WE’VE had good news, bad news, and surprising news from the Budget. The UK looks attractive, partly due to financial tension in Europe. The question is whether the Budget added to or reduced the UK’s appeal as a place to do business. The answer, unsurprisingly, is mixed.
The reduction of additional rate income tax from 50 per cent to 45 per cent will be welcomed by many in the City, alongside measures aimed at making the UK more attractive to non dom investors -- including enabling tax efficient onshore investment using offshore funds in some circumstances. However, there is also a huge focus on anti-avoidance, both generally and through stamp duty.
Tax reductions seem to be counterbalanced by the restriction of uncapped relief – anyone claiming more than £50,000 of uncapped income tax reliefs will be restricted to the greater of £50,000 or 25 per cent of income. While this won’t hit pension contributions, it will hurt charities unless government’s talks with philanthropists find a solution. With charities struggling, this seems unfair and sends a strange message. Hopefully, the restriction will target fabricated income tax loss schemes and charities will not bear the brunt.
Prime residential property has fared well over the past few years, especially in London. George Osborne came down like a ton of bricks to deter the significant stamp duty planning that accompanies the desirability of London homes. From next April, any properties over £2m purchased through a “non natural person envelope” – a company, generally speaking – will have a 15 per cent stamp duty rate, or 7 per cent if purchased directly. Residential properties over £2m, held through corporate or similar structures, will be subject to a “large annual charge” -- and capital gains tax will apply to their sale.
It’s not clear how this will be policed, let alone how valuation will work, but it marks a sea change in the UK’s system, sounds suspiciously like a wealth tax and changes the basis of capital gains tax, which until now only applied to UK residents. Add the promise of a General Anti Abuse Rule (GAAR), and we have some interesting food for thought. A properly structured and resourced GAAR could be a boost for taxpayers, if it made clear what is and is not acceptable tax planning, as well as incorporating a clearance procedure. The concern is that it will catch legitimate tax planning and add to existing uncertainty. Much depends on the consultation process.
We must move away from the worrying promise of retrospective legislation, because while abusive tax planning shouldn’t be tolerated, there is little agreement on what exactly that is, and a worrying tendency to speak of avoidance and evasion as equal creatures.
Taxpayers need certainty. I act for wealth creators, and regularly hear the need for certainty and stability in tax policy. If we combine more attractive rates with clear guidelines for tax planning, the UK can make the most of present circumstances. The consultation processes must ensure this happens, and that the guiding principles of “predictability, stability and simplicity” set out in the June 2010 emergency Budget are closely adhered to.
Sophie Dworetzsky is a partner at Withers LLP.