What does the Budget mean for the rich?

For all the swipes at the non doms and high end property owners, George Osborne seems to have taken a break and made a few thin concessions.

As from 6th April 2016 capital gains tax will go down from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate taxpayers.

This is of course welcome – but the extraordinary thing is that from our studies capital gains tax at 28% was the tax that most UHNW individuals did not mind paying. The taxes they really resent are the tax on the remittance basis for the non doms, Stamp Duty Land Tax on the purchase or their homes in the UK and most disliked of all is 40% inheritance tax.

If the government showed just a glimmer of understanding of the Laffer curve, it would understand that to cut capital gains tax – a tax which is of least concern to the wealthy and therefore less likely to try to avoid it will just result in less tax in the Government’s coffers. If, however, they were to reduce the tax rate of what the UHNW individuals most dislike and are at pains to avoid, such as inheritance tax at 40% or stamp duty at 15% they would be more likely to increase the tax take for the Government.

As I have said in previous notes the tax taken on stamp duty for Westminster and Kensington and Chelsea has fallen since 2013 by about one half since the stamp duty went up. How do people avoid this tax? Simple – the market has dried up for residential properties above £4 million. In 2013 the tax take from stamp duty from these boroughs alone accounted for more than the total tax taken from Northern England, Scotland, Northern Ireland and Wales put together. If the Government was really serious about raising money for the Treasury it would do some serious research into what taxes are disliked to the point at which people will change their behaviour to avoid them and which taxes are tolerated. It would then reduce the rates of those which taxpayers want to avoid and up the taxes taxpayers were happy to pay. The Government needs to find the rate at which the maximum return can be made for the Government. Sadly the Government would appear to be keener on clinging on to power than raising revenue.

The other measure we tend to gloss over – but at our peril is the continued drive to crack down on ‘all forms of tax evasion and avoidance, and aggressive tax planning and non-compliance’. The Government press policy statement goes on ‘There should be a level playing field for the majority who pay their tax, and everyone should make their contribution.’

These are sentiments with which everyone can agree. However for those running businesses or who have more money than they need to maintain their lifestyle paying the right amount of tax is not always so straightforward.

The UK has more tax legislation than any other country in the world other than India and every tax payer is expected to know and understand every word. Most professionals do not know every nook and cranny and even if they did may have misinterpreted the legal nature of the facts and come up with the wrong assumptions with the result that the taxpayer does not declare what he should or puts in the wrong amount in his tax return.

To give an example, Roger owns his house in the UK through an offshore company and trust structure. He took advice from Blink and Co in 2014 which said that based on the facts before them the company owned the property as a nominee for the children and therefore the Annual Tax on Enveloped Dwellings did not apply (furthermore Blink and Co advised, the ATED payment in 2013 was incorrect and should be recovered). Furthermore they advised, the property was not a trust asset and therefore not subject to the 10 yearly inheritance tax charges.

Blink and Co relied on the facts provided by Roger, but Roger does not fully understand the legal difference between whether a property is held on trust for the children or for them as a nominee. Blink and Co did not verify the facts with the trustee ABC Trust Co; they simply relied on what Roger told them.

If they had asked ABC and Co to verify the facts, they would have discovered not only that the property was owned by the company beneficially but also that the company was owned as an asset of the trust which was used as security to a bank for borrowings. They would also have discovered that ABC Trust Co was very concerned as to the lack of payment of ATED on the property and were refusing to continue as Trustees unless and until ATED was paid.

It is therefore only a matter of time before HMRC finds out that ATED was not paid for a few years and at that time it is likely that the advice given by Blink and Co based on the facts provided by Roger will become known. With the funding from the Government and a clear endorsement to pursue non tax payers, it is more than likely that Roger will then face a full tax investigation together with fines for assisting to evade tax which will then extend to Blink and Co.

In 2014 when Roger took advice neither he nor Blink and Co thought that their actions were evasion of tax – it would have then been considered tax avoidance – not now.

If you would like to comment on this or book an appointment with Caroline please contact svetlana@garnhamfos.com or phone 020 3740 7423.

Tomorrow's budget

In 1985 I was ill in bed when the Budget was being read in the House of Commons. At the strike of a pen Development Land Tax was abolished – that was my area of expertise. I wondered whether it was worth going into work when better.

There must be many advisers – accountants, private bankers, lawyers, financial planners, estate agents and trustees keen to see what George Osborne will say tomorrow about the taxation of non doms – their clients. He seems hell bent on killing the golden goose; cutting down the tax reliefs which have made the UK such an attractive place to live for non doms.

Given the pace of change, most non doms living in the country, or who have homes in this country are not rushing to unravel their offshore structures. Many are sitting on their hands, even if it means paying more tax. They have not decided how they want to structure their investments or whether to stay or leave. Living in the UK has been so good for so long they are not convinced that they can no longer do whatever they want and not pay tax.  They talk to their friends, neighbours and colleagues – who are also bewildered and waiting.

Their advisers are also waiting; waiting for the small print in the legislation. Will there be an exemption or planning opportunity?

If not then this rich community is still likely still to do nothing until after the referendum on Brexit.

David Cameron and George Osborne may be keen to stamp out the tax advantages for rich non doms – but will this policy be adopted by Boris Johnson and Michael Gove. If Boris and Michael are concerned about the country and serious about reducing our horrific debts, they should consider how best to use our new independence to attract more monies into the country; which must include making the country attractive to wealth creators.

As I wrote in last week’s blog, if following the referendum we see Britain leave the EU, there will be an opportunity to alter our policies to be more in line with Switzerland. If the new Government does so, in such a manner to give the UHNW community confidence and the electorate see the changes as fair we could see monies flooding into the UK; away from Switzerland and offshore tax havens. This will make everyone happy including accountants, lawyers, trustees, estate agents, architects, bankers, wealth managers and all manner or tradesmen shopkeepers and other service providers.

There are good reasons to introduce the changes. As a result of George Osborne’s hike in stamp duty land tax we have seen a dramatic fall in property sales above the £4 million mark and a consequential drop in the tax take in Westminster, Kensington and Chelsea by about one half since 2012/13.

Whatever George says tomorrow in his Budget statement, I doubt whether we will see a return of confidence or a boost to our economy. The next date for optimism will be the referendum. If we are out of the EU, then we will again need to wait to see what policies will be adopted by Boris and Michael.  I for one will be lobbying hard for them to take a leaf out of the Swiss book to attract foreigners to not only come to the UK, but to bring their wealth with them.

Having been an ardent follower and commentator on budgets over many years – I would like to see politicians axe taxes and lower rates. The irony is that the fewer taxes and lower rates we have– the more tax is collected and the more work there is for everyone – apart from a small handful of nerds.

If you have any comments or would like to book an appointment with us, please call 0203 740 7423 or email svetlana@garnhamfos.com

What is going on?

Last week I met with an elderly residential property expert, James. He has spent a lifetime watching property buying trends and the current market conditions were not a surprise to him.

Just before Christmas James had paid a visit to Asia, and a colleague of his is currently in the Middle East. From their meetings they remained convinced that the appetite for residential property in the UK remained strong. The UK is safe, it remained buzzing and is still the place UHNW families wanted to be.

He pointed out that this contention was supported by the unusually strong market for lettings and for commercial property. The only area where the market is weak is the residential agency sector, and this he said was skewing the other sectors. Whereas clients who usually come to London at this time of year would be looking for good residential property for their portfolio, they were now hunting down good commercial property because the stamp duty was 4% not 12%.

Buying a home however is very different from buying a commercial property, he went on. It is more akin to an investment of passion; it can be personalised to the tastes of the family, it can create status and deepen relationships. Inviting a business prospect in to your home is much more personal than meeting in a hotel lobby or restaurant.

The current increase in buyers for residential homes in January he said was due to the announcement of an increase in SDLT for second homes as from 1st April from 12% to 15%. However this blip would soon evaporate after 1st April as the market adjusts to the new rate of tax.

What, I asked, was the cause, not so much for the weakness in the market, but which is due to the hike in stamp duty, but the length of time it is taking before it is absorbed into the price? In his opinion the continued lack of confidence was due to confusion as to how structure the acquisition – if an offshore company provided little or no benefit how should the investment now be structured.

James was clearly plugged in to the mood of the market so I asked him about the market response to ATED. Why were so many homes of non UK residents still owned through offshore companies despite the exponential rise of ATED? The tax costs on homes above £2million are now considerable, even for those rich enough to pay them as I set out below.

Property Value     ATED         Inheritance Tax (exc nil rate)

£2m-£5m            £23,350       £800k-£2m

£5-£10m             £54,450       £2m-£4m

£10-£20m           £109,050     £4m-£8m

£20m+                £218,200     £8m+

James explained that the reason why the higher residential market is depressed could be in part the same reason why people were slow to de-envelope - a lack of confidence as to how to structure the investment.  Confidence would return as soon as buyers and home owners knew what the options were under the new regime.

In my opinion, what is needed is old fashioned tax planning, knowing how the taxes work, what reliefs are available and putting them together well.

Six top planning tips

1. Be clear as to the long term intentions with regard to the property you own or are planning to buy
2. If you are concerned as to your privacy own the property through a company as a nominee
3. Be sure that the right person owns the property - multiple ownerships are not usually a good ide
4. Make sure you know who is to inherit the property and plan accordingly
5. If the investment is for life – think about CGT
6. Plan to avoid inheritance tax – it need not be paid in full if at all, multiple ownership is often NOT the best solution.

James was excited; he wanted me to come to his office and explain my planning tips to his sales team. Once they were clear as to what could be done he was sure confidence would return and buying and restructuring would pick up.

If you would like to know more about my six top planning tips, please contact svetlana@garnhamfos.com for a further discussion.

Team players

I had a meeting last week with an old friend who works primarily in the Middle East, Lama. She has a client Farah who is the widow of a very wealthy businessman that died six months ago. Farah’s husband left a substantial family trust based in Jersey and five properties in London which he held in his own name. The Trustee was a professional who had been given a Letter of Wishes as to what it should do with the trust fund. It had been drafted by a reputable firm of lawyers and in it the trustees were expected to make ‘reasonable provision for the siblings’. Already the siblings were beginning to mutter between themselves and with the trustee as to what this could mean for them.

In addition to this trust he had left five substantial properties which he owned personally, having been encouraged to de-envelop last year to avoid ATED by his lawyer.

Farah was at a loss to know where to start. She had lost confidence in the trustees who seemed incapable of getting to grips with her siblings in law and were delaying in responding without an opinion from a QC.  With regard to the lawyers, which her husband had been using, she was also furious that they had encouraged him to de-envelope the five London properties to avoid paying the annual tax on enveloped dwellings without any consideration as to the Inheritance Tax consequences. She was now facing an inheritance tax bill of £3 million.

Farah asked Lama to fix a meeting with our Family Office, because she wanted to know what to do. She wanted to sue her lawyers and remove the trustee, but did not know how she should replace them.

After spending the first few hours getting to know her concerns, the family culture and background, I started by telling her that there was no easy solution. She needed to understand the law, her options and the consequences before choosing what and who she needed by way of professional guidance.

The most pressing need was to get a Grant of Probate for the five homes in London. Farah’s husband had not left a Will and as already mentioned he owned them personally. Under the Intestacy rules Farah was left with an outright gift of £250,000 and half of the remaining value (of around £8m) subject to inheritance tax.

I told her that she and her children could enter into a Deed of Variation and explained what was needed, including a probate lawyers to prepare the necessary forms and the Deed; I explained the process.

She then needed to put a halt to the dispute between the trustees and her siblings in law before it got out of control. I suggested she meet a member of our team who could advise her on what was needed to put a swift end to the dispute without incurring substantial professional fees and it made her feel delighted.

Next on our agenda was to address her right as Protector to remove the Trustee. I pointed out to her that her duty was fiduciary which meant that she could be made liable for any loss to the trust personally. Given that her siblings in law were beginning to show their appetite for a fight, she needed to address this exposure seriously.

I explained that she had the option of setting up a private trustee company which could be owned by a Bahamas Executive Entity and then put in place some good governance principles which a member of our team could guide her on the detail of this. She could continue to use her existing trustees to administer the trust, but they would not then make the decisions which could then be left to the board. She could possibly use the office as a director or member of the board to encourage one or more of her siblings in law to take a less aggressive stance and work with the trust not against it.

As we came to the end of a very interesting and fruitful discussion, she commented on how weary travel had become without a European passport. This of course is an area I advise on frequently and we are in the process of choosing a suitable EU country of which she can become citizen.

They say it is not what you know but who you know – which is true. However for many the difficulty is finding a Family Office at the hub of the wheel, that not only has the right connections but can  ensure that the correct contract is put in place to get the most out of them.

UHNW families are looking to family offices for independent, neutral advice

There is a misconception that people who have a lot of money have excellent advisers who look after all their problems.

This is of course true for families with family offices, but for those who do not, or their family office only looks after their investments, the industry is confusing. It is made up of specialists and until recently there were very few general practitioners to whom they could turn for guidance. This has been recognised and family offices are now being set up to provide independent, neutral and general advice.

In the medical profession there are numerous independent and unbiased general practitioners. If you have a pain you go to your doctor who may refer you to a specialist having diagnosed what the problem is likely to be. If it does not get fixed you go back to your doctor to discuss with them any ongoing concerns.

Imagine a medical profession without a doctor and then you will get some idea the frustration the UHNW community experiences in finding a good advisor for a variety of concerns. Without a general practitioner they need first to recognise their problem – without the early warning sign of pain, analyse who best to serve them, instruct them, monitor progress and at the same time stop fees running out of control. UHNW families are not always loyal because they have found an adviser they trust, but because there has not until recently been a general practitioner to turn to for an independent neutral opinion.

David came to see me Monday afternoon; he has a home in the UK which he owns through a company in Jersey. He lives in Switzerland and is anxious about the Annual Tax on Enveloped Dwellings which is approaching; this year it will cost him in excess of £100,000. His trustees in Jersey have told him that it will take between six to eight weeks to de-envelope. He sought advice from his lawyer as soon as George Osborne said his house would be subject to inheritance tax as from 2017, but was told to wait until the Government paper on ATED is published. It was promised to be forthcoming after the summer recess, but there is still no sign of it and his lawyer is away for the next few weeks abroad.

David is cynical. ‘The Government only wants another round of ATED collection. The tax on homes owned through offshore companies has been a ‘windfall’. I suspect we won’t have the consultation paper until it is too late to get our properties out of offshore companies. If I want to de-envelope by the 1st April, I need to start the process at the latest in early February which is in two weeks or I face another year’s tax. My lawyer seems to think that paying another year’s tax excess of £100,000 is somehow fine – well it is not!’

Of course I was unable to comment, but told him that ATED and IHT on UK real estate was not going away and there were a number of options. Which option was best for him was dependent on his life expectancy, circumstances and priorities. It became clear after some discussion that David was planning to sell his home as soon as his wife and children no longer wanted to come to London together. His children were now in their early twenties and would soon want homes of their own.  His intention was therefore to sell in four years.

David easily made up his mind as to what he wanted to do. I said I could introduce him to an advisor who would quickly and inexpensively provide a tax audit of his offshore structure and then I would make sure the protector gave the necessary instructions to liquidate the Jersey Company.

David would then own his home directly with his wife as joint tenants.

David was delighted; he was able to get on with what he was convinced was the right thing to do, save many thousands of pounds of tax, and feel in control of his planning.

In David’s opinion his advisers had become complacent. Their holidays and international travel seemed to be of greater importance than the concerns of their clients. Although he had known his advisers for many years David felt they only ever responded when prodded and had never once picked up the phone to warn him of any dangers or to show real interest in his concerns.

If David is not alone in his frustrations, the industry which serves the UHNW community may not only face increased dangers of litigation from clients and HMRC– as I noted last week, but as the number of family offices which provide independent estate and succession planning advice grows so may the dissatisfaction with existing advisers become evident by business going elsewhere.