failure to do so is likely to result in further enquiries from HMRC. If you have received a nudge letter and are unsure of your position, or how to respond to HMRC, we can advise you now best to proceed.
Financial Institution Notices – HMRC's use of its new information gathering power
Financial Institution Notices (FINs), introduced by Finance Act 2021, are the latest addition to HMRC's wide ranging information gathering powers and HMRC seem to have wasted no time in making use of them having issued a number of notices in the five months since the power was introduced.
HMRC has power to request information and documents from taxpayers directly, by issuing a ‘taxpayer notice’, or from a third-party holding information about a known taxpayer (such as lawyers, accountants or administrators), by issuing a ‘third party’ notice. The information requested must always be ‘reasonably required’ by HMRC to check the relevant taxpayer’s tax position. Essentially this means that a balance must be achieved between the burden of gathering and sharing information for the recipient of the notice and how important or relevant the information is to HMRC’s enquiry.
Third party notices cannot generally be issued unless HMRC has obtained either the agreement of the relevant taxpayer or the approval of the tax tribunal. However, HMRC was granted powers by Finance Act 2021 to issue a new type of third party notice - 'Financial Institution Notices'. These are third party notices which can only be issued to financial institutions and which require the financial institution to provide information to HMRC above about a specific taxpayer. Crucially, HMRC do not require either taxpayer consent or tribunal approval to issue FINs, but merely need to demonstrate that the information requested is reasonably required for the purposes of checking a taxpayer's position. In addition, there is no right to appeal a FIN.
Before the introduction of FINs, HMRC argued that they were required to enable it to respond to international exchange of information requests within the international standard of six months, but anticipated that they would impact on only around 20 financial institutions, such as banks and building societies. It now appears that HMRC may, in practice, use FINs more widely. It is also anticipated that HMRC will seek to argue that it can issue FINs to non-UK residents, as with taxpayer notices and third party notices. It should be noted that for these purposes, 'financial institution’ does not include family trusts (unlike the position under the OECD’s Common Reporting Standard).
If you receive a FIN or any other request for information from HMRC, either in your capacity as taxpayer or as a third party, we can advise on whether it constitutes a valid notice, whether the information requested ought to be produced, and more generally on the appropriate manner of corresponding with HMRC.
HMRC's Family Investment Company unit closed
Family Investment Companies (FICs) are private companies used to hold and manage investments for a family, and in some cases to pass wealth down to younger generations. If the FIC is UK tax resident it will be taxed in the same way as any UK company.
HMRC set up a specialist unit in April 2019 to investigate the use of FICs and assess any tax avoidance risks posed by FICs. HMRC has concluded that ‘it now has a better understanding of the characteristics of FICs and the use of these structures does not suggest those taxpayers that use them are non-compliant when it comes to their tax affairs’ and the unit has now been closed down.
