More Adviser News

Canada Life Article - Whats Instore for offshore 2016

What’s in store for offshore 2016?

 

Yes, it’s crystal ball time. Following a year packed with change, announcements and consultations – what can we expect to see for tax and investment in 2016?
In fact, there is a considerable amount that we know will happen, as it has been flagged up by the government already. Plus there is one very significant anniversary, or more accurately a ten-yearly anniversary, which will be a focus for estate planners.
A lot of the action takes place in the first half of the year and here are the highlights.

 

March Budget

 

Rumours

Just like Fleetwood Mac, the Budget is well known for rumours. Some well-informed, and some just pure conjecture.

We do know that there is currently a consultation about the proposals to introduce deemed domicile status for all taxes after 15 years of UK tax residence. The responses to that consultation may lead to fine tuning of the proposals in the Budget.

One rumour that doesn’t seem to go away is that there will be restrictions in pensions tax relief – currently costing the government £50 billion and rising – not least because of auto-enrolment. Many people were surprised that nothing was said about this in the Autumn Statement so perhaps the bad news was held over until this March?

We also know that the government remains concerned about the growth of salary sacrifice arrangements and is considering if any action is necessary. If so, that could be included.

Proposals for a secondary market for annuities are also being considered and we may hear more about this in March.

 

Finance Bill 2016

 

A Finance Bill shortly follows a Budget and we actually know some of what will be in it, because the government told us in the Blue Book, released after the Autumn Statement.

Amongst the provisions included will be:
 

  • New civil penalties for offshore tax evaders and those who enable offshore evasion
  • A new criminal offence for tax evasion
  • A new penalty of 60% of the tax due will be charged in all cases successfully tackled by the General Anti-Abuse Rule (GAAR)
  • The government will extend the reliefs available from the Annual Tax on Enveloped Dwellings (ATED) and the 15% higher rate of SDLT to equity release schemes (home reversion plans), property development activities and properties occupied by employees
  • Changes to which investments are eligible under Venture Capital Trusts (VCTs)
  • ISA savings of a deceased person will continue to benefit from tax advantages during the administration of their estate
  • New legislation will determine when performance awards received by asset managers will be taxed as income or capital gains


22 March 2016

 

Ten years is a long time in financial services, but for estate planners a significant event occurred in the Budget on 22 March 2006; Gordon Brown announced a radical change to the taxation of trusts.

From that date, any new flexible power of appointment trusts would be taxed as ‘relevant property’ for IHT purposes. This meant that any new non-exempt transfers to such trusts would now be chargeable lifetime transfers and not potentially exempt transfers, as before.

So on every tenth anniversary, they would have to be assessed to see if a ‘principal charge’ to IHT was due – and in any event, if the value of the trust exceeded 80% of the nil rate band at the time, details would have to be reported to HMRC. (If it is a discounted gift trust, it will be 80% of the discounted gift value).

Ten years on from Gordon Brown’s change, on 22 March 2016, professional advisers will need to check their records and tell trustees of their obligations. There may be nothing to do, or paperwork at least, and possibly the payment of tax to HMRC.

1 April 2016

 

Another change that appears to have sneaked under the radar of some advisers is that there was a new EU Accounting Directive which has affected the basis of accounting for UK companies.

It is effective for accounting periods beginning on or after 1 January 2016 – but early application is permitted, so in practice the first corporate year end where it is used could be 1 April 2016.

This directive has done away with the concept of ‘historic cost’ accounting, which was the basis for a company getting tax deferral on an offshore bond investment. You now have to look at whether any new offshore bond holds ‘complex’ or ‘basic’ financial instruments.

Basic financial instruments are effectively cash deposit and fixed income funds and tax deferral is still available. All other funds are complex financial instruments, so any increase in value has to be accounted for year-on-year.

 

6 April 2016

 

Some quite radical changes to income tax were announced last year, plus one that predates that. They are:

Dividend allowance

From the next tax year, all taxpayers will have an allowance whereby the first £5,000 of dividends will be tax-free. Above that, basic rate taxpayers will pay 7.5% tax on the excess, higher rate taxpayers will pay 32.5% and additional rate taxpayers will pay 38.1%.

So some people will be better off, whilst others may pay more – something that should be ascertained before April, in case a change of tax wrapper or indeed, dewrappering (a word that I’ve just invented), is appropriate.

For example, because of the generous allowance (in their situation), a higher rate taxpayer would need to receive total dividends of over £21,667 before they paid more tax. Assuming a yield of 3%, that equates to an equity or equity collective portfolio of £722,233.

I hasten to add that the needs of the client and their capacity for loss will also weigh on the ‘wrapper or not’ decision.

 

Personal savings allowance (PSA)

The PSA is a new allowance that will apply a new 0% rate for up to £1,000 of savings income, provided that you are a basic rate taxpayer. It will be £500 for higher rate taxpayers and is not available at all to additional rate (45%) taxpayers.

At the same time, tax will no longer be deducted at source from bank and building society interest payments.

So does this mean that technically, a taxpayer could receive £22,000 of income from the relevant investments and get it tax-free, because of their personal allowance (£11,000), the 0% starting rate for £5,000 of savings income, the dividend allowance of £5,000 and the £1,000 PSA? It would appear that the answer is ‘yes’.

In addition, chargeable gains from offshore bonds are treated as savings income and this could open up greater opportunity for washing out tax-free chargeable gains through assignment to non-taxpaying partners or relatives.

The Scottish rate of Income Tax (SRIT)


SRIT will start in the 2016/7 tax year and depending on the decision of the Scottish Parliament, those living North of the border (or closely connected to Scotland) may be paying a higher or lower overall rate of income tax on their earned income.
It does not apply to investment income or investment bond chargeable gains.

Autumn Statement


After all the excitement in the first part of the year, the second half usually just sees the Autumn Statement as a focus for financial planners. But if this year is anything like last year, there will be more than enough in the first half to keep us occupied.

More change amongst offshore life companies?

In 2015, we saw FPI exit the UK market (International Adviser, 1 October 2015) and Legal & General International acquire new owners (International Adviser, 10 February 2015).

There are also rumours that Axa Wealth International is a potential candidate for sale (International Adviser, 23 November 2015).
It seems that the offshore life market will soon result in just the serious long-term players.

 

Investment bond taxation

Joost Lobler and others

The names of Joost Lobler, Chandraprakash Shanthiratnam and Captain Steven Cleghorn probably do not mean that much to you, but they are the source of much concern to HMRC.

They all made withdrawals from an investment bond far in excess of their 5% allowance and generated a huge excess chargeable gain, which they did not take action in time to correct. They had, therefore, huge tax bills totally unconnected to the actual investment gain made by the bond and in the case of the unfortunate Mr Lobler, it sent him into bankruptcy.

This was much to the embarrassment of HMRC who were simply applying the letter of the law and are now desperately seeking a way of leaving the law mostly as it is, but having a solution to the ‘Lobler problem’.

Meetings have been held with interested parties and a consultation will be issued this Spring, with possibly a proposed solution being mooted at the time of the Autumn Statement. Details of legislative changes, however, are not expected before the Finance Bill 2017.

5% allowance

One good thing emanating from the meetings with HMRC, about the problem above, is that they made it very clear that there were no proposals whatsoever to do away with the 5% allowance or reduce it.

So if that old chestnut of a rumour surfaces before the Budget next year, it can be quashed immediately!

 

Conclusion

It looks like another busy year in store for advisers. At the very least, they should consider which of their clients need to be alerted about ten-yearly anniversaries and the new dividend allowance.

 

Neil Jones
Technical Support Manager
Canada Life

 

01707 422999

ican@canadalife.co.uk

Categories

All News

Search Our News Archive

Archive

Register For Latest News Updates

Register Now

This website is for UK professional advisers only and is not approved for use by private customers.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

Canada Life International Limited and CLI Institutional Limited are Isle of Man registered companies authorised and regulated by the Isle of Man Financial Services Authority.

Canada Life International Assurance (Ireland) DAC is authorised and regulated by the Central Bank of Ireland.