Private Client Special Report: Divine ’09

It is the time of year when people’s thoughts naturally turn to the future and predictions are made as to what the next 12 months will bring. In this spirit, we have dusted off our crystal ball to see what may be the key trends in the private client sphere in 2009.

Increased emphasis on capital returns

Following the reduction in the main rate of capital gains tax to 18 per cent and the ­recently announced increase in the top rate of income tax to 45 per cent (from April 2011), there is a much greater financial incentive to create investment structures that generate capital returns rather than income, and it is likely that such structures will increase in popularity over the coming year.
Structures such as those involving ­insurance bonds held through offshore ­companies funded by loans can be used to create capital rather than income returns, and it is likely that many private clients will place a greater reliance on such bespoke investment structures.

Increasing use of alternatives to trusts

Although the changes announced in the Finance Act 2006 affecting the taxation of trusts became effective from 22 March 2006, the transitional period that enabled certain existing trusts to be varied only recently expired on 6 October 2008. With the ;well-rehearsed changes to the inheritance tax treatment of most trusts then ­combining with the announcement that the income tax rate applicable to trusts will increase to 45 per cent from 2011, the search is very much on for a series of alternative wealth ­planning structures in place of the traditional trust.

One such structure that is likely to become more popular in 2009 is the Family Limited ­Partnership, which has been developed to provide a viable alternative for certain families looking to pass wealth down to the next generation while still retaining a degree of control.

It is also likely that there will continue to be more use of existing structures in ­innovative ways as private client lawyers seek to maximise the tax efficiency of ­families’ holdings while also preserving the elements of control and protection that are such key characteristics of trusts.

Non-doms and offshore trusts

2008 was dominated by the changes to the law concerning the taxation of so-called ‘non-doms’, first announced in the pre-­Budget report of 7 October 2007. The changes in the Finance Act 2008, which brought in the changes, were somewhat different those first proposed, but still marked a seismic shift. 2009 will see the new rules being put to the test for the first time.

One of the main areas of activity in this area in the coming year will relate to ­decisions having to be taken (by 31 January 2010) as to whether or not to claim the remittance basis and pay the £30,000 charge (together with the concurrent loss of personal allowances).

For those claiming the remittance basis and for offshore trustees, 2009 will also see an increasing emphasis on accurate record ;keeping ;and ;maintaining ­distinctions between income and capital, both pre- and post-6 April 2008, so as not to fall foul of the matching rules. Equally, trustees of offshore trusts will have to decide by January 2010 whether to elect to rebase the values of all the trust assets to the values at 6 April 2006, so that only gains arising since this date are chargeable on any ­capital distributions.

Preservation of assets and tax-efficient use of losses

With all the problems affecting the economy set to continue throughout 2009, it is likely there will be an even greater shift in the types of investments made by private clients as people move away from seeking high returns at all costs and look instead to ensure that the capital value of their assets is preserved.

While tax planning may be far from the minds of most investors at the moment, there is an unexpected upside to the current ­global turmoil that investors should not ignore. For many investors, now may be an opportune time to undertake certain tax planning arrangements that can be effected on a tax-free basis, which would not typically be the case in more positive market conditions.

The offshore world

One of the items announced in the ­pre-Budget Report of 24 November 2008 was that the Government was commissioning an independent review of UK offshore financial centres, which aimed to focus on the role of such centres in the global economy and their long-term business strategies. The review aims to produce interim conclusions by the time of the 2009 budget.

While the Government has been clear that it will respect the financial autonomy of the offshore centres, and in particular their ability to set their own rates of taxation, it is certainly possible that there may still be a tightening up of restrictions governing the interaction between the UK and its ­offshore centres. In the worst-case scenario, this might herald the start of a new attack on offshore trusts.

The great unknown is the Government and what legislative changes it might introduce during 2009. After the Finance Acts of 2006 and 2008, many may be hoping for a quieter year; but given the Government’s need to increase revenues, this is perhaps wishful thinking. All that can be known is that, such is the nature of the private client world at the moment, there is bound to be a very different landscape to survey when it comes to making predictions for 2010.

Patricia Milner is a partner and Charlie Tee a solicitor at Withers