How 2011 Budget will affect HNWIs – our predictions

Tuesday, March 15, 2011 | Posted by: Francesca Lagerberg
Categories: Business, Personal, Protecting your wealth | Tags: tax, property, pensions, tax avoidance, budget, relief, planning, stamp duty, deficit, Office for Tax Simplification, residence, non-dom, PPR, private residence relief, GAAR, predictions, personal allowance, non-domicile, stamp duty land tax

What lies in store for high net worth individuals (HNWIs) and high earners in the UK in next week’s Budget? Francesca Lagerberg, Grant Thornton’s Head of Tax, makes some predictions…

1. Non-domiciled (‘non-dom’) individuals
The Coalition Government stated last June that it would review the taxation of non-doms. There are also issues around showing who is and who is not resident in the UK, which has significant impact on their UK tax liabilities. On the issue of domicile, there has been much media coverage of those who appear to get a better deal on their UK tax position than UK-domiciled taxpayers, particularly in relation to those who have been present in the UK for many years.

The key here is to avoid the law of unintended consequences. There will be a fine line between putting off the wealthy from settling in the UK – especially those who will set up businesses here – and sending out mixed messages on the means high net worth individuals use to mitigate their tax bill.

While major changes were made around the taxation of non-doms and residency in the Finance Act 2008, the UK still lacks a robust statutory residence test to provide certainty on an individual’s residence status. Again the Government has a chance to commit to finding a simpler system that is both fair and competitive with our neighbours.

2. General Anti-Avoidance Rule (GAAR) and other anti-avoidance measures
The Government is already committed to consulting on a GAAR and the resulting report will be published this autumn. Meanwhile, cracking down on known avoidance ideas will continue apace. The already announced attack on ‘disguised remuneration’ shows how seriously the Coalition is taking this issue and we will expect to see other targeted measures.

With the Coalition Government committed to increasing revenue by prosecuting tax evaders we may see a commitment to five times more tax prosecutions from government. And after years of overhauling HMRC’s powers, we will definitely see a more concentrated effort to crack down on those who do not make reasonable efforts to get their tax affairs right.

Chancellor George Osborne may also announce a ‘special arrangement’ with another offshore jurisdiction, such as occurred with Liechtenstein. 

3. Personal allowances for pensioners
While changes to personal allowances have already been set in last year’s Coalition agreement, the Chancellor may make some concessions towards pensioners. The personal allowance for over 65s currently stands at £9,940 for 2011/12. While it is unlikely that there will changes for the tax year 2011/12 he may make some concessions for the following year.

4. Pension tax relief and other announcements
These will include detailed rules to be introduced on changes to pension tax relief and child benefit. Detailed consultations have been conducted over the last few months and we will expect the Chancellor to spell out his intention in these areas. However there is likely to be little surprise in these measures but hopefully more detail.

5. Property tax
There are likely to be further anti avoidance measures announced around Stamp Duty Land Tax (SDLT) particularly in light of the new 5% rate for residential properties in excess of £1 million from 6 April 2011. There is an expected clampdown on high net worth individuals avoiding paying SDLT through purchasing property via corporate vehicles.

6. Principal private residence (PPR)
Further parameters around PRR relief are likely to be announced in this Budget. The Chancellor may choose to review the current rule, which gives individuals the final three years exemption from Capital Gains Tax. This may now be reduced to two years to curb ‘PPR flipping’, which rose to prominence during the MP expenses scandal.

7. Office for Tax Simplification (OTS)
With the recent publication of the final reliefs and exemptions report from the OTS, this will be an opportunity for the Chancellor to show how the Government is committed to making tax policy simpler and better for individuals and businesses. We would expect to see the report welcomed and although it may be too soon for him to make announcements on certain reliefs there could be a clear indication that the more bizarre or unused ones have run their course.

For questions on any of these areas, contact your local Grant Thornton adviser – or read on for further information on relevant services.

You might also find these posts useful:

* Private residence relief – not just for MPs
* Retiring abroad could be more taxing than you think
* IHT: How does your estate currently balance in relation to the Balfour case?