Benjamin Franklin famously said that there are only two certainties in life – death and taxes. Most people would like to avoid both. Although procuring avoidance of the former is beyond the professed capabilities of most specialist private client advisers, many people seek professional advice from lawyers or accountants to reduce the burden of the latter, during their lifetime and on their death.
Inheritance tax, higher rates of income tax, capital gains tax and even stamp duty were once regarded as the province only of very affluent individuals and families. ‘Tax planning’ was an industry that sprang from the desire of those people to pass on as much as possible of their hard-earned, or generations-old, wealth to their families, or, in the 1970s particularly, to shelter their dividend-based income from the punitive rates of tax reserved for unearned income.
The private client landscape is changing rapidly. In the UK, our view of what ‘wealthy’ means is also changing, and the number of people we regard as wealthy has increased considerably. In the world of private client advisers, new vocabulary has developed to distinguish different types of wealth – we talk about ‘traditional’ (inherited) or ‘international’ wealth (the internationally-mobile businessman or entrepreneur), and the ‘mass affluent’ (the increasingly comfortably-off middle class). Different tax planning techniques have evolved to meet all of these different needs.
But are UK private clients getting noticeably richer? The Inland Revenue’s figures on tax receipts seem to indicate that there is more taxable wealth in the UK than ever before, although that may not mean quite the same thing. Lottery winnings and the technology boom may be among the contributing factors to the increase in perceived wealth. But the rising value of real property is arguably the cause of much of the increase in individual net worth on a mass basis, as well as the motivation for stamp duty rate rises. Average property prices rose 12.5 per cent in the 12 months from October 2002, with the average property in the UK now worth £164,000 – London’s average is £261,000.
The stamp duty threshold has not risen to match these increases. In fact, it has not risen at all. In 1993, 65 per cent of all property transactions were below the £60,000 threshold, but in 2002 only 29 per cent of transactions did not attract stamp duty. The average first-time buyer in every region of the UK now pays stamp duty. Receipts of stamp duty – one of the only taxes where rates have risen over the past few years – rose from £1.3bn to £7.5bn over the decade from 1992-3 to 2002-3.
Similarly, the inheritance tax threshold rises by approximate reference to the retail price index, lagging behind property price rises in the UK. It is now estimated that more than two million homes in the UK are worth more than the inheritance tax nil rate band, up from an estimated half a million in 1997. It is still the case that fewer than 50 per cent of UK estates warrant the making of a return to Inland Revenue capital taxes, and tax is only payable in respect of about 4 per cent of annual deaths. The total receipts of inheritance tax, however, have nearly doubled, from £1.2bn in 1992-3 to £2.3bn a decade later. This appears likely to continue to rise, as in 2003-04 a projected 32,000 estates will be subject to inheritance tax, up from 18,000 in 1992-3 and 23,000 in 2002-3.
More and more people, in fact the average person or family, are now caught within the ‘net’ of taxes that were once intended to impose a charge on those whose wealth was regarded as greater than average. The range of opportunities for reducing the tax burden on the demonstrably larger number of taxpayers is, at the same time, appearing to constrict. Tax planning seems to be taking on a new moral dimension, as the distinction is increasingly drawn, not between lawful and unlawful activity, but more finely between ‘tax evasion’ (criminal and wrong), ‘tax avoidance’ (legal, but undesirable) and ‘tax mitigation’ (legal and acceptable).
In one view, which the Inland Revenue might now be calling the ‘Footballers’ wives test’, what is acceptable and what is unacceptable is now defined in part by the popularity of a particular exemption, loophole or relief. The abrupt cancellation, in February 2004, of tax relief for film finance partnerships was an interesting example of this. This generous relief, which had been expressly created to encourage investment in the film industry, was withdrawn when it was so successful in achieving its purpose that, as was reported at the time, “even footballers and their wives” were investing in films so as to claim the relief such investment attracted. The Treasury said: “The Government simply cannot be expected to stand by and let people draw up complex and abusive schemes to take advantage of a loophole in the relief and avoid tax at the expense of honest taxpayers.” Note the use of the word “honest” to describe taxpayers who do not seek available reliefs, even though there is nothing dishonest about the use of a tax relief for its intended purpose by those who do seek it.
The Government’s exasperation at the use of tax-saving schemes, both mass-market and tailor-made, has become increasingly evident in recent years, culminating in the budget announcement of legislation to require such schemes to be registered by those who market or use them. The Inland Revenue and Customs convened a meeting of major firms of tax advisers on the morning after the budget, so as to impress upon them the Government’s desire to end the cycle of “abusive” identification and exploitation of loopholes, and the introduction of counter legislation. It is hinted that broader general anti-avoidance rules could follow if the registration system does not have its intended effect.
Moral arguments also underpin the current review of the law on the residence and domicile of individuals, which is stated to be motivated by “the Government’s commitment to creating a tax system which ensures that individuals make a fair contribution to investment in public services”.
There is a whole specialist field within the private client industry that focuses on advising non-UK domiciled individuals on structuring the ownership of assets in the UK and their spending in the UK so as to minimise, or avert entirely, their exposure to UK taxes, as current legislation permits. On one analysis, it is good for UK plc to attract high net-worth non-domiciled individuals to come and live here, as even if they are not liable to pay any direct taxes, they contribute to the wealth of the UK through the businesses they own and operate here, or through sheer spending power. The contrary view is that, if they have a long-term connection with the UK, they ought to be taxed in a way that reflects that connection more accurately, by requiring them to submit to the ordinary tax regime of the country they choose to live in. Although these issues have been rehearsed a number of times since the early 1980s, without any changes being made to the existing rules, the moral emphasis that is now given to the latter argument is an interesting additional dimension not present in earlier reviews.
What is most interesting about the current trends in personal taxation is the identity of those who are now regarded as, and taxed as, wealthy individuals. The super-rich can almost always achieve tax savings or move themselves and their wealth to lower-tax jurisdictions. Broadly, it is the middle-earners who are increasingly affected by higher-rate bands of tax, and at whom the mass-market tax saving schemes developed by the industry are aimed. They will continue to be most affected by the current shifting of the tax burden. The ingenuity of private client professionals is unlikely to be curbed by the drive to make payment of tax a moral issue.
Arabella Saker is a senior associate in the private client department at Allen & Overy