CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 Introduction Since 2011, The UK government has introduced tax changes to any properties not held in your personal name. As of April 2015 the Capital Gains value will be crystallised and the below table shows the various UK taxes that individuals owning UK property will be exposed to, depending on how the property is held. Where will you be? SDLT Residential Property Income Capital Tax Gains Tax IHT on Death ATED POAT Income Tax 10Yr Anniversary IHT Charge Held by: Personal Yes 20% 28% 40% No No No Nominee Yes 20% 28% 40% No No No Corporate Yes 20% 20% No Yes No No Trust Yes 20% 28% No No Maybe* 10% Pension Yes 20% No No No No No * Dependent upon use of trust property i.e. occupancy by trust settlor or family Almost all of the property ownership and wealth protection structures available will now be subject to some level of taxation on UK residential property holdings. Pensions are the only form of ownership that has not been affected by the latest changes. Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 The most notable taxes are: Capital Gains Tax (CGT) Capital Gains Tax is the levy the Government makes when you sell or dispose of certain assets on which you make a large profit. The probable two most common such assets are on the sale of shares, and properties which are not your main residence (perhaps a property you have been letting). The basic rule is to tax the difference between what you bought and sold for, taking into account any extra costs you incurred during your ownership. Example House in London Sold £5,000,000 Bought £2,000,000 Gain £3,000,000 Tax @ 28% £840,000 The new Charge on Non-residents from 5th April 2015 introduced this tax on residential properties in the UK. The main difference being that it is only gains from April 2015 that will be taxed. So Growth in value before that date will not be taxed. Inheritance Tax (IHT) Inheritance Tax is paid if a person dies and their estate (their property, money and possessions) is worth more than £325,000 when they die. This is called the ‘Inheritance Tax threshold’. The rate of Inheritance Tax is 40% on anything above the threshold. When someone living abroad dies it applies to all assets in the UK whether or not you live, or have lived, in the UK. Their family: has to pay Inheritance Tax on their assets in the UK. won’t have to pay UK Inheritance Tax on their assets outside the UK If the person has lived in the UK then the Tax will be due on all their worldwide assets. Example House in London Value at Death £5,000,000 Less Allowance £325,000 Taxable Amount £4,675,000 Tax @ 40% £1,870,000 Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 Example 1 - Changing the Ownership of UK residential property. Situation Client holds property in personal trust or corporate ownership Action Taken The client established a Qualifying Non-UK Pension Scheme (QNUPS) The client sold the property to the QNUPS in exchange for an annuity (not a pension or life annuity) issued by the QNUPS in full satisfaction of the price. The client pays sufficient contributions to the Client is not UK Domiciled Or Resident QNUPS to pay the annuity instalments. Asset is not a let property Resulting Benefit: Property is worth £5m, grows at 12.5% annually and is held for 5 more years before either event occurs Tax Cost by ownership type Scenario 1 - Sale ATED Personal Nil Nominee Nil Corporate Trust Nil QNUPS Nil £1,067,278 £1,067,278 £1,067,278 £1,067,278 £762,342 £941,842 £1,067,278 £1,067,278 Nil Nil Professional Costs to Move to QNUPS £ 175,000 Net Saving on Case If Corporate £ £ 892,278 766,842 178,456 £ 117,468 £ 178,456 153,368 Per Anum Saving If Corporate £ £ £ 35,900 £ Scenario 2 - Death ATED IHT on death Total Personal Nil £3,524,683 £3,524,683 Nominee Nil £3,524,683 £3,524,683 Corporate There is no Inheritance Tax on the value held in the pension. Capital Gains Total £179,500 The individual's wealth is protected in an offshore pension structure. £179,500 Nil £179,500 Trust Nil Nil Nil QNUPS Nil Nil Nil Professional Costs to Move to QNUPS £ Net Saving on Case £ 3,349,683 175,000 Free of any 55% Benefit tax charge Lump Sum Death There is no Capital Gains Tax levied on offshore pensions from April 2015. Stamp Duty Land Tax (SDLT) is minimised on the acquisition. No Annual Tax on Enveloped Dwellings (ATED) No 10 Year Anniversary Charge No Pre-Owned Asset Tax (POAT) Income Tax Charge The asset will be uplifted to current market value in the hands of the QNUPS; Provided action is taken before April 2015, there will be no CGT to pay. The client can access up to 100% of the capital in the fund at any time. Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 What is a QNUPS? A Qualifying Non-United Kingdom Pension Scheme (QNUPS) is a trust defined as a Pension with special tax exemptions and protected by international treaties. Unlimited contributions reporting status and A QNUPS has the advantage that as it does not hold UK tax relieved funds, there are no limits on the fund size. As monies It is a “member” directed or selfmanaged pension, governed by a trust deed. Assets in the Fund are held for the benefit of the designated member. Since a QNUPS is a Trust Structure the legal owners of the assets are the trustees who hold them for the members benefit. Upon the members death the trustees retain the assets and thus they will fall outside of the members estate. Suitability A QNUPS can be utilised for bespoke planning. Since there is no limit on contribution size a QNUPS can be utilised as a main or a supplementary pension. A QNUPS may also have appeal to clients looking to shelter assets and also older clients for estate planning purposes. Investment A QNUPS offers greater discretion over investment choice compared to that of most UK based pension schemes. Investment options are wide-ranging and include the ability to invest in both standard asset classes such as cash, stocks, bonds and life policies and also non-standard asset classes such as residential and commercial property, land, private equity and secured loans. It is also possible for an investment advisor of the client’s choice to be appointed. settled into the plan are non-tax relieved assets, there is no requirement for the trustee to report to HMRC. Benefits QNUPS are fully available to UK resident and non-resident members. There are no age restrictions for contributions made or benefits taken and QNUPS can facilitate efficient succession planning for members. Loans of up to 30% of a fund are available to members and assets in the plan grow free of taxation subject to any withholding taxes. QNUPS provide flexibility on drawing benefits as the plan proceeds are paid out gross and there is discretion over distribution of the fund upon death of the member. Exit There are no penalties or hidden exit charges upon closure or transfer of the scheme. The pension benefits of the member under the scheme are payable no earlier than at the age of 55. On reaching this age, it is possible to take a lump sum of 25% of the fund. Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 Acquiring New UK Property Considerable care will need to be taken to ensure that new acquisitions are to unnecessarily exposed to the UKs property tax regime. Old structures are now more taxed than ever before and prospective owners of UK residential property need to utilise the most tax efficient structures when making the purchase. The right structure, combined with the right advice will provide wealth preservation, anonymity flexibility and tax efficiency for generations to come. Consider the example below of a £2m house purchased in April 2015 The House grows at 5% yearly and is held for 10 years Tax Cost by ownership type The Death of the owner after 10 years would attract tax of: Scenario 2 - Death ATED Personal Nil Nominee Nil Corporate IHT on death Total £1,303,116 £1,303,116 £1,303,116 £1,303,116 £154,000 Nil £154,000 Trust Nil Nil Nil QNUPS Nil Nil Nil Professional Costs to Acquire by QNUPS £ Net Saving on Case £ 1,233,116 70,000 The Purchase of the new property via a QNUPS is less than the 10 year costs of E placing it in a company. The Stamp Duty payable on the acquisition is also vastly reduced by the use of this vehicle. Typically a 100% saving. Scenario 1 - Sale ATED Capital Gains Total Personal Nil £352,181 £352,181 Nominee Nil £352,181 £352,181 £251,558 £405,558 £352,181 £352,181 Corporate £154,000 Trust Nil QNUPS Nil Nil £ 70,000 Net Saving on Case £ £ 282,181 335,558 28,218 £ 18,156 £ 28,218 33,556 Per Anum Saving £ If Corporate £ £ 15,400 £ £153,750 for an Individual, Trust or Nominee £300,000 for a Company Nil Professional Costs to Acquire by QNUPS If Corporate Stamp Duty on the initial purchase would have been: But is reduced to Nil by the use of a QNUPS. Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 Meet the Team Cornerstone Tax Advisors is a niche firm of tax consultants specialising in advice on Stamp Duty Land Tax (SDLT). They are experts when it comes to property matters, advising you or your clients on how to arrange property transactions in the most tax efficient manner. Established by David Hannah ACA CTA as a property tax practice, David is an experienced Chartered Accountant (1984), Chartered Tax Advisor (1987), and a member of the Chartered Institute of Taxation (CIOT). In 2006, David set up his own firm, Cornerstone Tax Advisors, which now works with nearly 200 lawyers, accountants, wealth managers, and financial advisors. David also has expertise in Inheritance Tax. Capital Gains Tax, Annual Tax on Enveloped Dwellings, Value Added Tax, Capital Allowances. Over the last 10 years, David has been consulted on over 4000 property transactions. Bespoke Pension Management/ LLP Services is a privately owned and managed financial services specialist which was founded by the current Directors in 2004. The company is focused on the provision of unique product solutions, specialist tax planning and pension administration for high net worth individuals. Since 2004, LLP Services Limited has raised in excess of £400 million for funds covering areas as diverse as:· Central London Triple ‘A’ rated Institutional Property · Distressed UK Commercial Property · The renovation and letting of Central London Residential Property David features regularly in publications such as London Property Magazine for which he writes a monthly column, Prime Resi Magazine, Finance Monthly, The Telegraph, The Resident Magazine and The Financial Times. For further information, please contact DAVID HANNAH ACA CTA Cornerstone Tax +44 1858 439 033 [email protected] www.ctatax.uk.com JOHN RAWICZ-SZCERZBO LLP Services +44 7860 414 801 [email protected] www.llpservices.com Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 Legal Advice Obtained - Extract from Barristers Opinion IN THE MATTER OF CORNERSTONE INTELLECTUAL DEVELOPMENTS LIMITED and QUALIFYING NON-UK PENSION SCHEMES _________________________________ OPINION __________________________________ 1. I have been instructed by Cornerstone Intellectual Developments Limited (“Cornerstone”) to consider the UK tax position of Qualifying Non-UK Pension Schemes (“QNUPS”). 2. In particular, I am asked to answer the following questions: (1) What is the inheritance tax position of a QNUPS? (2) How are contributions to a QNUPS treated? (3) How are the trustees taxed in respect of capital gains realised by the QNUPS? (4) What is the taxation position of QNUPS beneficiaries? SUMMARY OF CONCLUSIONS 3. For the reasons set out in detail below, my conclusions in brief are as follows: a) b) Inheritance tax and QNUPS: Assets are outside the deceased estate on death; Not relevant property i.e. periodic or exit charges; Contributions to QNUPS: No income tax deduction; No tax charges on cash contributions; Potential capital gains tax charges on contributions of chargeable assets depending contributor’s tax residence; Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS CHANGES IN UK TAXATION OF PROPERTY APRIL 2015 c) d) Taxation of QNUPS trustees: Exempt from capital gains tax on disposal of UK assets; Not affected by the changes in the Finance Bill 2015; Taxation of QNUPS beneficiaries: 90% of the pension income paid is taxable; Capital sums paid are not treated as income. Please note that this information does not constitute advice of any kind and tax advice should be taken by a client prior to entering into a QNUPS
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