The careful management of wealth for future generations is a hot topic for the well-off, with private client lawyers at the heart of the decision-making
The Budget this year was called a ‘Budget for millionaires’ by Labour, but the Coalition insisted it would hit the rich. In this week’s report our panel of private client specialists debates the impact of some of the Budget changes on their clients.
What do you think will be the real impact of the cut to the top UK tax rate from 50 per cent to 45 per cent? Will this encourage wealthy individuals to remain resident
in the UK?
Anthony Thompson, head of private capital, Lawrence Graham: I am not sure that the reduction in the top rate of tax by 5 per cent will make a big difference to an individual’s decision to remain or to leave the UK. Unless there is an aggressive tax policy to significantly increase tax across the board (as we are likely to see in France following the recent general election) an individual’s decision on whether to stay or leave is based on many lifestyle factors and how easy it is to do business. Provided those aspects are competitive it is likely that wealthy individuals will move to or stay in the UK and we might also get an influx of people from France.
Clare Maurice, senior partner, Maurice Turnor Gardner: Few, if any, of my clients have left the UK. A lot talked about it but, when the crunch came, it was too difficult, or nowhere else was very attractive. A number may have ‘gone home’, but that was more about being on the cusp of acquiring a deemed domicile.
I think everyone had assumed the 50 per cent rate would only be temporary, so they are now relieved. I also believe that clients are focused on generating gains (taxed at 28 per cent) rather than income. Reducing the rate to 45 per cent will not change their strategy.
Russell Cohen, head of international private wealth, Farrer & Co: The impact is likely to be slight. Many ‘non-doms’ do not earn income in the UK and so, in practice, are not subject to UK income tax. Therefore, the cut is likely to make little difference to them.
The cut is more relevant to individuals such as bankers, who generate significant income in the UK. However, a rate of 45 per cent is not much more than they would expect to pay in other major jurisdictions.
The main impact of the 50 per cent rate was psychological. It sent out the signal that the UK government would penalise wealth generation (while at the same time, it would appear, the measure did not actually generate more tax). Unfortunately, the reduction to 45 per cent (rather than the original 40 per cent) does not reverse the damage, as it appears half-hearted and the intellectual battle has certainly not been won: if Labour returns to power we could well see the rate increase again.
John Ward, head of private client, Speechly Bircham: The proposed reduction in the top rate of income tax from 50 per cent to 45 per cent from 2013 is good news. It will send a positive signal to wealthy individuals who might otherwise be thinking of leaving the UK. It also makes the UK more attractive to those thinking of moving here.
Announcing the change a year in advance means that, where they can, some taxpayers will defer taking income until after the rate has gone down to 45 per cent – for example, by delaying taking a dividend.
The rate reduction is also good news for certain trusts. Where income is retained within the trust rather than being distributed to beneficiaries it is taxed at 50 per cent currently. This will reduce to 45 per cent from 2013.
What sort of legal issues will arise from the so-called ‘mansion tax’ on high-value properties?
Thompson: One of the major difficulties with the mansion tax will be assessment of value. Precise valuation of property is extremely difficult, particularly in relation to high-value residential properties. On death, when there is no sale of a property, there are often significant disagreements between the valuers for the executors and the valuers for HM Revenue & Customs (HMRC).
Maurice: The biggest issue for us is whether or not to unscramble the structures that hold UK residential property. It will come down to mathematics – what will it cost to maintain the structure against the cost of taking it apart? On the face of it an annual charge may be worth contemplating. However, we have no idea how the proposed capital gains tax (CGT) will be levied on “envelopes”. If it will be tax-neutral I can see a number of clients collapsing structures to avoid the annual charge. If not, each client will have to make the calculation and decide what they want to do.
It may be that a number will sell up rather than have the continuing aggravation: at least if the property is sold there is cash around to pay the CGT.
It is still too early to predict as we do not have a consultation paper. In our case, we do not have many clients with residential property held in structures. We were always very much against the use of offshore companies – too much risk of tax charges. But we know this is a matter we will have to address.
Cohen: HMRC has indicated that the proposed annual charge on high-value UK residential properties held by “non-natural persons” (including companies) will not exceed 0.75 per cent of the value of the property. Feedback from clients suggests that this will often be a price worth paying given the benefits of retaining such structures (for example, inheritance tax (IHT) mitigation, confidentiality and intergeneration planning).
In any event, these structures are not necessarily simple to wind up (particularly for UK residents) and complicated tax issues may come to light depending on the client’s circumstances.
In the future, we expect alternative structures to be of interest to clients, but we will always need to be alert to the risk that the government may introduce retrospective legislation to counter any planning undertaken to avoid the new charges.
Ward: The mansion tax applies to residential properties worth more than £2m held in a company, whether in the UK or offshore. Together with the new 15 per cent stamp duty land tax (SDLT) charge on companies buying such properties and forthcoming changes to CGT it will be less attractive to hold high-value residential properties through a corporate structure.
However, before dismantling such structures it will be necessary to consider the implications for other taxes, such as IHT. Often, non-UK domiciliaries own UK property through offshore companies to shield the property from IHT. Dismantling the structure will bring the property into the IHT net, although in many cases it may be possible to mitigate the IHT liability in other ways, for example by securing debts against the property.
Which jurisdictions do you think are most attractive as domiciles for trusts at present, both from a legislative and a client demand perspective?
Thompson: The established offshore financial centres continue to be favoured for locating offshore trusts. Singapore and New Zealand have also become popular for various reasons, but still most trusts tend to be created in traditional offshore financial centres.
Maurice: The selection of a jurisdiction for a trust is based on many factors that will be particular to the client. Geography is a key issue – how easy is it to contact trustees? Quality of local advisers, good court infrastructure, robust anti-forced heirship legislation – all are aspects clients will want to bear in mind.
Locally, I like using Jersey or Guernsey. In the ‘warm water’ jurisdictions my preference would be Bermuda or the Cayman Islands. However, I have used the British Virgin Islands recently and been pleased with the assistance we had. I have also used the Bahamas, but that was definitely the client’s choice. Some clients want to use Singapore as they want to escape the old jurisdictions. I cannot detect any real ‘leader’ in terms of jurisdictions.
Cohen: There are two issues in play here: the governing law of trusts and where they are administered.
In the case of governing law, there is much professional debate as to which jurisdiction is the most attractive. Certain jurisdictions offer particular trust regimes – for example, the Special Trusts (Alternative Regime) trusts in Cayman – which appear to give an edge in certain respects.
However, in my experience, the fundamental issues remain the same: does the client understand the nature of a trust, has the adviser been sufficiently thorough in drafting the trust documentation to take account of the clients’ objectives and will the trust be well administered?
As to the most attractive jurisdiction for administration, again it all depends on the circumstances of the client. There is, for example, a move towards having New Zealand trustees (and law), given that it is for many purposes an ‘onshore’ jurisdiction with a sophisticated set of ‘offshore’ trust provisions. However, many clients like (not unreasonably) to be able to visit their trustees or at least operate in the same time zone. The Channel Islands should therefore not be overlooked, while Zurich and Geneva are coming more into play.
Ward: There are two issues here, wrapped up as one: trustee residence and governing law. There can be no single answer. You need to factor in the client’s background, the reasons for establishing a trust and perception issues, but above all what kind of service you expect from the trustee.
There are differences between the trust laws across offshore jurisdictions, but to be honest they are pretty subtle. What is far more important is being in a jurisdiction where you can find a trustee that really understands its role and will do its job properly. And don’t forget that for some settlors, onshore solutions work much better than offshore ones. For example, English law trusts with Swiss resident trustees are popular, for a number of reasons, among South American settlors.
What will be the effect of the Tax Tribunal ruling in the Eclipse 35 case?
Do you expect this to act as a deterrent to individuals to participate in such schemes?
Thompson: When there are high rates of tax there are always people looking to design tax mitigation schemes and it is likely there will always be those people who wish to participate in them in the hope that they will significantly mitigate their tax bills.
Maurice: As a firm we are allergic to most ‘schemes’. I am not aware of any of my clients having participated in such schemes. I have always cautioned against the use of schemes and see no reason to change my advice.
Cohen: The decision in Eclipse 35 is just one of a series of similar decisions arising out of attempts to form film-related partnerships with borrowed finance that theoretically would enable partners to claim loss relief against other, taxable, income.
HMRC has been denying loss claims arising from these schemes and pursuing the related litigation through the courts for years. I agree that the decision, along with the others in this territory, will act as a deterrent in relation to participation in such schemes, but this type of tax planning has been largely overtaken by the latest Budget announcement.
The legislation announced for inclusion in Finance Bill 2013 will apply a cap on income tax reliefs claimed by individuals. The cap of 25 per cent of income (or £50,000, whichever is greater) will apply to reliefs that are currently unlimited and, while the focus has been on donations to charity, these rules will also apply to the sort of claims that were at the centre of the Eclipse case. It seems clear that HMRC would prefer to avoid litigating cases like Eclipse by making the game not worth the candle.
What would you identify as the biggest issue for private clients at present?
Thompson: I principally deal with non-dom clients, many of whom are resident in the UK. For them, the change in taxation for properties valued at over £2m owned by offshore companies is a significant issue.
When this Government increased the remittance base charge from £30,000 to £50,000 they said they had reviewed the taxation of non-doms, they felt that this was an appropriate increase and they were going to do no more. The new rules on property ownership by offshore companies will target the resident non-dom community as it is generally only a non-domiciled person who would structure their property purchase that way.
The irony is that the increase in SDLT means it is much more likely that an individual would be tempted to buy the shares in the offshore company rather than the property direct. In the 25 years I have been dealing with non-domiciled clients it is rare for the person to buy the shares in the offshore company so, despite newspaper articles to the contrary, little SDLT was lost via that route. The new rules may well mean that more SDLT is lost as people chose to buy the company shares to save the tax.
Maurice: For the non-dom client it must be the changes to SDLT and possible CGT on residential property. Having been promised by Chancellor George Osborne that there would be no further changes to the taxation of non-doms they feel let down. For UK-domiciled clients the search for an alternative to the trust is a challenge. Clients want to hand on assets but are anxious about children having unconstrained access. The result is that wealth is not cascading down the generations as I believe John Major wanted. It is getting stuck.
Cohen: The biggest issue is that almost any client with substantial means now requires complex advice of an international nature to arrange their estate planning in a tax-efficient and orderly manner. It is no longer sufficient for advisers based
in London to give UK advice and assume any advice required in other jurisdictions will look after itself.
A wealthy client is likely to have assets, family members and trusts in a number of jurisdictions and the advice in each of these needs to be coordinated. As governments become more aggressive in their attempts to raise tax (see, for example, recent French legislation concerning trusts), advisers should keep things as simple as can reasonably be achieved: the greater the complexity of an estate plan, the greater the risk of it being undermined by future legislation in one or other jurisdiction.