Private client review of 2018

Wendy Walton

Speed read

With the off-payroll rules extending to private sector businesses, the BBC’s troubles with IR35 became a salutary lesson. US tax reforms have a big impact on UK-based US entrepreneurs and other non-doms’ focus on cleansing of mixed accounts. Brexit uncertainty affects private clients’ plans (with a lifetime IHT sting in the tail for referendum donations) and UK property taxes for non-residents add more complexity. Disclosure of tax avoidance scheme for IHT and changes to the entrepreneurs’ relief qualification rules affect family succession planning. Tax transparency is reinforced through trust registration, HMRC’s requirement to correct and the common reporting standard.

In recent years, private client advisers have become accustomed to constant change and 2018 has proved to be no exception. This article will focus on tax changes in 2018 that have an impact on key themes that are currently important to private clients: the creation and preservation of wealth, the transition of wealth to future generations, and tax transparency.

Creation and preservation of wealth

All advisers with clients operating through personal service companies (or even as sole traders) will have taken a keen interest in the case of Christa Ackroyd Media Ltd [2018] UKFTT 69 (see Tax Journal, 20 April 2018). This was a major win for HMRC on IR35 issues and, with the responsibility to consider the IR35 rules now placed on the engager, it underlines how seriously public sector bodies must take the issue when engaging freelancers.

The wider National Audit Office (NAO) report on how the BBC handled the issue also made interesting reading on the importance of HMRC’s check employment status for tax (CEST) tool. The NAO stated: ‘By June 2018, the BBC had assessed 663 on-air freelancers using HMRC’s tool and 92% received an “employed for tax purposes” determination.’ Previously, most on-air freelancers had been treated as self-employed by the BBC.

The topic has been given extra resonance now we know that the off-payroll rules will be extended to all private sector businesses from April 2020. Moreover, with the government yet to comment on the consultation responses to the idea of creating a statutory employment status test, we may yet see a statutory test built into CEST by April 2020.

On the international front, the impact of the US tax reforms for individuals (see ‘US tax reform: examining the Tax Cuts and Jobs Act 2017’ (Donald Korb & Andrew Solomon), Tax Journal, 12 January 2018) came into focus during 2018 as US nationals reviewed their position and the need to adapt their family wealth preservation strategies.

While the reforms represent a sizeable tax cut for those living in the US, Americans abroad are unlikely to see any reduction and entrepreneurs can face significant issues. Americans with a business outside the US have to deal with additional US reporting obligations and complex controlled foreign corporation (CFC) rules – which are now onerous.

The corporate tax reforms designed to encourage US multinationals to repatriate profits also apply to individual Americans who ‘control’ non-US companies. This can make them liable to the ‘transition tax’ (at rates of up to 17.5%) on undistributed profits held within such companies. Assuming the UK corporation tax rate falls to 17% in April 2020 as planned, future profits of UK companies owned by US entrepreneurs are also likely to be taxed at penal rates under the new US global intangible low taxed income (GILTI) regime with no UK tax credit for the owners. It is perhaps no surprise that many UK-based US nationals are reviewing their US citizenship, although even giving it up has to be handled carefully as it can trigger an exit tax.

US nationals were not the only non-doms facing challenging issues in preserving their wealth in 2018. UK resident non-doms with mixed funds should have been considering carrying out a ‘cleansing’ exercise before 5 April 2019. Advisers will find HMRC’s formal guidance on such exercises useful but guidance issued by ICAEW, STEP, the CIOT and the Law Society is an invaluable tool as we count down to the deadline (see bit.ly/2SwAqlO).

Of course, the other current issue for many non-doms is whether to stay in the UK at all with the high political uncertainty around Brexit. According to the Office for National Statistics, the impact of Brexit is clear: there was a fall of 132,000 EU nationals working in the UK in the year to the third quarter of 2018. However, the number of non-EU nationals employed in the UK increased by 34,000 in the same period.

Brexit uncertainty is also having a major impact on UK entrepreneurs through the need to protect their businesses from all eventualities in 2019. While some are seeking opportunities in their markets, there have been far fewer M&A deals in 2018 as the majority build up their working capital for uncertain times ahead.

For some who are politically engaged in Brexit, there was also a nasty late surprise from the referendum when it emerged that HMRC is applying a strict interpretation to the IHT rules on gifts and donations made to the leave and remain campaigns. These do not qualify as exempt political donations, so are lifetime chargeable transfers taxable at 20% (see ‘IHT and the undead’ (Jackie Hall), Tax Journal, 26 January 2018). If there is to be a second referendum, fundraising for the campaigning may be more difficult this time around.

The trend for globally mobile individuals preserving their wealth by investing in the UK property market declined during 2017 and 2018 as higher stamp duty costs made high value residential property in London and the south east less attractive. Despite (or perhaps because of) this, it was announced in the Budget that the government will consult on adding a further SDLT surcharge of 1% where non-UK resident individuals purchase residential property in England and Northern Ireland.

Overseas investors have been liable to CGT on gains made on such properties since April 2015 and this year the government has also confirmed that gains on commercial properties will be liable to CGT from April 2019 onwards. Happily, this does mean that the annual tax on enveloped dwellings (ATED) related CGT can be abolished from the same date. Together with the new ownership reporting proposals (see below), this does now level the playing field for UK property ownership for UK and non-UK residents.

We have already seen that this can lead to practical difficulties. The case of Hart v HMRC [2018] UKFTT 207 (TC) (see ‘Private client briefing for June’ (Andrew Goldstone & Katya Vagner), Tax Journal, 15 June 2018) addressed late submission penalties for a non-resident CGT (NRCGT) return. Interestingly, even though there was no tax due, the tribunal agreed that not knowing about the UK filing obligation was not a reasonable excuse. However, it found that the individual did have a reasonable excuse because they had not been notified of the obligation by their conveyancing solicitor. One wonders whether there will be similar SDLT cases when the SDLT payment deadline is reduced to 14 days from the date of sale from 1 March 2019.

Passing family wealth down the generations

Significant changes to the disclosure of tax avoidance scheme (DOTAS) rules relating to IHT took effect from 1 April 2018 (reported in Tax Journal, 4 April 2018). It should be remembered that the new hallmark expands the rules beyond the transfer of assets into relevant property trusts. Advisers must now disclose arrangements that enable a person to obtain an IHT advantage by:

avoiding or reducing the charge on gifts with reservation of benefit, where there is also no pre-owned asset income tax charge; or
reducing the value of a person’s estate without giving rise to a chargeable transfer or potentially exempt transfer;

where either of these actions include steps that would appear contrived or artificial to an ‘informed observer’.

While HMRC’s updated DOTAS guidance helpfully provides 18 examples of transactions and sets out whether or not they are disclosable, in situations that are not identical to these examples, advisers should take extreme care when considering if a particular course of action is disclosable.

For private clients, family wealth is often centred on the family business. Therefore, the changes to entrepreneurs’ relief (ER) announced on Budget day will affect many families’ long-term wealth plans. Family business ownership structures built to maximise ER for family members may no longer be effective.

The new ER qualification rules require that in addition to holding 5% of the ordinary share capital and votes of the company, an individual must: hold 5% of assets available to the ‘equity holders’ of the company on a winding up; and
be ‘entitled to’ 5% of distributable profits (dividends).

Although these new rules took effect from 29 October 2018, there remains much to be clarified. The term ‘equity holders’ is widely defined for both these new tests and includes holders of certain preference shares and other loans (e.g. loans that are convertible into shares or bear interest which exceeds a ‘commercial’ return). This effectively means that shareholders now have to hold 5% of the overall economic value of the business to qualify for ER (see ‘Entrepreneurs’ relief: Hammond’s disappearing trick’ (Ceinwen Rees & Alex Eriera), Tax Journal, 23 November 2018).

The requirement to be ‘beneficially entitled to’ at least 5% of the company’s distributable profits may also prove to be problematic where a company has several different classes of shares. Where the company can opt to pay different dividends (or none) on different share classes (e.g. alphabet shares), are any shareholders ‘beneficially entitled to’ profits as the draft legislation requires?

This change has already affected a number of individuals where business disposals were not completed before Budget day. For those who are still in the planning stages of a disposal, it may force a long delay. Where the 5% tests can no longer be met, even if there are business reasons to restructure family holdings, the qualifying period for ER will have been broken. Therefore, the shareholders will now have to continue to hold their new qualifying shareholding for 24 months, as the disposal will have to take place after 5 April 2019.

Transparency

After the initial deadlines for online trust registration for 2016/17 liabilities were extended several times, the final deadline passed on 5 January 2018, only a few weeks earlier than the 31 January 2018 deadline for registering all existing trusts. HMRC should now have details of all UK-based trusts, including the names of settlors and the beneficiaries – a major advance in tax transparency.

Of course, UK companies have been reporting on shareholders who are ‘persons of significant control’ since 2016. The transparency trend will continue in the future, as the government intends to extend similar reporting rules to ownership of UK property by offshore companies. From 2021, to register title to a UK property, it will be necessary to disclose details of beneficial owners of offshore companies that are involved in the transaction.

Few other tax jurisdictions have similar registration schemes in place to date but reporting of financial information under the common reporting standard is well underway; for example, the first exchange of information between the UK and Swiss tax authorities took place on 30 September 2018. HMRC’s related tax enforcement legislation, the ‘requirement to correct’ any past tax return inaccuracies in respect of offshore assets by 30 September 2018, caused a late flurry of activity for advisers. As expected, a number of individuals were keen to start resolving past issues before the new tougher penalties regime took effect from 1 October 2018 (see ‘Requirement to correct offshore tax non-compliance’ (Katharina Byrne), Tax Journal, 14 September 2018).

What to look out for in 2019

At the time of writing, the government is rushing through the Finance Bill but it is hoped that most of the remaining uncertainties with the new ER tests can be clarified before royal assent, or at least by formal HMRC guidance early in 2019. Of course, the rush to legislate arises from the political uncertainties around Brexit. Private clients are not immune to these concerns; therefore, however we may feel about the subject, private client advisers must keep up to date with Brexit developments. In many cases, private clients will want to build greater flexibility into their own financial arrangements so that they can quickly take matters into their own hands as the outcome becomes clearer.

Finally, the government has announced that new applications for Tier 1 investor visas have been suspended from 7 December, pending the introduction of a new independent financial auditing process for applicants. We can expect even more developments in tax transparency in 2019. It already looks set to be an ‘interesting’ year.

Issue: 1425
Categories: Analysis , Anti-avoidance , IHT , Private client taxes , non-resident , tax transparency

Speed read

Creation and preservation of wealth

Passing family wealth down the generations

avoiding or reducing the charge on gifts with reservation of benefit, where there is also no pre-owned asset income tax charge; or
reducing the value of a person’s estate without giving rise to a chargeable transfer or potentially exempt transfer;

where either of these actions include steps that would appear contrived or artificial to an ‘informed observer’.

The new ER qualification rules require that in addition to holding 5% of the ordinary share capital and votes of the company, an individual must: hold 5% of assets available to the ‘equity holders’ of the company on a winding up; and
be ‘entitled to’ 5% of distributable profits (dividends).