Rob Edwards of HedgeStart Partners LLP provides a snapshot of the key features in the UK Chancellor's Budget for 2005/06
Perhaps even more so than before, the level of tax changes promulgated by press releases after the Chancellor sat down, is far greater than his speech implied.
Some of these changes are the result of continuing consultation, such as the tax treatment of Authorised Investment Funds and Real Estate Investment Trusts, but the majority are because of disclosures made by "tax scheme" promoters and users following the introduction of the new disclosure rules last year, and other schemes the Revenue have themselves identified.
We had witnessed the reduction in the number of bonus schemes in the market because of previous law changes and the threat of retrospective legislation, and this Budget further reduces the opportunities available. It also restricts the ability of both UK domiciled and non-domiciled individuals to avoid CGT.
Yes, ISA's have been extended until April 2010, employees who have used computers (and bicycles) provided by their employer will no longer pay tax on anything other than the then market value if they acquire them, and yes, Shari'a compliant financial arrangements will be put on the same footing as interest financing, more intermediaries will be exempt from stamp duty and SDRT on stock lending, and the Section 48 relief on sub £15m British Films has been extended to March 2006, but the main focus is on closing loopholes. In particular:
* Companies' ability to avoid tax by exploiting differing taxation regimes relating to hybrid entities and hybrid instruments will be curtailed, and
* Tax shelter schemes on stripped corporate bonds, and manufactured gilt dividends are closed, or in the case of the latter, existing law clarified. Those who did a gilt scheme in the last few weeks beware!
* Use of certain arrangements to convert income into capital are blocked, as are a variety of corporate tax schemes used by groups of companies, involving double tax relief, financing arrangements, intangibles etc
* A non-UK domiciled individual will now find that certain securities and intangibles fall be regarded as UK situs assets (eg UK bearer shares) and hence subject to CGT, and
* Individuals will also no longer be able to become technically resident in eg Belgium, to take advantage of the CGT overide in the Tax Treaty. They must give up actual UK tax residence and ordinary residence, and a permanent departure or 5 year absence will be required
* Other schemes involving trusts and SDLT are stopped, and more meat is put behind the film partnership anti-avoidance rules announced on 2nd December 2004
* The introduction of International Accounting Standards has created friction with UK tax rules reliant on GAAP, and with it opportunities for exploitation. Further anti-avoidance rules are announced, but in addition the adverse impact on securitisations transactions have been removed. Indeed the Finance Bill will contain power to make regulations that provide a taxing code for securitisation SPV's.
The grandly named release on the "Reform of Taxation of Collective Investment Schemes" does not cover offshore funds, but will be of great interest to those involved with onshore, regulated collectives.
Greater flexibility in the tax treatment of distributions made by a fund such as a unit trust or OEIC is given, to allow advantage to be taken of the greater flexibility in the various interests that can be created in such a fund under the new FSA rulebook (COLL).
However there is always a sting in the tail, and the perception by the Revenue that significant investors in the new Qualifying Investor Scheme ("onshore hedge fund") entities could result in tax abuse, means that the Revenue are not backing down on what many believe is unworkable anti-avoidance rules to remove the tax benefits.
To be frank, until the Revenue change the way fund portfolio gains are taxed (ie as capital rather than income for such funds), no QIS will come into being. Such a change in tax law is still awaited.
A Discussion Paper on UK Real Estate Investment Trusts has been issued, and one outcome is to be the establishment of a small working group of tax specialists, which is to be welcomed. A report back will be made later in the year with a view to proposing legislation in the Finance Bill 2006.
This note inevitably is but a high level view. More detail will no doubt emerge over the next few days.
HedgeStart Partners LLP