International law firm Withers hopes to see signs of stability in George Osborne's first solo Budget
> Pension tax relief – The problem with committing to a lock on the headline rates of tax in an era of continuing austerity is that it leaves the Government with the question of how to increase tax revenues. The answer is likely to be the continued restrictions on tax relief for contributions for higher rate taxpayers, with those earning more than ’150,000 being progressively restricted to an annual allowance of ’10,000. Top rate taxpayers would be well advised to consider whether they should either top-up their pensions or bring forward regular contributions before the Emergency Budget.
> Income tax – Income tax (along with National Insurance and VAT) will be the beneficiary of the tax lock. The most notable point of this is what it leaves out, so there is no commitment to maintaining or raising the income tax thresholds and taxpayers in the higher bands should not be expecting any positive moves in that regard soon.
> Capital gains tax – Capital gains tax has notably not been included in the triple lock guarantee. Rates presently stand at 28% for higher rate taxpayers, and indeed were set at that rate in the then government's Emergency Budget held in June 2010 – increasing the rate from the previous 18%. So one might be inclined to think that there should be little temptation to play with the rate further, yet when the Chancellor's hands are tied on the other direct taxes as a result of the triple lock, this might suddenly look rather more tempting.
> Entrepreneur's relief – Even if the headline rate of CGT doesn't change, there can be said to be risk exposure around Entrepreneur's Relief. This is currently a popular and successful relief which effectively gives a ’10m lifetime allowance for gains on certain types of active business investments to be taxed at the 10% rate – so sort of, but not really, like Business Asset Taper Relief. An easy way of saving the Treasury money would be to reduce or restrict this – whether by reducing the lifetime allowance, increasing the rate at which it applies or significantly reducing the extent of the relief. It is understood that it was estimated to cost ’2.9bn in 2013-14. So a ’2bn additional cost (even if it is largely down to an increase in the headline capital gains tax rate) is likely to look rather obvious and pose a risk to Entrepreneur's Relief. It is however to be hoped that sense will prevail and that the importance of a tax relief that encourages investments in active UK trading entities survives. On that note it would also be desirable to see the scope of business investment relief, which permits non-doms to invest in some onshore businesses tax efficiently, expanded, for the same reasons.
> Non-domiciliaries – George Osborne has been robust in his defence of the remittance basis regime, claiming in the General Election campaign that abolishing 'non-dom status altogether … would cost our country hundreds of millions of pounds in lost tax revenues and lost investment'. However, leaving the regime in its current form does not seem to be in the Conservatives' plans either. So the remittance basis charge which was increased to a maximum of ’90,000 in the April Budget looks likely to increase further. The proposal to allow non-doms to elect for the remittance basis only on a triannual basis also looks likely to proceed. Will there though be a more far reaching reform of the non-domicile regime?:
So how might domicile be changed? Perhaps the first point to make is that it seems unlikely that the concept of domicile, which has implications far wider than simply an individual's tax profile, will itself be amended. Instead it is likely that only the basis for qualification for the remittance basis would be changed. Politically the greatest pressure for reform seems to fall on three categories of non-dom:
1. The inherited non-doms – there are an increasingly large category of '2nd generation' non-doms being born and brought up in the UK, but who retain a domicile outside the UK
2. The long-term resident non-doms – perhaps more colloquially described as 'the ones who are never going to leave are they…'
3. Returning non-doms – UK doms who have left the UK and acquired a domicile elsewhere only to return to the UK as non-doms
A new test for qualification for the remittance basis – In 1985, the Law Commission considered replacing domicile with the concepts of 'habitual residence' or simply nationality, although neither found favour with the Commission. For current tastes, habitual residence, which is used already in determining the jurisdiction of the English divorce courts, is likely to be too vague a concept and therefore prone to abuse. Nationality, by contrast, has the benefit of being certain, but would have the effect of bringing into the scope of UK tax a large number of ex-pats who, for all other purposes, had severed their ties with the UK. The position of dual nationals would be difficult to deal with.
For inheritance tax, there is a concept of 'deemed domicile' which provides that non-doms who have been resident in the UK in 17 of the previous 20 tax years will be treated as domiciled in the UK for inheritance tax purposes. This concept could be extended to income and gains tax and would ensure that long-term residents of the UK would not be able to claim the remittance basis. Such an amendment would have the benefit of simplicity and clarity and would address the perceived injustice of the inherited and long-term non-doms, but depending on where the line is drawn George Osborne may consider that he is in danger of killing the golden goose.
If one of the issues with the current state of the domicile regime is that it is too easy for non-doms to resist the acquisition of a domicile in the UK, a rebuttable presumption could be introduced so that after a certain number of years of residence a rebuttable presumption would arise. The effect of this would be that while long-term non-doms would be able to continue to benefit from the remittance basis, rather than for HMRC to have to show that they had acquired a domicile in the UK, the taxpayer would have to demonstrate that they had not done so. Such a presumption could also be combined with a deemed domicile threshold so that after say 12 years of residence, taxpayers would be presumed to be domiciled in the UK and after say 17, deemed conclusively to be so. In recent years, the watchwords for new tax legislation have been simplicity and fairness. Of the proposals set out above, the extension of the deemed domicile rules is the most simplistic, but such simple rules can often lead to unfairness in individual situations and a more nuanced rebuttable presumption may be preferred.
> Tax avoidance – Will we see further measures in the same tone as accelerated payment notices and an increase in tax controversy? Given the advent of the common reporting standard, HMRC is going to be getting reams of information rather soon, which will mean greater use of investigations and therefore potentially the introduction of further measures which will enable the Treasury to monetise that information without having to wait for an investigation to be concluded in the taxpayer's favour.
> Inheritance tax – The Conservatives fought the election on the basis of adding a further ’175,000 'transferrable main residence allowance' to the nil rate band. This proposal largely seems designed to allow the Conservatives to fulfil their long stated desire to increase the (effective) IHT threshold for married couples to ’1 million without actually increasing the nil rate band.
> Deeds of variation – It was announced in the April Budget that there would be a review of Deeds of Variation. Whether this was a genuine desire to review the law, or a political stunt is unclear. In 1989 Chancellor Norman Lamont proposed the abolition of Deeds of Variation for inheritance tax purposes because of a fear of avoidance. However in the event, the proposal was dropped before it became law and it is to be expected that the wiser counsel that prevail on that occasion will do so again.
> Tax policy – Finally, one of the first acts of the last government was to publish a policy paper entitled 'Tax Policy Making: a new approach'. This committed the government to greater stability and predictability in the tax policy making and was manifested in increased consultation with many (but certainly not all) measures introduced in the last Parliament. It is to be hoped that this approach will continue under the new Government.