The essential new year’s tax checklist

As significant changes take effect with pensions, offshore tax evasion and property, 2015 looks like it will be an interesting year. However, there are still opportunities to be found despite the ongoing upheaval.

As we all start a fresh new year, many advisers will be starting to think about the pending changes and how these can be turned into advice opportunities.

One thing is clear, the wholesale pension reforms happening in the UK this year are likely to dominate most client conversations where they hold UK pension savings, especially if they are approaching retirement.

 Another key theme in the international marketplace will continue to be the focus on offshore tax evasion. This issue is global, with most jurisdictions helping to clamp down on those evading tax.

Here is a checklist of opportunities to help your clients navigate the forthcoming changes:

Greater need for pension advice at retirement – In 2015 we will see the biggest change to UK pensions in 100 years. From April 2015 individuals will have the freedom to decide exactly how they wish take money from their defined contribution pension.

How the rules work for a defined contribution pension now and how they will work from April 2015 are shown in the three charts.

Still consider QROPS for those emigrating from the UK – The Government confirmed it would ensure the rules relating to QROPS will be changed in line with the changes to Registered Pension Schemes. It is likely that subsequent amendments will be issued in the coming months to ensure QROPS offer their members the same flexibilities that will apply to Registered Pension Schemes from April 2015.

With this in mind, QROPS should continue to be attractive for people who are emigrating from the UK and wish to take their pension savings with them. There are clear advantages where individuals would be at risk of reaching the £1.25m Lifetime Allowance (LTA) if their benefits remained in a registered pension scheme.

Once funds are held in a QROPS, they can grow above the LTA limit in the future, without this growth being subject to the 55% LTA excess tax rate.

Ensure all clients have disclosed their overseas assets to the relevant authorities – We are seeing a global shift towards disclosing overseas assets to local tax authorities with the introduction of FACTA and numerous disclosure agreements between jurisdictions.

This is only going to increase as time moves on, and there really will be nowhere left for investors to hide. HMRC have outlined proposals which will make it a criminal offence to evade offshore tax.

HMRC also plans to impose tougher penalties for those evading UK tax jurisdiction’.

Legitimising overseas assets by disclosing them doesn’t have to be painful. With advice from a professional, the assets can be restructured to make them efficient from a tax and reporting perspective.

For example, placing the investment into an offshore bond means the investment can grow free from tax (other than withholding taxes on the underlying funds) making it a more efficient investment going forward.

Help clients with multiple trusts preserve the tax benefits – The practice of setting up multiple trusts on different days to benefit from multiple inheritance tax nil rate bands is known as the Rysaffe principle.

The UK Government was planning a single nil-rate settlement band as a way of preventing this practice, however, it u-turned on this decision in the Autumn Statement. All trusts set up prior to 6 June 2014 were previously ring-fenced and could continue to benefit from using multiple nil-rate bands (provided they don’t add new property to the trust).

It would be prudent for advisers to assume this situation will continue, and should help their clients preserve the benefits of their existing trusts, e.g. if a client has more assets to add to their trust, the creation of a new trust may be more beneficial than adding it to an existing one.

Further draft legislation has been issued but it is still up for debate as to what the final position will be. The new proposals are drafted so that where additional property is added to multiple settlements on the same day, the value of all the settlements will be taken into account for both periodic and exit charge calculations.

This appears to provide opportunities for multiple settlements where property is added on different days. Therefore it is likely that the legislation will be redrafted following industry feedback, leaving a longer period of uncertainty for advisers and clients.

Consider impact of the higher remittance charge basis on non-domiciles resident in the UK – Non-domiciles resident in the UK have two options when it comes to paying tax on overseas income and gains.

They can pay UK tax as and when the liability arises (the arising basis), or they can pay a charge and defer the tax until such time as they bring the income or gain into the UK, known as a ‘remittance basis’.

Some clients choosing the remittance basis will see their annual ‘remittance basis charge’ increase significantly so advisers need to carefully consider the options available to their clients. The changes are as follows:

• resident for seven out of nine years, charge remains £30,000

• resident for 12 out of 14 years, charge increases from £50,000 to £60,000

• a new charge of £90,000 introduced for people resident for 17 out of 20 years

If a client chooses the remittance basis, they will also lose their personal allowance and capital gains allowance. Rather than paying the annual remittance basis charge, if the non-domiciled individual only holds investments, an alternative solution could be to wrap the investments inside an offshore bond.

The offshore bond essentially defers any income tax and capital gains tax liability until the bond is encashed, which is why there is no tax to declare on an annual basis.

CGT for non-residents on disposal of residential property situated in the UK – Key changes are proposed from 6 April 2015 impacting non-UK residents who own a property in the UK.

Firstly, all gains from property will become subject to capital gains tax at 18% / 28% subject to the annual exemption. This will only apply to gains from 6 April 2015, so is a pragmatic and fair approach. The Government will either allow rebasing to 5 April 2015 or time apportionment on the whole gain.

Secondly, Private Residence Relief (PRR) will be restricted to properties located in a jurisdiction where the individual is not tax resident. This rule could apply in cases where a non-UK resident disposes of a UK residential property or a UK resident disposes of a residential property located outside the UK.

The rule will require that in either of these circumstances, a property owned by a person will not be capable of being treated as their only or main residence for a tax year unless they satisfy the 90 day rule (i.e. they have resided in the property for at least 90 midnights in that tax year). Consequentially access to PRR relief will then follow normal rules.

Following these changes, advisers can help non-residents plan and make best use of any PRR relief. For British expats, these changes significantly impact the tax efficiency of investing in UK property, however, it does bring the rules in line with many other jurisdictions.

Conclusion

There are some fundamental changes happening this year. Ensuring overseas assets are legitimised and fully disclosed and then restructured to be as efficient as possible is a basic priority, but there will be many clients who have more complex financial needs as a result of these regulatory changes.

Change brings opportunity, and advisers have the chance to demonstrate their knowledge and the value of their advice to their clients.