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a budget to close tax loopholes

The UKs Budget delivered yesterday by Chancellor George Osborne has seen the government clamp down on tax avoidance by Britains wealthy individuals.

a budget to close tax loopholes

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Because of this, some areas of the international finance industry will be impacted. With this in mind, International Adviser asked members of its Tax Panel to explain some of the more important and interesting changes.

Below you will find comment on:

The introduction of a General Anti-Avoidance Rule from April 2013 – Julie Hutchison, head of international technical insight at Standard Life International

Inheritance tax exemption for spouses – Gerry Brown, head of trusts and taxation at Prudential

Reforms to life insurance policies, capital redemption polices and annuity contracts – Rachael Griffin, head of product law and financial planning at Skandia International

The introduction of a General Anti-Avoidance Rule from April 2013

Standard Life International’s Julie Hutchison: Abusive and artificial tax planning has been targeted in a number of ways in this year’s UK Budget.  Above all, there was confirmation that we will see a General Anti-Avoidance Rule (GAAR) from April 2013, with further consultation in the months ahead.  This was accompanied by targeted measures aimed at aggressive income tax avoidance associated with chargeable events and investment bonds.  The conclusion?  There is much to be said for the centre ground of tried and tested tax planning.

The direction of travel for a GAAR was set late last year in the Aaronson report, which considered whether it was appropriate for the UK to have a GAAR.  In this measured report, a limited form of GAAR was proposed, to target “highly abusive contrived and artificial schemes”.  Whilst the report recommended the GAAR applied just to income tax, capital gains tax, corporation tax, national insurance and petroleum revenue tax, the Budget saw this scope extend to stamp duty land tax too.  This wasn’t surprising, given the focus on stamp duty land tax avoidance in the Chancellor’s speech. 

A key point to watch for in the consultation is whether the safeguards from the report translate across into the draft legislation. For example, there is a specific safeguard proposed for “reasonable tax planning”, where someone has exercised choices afforded by tax legislation. ISAs enjoy tax advantages. So do pension contributions. Withdrawals from investments bonds can have a tax deferral. Legislation is the source of these benefits, so the mere fact of a tax saving here would not be enough to bring them within the scope of a GAAR. There would have to be something else, so mainstream financial planning has nothing to fear from a GAAR here. 

Contrast this with the two areas which were targeted in the Budget, relating to aggressive income tax arrangements linked to investment bonds. One such scheme (which has been closed from Budget day) is where gains from an investment bond were left behind in a final segment. Another scheme (now also closed) involved allowing a deduction for certain earlier gains, e.g. when the individual was non-UK resident, in a way which was viewed as abusive. This was because people were claiming relief for gains that they had never paid UK tax on.  Readers will have their own view on where these fell in the spectrum of tax risk, and how comfortable they felt with them. 

No-one can be in any doubt about the prevailing approach now being taken towards multi-layered or aggressive tax planning. Combine the Budget announcements with the proposed legislation which targets dishonest tax agents, and the balance shifts towards favouring the middle ground for tax planning, all of which should be good news for many financial advisers. After all, as the Aaronson report noted last year, something which a GAAR might prevent is the loss of potential clients to those advisers willing to recommend more aggressive/abusive tax planning.

Inheritance tax exemption for spouses

Prudential’s Gerry Brown: The inheritance tax exemption for transfers between spouses/civil partners is a cornerstone of the UK inheritance tax code. There is no limit on the value that can be transferred within the scope of the exemption. Most other jurisdictions offer full or partial exemptions for inter-spouse transfers.
However the UK code has one important restriction on “spouse exemption” – it is limited to £55,000 where immediately before the transfer:

– the transferor spouse is domiciled, or deemed domiciled, in the United Kingdom, but
– the recipient spouse, or civil partner, is neither UK domiciled nor deemed UK domiciled

This £55,000 limit does not apply if;

– both the transferor and recipient are domiciled outside the UK, or
– the transferor is domiciled outside the UK but the spouse or civil partner is domiciled in the UK

This £55,000 limit has remained unchanged since the “conversion” of capital transfer tax to inheritance tax in 1982. It was the threshold or “nil-rate band” applying from Budget day 1982 (9 March 1982) to Budget day 1983 (14 March 1983). (In those long-off days inheritance tax rates and nil-rate bands were applied from Budget day.)

The rationale for the restriction is relatively straightforward – the limit will stop “leakage” of UK wealth outside the inheritance tax net. The fact that the measure is “discriminatory” is often overlooked – profit before principles.

Fortunately, George Osborne has come to the rescue. Finance Bill 2013 will contain legislation increasing the IHT exempt amount from its current level. There will of course be a consultation. The proposals also include an opportunity for individuals to “elect” to be UK domiciled for IHT purposes. This could open many planning strategies.

George has opened one IHT planning door – will he close others?”

Reforms to life insurance policies, capital redemption polices and annuity contracts

Skandia International’s Rachael Griffin: A lot of the detail in the UK Budget is targeting perceived loop holes. The disclosure rules HMRC introduced a few years back are starting to reap rewards and are becoming the ‘go to’ list for tax avoidance legislation. The income tax avoidance notes in relation to life insurance policies puts beyond doubt that any chargeable event gains liable to income tax are not able to reduce that gain by utilising untaxed gains earlier in the life of the policy or contract. 

Another casualty will be schemes where certain ‘cluster policy’ arrangements deferred any income tax liability until the final policy in the cluster was encashed.  These measures will apply to contracts taken out on or after 21 March 2012 and will also affect existing contracts where certain amendments are made, such as additional premiums paid.  It’s back to the old cliché which yet again proves that if something is too good to be true, it won’t last long.

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