Guernsey's 2018 Annual Budget
10 October 2017
On 10 October, Guernsey’s Policy & Resources Committee published its Budget for the calendar year 2018. This is a relatively progressive Budget and a summary of the main proposed measures are as follows:
Probably the most interesting measure proposed is designed to simultaneously stimulate Open Market Property sales and attract wealthy residents to Guernsey. The proposal is for the introduction of a temporary tax cap of £50,000 per annum for any new resident that has paid document duty of at least £50,000 on the purchase of an Open Market property. The purchase must have been made within a period of 6 months before and 6 months after taking up permanent residence in the Island.
This is an excellent proposal which retains Guernsey’s competitiveness at a time when other jurisdictions are introducing favorable regimes to try and entice high net worth individuals to their shores. It has received the backing of Locate Guernsey and the tax cap will be available to previously non-resident individuals in the year of permanent arrival and for the following 3 years. If approved, the proposal should boost sales of property valued in excess of £1,666,667 and so should stimulate sales of larger properties in the mid-range.
- There is a proposed increase in annual personal allowance of £500 per person or £1,000 per couple
This is good news for most taxpayers and represents an above inflation 5% increase on the 2017 allowance
There is a first move towards independent taxation with the proposal, with effect from 2018, for each individual’s personal income and entitlement to allowances to be considered separately and also to allow the transfer of unused personal allowances between spouses and civil partners. The second phase of this proposal is the introduction of independent taxation, maintaining full transferability of unused personal allowances. There is currently no set date for final introduction of phase 2 as this will involve IT changes but the earliest this could happen would be 2019
This proposal moves Guernsey towards a more modern tax system of independent taxation and will facilitate better collection of tax through the ETI (Employee Tax Instalment) Scheme and should eventually reduce the number of people required to submit tax returns
Previously the States had introduced a gradual withdrawal of personal allowance for taxpayers with income in excess of the Social Security upper earnings limit. It is proposed that this withdrawal should now be extended to all other personal allowances including pension scheme contributions (above £1,000) and mortgage interest relief. This phased withdrawal of the allowances is at the rate of £1 for every £3 of income exceeding the social security upper earnings limit (currently £138,684 and likely to rise to £142,896 in 2018). Based on these figures, 100% withdrawal of tax relief will occur when a person has annual income in excess of £234,396
This is a progressive measure in the States drive towards “20 means 20” and places a greater burden of contribution on those that have the broadest shoulders without increasing the headline rate of personal tax. However, somewhat bizarrely relief will still be available on contributions of £1,000 per person. This is claimed to be an attempt to continue promoting financial independence but it is unclear what effect a tax reduction of only £200 will have on taxpayers earning over £142,896.
An interesting move is the reduction in tax relief available for pension contributions. Currently relief is available for pension scheme contributions of up to £50,000 per annum. This is set to reduce to £35,000 per annum from 2018
First impressions are that this could dissuade taxpayers from saving for retirement and could result in more people being reliant on the State in old age. However, the taxpayers impacted by this reduction in tax relief are likely to have sufficient personal funds available to save for retirement in ways other than by way of a pension scheme. In addition, taxpayers making such large contributions may well be higher earners already affected by the new restriction of personal allowances. Annual contributions, into pension schemes, in excess of £35,000 without tax relief will still be possible
This Budget sees a further extension to the company intermediate (10%) rate of tax to income from the provision of regulated investment management activities to individual clients
This is the latest in a line of periodic extensions to the intermediate rate of tax introduced under the Zero 10 company tax legislation in 2008. In earlier years the rate has been extended to the regulated activities of fiduciary business, insurance managers, insurance intermediary business, domestic insurers and fund administrators and the provision of custody services. The latest proposal will apply only to investment managers providing investment management services to local private clients and will not impact on similar services provided in connection with collective investment vehicles, thereby maintaining the competitiveness of the island’s international business.
There is a risk that the continued extension of the 10% rate to other activities could be seen as a move away from the 0% standard rate of company tax to the 10% rate.
A further technical change designed to attract high net worth taxpayers that already have a connection with Guernsey to spend more time here and become permanently resident. Currently individuals who are in Guernsey for between 91 and 182 days each year are not regarded as fully resident and are able to restrict their annual tax liability by paying a Standard Charge of £30,000. Should they become fully resident by spending more than 182 days a year in Guernsey the current legislation provides that the taxpayer would be regarded as permanently resident in the previous year. This look back has the effect of dissuading such individuals from moving permanently to the Island and is being removed
This is a sensible measure as it will encourage people to become fully resident in Guernsey without the penalty of the adjustment to their prior year tax liability. Fully resident taxpayers will pay more tax and will also spend more in the wider economy for instance on Open market property.
Another technical change proposed is the removal of a piece of legislation that renders a company held within a trust and company structure as transparent for tax purposes. This is effectively a continuation of the deemed distribution regulations that were considered by the OECD as being a harmful tax regime. The proposal provides that income arising within such a company will from January 2018 only be effectively taxable when it is distributed to a local resident
This is a sensible proposal. Trusts are effective structures for non-tax reasons such as asset protection and the existing tax regime effectively applies a penalty when compared to the income of a company held outside a trust structure which is effectively taxable only on a distribution of income to local resident shareholders. So this proposed measure puts companies within a trust structure on the same footing as those held outside a trust structure.
Non-direct tax measure proposed include a relatively large increase in TRP (Tax on Real Property) on domestic property of 10.2% (inflation plus 7.5%) and also the introduction of a new rate of TRP on commercial property occupied by businesses involved in the provision of legal services. The intention is to raise the level of TRP on such property to the same level as property occupied by regulated financial services businesses. What this means is an effective 200% increase in the amount payable when compared to the previous year.
The intention of this proposal is to raise additional revenue from activities benefitting from public investment. Previously this has been applied to regulated utilities such as telecommunications and is now being extended to legal services which operate as partnerships. Short of increasing the rate of tax on such profits which are directly assessed on the partners, the States has opted for an increase in tax on property which is not based on the level of profit from these activities. The Budget report refers to raising greater revenue from unregulated professional services businesses such as Advocates and Accountants….so who’s next?
Another significant non-direct tax proposal is an increase in fuel duty of 3.5 pence per litre. This represents an increase of approximately 5.5% from 63.5p to 67p.
The increase is designed to maintain the revenue from this source at the same level as previous years and will not increase revenue. If the rise was not implemented, revenue levels would fall as a result of the greater fuel efficiency of motor vehicles. Whilst the level of fuel duty is slightly higher than other jurisdictions such as Jersey and the UK, the overall cost of motoring in Guernsey is significantly lower than those jurisdictions when taking into account registration charges, other consumption taxes, parking and MOT costs.
Other non-direct tax increases include the regular rise in duty on tobacco which is set at 7.8% for 2018 being inflation (RPIX of 2.8%) plus 5% and an increase in duty on alcohol of 5% for 2018.
10 October 2017