Royal Bank of Canada Budget update

Gordon Brown’s Budget - almost certain to be his last - was widely trailed as likely to include sweeping changes to many areas of UK taxation.

However, as is often the case, the reality was perhaps a little less dramatic. Nonetheless the Chancellor did have a few tricks up his sleeve in three areas of particular interest to high net worth individuals.

(i) AIM Listed Shares

From Royal Assent, HMRC will have the power to designate ‘recognised stock exchanges’ for tax purposes. If they so designate the Alternative Investment Market (AIM) this will mean the end of EIS relief, CGT business asset taper relief and IHT business property relief on listed companies, with the likely consequence that this will make investment in AIM shares much less attractive to clients. In addition investors currently holding AIM shares in order to benefit from inheritance tax relief in particular could find that their estate planning has become ineffective.

(ii) Targeted Anti-Avoidance Rules

Capital Gains Tax
First announced in the Pre-Budget Report in December 2006, HMRC today confirmed that if individuals or trustees enter into an arrangement where one of the main purposes was to create an artificial capital loss, the loss will not be available to offset the taxpayer’s capital gains. Unlike most previous anti-avoidance rules, this does not target a specific arrangement, but instead looks to the motive of the taxpayer in entering into any arrangement. It will be interesting to see if this represents a new approach to legislation.

Income Tax
Much of the income tax anti-avoidance legislation was announced prior to the Budget. The main provision was a restriction on the ability to offset losses arising in a trading partnership against the partner’s other income. Commenting on this, Louise Somerset,
Head of UK Tax, Royal Bank of Canada said: "Over the last few years, a large number of partnerships designed to allow wealthy individuals to access this tax relief in ever more ingenious ways have been set up. From 2nd March 2007, where the partner works for less than 10 hours a week in the business of the partnership, only £25,000 relief is available and, if one of the main purposes of investing in the partnership was to obtain the relief, thenno relief will be available at all."

This restriction does not apply to the long standing ‘sale and leaseback’ film partnerships. Such arrangements, designed to defer the income tax liability, are still effective.

(iii) Ownership of Foreign Homes

The Budget contained new rules relating to the ownership of foreign homes. Commenting on these changes, Louise Somerset said: "For many years now, there has been uncertainty over whether individuals could be taxed when they visited an overseas holiday home purchased through a company. However today in a welcome clarification, the Chancellor has confirmed that where individuals have established a company to own overseas property which is used for their own occupation and/or letting, there will be no living accommodation charge. This clarification will apply retrospectively as well, which is particularly helpful."