In what might be Chancellor Alistair Darling’s final Pre-Budget Report, he announced that he was intending to present a financial package that would be neutral overall. However, this hid significant advantages and disadvantages for specific individuals and companies.

In particular, he introduced what he described as “tough but necessary” measures as a result of which the “biggest burdens will fall on those with the broadest shoulders”. Put simply, this will hit the top 2% of income-earners.

There had been much speculation regarding the content of the Pre-Budget Report, with increases in capital gains tax and VAT considered a strong possibility. In the event, the new “bank payroll tax” stole the day, followed by the increase in national insurance contributions (NIC) from April 2011.

As so often in these cases, the devil is in the detail and, in particular, the introduction of anti-avoidance and evasion measures that aim to net the Exchequer a cool £5 billion a year will have a significant impact.

This article focuses on the elements of the Pre-Budget Report that may be of relevance to offshore trusts and companies and those parties connected with them.

BANK PAYROLL TAX

As had been widely mooted in the days leading up to the Chancellor’s speech, a new 50% windfall tax is to be charged on banks that pay any bonuses over £25,000 to individual employees. This additional tax burden may result in the bonus pool for employees being substantially reduced. The net effect of this is that those hoping for a £1m gross bonus will receive very substantially less for every pound expended by their employers.

The new “supertax” has been initially introduced for a limited period up to 5 April 2010, although this may be extended.

The initial drafting of the proposed legislation does not appear to limit the scope of the supertax to banks and building societies but also catches various other financial institutions.

The supertax covers not just bonuses but “all benefits”, a term which is very widely drawn. It is however, expected to have certain limits. For example an employee would be unlikely to be subject to the supertax on obtaining value from an existing employment arrangement such as a carried interest, although amendments to existing entitlements or the issue of new entitlements would certainly be caught.

The draft legislation also indicates that the defined class of employees will also be subject to the supertax if they receive benefits from an Employee Benefit Trust or an Employer Financed Retirement Benefit Scheme, even if the funds were contributed by the employer prior to 9 December 2009. Further clarifications may be made by HMRC in due course.

TAX RATES AND THRESHOLDS

Capital Gains Tax - although the anticipated increase in the rate of capital gains tax from 18% did not materialise, it is quite possible this will be reviewed at a later date. The use of offshore trust structures to defer capital gains tax liabilities remains attractive with a maximum CGT rate of 28.8% on distributions of capital. The changes to the matching order for capital distributions effective from 6 April 2008 mean that the rate charged will often be below the maximum level.
No reference was made in the Pre-Budget Report to the level of the capital gains tax annual exemption for 2010/11.

Income Tax - the 20% basic rate and the 40% higher rate remain unchanged for 2010/11. It was confirmed in the Pre-Budget Report that the income tax rate of 50% applying to income in excess of £150,000 (42.5% for dividend income) will be effective from 6 April 2010. These rates will also apply to trusts subject to discretion. Income tax allowances and thresholds have been frozen at the 2009/10 levels.

Inheritance Tax - it had been announced in the 2007 Budget that the nil rate band for 2010/11 would be increased to £350,000. However this has been overridden by the announcement in the Pre-Budget Report that the band will remain frozen at the 2009/10 level of £325,000. Provisions allowing the transfer of unused nil rate bands between spouses or civil partners remain in force.

INHERITANCE TAX ANTI-AVOIDANCE IN RELATION TO TRUSTS

Draft legislation has been issued with effect from 9 December 2009 to target two avoidance arrangements in connection with schemes to avoid IHT charges on property in trust. It also appears that double charges to IHT might arise in some circumstances, where these structures are used.

The first arrangement involves the purchase of an interest under a trust for full market value which previously enabled value to be put into trust but without any corresponding value being included in the purchaser’s estate. Under the new rules, where the interest is purchased at full value the purchaser will be treated as beneficially entitled to the underlying trust assets.
 
The second arrangement concerns the use of reversionary (future) interests whereby the value of the property transferred into trust is diminished by the value of the reversionary interest, thus avoiding an immediate inheritance tax charge. Under the new rules, when the reversionary interest becomes an interest in possession or is given away, a chargeable transfer will occur for the person who was entitled to the interest.

VAT

As previously announced, the standard rate of VAT is returning to 17.5% from 1 January 2010.

STAMP DUTY LAND TAX

No increases were announced to the rates of SDLT although the exemption threshold for residential property will revert to £125,000 (from £175,000) with effect from 1 January 2010.

The current stamp duty land tax disclosure regime applies to schemes involving non residential property with a value of at least £5 million. Unlike the other disclosure regimes operated by HMRC, there is no requirement to identify the user of the scheme. Following on from earlier consultation, it was announced that from 1 April 2010 the SDLT disclosure scheme will be widened to include residential property with a value of at least £1 million or mixed use property which exceeds either the residential or non-residential value thresholds. In addition, users of the scheme who expect to gain a stamp duty land tax advantage will be required to report certain information to HMRC.

DISCLOSURE OF TAX AVOIDANCE SCHEMES

Proposed changes to the Disclosure of Tax Avoidance Scheme regime include increased penalties for failure to disclose and a requirement for promoters to provide HMRC with information about the clients to whom the scheme has been provided.

In addition, three new scheme “hallmarks” have been proposed. Of particular note is the Employment Scheme hallmark which is very broad and likely to include many arrangements involving employee benefit trusts and employer financed retirement benefit schemes.

DISCLOSURE OF OFFSHORE ACCOUNTS

The proposals cover new and tough measures to punish those with undeclared offshore tax liabilities. Failure to declare such liabilities will attract tough penalties usually associated with tax evasion.

There will also be a new requirement for UK-resident individuals to notify HM Revenue & Customs (HMRC) when opening offshore bank accounts in certain jurisdictions, supported by an additional penalty regime. Accounts in those jurisdictions which automatically exchange information on savings with the UK will be exempt from these requirements. It is expected that Guernsey will fall into this category although it has yet to be confirmed. In addition, HMRC have confirmed that the notification requirements will not apply to UK-resident but non UK-domiciled individuals who are claiming the remittance basis in the year that the account becomes notifiable.

The announcement of a penalty for failure to disclose new offshore accounts seems to be the first step on the path used in the USA. Under the “FBAR” rules in the USA, taxpayers now have to declare details of their offshore accounts when filing future tax returns, otherwise they face crippling penalties.

INFORMATION ON OTHER OFFSHORE FINANCIAL STRUCTURES

In an effort to ensure that offshore trusts are not used as vehicles for tax evasion, HMRC are considering extensions to the existing information requirements.

Currently, for inheritance tax purposes, a UK-domiciled settlor or any professional advisor involved in the creation of an offshore trust is required by statute to notify HMRC within 12 months of a transfer being made. The current exemption for barristers is now under review.

HMRC are also considering introducing a requirement for UK-resident settlors to notify all transfers to offshore trusts. Whilst there is a specific exclusion for non UK-domiciled individuals, this only applies if they are claiming the remittance basis in the year of the transfer. A penalty regime identical to that used for the disclosure of offshore accounts is proposed.

CHANGES TO PENSION TAXATION - EFRBS

Contributions to Employer-Financed Retirement Benefit Schemes (EFRBS) do not give rise to an immediate corporation tax deduction for the employer or a tax charge for the employee. However, the employee is taxable when he receives funds from the scheme. In order to avoid abuse of these rules, a tax charge is imposed where benefits are paid from the scheme to an entity other than an individual (e.g. a company). It has been announced that this charge will rise from 40% to 50% with effect from 6 April 2010.

ACTION POINTS

As a result of the April Budget and this Pre-Budget Report you should consider the following:

• You must ensure that your existing fiduciary provider has the technical knowledge and capability to ensure that your structure remains fit for purpose and tax-compliant.
   
• Staying in the UK? Praxis can assist you and your existing advisors with the planning and implementation of a number of robust and efficient solutions.
   
• Thinking of going overseas? Praxis can advise and work with you and your advisors to ensure that you make the most of the emigration tax planning opportunities.

FOR MORE INFORMATION CONTACT

John Bradley - Tax Director
Email: john.bradley@praxisgroup.com           Tel: +44 (0) 1481 737668

André Trebert – Associate Director, Tax Services
Email: andre.trebert@praxisgroup.com          Tel: +44 (0) 1481 737660