Finance Bill 2019-20 draft clauses affecting capital taxes

The Tax Faculty has submitted two responses to clauses in the draft Finance Bill relating to capital taxes; ICAEW REP 90/19 Inheritance tax and excluded property added to and transferred between trusts and ICAEW REP 91/19 Changes to ancillary reliefs in capital gains tax private residence relief.

Inheritance tax (IHT) and excluded property trusts

This clause introduces legislation to provide that additions of assets by individuals domiciled in the United Kingdom to trusts made when they were non-domiciled cannot be excluded property and are therefore within the scope of IHT.

Our understanding was that a consultation paper on the changes would be issued and we would have the opportunity to submit a formal response to the proposals. However, the expected consultation paper was not issued. We are disappointed by this lack of consultation.

While we appreciate that there was an announcement in November 2018, the lack of a consultation paper or any follow up until the draft Finance Bill was published is likely to mean that trustees of offshore trusts are unlikely to have considered these changes in the necessary detail. We are concerned that the legislation will come in from Royal Assent and there will be insufficient time for trustees to take advice so as to understand the full implications and whether they want to take any actions to unwind structures etc.

Our preference is for the measures to be delayed and properly consulted upon.

Capital gains tax (CGT)

The clauses when introduced will reduce the final exempt period on the sale of a principal private residence from 18 months to nine months and change the rules for lettings relief meaning it is only available during periods of co-occupation of owner and lodger.

We responded to the consultation on these changes in ICAEW REP 52/19; none of the points made in our representation seem to have been taken into consideration in the draft clauses.

Given the state of the economy, stagnant property market in large areas of the country (although HMRC claim average period for a sale is less than five months), and Brexit uncertainty, now does not seem to be the best time to shorten the final period to nine months. At the very least there should be a discretion for HMRC to extend the final period by up to 12 months so a total of 21 months. The changes are retroactive and in effect we are already in the allowable final nine months violating the principle that retroactive legislation should only be used against egregious tax avoidance.

As far as lettings relief is concerned, if the desire is to reduce the relief, a similar result could be achieved with better targeting (eg, restrict to two years or the period the property has been owned, if less). To prevent retroactive effect, ICAEW suggests it should be possible to ‘bank’ any accrued lettings relief at 5 April 2020.