KPMG has highlighted several proposals in Chancellor George Osborne's Budget that may affect individuals and the finance industry in the Channel Islands.
Profits from trading in and developing UK land
The government proposes legislation and a change to the UK double taxation agreements with Jersey and Guernsey to ensure non-UK resident developers of UK property will always be brought into UK tax on the profits from that development. The measure will come into effect from the report stage of Finance Bill 2016.
The legislation puts in place a set of rules to tax trading profits derived from land in the UK. Those rules will apply equally to resident and non-resident businesses, and will not depend on the existence of a "permanent establishment" in the UK.
The legislation will be introduced at report stage and will take effect from the date of introduction. However, anti-avoidance rules will take effect from Budget day to counteract arrangements put in place between then and the date the new legislation is introduced which are designed to avoid the charge.
KPMG said: "Jersey and Guernsey companies have been used to legitimately take advantage of the benefits within the double tax arrangements with the UK. These proposals will have an impact on the tax position of these companies, although the intention is merely to place non-UK developers of UK property in the same position than UK developers."
Change in rate for capital gains tax (CGT)
A proposal has been announced to reduce from 6 April 2016 the 18% rate of CGT to 10% and the 28% rate of CGT to 20% for chargeable gains, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest.
"The rate of ATED [annual tax on enveloped dwellings]-related chargeable gains accruing to non-natural persons, including CI resident companies, holding UK residential property will continue to be 28%. This proposal will also reduce the rate of CGT on 'stockpiled gains', subject to seeing the detailed rules," said KPMG.
Annual tax on enveloped dwellings (ATED)
The ATED charge bands for the period 1 April 2016 to 31 March 2017 are set out below. ATED returns, including relief claims, must be sent to HMRC by no later than 30 April 2016. ATED charges are payable on or before 30 April 2016 as set out below.
• Property value more than £500,000 but not more than £1 million: £3,500
• Property value more than £1 million but not more than £2 million: £7,000
• Property value more than £2 million but not more than £5 million: £23,350
• Property value more than £5 million but not more than £10 million: £54,450
• Property value more than £10 million but not more than £20 million: £109,050
• Property value more than £20 million: £218,200
KPMG said: "Taking aside the introduction of the new ATED band for properties valued at £500,000 to £1 million, the ATED charge rates have not risen above their 2015/2016 rates. This is a welcome surprise given the government’s original prior commitment to raise rates year on year by at least the rate of the Consumer Price Index."
Non-UK domiciled individuals
There was little further detail provided on the proposed reforms to the taxation of non-domiciled individuals or UK residential property. However, the government did announce what appears to be another rebasing provision for assets held at 6 April 2017 and some transitional relief (as yet undescribed) for those holding offshore funds.
UK transfer pricing guidelines
The government is to legislate for the revisions to the OECD Transfer Pricing Guidelines agreed as part of the OECD BEPS Project. The intention is that these measures will have affect for corporation tax purposes for the accounting period beginning on or after 1 April 2016, and for income tax purposes in relation to the tax year 2016/2017 and subsequent tax years.
The OECD BEPS actions on transfer pricing have clarified and strengthened existing standards including the guidance on the arm’s length principle. The work has focused on three key areas:
• Transfer pricing issues relating to controlled transactions involving intangibles, since intangibles are by definition mobile and hard to value.
• The new guidance ensures that contractual allocation of risk is respected only when the allocation is supported by actual decision-making and thus the enterprise exercises control over these risks.
• Transfer pricing on high risk areas including the scope for addressing profit allocations resulting from controlled transactions which are not commercially rational, the scope for targeting the use of transfer pricing methods in a way which results in diverting profits on the most economically important activities of a multinational group, and the use of certain type of payments between multinational groups, such as management fees and head office expenses, in order to erode the tax base in the absence of alignment with value creation.
KPMG said: "All Jersey and Guernsey entities that transact with a related UK enterprise must reconsider its transfer pricing arrangements in light of the BEPS actions on transfer pricing. This is likely to have an effect on the profit allocation of Channel Islands companies, including those that are involved in the asset management business where the related investment adviser is resident in the UK."
Cap on interest relief
The government is proposing to introduce domestic legislation to enact the recommendations contained in the BEPS Project Action 4, which provides proposed rules to prevent base erosion through the use of interest expense.
Following a consultation with interested parties, the UK government will introduce a restriction on the tax deductibility of corporate interest expense consistent with the OECD recommendation. The new rules will apply from 1 April 2017.
The UK will introduce a 'fixed ratio rule' limiting corporation tax deduction for net expense to 30% of the group’s earnings before, interest, tax, depreciation and amortisation (EBITDA).
In recognition that some groups may have high external gearing for genuine commercial purposes, the UK will also implement a 'group ratio rule' based on the net interest to EBITDA ratio for the worldwide group, as recommended in the OECD report.
There will be a de minimis group threshold of £2 million net of UK interest expense, and an exemption for public benefit infrastructure.
Furthermore, the government will continue to engage with the OECD on the design of rules to prevent BEPS involving interest in the banking and insurance sectors.
Asset managers
Following the draft legislation issued in the Autumn Statement 2015, the government has finalised the rules that determine when asset managers can pay capital gains tax rather than income tax on their performance-related returns (ie carried interest).
These new rules ensure that carried interest will be taxed at capital gains tax only when the fund undertakes long-term investment activity, with investment arising longer than three years.
KPMG said: “Although the upper rate of capital gains tax is to be reduced from 28% to 20%, this reduction does not apply to carried interest, which will continue to be taxed at 28% for higher rate payers.”
Criminal offence for tax evasion
As announced in the Spending Review and Autumn Statement 2015, the government will introduce a new criminal offence that removes the need to prove intent for the most serious cases of failing to declare offshore income and gains.
Stamp duty land tax (SDLT): non-residential and mixed transactions
This measure will affect purchasers of commercial property with an upfront payment worth more than £150,000 or a lease net present value of more than £5 million. The proposal is that on and after 17 March 2016, SDLT will be charged at each rate on the portion of the purchase price which falls within each rate band. The new rates and thresholds for freehold purchases and leases premiums are:
• £0-£150,000: 0%
• £150,001-£250,000: 2%
• £250,000 or more: 5%
For new leasehold transactions, SDLT is already charged at each rate on the portion of the net present value (NPV) of the rent that falls within each band. On and after 17 March 2016 a new 2% rate for rent paid under a non-residential lease will be introduced where the NPV of the rent is above £5 million.
SDLT: purchases of additional residential properties
An additional higher rate of SDLT will be levied on individuals, companies and other non-natural persons purchasing a residential property in England, Wales and Northern Ireland who at the end of the day of the transaction own two or more residential properties and are not replacing a main residence.
From 1 April 2016 higher rates of SDLT will be charged on purchases of additional residential properties, such as second homes and buy-to-let properties. The higher rates will be 3 percentage points above the current SDLT rates as set out below.
• £0-£125,000: existing SDLT 0%, additional property SDLT 3%
• £125,000-£250,000: existing SDLT 2%, additional property SDLT 5%
• £250,000-£925,000: existing SDLT 5%, additional property SDLT 8%
• £925,000-£1.5m: existing SDLT 10%, additional property SDLT 13%
• £1.5m or more: existing SDLT 12%, additional property SDLT 15%
Companies and certain trusts purchasing residential property will be subject to the higher rates, including the first purchase of a residential property.
Corporation tax
Proposals have been introduced to cut corporation tax to a rate of 17% in 2020. KPMG said: "In the last Parliament, the government cut the main rate of corporation tax from 28% to 20% and introduced proposals to reduce the rate to 19% in 2017 and 18% in 2020. A proposed further cut will ensure the UK has the lowest corporation tax rate in the G20."