As Chancellor George Osborne delivers his third Budget, lawyers give their response to his changes
Martin Shah, a corporate tax partner at Simmons & Simmons
Reforms to the UK stamp duty land tax (SDLT) regime are among the most significant revenue raising measures in Budget 2012, as the chancellor seeks to increase the tax take from assets that cannot leave the UK in a hurry. Alongside the widely trailed 7 per cent rate for residential property acquired for more than £2m, new measures are to be introduced to tackle the ’enveloping’ of residential property.
Transfers of residential property to certain corporate and other structures will be subject to a higher 15 per cent rate where the consideration for the acquisition is more than £2m.
In addition, it is proposed to consult on the introduction from April 2013 of an annual charge for high value residential properties held in such structures, with a starting charge of £15,000 per annum that increases to £140,000 per annum for properties valued at over £20m. The annual levy would apply to properties already held in such wrappers.
In combination, these measures are likely to result in existing structures having to be reviewed as soon as possible and potentially unwound. The wider impact on prices at the upper end of the property market, particularly in London, remains to be seen.
The chancellor also took steps to close down a widely marketed scheme that sought to take advantage of the sub-sale relief rules to defer (potentially indefinitely) a charge to SDLT. Tucked away in the explanatory notes, it is made clear that the amendment to the legislation is intended as a clarification of the current position, and that HMRC will challenge taxpayers who have already used these schemes.
Having invoked the “anger of many of our citizens”, the chancellor finished his attack on SDLT avoidance with a steely glint in his eye, promising to move “swiftly, without notice and retrospectively” against those seeking to circumvent the new rules. Although intended to stop those perceived to be abusing the rules, the uncertainty introduced by the possibility of retrospection will be a concern for all taxpayers.
Peter Jackson, head of tax at Taylor Wessing comments
The Budget promised far-reaching tax reforms with the rich paying more and the poor paying less. It is fair to say, following on from today’s announcement, that one of the groups that will be most impacted upon will be high-net-worth individuals, with some of the effects being positive, some less so.
The main positive arising from this announcement for high-net-worth individuals is the reduction in the additional rate of tax from 50 per cent to 45 per cent for income in excess of £150,000. This change in rate will take effect from April 2013.
As expected, the headline-grabbing announcement will be for those with an interest in prime and super-prime property with the chancellor confirming what many expected: the increase in the rate of stamp duty land tax to 7 per cent (from 5 per cent) on residential properties sold for more than £2m. Although the scale of the impact is somewhat less certain, with some figures suggesting only 3,000 properties over £2m were sold last year. This increase will take effect from midnight tonight.
Further announcements made, which are consistent with the chancellor’s approach on ’tax evasion and aggressive avoidance’, include the introduction on a new 15 per cent (punitive) stamp duty land tax rate for residential properties acquired within a corporate wrapper, with effect from today.
Furthermore, in order to curtail such arrangements, ’large annual charges’ will be imposed on residential properties already held within a corporate wrapper and additional capital gains tax implications for non-residents holding UK residential properties through an offshore company.
Interestingly for both high-net-worth individuals and taxpayers as a whole, it was announced that in order to prevent “morally repugnant” tax evasion and aggressive avoidance, a general anti-avoidance rule (GAAR) will be introduced, with the intention of the GAAR being included in next year’s Finance Bill. The scope of the GAAR will be further consulted on and no doubt heavily debated over the next year.
For non-doms, the annual charge will be increased to £50,000 for those who have been a UK resident for 12 years or more. In order to help stimulate international investment, there will also be new incentives introduced for non-doms wanting to invest in the UK.
A new cap on certain tax reliefs will be introduced for individuals so that not more than 25 per cent of total income can be relieved for persons who claim more than £50,000 reliefs in a year.
Overall, the Budget can be deemed as something of a mixed bag for high-net-worth individuals, but with the introduction of a governmental annual statement, at least they might get the satisfaction of seeing what their tax payments are being spent on.
Ashley Crossley, tax partner and European chair of wealth management at Baker & McKenzie
This Budget had a very international flavour. Osborne frequently referred to China and our key international competitors. The changes to the additional rate to 45p, corporation tax and new allowances are designed to attract an international audience and show the UK is open for business for inward investment. That is good news.
The 50p was a political statement. It brought in little revenue and harmed the UK’s reputation as a place to do business. The reduction is a good first move.
The stamp duty land tax (SDLT) double whammy of a 15 per cent punitive rate and 7 per cent means lots of restructuring work as non-doms seek to unwind their UK house structures.
The SDLT increase is probably the best of the bad options on the table, which included the so-called mansion tax. There will be a concern though as to how it affects the London property market.
Vince Cable looked pleased, he got a mansion tax in all but name, the 15 per cent punitive charge may badly hit offshore structures and we will see what that does to some parts of the London property market.
The increase of the bank levy was a smart move to counter some of Labour’s calls that banks would benefit from the corporation tax cut.
The personal allowance rise didn’t however dent Ed Milliband’s cry that this was the Government’s bonus to millionaire bankers. There is still more mileage in political banker-bashing to go yet.
Miranda Cass, tax partner at Bristows
The reduction in the 50 per cent tax rate is obviously good news for entrepreneurs and other top rate taxpayers. While public perception is that this is a hand-out to the rich, the chancellor has clearly done his sums and worked out that this measure will have wider economic benefits.
However, this coupled with the increase in stamp duty on very expensive homes will do nothing to attract new wealth generators to the UK or stop taxpayers looking for ways to avoid the effects.
There is something to smile about for basic rate taxpayers, the increase in the personal allowance before income tax is payable should put a little extra in their pockets.
Charles Hutton, partner in the private client team at Speechly Bircham
Although parts of this announcement were expected, the scale of the tax increase is surprising – the 15 per cent rate is triple the current top stamp duty rate and more than double the new top rate announced only today.
Anybody who has an offshore structure owning UK residential property, or non-UK residents thinking of acquiring UK property, will have to review the implications of the announcements in today’s Budget very carefully.
The details are limited, however, it does appear that the use of offshore companies to own UK residential properties will be severely curtailed by the immediate stamp duty rise and, from April 2013, by changes to capital gains tax and a possible annual tax charge. It is possible that timely action may reduce the effect of these swingeing proposals.
It is difficult to predict the future impact of this rise as we have yet to see how wide-ranging the new charges will be. In the long term we are likely to see a large increase in non-UK residents owning their properties direct.
Matthew Swynnerton, pensions partner at DLA Piper
Recent speculation in the press that the pensions annual allowance could be reduced to £40,000 or even £30,000 has proved unfounded and the annual allowance will remain capped at £50,000. Reducing the annual allowance would have broadened the application of the annual allowance charge and therefore potentially discouraged more people from contributing towards pension schemes.
The annual allowance is the maximum amount of pension saving that can be made in any one year without triggering a tax charge (known as the annual allowance charge) and was reduced from £255,000 to £50,000 for the tax year commencing 6 April 2011. The value of any excess over the annual allowance is taxed at the individual’s marginal rate of income tax. The chancellor confirmed that the limit on uncapped income tax reliefs over £50,000, which it was announced would be set at 25 per cent of income as part of this year’s budget, will not apply to tax relief in respect of pension contributions, which is already capped.
Ben Jones, tax associate Eversheds
The acceleration in the reduction of the UK corporation tax rate, which the chancellor announced today will be reduced to 24 per cent from this April, rather than the 25 per cent rate previously announced, will of course be welcomed by UK businesses. The real question though is whether this reduction, and the eventual reduction to a 22 per cent rate, will attract further business to the UK.
The rate reduction is a headline grabber, but of real importance to international business will be issues such as the final position reached on the reform of the controlled foreign companies regime, previously a significant deterrent to establishing operations in the UK, and the reform of the proposed general anti-avoidance rule.
These more complex issues will have a significant impact on the one aspect of a tax system international businesses value most highly – certainty of tax treatment – and it is the UK Government’s final approach on these issues that will be key to proving that Britain is open for business.
Sophie Dworetzsky, partner in the wealth planning team at Withers
An almost radical Budget which still had a few surprises despite being quite ’leaky’ in advance. We see the promised crackdown on stamp duty land tax (SDLT) avoidance, with a real twist in the tail – where UK property is bought through an offshore company, SDLT will apply at 15 per cent if the property is worth £2m or more.
Coupled with the announcement that capital gains tax will apply to properties held in ’overseas envelopes’, does this indeed mark a new basis for taxing foreign holders of UK properties. At the very least, significant and speedy restructuring of offshore property holding structures will be needed.’
We were told it would be a Robin Hood budget. If so, it is prettily presented. The 50 per cent rate falls to 45 per cent as of April 2013, on the basis that HMRC and the Office for Budget Responsibility both apparently concur that only £1bn (if that) has been raised, rather than the £3bn estimated when the increased rate was brought in. The income tax rate drop is to be matched with increases in SDLT to 7 per cent for properties over £2m, and a radical clamp down on avoidance. The interesting question is whether the headline reduction mitigates talk of retrospective legislation where SDLT planning is concerned’.
The UK is to have a General Anti Avoidance Rule. Although details are hazy and the rule will not be introduced until next year, when combined with talk of retrospective legislation to block stamp duty planning, it marks a rather seismic shift in the approach to tax planning, with taxpayers and advisers needing to be very alert to the risk of planning being unwound after the event.
Elliot Weston, corporate tax partner at Lawrence Graham
Increasing the top rate of stamp duty land tax on high value homes is a soft target as very few HMRC staff are needed to collect the tax.
The increased rate is likely to lead to new schemes being marketed to avoid the tax so enforcing the new rate will be a challenge.