Election 2015: a private client lawyer’s take

The taxation of individuals is often one of the central issues to any election campaign.

Election 2015 vote

Following Labour’s announcement on 8 April that they will seek to abolish the resident non-domiciled tax regime, the taxation of individuals has been catapulted to the forefront of the general election campaign and is set to be one of the central issues discussed over the coming few weeks by both politicians and the media.

This follows on the back of increased media scrutiny of “tax avoidance” arrangements involving celebrities or the holding of undeclared offshore bank accounts.

It is fair to say that personal wealth planning has become a politically charged issue. Away from the headlines, however, there is a clear trend towards greater tax transparency and a requirement for people to abide by the rules.

This is a good thing. Both the main political parties who are likely to form the next government are agreed on that. Despite the rhetoric, both are clear taxpayers should pay the tax that is due. Where differences become wider is who pays and how much?

In an announcement made on 8 April, Labour leader Ed Miliband stated that if elected Labour would abolish the res non-dom status from April 2016 and replace it with a general presumption that anyone permanently resident in the UK will be liable to pay UK tax on their worldwide income and gains, although this is still to be clarified.

Under the current system, those that are resident (i.e. living) in the UK, but not UK domiciled can elect to be taxed in the UK under the remittance basis of taxation. This enables such individuals to pay UK tax on their UK source income and gains and only on their foreign source income and gains that are ‘remitted’ into the UK, but unlike those resident and domiciled in the UK, they can legitimately avoid paying UK tax on their foreign income and gains kept offshore.

This is the Labour Party’s most radical announcement yet and if brought in would significantly alter the way private client lawyers advise wealthy individuals, as the res non-dom regime is often central to much of the wealth planning done for wealthy international private clients.

The Conservatives have expressed their criticism of the plans and note that the exact scope of Labour’s proposal is still not clear. George Osborne has referred to Labour’s plans as an “example of the economic confusion” which would result from a Labour Government and the Conservatives have been quick to point out that they have already tightened the res non-dom rules in 2014, by introducing an additional charge of £90,000 for those claiming res non-dom status for 17 out the previous 20 tax years.

Throughout the course of the last Parliament, political parties on all sides have sought to raise additional tax revenue from the taxation of real estate. One of the key measures brought in by the Coalition was the “Annual Tax on Enveloped Dwellings” (“ATED”), which puts an annual fixed charge on properties held through corporate vehicles and valued at over £1m.

This, in addition to the increase of Stamp Duty Land Tax to 12 per cent (and 15 per cent when real estate is purchased through a company), has set the scene for further tax raids on real estate. Labour have announced their plan for a “Mansion Tax” which will apply to all UK homes valued at more than £2m and, according to Labour, is expected to raise £1.2bn.

The tax is expected to operate quite similarly to ATED with bandings (save that the rate of tax for properties falling between £2m to £3m is likely to be lower), be self assessed and persons affected needing to undertake a valuation of their property. The Liberal Democrats are also making announcements to increase additional council tax bands for high value properties. The Conservatives by contrast have ruled out a Mansion Tax, though they have already announced a further reduction in the ATED threshold to £500,000.

In addition to any changes to the res non-dom rules, the taxation of individuals generally has also become a political football. Of key interest to any lawyer advising private clients is whether the result of the election will alter the rates of the three major personal taxes (income tax, capital gains tax and inheritance tax).

Going into the Election, the Conservatives have said that they do not intend to increase the burden of tax paid by individuals, so whilst a Conservative government may ‘tinker’ with particular rates and bandings, it is not expected the overall amount of tax an individual pays will change significantly in a Conservative-led government.

In their manifesto launched on April 13, Labour are also pledging no raises in the rates of basic or higher rates of income tax, but have announced they will raise the top rate of income tax back to 50 per cent. Should this increase in income tax occur, yet the rate of capital gains tax stay the same, this will further increase the differential between capital gains tax and income tax.

From a tax planning perspective this may lead to wealthy private clients further looking to structure investments to pay capital gains tax at 28 per cent, as an alternative to drawing income from the same investment (and pay income tax at 50 per cent). Some may even say 50 per cent and the added National Insurance isn’t “a fair share of tax” and leave the UK.

Labour have also confirmed that they would seek to reverse the Coalition’s reduction in corporation tax and this may have an effect for leading business operating out of the UK. In relation to inheritance tax, the Conservatives have always expressed a desire to increase the present nil rate band (currently £325,000) and in an announcement on 12 April released details of their plans in which parents would each be offered a further £175,000 “family home allowance” to enable them to pass property on to children tax-free after their death.

This could be added to the existing nil rate band, bringing the total transferable tax-free allowance from both parents in a married couple or civil partnership to £1m. It should be noted, however, that for properties worth more than £2m, the new allowance would be gradually reduced so that those with homes worth more than £2.35m would not benefit at all.

The Election is all to play for and never in recent times will the result have such a significant impact on both the wealthy and those that advise them.

Christopher Cook is an associate at Baker & McKenzie