Rachel Reeves, the first ever female Chancellor of the Exchequer delivers a UK Autumn Budget with potentially significant implications for many Kiwis and Britons who have migrated to New Zealand.
Meanwhile Inland Revenue’s crackdown on tax evasion continues.
The UK finance minister is officially called the Chancellor of the Exchequer, a post which is more than 800 years old, and until this year it had never been held by a woman. So, when Rachel Reeves, the Labour Chancellor of the Exchequer delivered her maiden budget speech last Wednesday night, she made history as the first woman Chancellor in British history.
There was quite a lot to consider in this UK Budget, as people were watching to see how the new government would respond to the challenges it inherited. British budgets, unlike ours, coincide with the release of a Finance Bill and tax measures there’s always a lot of tax matters to consider beyond the headline measures.
The headline measures
Most notably, there was an increase in Employer National Insurance Contributions (a Social Security tax) by 1.2 percentage points to 15% with immediate effect. There are also immediate tax rises for capital gains tax, but the top rate for capital gains tax still was capped at 24% for both property and non-property assets. Which as some commentators said is still lower than countries with which the UK compares itself. It’s quite interesting to see that comment about 24%, because one of the key points of our discussion around capital gains taxes here is what rate would apply? It’s therefore interesting to have an international comparison.
Beyond the headlines
It’s always interesting to dig around in other countries’ budgets and see what they do in certain areas. For example, the UK doesn’t have an imputation credit system, but there are lower rates of tax applied to dividends, even for those on the highest income. There’s also a savings allowance, which exempts certain amounts of investment income. It’s currently £1,000 for basic rate taxpayers (taxable income up to £37,700) and £500 for the higher rate taxpayers. The UK basic rate of tax is 20% and we have two rates lower than that so this savings allowance is not necessarily a measure we might want to copy here.
Twin cab utes and fringe benefits – an example to follow?
There’s apparently some uncertainty around the fringe benefit taxation treatment of twin cab utes which the Budget clarified. Where they have a payload of one tonne or more such vehicles are not there to be treated as cars for benefit in kind purposes unless they were acquired prior to 6th April 2025.
On Fringe Benefit Tax, the benefit value is calculated as a percentage of the vehicle’s list price when the car was first registered which is similar to our treatment. However, the percentage used is determined by the vehicle’s carbon dioxide emissions, or its range if it’s an electric vehicle. These percentages are set to increase steadily over the next three years as part of the range of tax increases announced. Inland Revenue is presently reviewing FBT and as is well known tax can act as a disincentive. If we want to incentivise a transition to a lower emissions economy, maybe we should be looking at how the UK applies FBT to vehicles.
UK pension tax free lump sum unchanged
There’s always lots of rumours before a Budget which I’ve seen sometimes used as a means to get people to buy new products or make tax driven decisions in fear of change. One of the rumours before this budget was that there were going to be changes to the taxation of pensions and in particular to the 25% tax free lump sum. That hasn’t happened, but remember, our rules are completely different. Just because 25% of the pension can be withdrawn tax free in the UK, that doesn’t mean the same rules apply here.
The big changes
But the main reason I was paying particular attention to this UK budget was because we finally got more detail around the two announcements made in the March Budget – the new foreign and income gains regime and the end of the non-domicile regime and the changes to inheritance tax. These are both measures which have significant impact for New Zealanders, who are either going to the UK or have returned to the UK, but also for UK expats who have migrated here.
New foreign income and gains regime
The foreign income gains (FIGS) regime is very similar to our transitional resident’s exemption in that a new tax resident’s foreign income and capital gains will be tax exempt for the first four UK tax years that they are resident in the UK. It’s not like our 48-month exemption period, it is tied to the UK tax year, which remember runs from 6th April to 5th April. (Perhaps reflecting that some of this stuff does date back 800 years or more, there’s no intention to change that tax year end).
What has also been clarified is that individuals who have previously elected to be taxed on the remittance basis, which meant their non-UK sourced income investment income was not taxable, can now be allowed to take advantage of a so-called temporary repatriation facility. This will last for three years, and they will be able to nominate and remit their non-UK income and gains from years when they were within the remittance basis and take advantage of lower tax rates. Initially 12% for the first two years ending 5th April 2026 and 2027, and then 15% for the year ended 5th April 2028.
As part of the FIGS regime there are also changes to what’s called the Overseas Workday Relief. This will allow UK tax resident employees who perform all or some of their duties outside of the UK to claim tax relief on the remuneration relating to their non-UK duties determined on “a just and reasonable basis”. This is quite a significant one for expats and for companies that have very highly paid and skilled employees and has been greeted with general enthusiasm by by those impacted.
Inheritance Tax
Potentially the biggest change though, is in relation to inheritance tax (IHT). This applies to all assets situated in the UK or all assets situated anywhere, if the person is domiciled within the UK. There’s a nil rate band of £325,000, above which 40% will apply (these rates and thresholds have been frozen until 2030). IHT has a potentially significant impact because under the present rules, someone tax resident outside the UK could still be within the IHT net because they are still deemed to be domiciled in the UK. I’ve had to deal with one or two of these instances.
There’s also a pretty nasty trap for someone like me who might have left the UK a long time ago and adopted a new domicile of choice outside the UK. At present if I ever became tax resident again in the UK, our domicile would immediately revert to the UK. Therefore, working or living for prolonged periods of time in the UK was actually potentially highly tax disadvantageous from an IHT perspective.
All this will be replaced now by a residence-based regime. The tests for whether non-UK assets are subject to IHT will now be whether the individual has been tax resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event, most typically death, but can also be a lifetime transfer into a trust, happens.
There’s also a tail on how long a person is in scope if they’ve been non-resident during a period. For example, if someone had been UK tax resident for between 10 and 13 years, they remain in scope for IHT for three years post departure.
(Courtesy Burges Salmon)
Implications for New Zealand residents
What this change means for a lot of British expats resident here is they’ve got to think again about what their IHT obligations could be. By the way, our double tax agreement with the UK does not cover IHT. The UK has the right to charge IHT on assets situated in the UK, that’s not surprising. However, it potentially also has got a long reach if HM Revenue & Customs determine someone resident here is subject to IHT.
IHT and trusts
One of the other IHT changes is to the taxation of trusts used to hold assets outside the scope of IHT, so-called excluded property trusts. If I understand it right, starting from 6th April 2025, if a settlor dies and they’re within the scope of IHT, assets settled by them into what was previously an excluded property trust are now within IHT. This is a major change and I’m investigating it further given we make very extensive use of trusts. I’ve been dealing with quite a few clients who have UK connections year and it’s been really revealing to see how complex the taxation of trusts is from the UK perspective. It’s good to see some clarity around the new rules, but as I say, it’s a significant budget in many ways, and there could be quite major consequences for more people based here than they might anticipate.
Meanwhile, Inland Revenue’s crackdown continues
Moving on, Inland Revenue continues its crackdown when it announced on Thursday that it’s making unannounced visits to hundreds of businesses who it believes are not meeting all their tax obligations as employers.
According to Inland Revenue, they receive about 7000 anonymous tip offs each year. It has said “the volume of tip offs has grown over previous years indicating an increased sense of frustration by the community in general, businesses who are not doing the right thing.”
Inland Revenue’s analysis shows that the tax risks overwhelmingly relate to taking cash for personal use without reporting sales and or paying employees in cash.
Based on this Inland Revenue is making unannounced visits to over 300 employers whose practices it will closely examine. I’ve seen this happen with a few clients under investigation. Inland Revenue staff will go to a café or business and just watch to see what’s happening. They may buy something, but they will certainly sit and observe and see who uses the till, how everything is recorded and from there they will draw the relevant conclusions.
The consequences of being investigated
As an example of what happens to taxpayers who have not been compliant, the director of an asbestos removal and labour hire company has been jailed for three years in what the judge called serious offending and the worst of its kind to come before the Christchurch District Court in the last 20 years. The director, Melanie Jill Tatana, also known as Melanie Jill Smith, was jailed for three years for what was described as wilful diversion of funds.
Her company employed around 60 people, and between April 2019 and September 2022 had been required to deduct PAYE on 63 occasions but failed to pay the full amounts totalling $1.6 million. Tatana was therefore charged with 63 counts of aiding and abetting to knowingly take PAYE from workers’ wages and not pay it on to Inland Revenue. Instead, more than $800,000 had been diverted for her personal use.
One of the more encouraging things from my perspective about this case is that this offending has all been pretty recent and Inland Revenue tracked it down within a couple of years. I’ve seen cases where the offending has been four or five years.
I still think 63 occasions of nonpayment is a little generous, but bear in mind that Inland Revenue did take the the foot off the throttle around pushing hard on on companies and businesses because of COVID. That amnesty or less stringent approach is now over and it’s back to business. And Tatana won’t be the first to find out about Inland Revenue’s hardline approach.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
More on UK trust filings, and why are there so many trusts in New Zealand?
Financing local government, time for change?
I’ll be honest, even after 30 years in New Zealand, I miss British budgets. There’s a building sense of anticipation beforehand, as rumours circulate about bold tax plans and the abolition/introduction of new measures. Then on the day itself, we have to deal with the myriad of tax measures introduced, usually always without any warning beforehand, other than leaks to selected media. Being perfectly cynical, they are handy work-creation events, much more so than their New Zealand counterparts. (That said this year’s May Budget here is looking like it will be the exception, which proves the rule).
This year’s UK Spring Budget, which was released on Wednesday night, did not disappoint. There were a whole raft of measures, some of which, to borrow the phrase the 1974 Lions adopted in South Africa against the Springboks involved “Getting your retaliation in first”. These measures were done simply to hamper what’s expected to be the next Labour government after Britain has its General Election sometime this year.
Ending the Remittance Basis of taxation
So, there’s a lot to consider, but there were two that are of particular interest to New Zealanders, and these are to do with the so-called non-dom rules. The UK has a special set of rules called The Remittance Basis of Taxation for non-domiciled persons. That is people, generally speaking, born outside the UK, and they are able to basically exempt their non-UK sourced income from UK taxation, if they don’t remit it to the UK.
These rules have been around for a long time and there has been a lot of amendments in recent years. And I suspect there is a fair bit of non-compliance going on from people here in New Zealand, who’ve not kept up with those changes.
The UK Labour Party had indicated it would remove the regime as a fundraising measure. Instead, the Conservative Chancellor of the Exchequer, (Finance Minister), Jeremy Hunt, has gone ahead and decided to pre-empt that by abolishing the regime with effect from 6th April 2025. It will be replaced by a regime which looks very similar to the transitional residence exemption we have here. That is, individuals will not pay UK tax on foreign income and capital gains for the first four years of UK tax residence.
There will be some transitional rules which will apply to existing individuals who are claiming the remittance basis. You can claim remittance basis for up to 15 years, but after a period of ten years you have to start paying a Remittance Basis Charge of £50,000. And then after 15 years of tax residency in the UK, you’re deemed to be domiciled in the UK and the exemption no longer applies. It’s long been a very controversial measure. The wife of the present Prime Minister, Rishi Sunak, is apparently a non-dom and questions have always been asked about whether she made use of that exemption as she comes from an incredibly wealthy family.
I’ve got a number of clients moving across to the UK, or who are all already there, and we’re looking at the question of how to manage the implications of becoming UK tax residents. So, this proposal is interesting to see. More details will emerge, obviously over time, but it is significant in that it will perhaps make it a little easier for people to migrate to the UK without triggering huge tax liabilities or having to manage them extremely carefully under the remittance basis regime.
Domicile and Inheritance Tax – good news for Kiwis & UK migrants?
Related to the end of the remittance basis regime and arguably even more important, are changes to the UK’s Inheritance Tax (IHT) regime. IHT is a unified estate and gift duties, and probably should be still what it was originally called Capital Transfer Tax. At present, IHT applies to all assets situated in the UK or all assets worldwide if the person is domiciled in the UK.
The proposal is that those current rules will also be replaced from 6th April 2025 with a residency-based set of rules which will probably involve a ten-year exemption period for new arrivals and then a ten-year tail provision for those who leave the UK and become non-resident. What that tail provision may mean is that someone who’s been resident or domiciled meets the test for IHT, may have to be non-resident for ten years to escape the full effect of it.
Now, in my experience, the impact of IHT on Kiwis who’ve been over in the UK or have assets in the UK, and then Brits like myself, who’ve migrated here, is not very well understood. But as the Baby Boomer and older generations are starting to pass away now, there’s a great transfer of wealth going on. The amount of IHT that the UK government is collecting is steadily rising. It’s now up to over £7 billion a year (0.3% of GDP, about $1.2 billion in New Zealand terms), steadily heading towards 0.5% of GDP. So, it’s starting to become a more significant part of the tax take.
These new rules may mean that people who have previously been caught in the regime will be out of it, but it may also mean that people who thought they were outside the regime may be caught. There’s no indication here that the rates that apply – 40% on estates worth more than £325,000 pounds or $650,000 thereabouts – have been changed. It’s a tax that people feel needs reform in that there is plenty of scope for mitigating it. It falls very heavily on relatively smaller states rather than the larger estates where they have the wealth to do some more estate planning.
More tax breaks for the film industry – a lesson for the Government?
And incidentally, just before moving on, I notice this budget also contains a number of measures to promote the UK film industry and theatre as well as the arts. These will provide over £1 billion in additional tax relief over the next five years. One of the things that’s common amongst tax systems around the world is support for the film industry, and the film industry as a whole is pretty cynical about going to where the best incentives are.
I think it’d be interesting to see just how the Coalition Government responds in the May budget about pressures mounting on the Screen Production Rebate, whether that’s going to continue in its present form. The industry here will be lobbying for it to continue because although we can’t compete with more generous exemptions that may be provided elsewhere, the rebate still provides the skills that have been built up here thanks to the likes of Weta Workshop and others which makes New Zealand skills still highly sought after. The Screen Production Rebate is the little kicker which helps get the deals across the line.
More on UK trust statistics and a warning about the perils of overseas trustees
Larger estates in the UK will undertake a fair amount of mitigation to minimise the impact of Inheritance Tax, and that invariably tends to involve the use of offshore trusts. I mentioned in last week’s podcast the extraordinary fact that in absolute terms more tax returns are filed in New Zealand for trusts than in the UK.
This provoked a lively debate in the comments section with some pointing out the UK numbers don’t really reflect trusts that have been set up to go offshore into tax havens such as the Caymans and the Isle of Man. Well yes, that’s right, the UK numbers don’t reflect this because trusts’ tax returns, for UK purposes are generally required to file tax returns based on the residency of the trustees.
That by the way, is a matter people here need to pay more attention to. If a beneficiary or trustee migrates to the UK, this may inadvertently make a New Zealand trust with New Zealand assets subject to UK taxation. Again, this is another matter which isn’t well understood, and I suspect there’s a fair bit of noncompliance going on.
The UK also has a Trusts Registration Service. This was in response to the EU’s Fifth Anti-Money Laundering Directive from 2017, which the UK went ahead and implemented despite Brexit. The UK actually went in for a tighter regime than the EU had proposed. According to the same statistics that the HMRC held about trust tax return filings in the UK, the Trust Registration Service had 633,000 trusts and estates registered as of 31st March 2023 and which remain open as of 31st August 2023. This includes 462,000 new registrations in the 12-months to 31st March.
This surge in registrations is the result of a compliance effort by HMRC to remind people around the world that if any trust has a property in the UK, or even has made loans to beneficiaries in the UK, it may have a UK tax liability, and therefore should register under the Tax Trust Registration Service. This is regardless of where the trustees are tax resident. And again, I suspect there is a fair bit of non-compliance here.
Why are there so many trusts in New Zealand?
But even if you take these greater numbers, we’re still left with the rather astonishing fact that per capita large number of trusts in New Zealand relative to the population. How did that evolve was one of the questions asked in the comments. The short answer would be that the effective abolition of Estate Duty in late 1992 removed the impediments to setting up trusts. What we saw in response was something quite unusual in trust law, where it was now quite possible for a single person to be the settlor (or the person who settles property on the trust), a trustee responsible for managing the property, and a beneficiary. This is very unusual in trust law terms around the world.
I think it has to be said that some lawyers and other practitioners took advantage of that opportunity to market themselves and trusts extremely well. Back in the early 1990s, by putting assets in trusts it was possible to mitigate against the impact of rest home charges. The income of trusts was not then taken into account when determining eligibility for the likes of Working for Families or student allowances.
All that has changed over time and my view is that a substantial number of the estimated 500,000 trusts that we have in New Zealand are no longer necessary. That’s also the view of many other practitioners in this space. So it will be interesting to see what happens over time as people realise the complexities of using trusts and the inadvertent tax issues that are created when trustees, beneficiaries or settlors move to another jurisdiction.
Since the start of the year, I’ve seen an upsurge in requests for advice in relation to trustees, beneficiaries or settlers moving to the UK or making distributions to the UK.
I don’t expect that to slow down, and I think it’s actually the tip of the iceberg.
Beware the information exchanges
I would also add that probably because of the common reporting standards and the automatic exchange of information as various tax authorities work their way through all that information that’s being accumulated and distributed around the world, they will be realising that they many trusts are non-compliant, accidentally or not, and they’ll be starting to crack down on it.
Local government finances, time for reform?
Finally this week, local governments are now looking to set their rates for the forthcoming 2024-25 year. The fact that no replacement for Three Waters has been found and the substantial infrastructure deficit we as a country have allowed to develop, means that rates are likely to be rising quite significantly for many of us. That’s obviously going to generate some pushback.
Writing on this topic Dan Brunskill noted the quite astonishing stat that local government rates have basically not increased as a percentage of the economy in the past hundred years.
Basically, local rates have stuck around about 2% of GDP overall across the country about $8 billion in rates are paid. (Not all that you pay to a Council is actually rates based on property values, there’s also the Uniform Annual General Charge together with the various services such as consent fees that councils charge).
As the graph illustrates, apart from the spike around the Great Depression period, when councils and central governments all did more to try and help alleviate the impact of that, rates as a percentage of GDP have been stable for well-nigh 90 years. I think the present rating present funding of councils is unsustainable, because, as the article notes, central governments keep giving local governments more and more to do, but restrict them in the level of income that they can raise. That’s both good and bad. We don’t want what happened with Kaipara District Council, which essentially went bankrupt because it could not fund a wastewater system in Mangawhai.
There’s scope for reform in this space. I think the crunch points around finance are arriving now and local and central government will need to think harder about how local government can be funded and what funding mechanisms are appropriate. For small councils such as Kaipara or, Waiora over near Tairawhiti East Coast, the funding issues and scope for raising funds are not the same as for Auckland a council with a rating base of over a trillion dollars. The laws need to change in my view, but we’ll have to wait and see developments.
As always, we will bring those to you when they happen. And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
