Whether it’s in response to Brexit or to legislation that’s been on the cards for some time, tax is high on the agenda right now. BL asks four tax experts to give their view on some of the more pressing issues
Post-Brexit
Jo Huxtable, Partner, Deloitte
The result of the UK referendum on 23 June was as much of a shock to Channel Islanders as it was to the rest of Europe. The position of the Channel Islands with respect to the EU is currently governed by Protocol 3 of the UK Act of Accession to the Treaty of Rome, which places them within the free market for the movement of goods, but outside the EU for other purposes.
In practice, this means that, depending on the outcome of the secession negotiations, trade between the Channel Islands and EU countries could be treated as imports and exports in future, involving duty payable and customs formalities.
This would be a real impediment to trade. The issue will be what, if anything, replaces Protocol 3 to define the relationship of the Channel Islands with the EU, and whether this will be negotiated on our behalf by the UK, or by the islands directly with Brussels.
From a general tax perspective, Brexit will not, in itself, cause major changes. In the UK, taxes such as customs duties are currently almost entirely governed by EU directives and regulations, which may need to be replaced by domestic legislation.
The main UK taxes, including income tax, corporation tax, inheritance tax and VAT, aren’t likely to be materially affected in the short to medium term, although over the longer term the UK may have more flexibility to deviate from EU tax policies, depending on the nature of the relationship with the EU that Britain negotiates post-Brexit.
For the Channel Islands, the key question is how Brexit changes our relationship with the EU and in particular, from a domestic taxation perspective, whether it changes our position on the EU Code of Conduct for business taxation.
The code dates back to 1997 and was established by the Council of Ministers. It isn’t a legally binding instrument but its adoption does require the commitment of member states to abolish so-called harmful tax measures and to ensure that the principles are applied in dependent or associated territories. This led to the review of the tax systems in Jersey and Guernsey and the conclusion in 2012 that they were compliant with the code.
Leaving the EU would mean that the UK would no longer remain committed to the code and therefore any commitment to apply the code principles to the Channel Islands should also fall away.
However, in reality there has never been any formal obligation on Jersey or Guernsey to comply with the code. Both islands have recognised the importance of voluntary compliance on a ‘good neighbour’ basis, given the possible consequences of being non-compliant. This will not change.
The work of the code overlaps to a large extent with the ongoing work of the OECD focus on harmful tax practices, including BEPS. The Channel Islands have recognised the importance of cooperating with the OECD in developing the BEPS project, including appropriate local implementation of certain minimum standards.
This is particularly pertinent given that the EU has recently confirmed proposals to draw up a common blacklist of ‘non-cooperative’ jurisdictions, to be finalised in 2017.
It’s essential that Jersey and Guernsey don’t appear on the final list, and whilst the Zero/Ten tax regimes have been examined and found compliant with the code, there is a risk that new criteria may be applied, potentially including low (and zero) headline tax rates. Maintaining a zero per cent general rate of corporate income tax is essential for the Channel Islands’ finance sector to remain competitive, and maintaining a constructive and cooperative dialogue with the EU in a post-Brexit world may be essential in helping to achieve this.
Non-doms
Hazel Johnson, Associate Director, Private Client Tax, Moore Stephens
The new rules for the taxation of non-UK domiciliaries were promised to us well in advance of 6 April 2017 – the date from which they will apply – so that UK-resident taxpayers would be able to plan for the transition to the new regime. Unfortunately, the draft legislation we have seen has only dealt with the new rules on domicile themselves, and not the new regime for offshore trusts or any transitional reliefs that may apply.
This places taxpayers and their advisers in a difficult position, and the change in Chancellor and the surprise Brexit vote surely mean that these proposed changes will have fallen even further down the list of priorities facing the Treasury.
Under the new rules, individuals who have been UK resident for more than 15 of the 20 previous tax years will be deemed to be domiciled in the UK for all taxes from the beginning of year 16 (rather than the previous rule, which applied after 17 out of 20 tax years and was limited to inheritance tax).
Individuals born in the UK, with a UK domicile of origin, who leave the UK, even for very long periods of time, will be treated as UK-domiciled if they again become resident in the UK. We’ve seen the draft legislation dealing with these changes, and the implications are well understood.
We are told there will be transitional reliefs, such as a rebasing of personally held assets for individuals who become deemed UK domiciled on 6 April 2017; that there may be reliefs on the winding up of house structures; there could be a softening of the rules for business investment relief; and there are suggestions the mixed funds rules could be revisited and simplified.
These would all be welcome, but in the absence of the detail of the rules, it’s impossible to advise a client to rely on these potential reliefs when they may not be enacted, may not apply in particular circumstances, or whose introduction may be delayed to later years.
There’s been very little guidance on the tax treatment of offshore trusts, other than to say there would be a benefit charge on beneficiaries but there should be no charge where income or capital gains aren’t distributed (other than UK source income, which would be taxable on a settlor). This is potentially attractive, allowing for tax-free roll-up of investments in a trust structure, but this does depend on the rate applicable to taxable benefits – anything higher than capital gains tax rates will be disastrous.
There will be a period of adjustment as long-term UK residents decide whether the new regime is unworkable for them, and the new statutory residence test will make it easier for people who wish to break residence to do so. Those who can’t break all ties with the UK may find they can reduce their presence in the country to such an extent that they cease to be resident, which could lead to a substantial drop in tax take from non-UK domiciliaries.
Property
Dan Collins, Head of Private Client and Trust in Guernsey, and Elaine Connor, Head of Private Client and Trust in Jersey, EY
The past four years have seen unprecedented change for structures and individuals in the Channel Islands owning UK residential property, including:
• From 1 April 2013, an annual tax on enveloped dwellings (ATED) was introduced for UK residential properties worth more than £2 million as at 1 April 2012, held by non-natural persons such as companies. The threshold for this charge has since been lowered to £500,000 and the charges range from £3,500 to £218,200, based on property value. Some reliefs from the charge are available, most notably where the property is commercially let.
• Companies liable to pay an ATED charge may also face ATED-related capital gains tax (ATED-CGT), at 28 per cent, on the disposal of the relevant property, for gains made during the period the ATED charge has applied.
• From 17 July 2013, there have been significant restrictions on the deductibility of debt for inheritance tax (IHT) purposes.
• From 6 April 2015, all non-UK owners have to pay capital gains tax (CGT) on the sale of UK residential property where there has been an increase in value from this date.
• From 1 April 2016, an additional three per cent stamp duty land tax (SDLT) is payable when purchasing a second residential property in the UK.
• From 6 April 2017, UK residential property held via a non-UK company will no longer be protected from UK inheritance tax.
There has been concern that the overhaul of this regime would spell the end for UK residential property being held through trust and/or company structures in the Channel Islands. We don’t believe that to be the case. Whilst in certain circumstances it may be preferable from a UK tax perspective to hold a UK residential property directly – particularly as the IHT protection drops away in April 2017 – privacy, asset preservation and succession planning continue to be important factors for clients who are looking to set up structures in the Channel Islands.
Also, where UK residential properties are owned for investment purposes and are commercially let, there remain UK tax advantages to holding these properties through trust and/or companies in the Channel Islands. Relief can be claimed for the ATED and ATED-CGT charges. CGT rates may be lower, and IHT will be more complex from April 2017, but in many cases the ultimate beneficial owner will be no worse off owning the property through a company.
Professionals in the fiduciary sector should now be reviewing how residential property is currently held in structures. Restructuring may be required, but one should note that this could bring unintended consequences and potentially tax charges, particularly in relation to CGT and SDLT.
De-enveloping reliefs have been mooted but the time period in which one will be able to act could be short, so whilst individuals may be well advised to ‘pause’ on taking action, there should be no hesitation in reviewing the current position.
One final point to note is that we’ve seen a slight increase in parties willing to consider acquiring the shares of a company that already owns residential property. Care is clearly required in this regard as the purchaser is acquiring the company and all that goes with it, but with appropriate due diligence a tax saving may exist for both parties.
The landscape is undoubtedly more complex than ever before and it means, perhaps unfortunately, that there is no ‘silver bullet’. The best method of owning UK residential property very much depends on long-term plans and personal circumstances. Advice should be taken where there is any uncertainty.