By: JOHN WETWOOD
Alistair Darling’s first Pre-Budget Report contained several major surprises and, as ever, it was the supporting material issued by the Treasury and HM Revenue & Customs (HMRC) that revealed the full extent of the tax changes planned.
In an overt snatch of Tory policies, the Chancellor announced a number of tax measures.
Before you say “Oh, inheritance tax doesn’t affect me here in Portugal”, take note. Most expatriates living in Portugal are still (despite their disbelief) UK domiciles. This means, apart from other things, that they are liable to UK inheritance tax on their worldwide assets.
Inheritance tax (IHT)
The inheritance tax threshold for married couples is to double from 300,000 pounds sterling to 600,000 pounds sterling. Many reports fail to mention that the individual limits are already at 300,000 pounds sterling, so for those couples with a simple nil-rate band discretionary trust, which is almost certain to be in place for any couple with a will drafted by a competent solicitor, there is absolutely no new benefit at all.
This is because the “will trust” very neatly makes use of both nil-rate bands. The new rule does, however, help those couples without a will trust in place.
This new basis will apply on the death of a surviving spouse or partner after October 8, 2007, regardless of when the first death occurred.
The amount of the nil-rate band available for transfer will be based on the proportion of the nil- rate band that was unused when the first spouse or partner died. The unused proportion will be applied to the amount of the nil rate band in force at the date of the surviving spouse or partner’s death.
For example, Mr A dies today, leaving his children 200,000 pounds sterling (i.e. two-thirds of the current nil-rate band) with the rest of his estate passing to his wife. On Mrs A’s subsequent death, her nil-rate band will then be increased by one-third. So, if the nil-rate band at the time of Mrs A’s death is 360,000 pounds sterling, she will be able to leave 480,000 pounds sterling free of inheritance tax, i.e. 360,000 pounds sterling plus 120,000 pounds sterling (one-third of 360,000 pounds sterling).
Despite this somewhat flimsy improvement to IHT rules, many will remain liable to IHT. Fortunately, there is still plenty of scope for sensible planning of family affairs. Loan-Trust and Discounted-Gift schemes offer the ability to shelter both capital and growth from the Chancellor’s clutches.
Capital Gains Tax (CGT)
I can now hear you all saying that UK CGT doesn’t affect you either. However, there are many who, despite living in Portugal, may still be liable to UK CGT especially if they dispose of UK assets, during the tax year that they move permanently to Portugal or return to the UK within five years.
There will be a single 18 per cent rate of capital gains tax from April 6, 2008, for individuals, trustees and personal representatives. Taper relief and indexation relief (except for companies) will be withdrawn from the same date.
These changes will result in a simplification of the identification rules for matching disposals of part of a holding of shares acquired on more than one date. The annual exemption (currently 9,200 pounds sterling) will remain and other capital gains tax reliefs (e.g. for a main residence) will continue.
Under these new rules there will be winners and losers. The amount of CGT currently payable depends upon an individual’s total taxable income, as any capital gain (allowing for indexation), is added to total income for the year. Therefore, CGT can be payable at rates between 10 per cent and 40 per cent.
Residence and Domicile
Several important changes will take effect from April 6, 2008, and those who have homes in the UK or spend significant amount of time there may be affected.
• An individual’s days of departure and arrival will be counted as days of residence in the UK for tax purposes. At present they are normally excluded.
• A non-UK domiciled individual who has been UK tax resident for seven or more years will only be able to use the remittance basis for taxation of their overseas income if they pay an additional tax charge of 30,000 pounds sterling a year.
• There will also be a number of technical changes to the remittance basis of taxation. The definition of remittance will be extended. The ‘ceased source’ rule will be removed, so that it will no longer be possible to close down a bank account or other income source in one tax year and remit the funds to the UK in the next year with no tax liability.
Offshore Funds
The government issued a discussion paper about the tax treatment of offshore funds, proposing the revision of the categories of distributor and non-distributor funds, as well as a number of other changes.
One should also note that the Inland Revenue has recently extended its “trawl” of off-shore accounts by requesting information on account holders from a further tranche of off-shore institutions. Remember that off-shore bonds also known as “wrappers” do not currently fall within the scope of these investigations or the European Savings Tax directive.
As always, please consult a qualified independent adviser concerning any financial matter.
Please contact Steve Rodgers of Blacktower Group for further information. Call 289 355 685 or email [email protected]
Do you have a view on this story? Email: [email protected]
