UK Trends and Developments Contributed by: James Ross and Helen Farr, Taylor Wessing LLP
countries that do, the UK is notable both because of the relatively high rate (40%) and the low threshold above which it applies (GBP325,000). Anecdotally, it is the changes to inheritance tax, rather than the changes to income and capital gains tax, that have been the main factor driving individuals to consider leaving the UK (or dis - couraging them from moving to the UK). Changes to the Taxation of Carried Interest The Labour party also came to office pledging reforms to the taxation of private equity carried interests. Historically, these have been taxed as capital gains where they derive from capi - tal gains realised by the underlying fund. The government is proposing to tax these as trading income from April 2026 but at an effective rate of just over 34% – a rate that appears carefully calibrated to ensure that the UK is not mate - rially less attractive than many of its European competitors. Further details as to how this new regime will work, particularly for internationally mobile executives, are awaited. Corporate Tax As far as corporate tax is concerned, it is very much “business as usual”. The government has stated that it does not intend to raise the main (25%) rate of corporation tax, and that it intends to maintain various other competitive features of the corporation tax regime as they are. These include: • the full expensing of capital expenditure when incurred; • the tax credit for expenditure on research and development; • the “creative” reliefs for expenditure on film and high-end television production, and on video games;
• the patent box regime, which provides an effective tax rate of 10% on profits deriving from patents; and • the intangible fixed asset regime, which allows companies to claim amortisation deductions for expenditure on intellectual property in line with their accounts. Given the current state of the public finances, it seems unlikely that the corporation tax rate will be lowered in the near future, which will dis - please many who felt that the increase in the rate from 19% to 25% rendered the UK a materi - ally less attractive place to establish a business. However, the government’s statements of intent with regard to corporate tax should provide a measure of stability, and potentially engender confidence as a result. In the international tax field, the UK remains committed to working within the framework laid down by the OECD. It has introduced the OECD- mandated Pillar 2 global minimum tax, which applies to large international groups, and has indicated its support for the Pillar 1 principles for reallocating a proportion of the residual profits of the very largest groups (although, given the lack of international consensus, this is unlikely to be implemented any time soon). The UK is also consulting on updating its international tax rules (such as the definition of permanent establish - ment and the scope of its transfer pricing rules) to ensure it remains aligned with the latest OECD developments. One way in which the UK has previously diverged from the OECD position was when it introduced diverted profits tax in 2015 to address perceived avoidance by multinational groups. It is now pro - posing to bring diverted profits tax within the scope of corporation tax, making it eligible for relief under tax treaties. The UK is therefore sig -
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