To read the article on Tax Journal click: here
There were several measures introduced by the 2025 Budget that will be of particular interest to HNW internationally mobile individuals, and I highlight a few of these below.
£5m IHT cap for pre-October 2024 EPTs: There will be a £5m cap on IHT payable by a discretionary trust over a ten-year period (to include exit charges and the decennial charge) for pre-30 October 2024 excluded property trusts to be introduced with retrospective effect from 6 April 2025. This broadly means that trusts with more than £83m of excluded property will pay less IHT.
The cap will be stepped from 6 April 2025 (the date upon which these trusts will have become relevant property) to the first ten-year anniversary after that date as that period will not be as long as 10 years, in this period the cap is £125,000 per quarter.
This is a welcome concession given that the IHT trust changes were a key part of what made FA 2025 so troublesome for EPTs. The £5m cap applies per trust.
APR/BPR £1m allowance to be transferable between spouses: In relation to the changes to APR/BPR due to come into force from 5 April 2026, the Budget sets out that any unutilised amount of the £1m 100% relief allowance can be transferred between spouses.
Miscellaneous IHT provisions: Anti-avoidance IHT provisions are being introduced to address various government concerns, including in relation to situs of IHT chargeable assets, as well as restricting charitable exemption to gifts made directly to UK charities and community amateur sports clubs.
Extension to temporary non-residence rules: Currently the temporary non-UK resident anti-avoidance provisions do not apply where there is a dividend or distribution from post departure trade profits to the individual in a non-UK resident year. Where the year of return is 2026/27 or later this will change. The post-departure trade profits legislative provisions are to be removed. This means that an individual who returns to the UK, without more than five complete tax years of non-UK residence, will be taxed on all distributions/dividends they receive in the years of non-residence from: (i) UK resident close companies; and (ii) non-UK resident companies that would be close if UK resident where:
• they held the shares prior to departure; and
• they are either (a) a material participator in the company or (b) an associate of a material participator in the company.
Specific legislation will allow for relief in respect of any foreign tax paid.
Remittance basis: Specific technical amendments (to ensure that the legislation operates as intended) are to be made to the FA 2025 legislation that removed the remittance basis from 2025/26 onwards and introduced the residence-based tax system. There is no specific detail as yet, but it has been announced that there will be further developments to bolster tax incentives for high talent new arrivals. This appears to mean making changes to the current four-year FIG and foreign employment earnings regimes.
Offshore anti-avoidance legislation: The Budget documentation refers to the Government’s commitment to substantially simplify the offshore structure anti-avoidance provisions (such as the CGT attribution provisions and the transfer of assets abroad legislation). The Government has pledged to proactively engage with representative bodies and stakeholders in this regard. It seems unlikely that there will be any significant changes here before 2027/28.
Property: The tax burden on holding UK property will increase. A new separate tax rate is being introduced for property income which will be taxed at 22/42/47%, so at a higher income tax rate than any other income (relief for finance charges will continue to be restricted). In addition, the Budget introduced a high value council tax surcharge (HVCTS) to be introduced from 2028/29 with respect to properties valued at over £2m. Like ATED borrowing is not deducted and there are different rates depending on the value of the property. For 2028/29, the lowest rate is £2,500 for property worth between £2m and £2.5m with the highest charge being £7,500 for £5m plus properties. There will be specific provisions applying to properties held within structures. Specific reference is made to relief for those who are required to live in the property as a condition of their job.
Lynnette Bober, Director, Joseph Hage Aaronson & Bremen
• Original Article
Higher earners facing a barrage of tax threats are turning to investments overseas as they try to shelter their cash from HMRC
Investors are ploughing record-breaking amounts into foreign bonds as they seek to lower their tax bills.
Financial advisers said that Ireland, Luxembourg and the Isle of Man were among the most popular jurisdictions for buying bonds because they offer significant tax advantages.
Some £10.5 billion was placed in offshore bonds in the 12 months to the end of June, more than double the £5.1 billion from the previous year, according to data reviewed by the Financial Times.
The trend is being driven by the barrage of tax threats that high earners are facing, including frozen income tax thresholds and Isa allowances and higher capital gains tax rates. Some pension pots will also be subject to inheritance tax from 2027.
• Income tax raid could cost higher earners £754 a year
Capital gains tax (CGT) for those in higher and additional rate income bands went from 20 per cent to 24 per cent in the last budget. The tax-free CGT allowance has also dropped from £12,300 to £3,000 over the past two tax years.
The anticipation of further taxes in the budget on November 26, aimed at those with the “broadest shoulders” is partly driving the trend, according to Claire Trott from the wealth manager St James’s Place.
Trott said: “Some investors may be concerned about potential tax increases in the UK, as offshore bond funds allow tax to be deferred while the investment remains within the bond. For others, it may reflect plans to relocate overseas.”
Money newsletter
The latest personal finance and investment news from our money team.
Offshore bonds offer tax deferral, meaning you only pay tax when you take the money out of the bond. The investment wrapper is legally structured as a life insurance policy, allowing you to invest income and accrue gains without immediately paying tax.
You can withdraw 5 per cent of the investment every year for 20 years, tax-free.
When you finally withdraw all the money, or more than 5 per cent, it will be subject to income tax at your marginal rate. This can be helpful for those who want the money for retirement, when their income tax rate is likely to be lower than it is when they are earning.
• I’m buying a house with my daughter. Will it land her with a big tax bill?
Offshore bonds can also serve as a tax-efficient way to pass down wealth, for example to grandchildren who have little or no income and so will pay less tax on the investment.
Helen McGhee from the London law firm Joseph Hage Aaronson & Bremen said that while offshore bonds were becoming popular, they weren’t for everyone because the rules were complicated — and the tax office had them in its sights.
“Offshore bonds are being heavily marketed by some firms, but investors should be cautious. In most cases they do not reduce tax payable; they defer it, and the deferral objective can be compromised in some circumstances.
“HM Revenue & Customs’ Personal Portfolio Bond legislation can trigger an earlier than envisaged tax bill, which could wipe out the expected benefit. Equally, with increasing popularity comes increasing attention from HMRC.”
Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
To read the article on Tax Journal click: here
There were several measures introduced by the 2025 Budget that will be of particular interest to HNW internationally mobile individuals, and I highlight a few of these below.
£5m IHT cap for pre-October 2024 EPTs: There will be a £5m cap on IHT payable by a discretionary trust over a ten-year period (to include exit charges and the decennial charge) for pre-30 October 2024 excluded property trusts to be introduced with retrospective effect from 6 April 2025. This broadly means that trusts with more than £83m of excluded property will pay less IHT.
The cap will be stepped from 6 April 2025 (the date upon which these trusts will have become relevant property) to the first ten-year anniversary after that date as that period will not be as long as 10 years, in this period the cap is £125,000 per quarter.
This is a welcome concession given that the IHT trust changes were a key part of what made FA 2025 so troublesome for EPTs. The £5m cap applies per trust.
APR/BPR £1m allowance to be transferable between spouses: In relation to the changes to APR/BPR due to come into force from 5 April 2026, the Budget sets out that any unutilised amount of the £1m 100% relief allowance can be transferred between spouses.
Miscellaneous IHT provisions: Anti-avoidance IHT provisions are being introduced to address various government concerns, including in relation to situs of IHT chargeable assets, as well as restricting charitable exemption to gifts made directly to UK charities and community amateur sports clubs.
Extension to temporary non-residence rules: Currently the temporary non-UK resident anti-avoidance provisions do not apply where there is a dividend or distribution from post departure trade profits to the individual in a non-UK resident year. Where the year of return is 2026/27 or later this will change. The post-departure trade profits legislative provisions are to be removed. This means that an individual who returns to the UK, without more than five complete tax years of non-UK residence, will be taxed on all distributions/dividends they receive in the years of non-residence from: (i) UK resident close companies; and (ii) non-UK resident companies that would be close if UK resident where:
• they held the shares prior to departure; and
• they are either (a) a material participator in the company or (b) an associate of a material participator in the company.
Specific legislation will allow for relief in respect of any foreign tax paid.
Remittance basis: Specific technical amendments (to ensure that the legislation operates as intended) are to be made to the FA 2025 legislation that removed the remittance basis from 2025/26 onwards and introduced the residence-based tax system. There is no specific detail as yet, but it has been announced that there will be further developments to bolster tax incentives for high talent new arrivals. This appears to mean making changes to the current four-year FIG and foreign employment earnings regimes.
Offshore anti-avoidance legislation: The Budget documentation refers to the Government’s commitment to substantially simplify the offshore structure anti-avoidance provisions (such as the CGT attribution provisions and the transfer of assets abroad legislation). The Government has pledged to proactively engage with representative bodies and stakeholders in this regard. It seems unlikely that there will be any significant changes here before 2027/28.
Property: The tax burden on holding UK property will increase. A new separate tax rate is being introduced for property income which will be taxed at 22/42/47%, so at a higher income tax rate than any other income (relief for finance charges will continue to be restricted). In addition, the Budget introduced a high value council tax surcharge (HVCTS) to be introduced from 2028/29 with respect to properties valued at over £2m. Like ATED borrowing is not deducted and there are different rates depending on the value of the property. For 2028/29, the lowest rate is £2,500 for property worth between £2m and £2.5m with the highest charge being £7,500 for £5m plus properties. There will be specific provisions applying to properties held within structures. Specific reference is made to relief for those who are required to live in the property as a condition of their job.
Lynnette Bober, Director, Joseph Hage Aaronson & Bremen
• Original Article
Higher earners facing a barrage of tax threats are turning to investments overseas as they try to shelter their cash from HMRC
Investors are ploughing record-breaking amounts into foreign bonds as they seek to lower their tax bills.
Financial advisers said that Ireland, Luxembourg and the Isle of Man were among the most popular jurisdictions for buying bonds because they offer significant tax advantages.
Some £10.5 billion was placed in offshore bonds in the 12 months to the end of June, more than double the £5.1 billion from the previous year, according to data reviewed by the Financial Times.
The trend is being driven by the barrage of tax threats that high earners are facing, including frozen income tax thresholds and Isa allowances and higher capital gains tax rates. Some pension pots will also be subject to inheritance tax from 2027.
• Income tax raid could cost higher earners £754 a year
Capital gains tax (CGT) for those in higher and additional rate income bands went from 20 per cent to 24 per cent in the last budget. The tax-free CGT allowance has also dropped from £12,300 to £3,000 over the past two tax years.
The anticipation of further taxes in the budget on November 26, aimed at those with the “broadest shoulders” is partly driving the trend, according to Claire Trott from the wealth manager St James’s Place.
Trott said: “Some investors may be concerned about potential tax increases in the UK, as offshore bond funds allow tax to be deferred while the investment remains within the bond. For others, it may reflect plans to relocate overseas.”
Money newsletter
The latest personal finance and investment news from our money team.
Offshore bonds offer tax deferral, meaning you only pay tax when you take the money out of the bond. The investment wrapper is legally structured as a life insurance policy, allowing you to invest income and accrue gains without immediately paying tax.
You can withdraw 5 per cent of the investment every year for 20 years, tax-free.
When you finally withdraw all the money, or more than 5 per cent, it will be subject to income tax at your marginal rate. This can be helpful for those who want the money for retirement, when their income tax rate is likely to be lower than it is when they are earning.
• I’m buying a house with my daughter. Will it land her with a big tax bill?
Offshore bonds can also serve as a tax-efficient way to pass down wealth, for example to grandchildren who have little or no income and so will pay less tax on the investment.
Helen McGhee from the London law firm Joseph Hage Aaronson & Bremen said that while offshore bonds were becoming popular, they weren’t for everyone because the rules were complicated — and the tax office had them in its sights.
“Offshore bonds are being heavily marketed by some firms, but investors should be cautious. In most cases they do not reduce tax payable; they defer it, and the deferral objective can be compromised in some circumstances.
“HM Revenue & Customs’ Personal Portfolio Bond legislation can trigger an earlier than envisaged tax bill, which could wipe out the expected benefit. Equally, with increasing popularity comes increasing attention from HMRC.”
Summary of facts
The Claimant, Hotelbeds UK Limited (“Hotelbeds”) is a business which purchases hotel accommodation from UK VAT registered hotels and sells this to other suppliers of hotel accommodation (self-described as a “bed-bank”) for onward distribution.
Hotelbeds made standard rated supplies of hotel accommodation to its business customers and paid VAT on the purchase of hotel rooms from its suppliers. Under normal VAT principles Hotelbeds could deduct the input tax paid on the purchase of hotel rooms. However, Hotelbeds had difficulties obtaining VAT invoices from its suppliers to support its input tax deductions.
Hotelbeds’ practice (in accordance with the industry norm) was to pay for hotel rooms by means of a virtual credit card when the hotel guest checked in or checked out of the hotel (not following issue of a VAT invoice by its suppliers). Despite the suppliers being legally obliged to issue a VAT invoice, this was rarely done in practice. It was not disputed that Hotelbeds made some efforts to obtain the VAT invoices from its suppliers, but HMRC’s position was that Hotelbeds could have tried harder to obtain the VAT invoices but did not.
Hotelbeds submitted two Error Correction Notices (“ECNs”) to HMRC to recover the input tax, but the ECNs were rejected by HMRC on the basis that Hotelbeds had “systematically failed” to obtain valid VAT invoices. This was despite HMRC making input tax repayments in relation to two ECNs submitted for earlier VAT periods on the same facts.
Under Regulation 29 Value Added Tax Regulations 1995, HMRC has a discretion to allow claims for input tax which are not supported by a valid VAT invoice where the taxpayer holds other evidence of the VAT charge. Hotelbeds relied on three policy documents published by HMRC which deal with the application of HMRC’s discretion: VIT31200; HMRC’s Statement of Practice dated March 2007 (the “SOP”); and VAT Notice 700.
Hotelbeds particularly relied on VIT31200 which stated, “where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff will consider whether or not there is satisfactory alternative evidence of the taxable supply available to support deduction.”
Hotelbeds brought a judicial review claim against HMRC on the basis that HMRC’s refusals to allow the deductions was unlawful because i) HMRC failed to apply their own guidance, ii) alternatively, it had a “legitimate expectation” that it would be entitled to deduct input tax based on statements in HMRC’s guidance; the SOP; and / or because HMRC accepted two earlier ECNs on the same facts, and iii) the HMRC
decision was “irrational” given that there was sufficient evidence of the relevant supplies.
What did the Court decide?
The Court determined that none of the three HMRC policy documents were drafted with a “no invoice” situation in mind. Instead, they each make references to circumstances where a taxpayer has an “invalid invoice” which did not apply in this case. Therefore, given the absence of any directly applicable policy the Court determined that, “the [HMRC] decision maker was required to go back to the scope of the discretion and to judge the request made against the principles of the tax and HMRC’s duty to protect the revenue.”
The Court concluded that:
· HMRC’s guidance was “inconsistent, ambiguous and, in [the Court’s] judgment, difficult for a decision-maker to navigate.”
· In relying upon the written policy contained in VAT Notice 700 HMRC has misconstrued and/or misapplied its own policy.
· The strong driver against recovery without a valid invoice is fraud but there was no real risk of fraud in this case
· The Court did not agree with HMRC that a “systematic” failure to obtain VAT invoices meant simply a “repeated” failure.
· The Court held that HMRC’s decision “erred in law” because it “failed to take the principles of neutrality and the right to deduct properly into account.”
· HMRC’s refusal was inconsistent with the payment of earlier ECNs and was “unfair and unreasonable, and unsustainable in public law terms.”
On that basis Hotelbeds’ application for judicial review was allowed. The Court did not consider it necessary to deal with Hotelbeds’ “legitimate expectation” argument because Hotelbeds succeeded on its main argument.
Comment
Hotelbeds main argument was that HMRC had not followed its own guidance. However, HMRC’s guidance is not law, rather it contains HMRC’s interpretation of the law and how the law should be applied. It is not unknown for HMRC to take a position which is contrary to its own guidance.
Unfortunately the Court did not rule expressly on the legitimate expectation argument, which put on the wider basis obliges HMRC as a matter of public law to exercise a discretion in a manner that is consistent with its “acknowledged duty to act fairly and in accordance with the highest public standards.”- per Sir Thomas Bingham MR in Unilever
(1996) STC 681), albeit it might well have reached the same decision. Whilst acknowledging the centrality of the invoice to the VAT system, this case involved similar claims from the Claimant being accepted in the past, HMRC being in a net positive position as regards the tax it received – contrary to the “adventitious windfall” in Unilever – here there was adequate evidence of the transactions in question, no risk of fraud and no risk of the issue continuing in future periods owing to a change of system. It is difficult to see how an HMRC officer properly instructed as to the true scope of the discretion could have reached the same decision rationally.
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