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Hung Parliament


09 June 2017

 


As we wake up this morning, the scenario that many thought was relatively unlikely and therefore had not really planned extensively for, has become reality and we once again face a Hung Parliament. It is very unclear at the moment whether Theresa May as the leader of the majority party will be able to form a coalition Government and if so with whom? The Liberal Democrats in particular have been very clear on their unwillingness to form a coalition with either the Conservatives or Labour. Another option is for the Tories to rule as a minority Government and rely on support from smaller parties on an issue by issue basis to get their agenda through Parliament.


With so much confusion and uncertainty about, any short term tax changes would need to be relatively simple and non-controversial. One relatively obvious option would be to drop the Conservatives proposed Corporation Tax rate cut which is due to take effect in each of the next two years, taking the rate down to 17%. Labour and the Greens want to increase it and the Liberal Democrats, meanwhile are suggesting 20%. On the positive side for small businesses and private landlords, it is likely Making Tax Digital, the Government initiative which requires more frequent online reporting of business income and expenditure, but which has proved very unpopular, will be even further postponed and potentially more exemptions granted for small businesses and self employed individuals as was promised in the Labour Manifesto.


The VAT rate is another area which many feel will now be a definite candidate for review. During their campaign, Labour highlighted the anti-progressive nature of high indirect tax rates, while the SNP and Plaid Cymru were both open to supporting the tourism and hospitality sectors with specific cuts to VAT in these areas.


With both Labour and the Liberal Democrats including plans to increase the rate of income tax in their manifestos, one by 5% for those earning above £80.000 and the other by 1% across the board, it is likely we will see some form of income tax changes.


Changes may also be seen in the new residential nil rate band for IHT as again this formed part of both the Labour and Liberal Democrat manifesto tax pledges.


With the first deadline for Theresa May to advise if she is able to form a new Government being on 13th June and it even being possible she will have sought permission to form a minority Government before then, things should become clearer over the next few days.

 

Disguised Investment Management Fees (DIMF)


In the past two years, HMRC have introduced various new rules in an attempt to tighten the tax regime applicable to investment funds and their UK-based fund management executives and service providers.


The new rules broadly seek to tax any amounts arising to fund managers from the collective investment scheme funds they manage as fee income (with a top tax rate of 45%), regardless of the underlying nature of those amounts at fund level.


There are two key exceptions: -

  1. Amounts which are performance related (carried interest)
  2. Amounts arising through genuine investments made by managers on arm’s length terms (Co investment)
Carried interest and self-funded profits will continue to be taxed under the capital gains tax (CGT) regime, with a top tax rate of 28%.

The primary target of these rules is the typical “GP – LP” private equity structure, although the legislation is now broadly drafted such that most investment management structures will fall within the new regime.


Key changes
The key areas for investment funds and their managers to be aware of are summarised below:

  1. Disguised Fees
  • Where an individual performes investment mangement services and a management fee arises to that individual, the whole fee is treated as trading profits chargeable to income tax in their hands.
  • A management fee is described as any sum except: ­ Carried interest (although see below); ­ An arm’s length return on the investment made by the individual in the investment scheme (co-investment, made on terms reasonably comparible with outside investors, suffering the same economic risks); ­ Repayment of the original investment made by the individual or ­ A fee that has otherwise been taxed as employment or trading income of the individual
  • These rules apply from 6 April 2015 onwards
  1. Income based carried interest
  • Carried interest can be partially charged to income tax, if the average investment holding period of the fund is between 36 and 40 months
  • Carried interest returns will be fully charged to income tax if the average investment holding period of the fund is less than 36 months
  • These rules apply from 6 April 2016 onwards

The new rules are complex, and if you carry out investment management services or otherwise participate in an investment fund, you should seek advice to ensure your tax position is not unduly affected by these changes.


Finance Bill 2017


Last week, the chancellor announced that the 2017 Finance Bill (which was originally due to be one of the largest parliamentary bills in history) was to have over half of its clauses removed prior to being rushed through parliament in advance of the general election.
 

Many of the clauses removed involve key tax policy changes including:

  • The overhaul of the non-dom tax rules
  • Making tax digital
  • The reduction of the tax-free dividend allowance from £5k to £2k

A full list of the provisions removed from the bill can be found here:

https://www.tax.org.uk/media-centre/blog/media-and-politics/government-drop-majority-finance-bill


The move creates an unfortunate period of uncertainly as it was anticipated that the complex and wide-ranging non-dom changes were going to take effect from 6 April 2017. Without legislation, and with the prospect of a new government in place after the June election, the future of the proposed changes is far from clear. Many non-doms have already taken steps to re-structure their affairs on the assumption that the new rules would apply from 6 April 2017, and many more will have made similar plans to take action after this date.


Opinion within the industry is divided as to whether the next finance bill would back-date the commencement of the non-dom rules to 6 April 2017, or delay until 6 April 2018 once the provisions have gone through parliament. As the government is now in purdah until after the election, there is no prospect of any further guidance being issued until after the election.


The sensible approach for non-doms affected by the rule changes would be to put relevant investment or restructuring plans on hold until there is some clarity from the post-election government as to the confirmed commencement date of the clauses that were removed from the Finance Bill.

Here at Everfair Tax, we specialise in advising non-UK domiciled and internationally mobile individuals. If you are affected by the non-dom rule changes, we can advise on the best way forward. Give us a call on: 01932 428536 or e-mail info@everfairtax.co.uk
 

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Must know information for those coming to live in the UK or leaving the UK
 
Short Term Business Visitors (STBVs)
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Residence, Domicile and the Remittance Basis
Statutory Residence Test (SRT)
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