Family offices involved in impact investing were provided a boost in the coalition’s last Budget. Rules governing tax-efficient venture capital schemes were generally tightened in the final version of the UK Finance Bill 2015, however financiers of social investments were given hope in the form of new social venture capital trusts (VCTs).
This move will see family offices and wealthy individuals rewarded with tax efficient ways when investing in fledgling social businesses and supporting UK plc. Social VCTs have the same tax advantages as VCTs, such as tax-free dividends and capital gains tax-free on disposal. Admittedly, given VCTs and EISs are high-risk investments in small unlisted companies, they usually only form a small part of a well-diversified investment portfolio.
Also, from April, companies must adhere to stricter criteria to qualify for Enterprise Investment Schemes and VCT investments — popular family office investment vehicles — to ensure compliance with European Union rules on state aid. Now, companies can only raise £15 million — rising to £20 million for knowledge-intensive companies — and will have to be less than 12 years old when they receive their first investments.
Non-domiciled individuals
Changes have also been enacted to the remittance basis of taxation for those individuals who are resident but not domiciled in the UK. Non-doms are taxed on overseas source income and gains only to the extent these are remitted to the UK.
The charge for those resident in the UK for 12 of the past 14 years increased from £50,000 to £60,000 and a new charge of £90,000 was introduced for those resident for 17 of the past 20 years.
Currently, individuals may make an annual choice whether they use the remittance basis and pay the charge or whether they are taxed on an arising basis in the same manner as those domiciled in the UK.
On the surface, this seems like a good deal all-round. The non-dom can reduce the amount of UK tax due, while the Treasury benefits because it encourages non-doms to settle and pay tax in the country.
However, the sharp increase in the top rate may prompt changes in how non-doms structure their wealth. Some non-doms may prefer to be taxed on income and gains when they are received, which may result in the remittance election bringing in less revenue in the future.
UK property tax
Non-doms are also affected by new legislation extending capital gains tax to disposals of UK residential property by non-UK residents. Gains arising on or after April 6 2015 are subject to the new provisions, which could place significance on valuations. Companies that are widely held will be exempt from the charge, as will unit trust schemes and open-ended investment companies that meet a widely-marketed fund condition.
Additionally, UK residential property owned by certain non-resident, non-natural individuals face higher rates of Annual Tax on Enveloped Dwellings (ATED). A new band was introduced for properties valued between £1 million and £2 million and the charges for properties more than £2 million increased by 50% above CPI (see table 1). From April 2016, an annual charge of £3,500 will be introduced for properties with a value over £500,000 but under £1 million.
Legislation of Stamp Duty Land Tax (SDLT) on residential property is now finalised with charge rates according to purchase price (see table 2). The government has been keen to emphasise that 98% of purchases will be subject to a reduced rate of SDLT, however, those who pay more under the new regime, pay significantly more.
For example, under the old regime, SDLT was £175,000 for a £2.5 million property but rises to £213,750 under the new rules. Furthermore, the 15% rate payable by certain non-natural persons that purchase residential property valued over £500,000 remains in force.
Investment relief
Family offices that invest in non-public debt will see withholding tax exemption on interest from qualifying private placements. However there are stiff requirements, for instance, holders of the loan notes must be qualifying investors unconnected to the issuer. Private placements must be unlisted loans issued by a trading company for a minimum three-year period and the minimum and maximum issuance size by a company is likely to be £10 million and £30 million, respectively. Companies must be a UK-regulated financial institution or an equivalent entity authorised outside the UK undertaking similar business.
Exchange of information and tax evasion remain high on the government’s agenda, reflected in a review of the Disclosure of Tax Avoidance Schemes regime, special penalties under the General Anti-Abuse Rule and measures against serial avoiders. Worth noting is that the Liechtenstein Disclosure Facility (LDF) and Crown dependency facility close at the end of 2015, instead of April and December 2016 respectively.
A tougher last-chance disclosure facility will be offered for undeclared funds between 2016 and mid-2017 with penalties of at least 30% on top of tax owed and interest and no immunity from criminal prosecutions in appropriate cases. The current LDF provides for penalties as low as 10%and a guarantee of no prosecution. The government’s message is clear; use the LDF before it is too late.
Overall, there was nothing too controversial from the coalition’s final Budget. However, the next finance bill is likely sooner rather than later, with an ‘emergency’ or summer Budget to be held on July 8.
