Taxation Matters

As Budget Day (March 21st) approaches, the airwaves are full of suggestions for (a) tax reductions for “poor” people (LibDems) and (b) tax reductions for “well-off” people (Conservatives).  Apparently these are to be paid for by tax increases on other people, usually foreigners (non-doms).

An economic realist would imagine that with the UK government set to cover only about 82% of its expenditure from taxes this year, the emphasis should be entirely on more tax raising until that 18% gap is closed and the government can begin to pay down the colossal accumulated national debt built up in the Brown-Blair years.

The 50% tax rate

A particular target for tax reductionists is the 50% rate on taxable incomes above £150,000 per annum introduced by the last Labour Chancellor, Alastair Darling, in 2009.  It is said to be “ineffective”, “anti-enterprise” and that “people will avoid it”; the tax collector HMRC is said to be “disappointed” at the prospective yield in 2011/12.

The vast majority (98.5%) of taxpayers not liable to the tax will observe that if it is so “ineffective” and “easy to avoid”, why is there such a noisy fuss being made.  They will wonder what scope quangocrats, chief constables, hospital consultants, local authority chiefs and other senior public sector, and private, employees have for legally avoiding the rate, and why they don’t avoid the 40% rate as well while they are about it.

One dodge exposed recently in respect of some quango bosses, senior BBC employees and advisors to the government is to get their employer to pay their salary to a private (close) company, which by way of dividends and salary then pays them.  The big advantage is that, with tax credits, dividends paid to an individual are taxed at 32.5% (42.5% over £150,000 per annum).  Where such an arrangement exists, HMRC already has powers (e.g. IR35) to insist that a close company pays mainly or wholly salary to its owners where it believes that the company is operated mainly for tax avoidance reasons.

Property transfer tax avoidance

Where a change in tax law is required, is in the buying and selling of real estate – principally in assessments for stamp duty and capital gains. The Chancellor, as usual, is contemplating adding yet more pages to the body of UK tax law (already the largest in the world) to counter the trend for foreign and UK non-domiciled people to claim that their properties are owned by overseas companies, which under current tax law are not therefore liable to either tax.

Put the taxes on the property not the individual

Instead of putting in place another well-meaning counter to tax avoidance, why not simply require sales of all UK real estate to be registered in the Land Registry and attach the tax liability to the property[1]not to the person or company selling or buying the property, irrespective of where they were domiciled.  Until the tax is paid the property would in law remain the property of the seller and funds from the sale could not be legally transferred to them.  Likewise unpaid annual property taxes would accrue as a charge on the property[2].

The capital gains tax allowances for UK taxpayers and transfers between spouses would be unaffected, but all the arguments by expensive tax lawyers about domicile and company ownership would be nullified at a stroke – no tax paid, no sale made – simple.

 


[1] Thus, while maintaining the current CGT allowance and exemptions for individuals, CGT would be payable on the increase between the sale and buy price as recorded in the Land Registry. Likewise stamp duty would have to be paid before the sale could be entered into the Land Registry.

[2] With provisions for forced sale of property where such taxes remained unpaid for more than say two years.


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