The International Tax Round Autumn 2024

Editor’s message

Peeling our eyes off our screens seems to be a big challenge these days. It must then be testament to the natural beauty of Switzerland that my problem is the opposite. As my train rolls through charming Swiss towns, I can’t stop my eyes drifting to the window, gazing with gratitude at stunning blue waters and endless rolling hills. With summer well and truly drawing to a close, this trip offers some last rays of sunshine which I gladly accept.

My speedy trip from Zurich to Neuchatel to Geneva has felt like a whirlwind, punctuated with true Swiss hospitality and memorable amounts of chocolate and cheese. I can’t recall a meeting without sweet treats on offer, nor can I recall having to weigh up whether the best use of time was to talk or devour mounds of delightful Swiss chocolate. I fear the withdrawal symptoms already.

Aside from the unavoidable indulgence, I thoroughly enjoyed catching up with my Swiss contacts after what felt like a long pause. Before the pandemic had impacted travel, my Swiss trips had been annual, so it felt great to be back on the ground.  Our Autumn Budget, set to be delivered on 30 October, was the central topic of conversation on this trip and it seems the Swiss are poised to welcome people from the UK.

Many debated the recent ‘Inheritance Tax initiative’ which calls for an inheritance tax and gift tax of 50% on sums of CHF50 million and above. This initiative, intended to finance climate measures, has garnered little public support with stats showing 96% would reject the initiative, 78% would consider moving and most family businesses would not or only partially remain in family hands following succession, posing a real threat to Switzerland as a hub for international business.

One thing is clear – tax is high on the agenda for every country and we’ll continue to be kept on our toes as big changes surround us.

As the days get shorter and SAD (seasonal affective disorder) threatens to settle in, I think of my winter survival plans. Immediately my thoughts turn to an upcoming holiday to Piedmont where wine tasting and copious amounts of white truffle, bonet and Nocciola gelato are firmly etched into plans. Food and wine therapy, I think they call it?

Enjoy the read!

• Labour government releases policy paper on changes to Non-UK Domiciled individuals
• Inheritance Tax implication for non-doms with existing trusts
• UK tax advantages for Furnished Holiday Lets to be abolished
• International aircrew – where are they resident?
• Valuation of imported goods
• Changes to Canadian Capital Gains Inclusion Rate by Bateman MacKay

Labour government releases policy paper on changes to Non-UK Domiciled individuals

As we have written previously, the new government is doing away with the concept of domicile as it relates to Income Tax, Capital Gains Tax and Inheritance Tax. Whilst the full legislation is yet to be released, (at the Autumn Budget set on 30 October 2024) on 8 August 2024 the government released a policy paper further outlining the possible outstanding changes.

For reference, refer to our article here for what was previously announced. In terms of what is new:

• The 50% reduction on foreign income subject to tax in the first year under the new regime will not be introduced.
• The rate of tax and length of time for the Temporary Repatriation Facility (TRF), where previous unremitted income and gains can be remitted, looks likely to change and will be announced at the Autumn Budget.
• The government is looking to expand the TRF to overseas structures for stockpiled income and gains and will confirm this at the budget.
• The date for the one time re-basing opportunity allowing individuals to rebase their foreign assets is unknown.
• The government intends to change IHT from a domicile-based system to a new residence-based system from 6 April 2025. This affects the scope of property brought into UK IHT for individuals and trusts. The government envisages that the basic test for whether non-UK assets are in scope for IHT from 6 April 2025 will be whether a person has been resident in the UK for 10 years prior to the tax year in which the chargeable event (including death) arises, with provision to keep a person in scope for 10 years after leaving the UK.
• The government intends to end the use of Excluded Property Trusts that are used to keep assets of the IHT scope.

2024 has been a big shake up in residency and domicile legislation. We now await further clarity at the Autumn Budget.

Inheritance Tax implication for non-doms with existing trusts

One of the common aspects I have been dealing with is the taxation of offshore trusts. With major changes in legislation over the years and with more to come in light of the new government, the question of whether such trusts are beneficial from a tax perspective or not is a common topic of discussion. Many find themselves wanting to terminate their trusts which were set up years ago.

When dealing with offshore trusts, it is important to know exactly what should be done to avoid unnecessary liabilities arising here in the UK. In a lot of cases, many trusts contain excluded property that was settled by non-domiciled settlors, which would be outside of the scope of the UK IHT under the current regime. The new government has indicated that it plans to end the use of excluded property trust for IHT purposes and we await further details on this. An option appropriate for one client may not work for another. Non-residence may not always be an answer from an inheritance tax perspective and doing nothing may not also be wise!

In general terms, IHT would be payable every 10 years at 6% should these new rules come into effect and further ITH charge would arise on the settlor’s death under the reservation of benefit provisions at 40% with no credit for the 10 year charges and no possibilities of any other reliefs.

Going non-resident may not solve much as the reality is that one would need to wait 10 years before losing the inheritance ten-year tail under the expected new regime.

Could one consider to be irrevocably excluded from his/her trusts? This is likely to suit an elderly settlor at which the trust really becomes a long-term roll-up fund for the issue of the settlor.

There is much to consider and hopefully greater clarity on the scope of the new inheritance tax provision can be outlined soon.

UK tax advantages for Furnished Holiday Lets to be abolished

Back in the Spring budget, the previous government announced that the tax treatment known as ‘Furnished Holiday Lettings (FHL)’ with respect to property rental would be abolished. The new Labour government has confirmed that this will proceed and from April 2025 there will no longer be FHLs.

FHLs differed from regular property businesses (i.e. long-term rentals) in that there were several beneficial treatments that they were entitled to, such as:

• Full deduction of residential finance costs.
• Capital Allowances.
• Treated as business assets and therefore access to related reliefs.
• Inclusion as relevant earnings for pension calculations.

The FHL scheme has been in the UK legislative books since 1984, the same year that Band Aid recorded ‘Do They Know its Christmas’! This change simplifies property letting for tax purposes, with there only now being two types of property letting business: UK and Overseas. It is thought that this move was brought in to reduce the attractiveness of acquiring properties in remote areas which in turn priced out locals – whether this will have a real impact remains to be seen!

What’s also interesting is that income from holiday accommodation is also subject to VAT where a non-UK resident individual is concerned.

International aircrew – where are they resident?

When it comes to residency, it is normally quite easy to determine the number of days one spends in a country (provided you keep good records!). However, what about for those individuals who work cross-border? Pilots and sailors are such types of people whereby the usual definitions under the legislation do not apply due to the nature of their work and establishing their tax treatment can be complex.

The starting point for determining the tax treatment of an individual who is employed to work on board an aircraft, as with any other employee is to determine whether they are resident in the UK or not. The Statutory Residence Test (SRT) includes various tests but these tests are varied for international transport workers who have a relevant job on a vehicle, aircraft or ship. For example, the third automatic overseas and UK tests would not be applicable at all if more than six cross border trips are undertaken in the year in question. If the sufficient ties test must be used to determine residency (due to not meeting the criteria of the automatic tests) then the definition of the work tie also changes and is based on the location of departure.

It is important to know where one is resident, and with the intricate nature of tax residency for international transport workers it may be the case that you are tax resident in more than one jurisdiction – therefore making sure you are certain of your UK tax residence position is paramount which will establish your tax obligations.

Most double taxation agreements would also include special provisions for aircrew and it is important that these are considered in conjunction with the above.

Valuation of imported goods

When goods are imported into the UK, they need to be valued correctly for duty and VAT purposes.

Generally, valuation for VAT is not normally an issue because importers, whether they are UK or non-UK based, can register for VAT and apply for Postponed VAT Accounting (PVA). This is carried out as part of the importation procedure and means that VAT is not levied at import but is rather declared on the businesses VAT return. In almost all cases, VAT is recovered as input tax on the same VAT return meaning there are no cashflow issues or any need for bank guarantees.

However, where the goods attract duty valuation is important. Normally, goods from the EU do not attract duty (see our previous update ‘Rules of origin for goods moving to/from the UK’). Goods from outside of the EU could attract duty, and when that is the case, it will be charged on the valuation the importer (or their agent) applies to the goods. If HMRC consider this valuation to be incorrect (i.e. too low!) they can seize the goods and even destroy them.

In a recent case, the GE VAT/Indirect team advised a client whose goods were seized and threatened with destruction unless a different valuation was agreed. Even when the team pointed out that there was no duty on those goods, the officer refused to release them. Consequently, our VAT team took the unusual step of submitting a ‘notice of claim’. This effectively states that HMRC has illegally seized goods and would force HMRC to start court proceedings, known as ‘condemnation proceedings’. In short, the team argued that the goods could not be seized as the law regarding seizure only allows certain specified goods to be seized or goods attract duty. The client’s goods fell into neither category.

Within a week HMRC had restored the goods.

The lesson here is that while it is important to ensure that goods are valued properly, professional advice should be taken when HMRC look to be acting unreasonably.

Changes to Canadian Capital Gains Inclusion Rate by Bateman MacKay

On June 10th, 2024, the Canadian Federal government released draft legislation detailing changes to the capital gains inclusion rate, which took effect on June 25, 2024. This was the most significant tax change arising from the 2024 Federal Budget. All corporations and most trusts will therefore be subject to the 2/3 capital gains inclusion rate on all dispositions occurring on or after June 25, 2024. For individuals, the draft legislation confirms an annual $250,000 capital gains threshold. This threshold allows $250,000 of capital gains realized by individuals to be subject to the 1/2 inclusion rate under the previous rules. Except in certain cases, this $250,000 capital gains threshold applies only to individuals.

Increased Withholding Tax for Non-Residents Selling Canadian Real Estate

Under current rules, a withholding tax equal to 25% of the sale proceeds applies when a non-resident of Canada sells Canadian real estate. A non-resident can apply for a certificate of compliance to reduce this withholding tax to 25% of the capital gain instead. With the increase in the capital gains inclusion rate, the withholding tax percentage will increase from 25% to 35% for dispositions occurring on or after January 1, 2025.

For more information on these changes, read our full blog. For detailed insights into how these changes might impact your financial planning and tax strategies, please contact a Bateman MacKay advisor for personalized advice. Stay informed by subscribing to our blog and following us on LinkedIn for the latest updates and professional guidance on navigating these new tax regulations.