With no new seismic changes to mull over, this is perhaps the first time in a while where we can reflect on the tax changes that have already been announced but will come into effect next month or slightly further ahead, and act where necessary. There are a lot of changes to reflect on, including (as a flavour only, not an exhaustive list):
• Non-UK doms living in the UK who might become UK domicile (deemed or revival of origin) – potentially impacts the tax effectiveness of offshore structures employed;
• IHT applicable to UK residential accommodation owned via an offshore company – should ‘de-enveloping’ be considered if ATED charges are significant (but be aware of possible immediate tax costs of de-enveloping);
• Impacts on offshore trustees – for example, some well-established practices such as ‘washing’ out capital gains sitting in offshore trusts by making capital distributions to non-UK resident beneficiaries have a less than one month shelf-life;
• Possible interest deduction and loss relief restrictions for UK property holding offshore vehicles if/when they move from UK income tax to UK corporation tax;
• A consultation process has been confirmed today in respect of the proposed transfer of UK property rental companies from income tax to corporation tax but the details of that process are outstanding. This change could have a big impact on UK property holding offshore companies. As well as the possible restriction on interest and loss relief, such companies might be required to submit financial statements to HMRC for the first time (a potential issue for highly geared companies that have not taken transfer pricing/thin capitalisation advice), and it could potentially affect the timing of tax payments;
• HMRC’s “Making Tax Digital” project – UK property letting businesses will have to submit quarterly reports to HMRC from as soon as April 2018 with other UK taxpayers following in due course. This project will have a significant impact on the working practices of administrators, especially how quickly they produce financial records in respect of UK property interests. It is not clear at this stage how Making Tax Digital will interact with the proposal to move Non-Resident Landlord companies from income tax to corporation tax. This project will also affect offshore trustees who prepare UK tax returns;
• Enhanced penalties for not correctly dealing with offshore interests within UK tax returns, or not advising HMRC of interests in offshore structures;
• Multi-jurisdiction reporting under the Common Reporting Standard; and
• For the larger MNCs, collating the information to be reported under the Country-by-Country Reporting regulations.
So, what new announcements has the Chancellor made today that potentially affect Channel Islands residents and businesses? Thankfully, there is nothing very substantial to report on. The main ‘highlights’ are:
Qualifying recognised overseas pension schemes (QROPS)
The government will introduce a 25% charge on transfers to QROPS. This charge is targeted at those seeking to reduce tax payable by moving their pension wealth out of the UK. Exceptions will apply to the charge by allowing transfers where people have a genuine need to transfer their pension abroad, including when both the individual and the QROPS are in the same country after the transfer, or the QROPS is in one country in the European Economic Area (EEA) and the individual is resident in another EEA after the transfer, or the QROPS is an occupational scheme provided by the individual’s employer. Also, payments out of funds transferred to a QROPS on or after 6 April 2017 will be subject to UK tax rules for five tax years after the date of transfer, regardless of where the individual is resident.
IHT and UK residential property
A welcome but probably limited in practice measure announced today is that the new rules will not apply to anyone who has a less than 5% interest in UK residential property.
We hope that the forthcoming revised Finance Bill 2017 will also address the problem of collateral/guaranteed loans (used to buy and repair UK residential property) such that the collateral/guarantee potentially subject to IHT under the new ‘relevant loan’ rules will not exceed the value of the loan itself.
Offshore property developers
The government will amend the legislation introduced in Finance Act 2016 to ensure all profits realised by offshore property developers who develop land in the UK, including those on pre-existing contracts, are subject to tax, with effect from today.
UK withholding tax on interest
The government will consult in spring 2017 (document to be issued on 20 March) on implementing an exemption from UK withholding tax for interest on debt traded on a ‘Multilateral Trading Facility’. It will be interesting to see if and how offshore structures might be able to take advantage of this if they are concerned that their debt obligations might have a UK source. Also, this new facility might provide competition for our very own The International Stock Exchange, especially if it provides a cost-effective platform for debt issuers.
Employed versus self-employed
Press attention in the UK will focus on the changes to the UK National Insurance system, which are designed to more closely align the treatment of self-employed and employed individuals, especially as this appears to be a breach of a manifesto promise made by the Conservative Party at the last general election. This measure should not have an impact on many Channel Islands residents.
Also of interest:
Declaring offshore interests
There will be a legal requirement for those who have failed to declare UK tax on offshore interests to correct that situation, with tougher sanctions for those who fail to do so before 1 October 2018. This new ‘requirement to correct’ is expected to come into force when the Finance Bill 2017 receives Royal Assent and will apply to all taxpayers with offshore interests who have not complied with their UK tax obligations as at 5 April 2017.
Enablers of tax avoidance schemes
In a further attempt to squeeze the tax avoidance industry out of existence, any enabler of a tax avoidance scheme that is subsequently overturned by HMRC will be liable to a new penalty.
A second 2017 Budget will follow this autumn as the fiscal cycle moves to annual autumn Budget.
Should you have any questions, please do not hesitate to get in touch with your usual BDO contact.
Rob Brown, Tax Director at BDO Limited in Jersey said: “This Budget has not been much of a fiscal event from the offshore perspective and felt more like an Autumn Statement. However, given the move to autumn Budgets from later this year, this is perhaps to be expected”.
Would you like to review the Spring Budget 2017?