How free will we be post Brexit?

On Sunday, 2nd February 2020, I travelled to London Gatwick airport from Spain where I had been skiing with my former colleagues at city law firm Simmons & Simmons in the Pyrenees. I wondered how different it would be to arrive in the UK post Brexit.

Entry was as smooth as ever, only the look and feel was different; big notices displayed the Union Jack flag alongside the flags of countries which could enter with the same ease as British citizens.

In our GFOS podcast this week Episode 8 of ‘How to Keep your Money’ I interview Dr Christian Kalin CEO of Henley & Partners known as the ‘Passport King’. I ask him what it will be like for British citizens post Brexit?

For the past 47 years, British citizens have enjoyed freedom of movement throughout the countries of the European Union, not only for themselves personally but also for their businesses and assets. Now we are no longer part of the Club - what will this mean in practice?

For British citizens, as I discovered on Sunday, individuals like me, will continue to travel across the European Union as normal, until the transition period ends on 31st December this year, 2020. Post 31st December as Christian points out in Episode 8 of our GFOS podcast, British citizens may have to apply for a Schengen visa, but can then travel freely across all 26 of the Schengen territories. Holidays in Europe will NOT be affected.

However, if a British citizen wants to live in an European country and does not have a European passport, then he or she may need to invest in an European passport from either Malta, Cyprus or Bulgaria. These European countries offer citizen investment programmes on which Henley & Partners are experts.

For British businesses, as for British citizens very little will change during the  transition period; UK-EU trade will continue without extra checks or charges, the UK will continue contributing to the EU budget and will still be bound by EU laws for the remaining 11 months - but it will lose its seat at the decision -making table.

Not much therefore will change for the remainder of this year. The UK will still be subject to the powers of the European Commission to investigate breaches of EU law in the UK and the European Court of Justice will still be able to impose fines. How true therefore is it to say that the UK left the EU on 31st January? Has anything changed other than the removal of the British flag from all over Brussels?

The real point of interest will be what effect leaving the EU will have on businesses post 31st December 2020. This will depend on the outcome of the negotiations between the UK and EU from now on.

Martin Territt of Territt Associates former EU Ambassador to Ireland made this clear in last week’s GFOS podcast.

In  Episode 7 Martin says that if there is the political will, it will be possible for the UK and the EU to reach an agreement by the 26th November 2020 (the deadline EU officials have set to give time for the EU Parliament to approve the deal before 31st December), but the success of these negotiations will depend upon secrecy.

Although there remains considerable uncertainty for British businesses, and there is much talk about British businesses such as pharmaceuticals, car making and fisheries becoming isolated and suffering, there is also a lot of optimism. Many British businesses will see Brexit as an opportunity. Britain now has the lowest unemployment since 1974 and sterling is buoyant - so it cannot all be bad.

However, I am skeptical of the reports from the CBI which says that Britain has seen the greatest surge in confidence among manufacturers on record, and the IMF which predicts that over the next two years our economy will grow faster than that of any other major European economy.  Is this surprising given that Britain has probably seen the deepest and longest period of  uncertainty ever?

If you would like to find out more, Sandaire will be hosting the first of our GFOS Talks on 25th February 2020, 18:00 to 21:00; Wealth Creators Post Brexit. If you would like to register your interest to join us for this debate click here. Spaces are limited.

Samuel Bosanquet from global Multi Family Office Sandaire, will be joined by Dr Christian Kailin of Henley & Partners, Martin Territt of Territt Associates, the former  EU Ambassador to Ireland,  and the fourth speaker Setu Kamal leading tax barrister who will talk about tax and EU freedoms. 

GFOS is committed to creating the definitive library of information for the UHNW community. It is a law firm which specialises in issues which affect the UHNW community. CEO and founder Caroline Garnham draws on her 35 years of working with wealth owners and entrepreneurs to invite people she knows and has worked with to contribute knowledge and expertise to our GFOS podcast library.

And if you would like to meet with Caroline for advice on Good Governance or any other concern to which she or her network can assist simply call Deborah on 020 3740 7423 or contact her on here.

Brand Sussex – Good or bad?

On the 8th January 2020, the Duke and Duchess announced their decision to ‘step back’ from duties as senior royals and work towards becoming ‘financially independent’ from the family ‘Firm’, the House of Windsor.

As a family governance lawyer, this decision is axiomatic of what we observe as a far deeper concern which needs to be addressed in the House of Windsor family constitution or protocol – what is expected of members of the family who are not destined for the ‘top job?

Prince Charles has hinted that he plans to cut costs and slim down its operations as part of a broader restructuring. Prince Andrew, Charles’s younger brother has been fired from functioning as a senior Royal by his older sibling due to his ill-fated television interview and connections with sex offender Jeffrey Epstein. Princess Anne carved out a niche for herself as an equestrian Olympian gold medallist, but with little brand credit for her achievements and philanthropic work.

These examples indicate a lack of protocol guidance as to what lesser senior Royals are to do with their time and for what purpose. This is not a problem unique to the Royal family, a similar problem presents itself with any family where some members work in the business and some do not

Hakan Hillerstrom in Episode 6 of our ‘How to Keep your Money’ ‘Survival of the Family Business’ highlights how good governance and planning can lead to the survival of the family business and the preservation of the family wealth.

Of course, there is no danger of the Firm not surviving, it is a well-oiled machine with experienced advisors, but recent events may have uncovered a weakness which should be addressed.

It is understood that Harry was told not to talk directly and discreetly to the Queen on this matter. It was considered not a personal matter between Harry and his grandmother but a strategy matter for the ‘Firm’s’ advisers who he feared would ‘rain on his parade’ and tie him and his new family in red tape. Is it surprising, therefore that he and his wife took matters into their own hands?

Brand Sussex according the Economist article ‘A right-royal shake-up’ is ‘widely perceived to be undervalued’ a fact on which the couple want to capitalize for their own financial advantage. The couple intend to follow the commercial model adopted by Obama when he left office with paid for publicity tours, speeches and philanthropic endeavours.

But, cannot this Brand Strategy also play into the political hands of Britain as it leaves the EU?

Martin Territt, former EU Ambassador to Ireland, makes it clear in Episode 7 of this week’s podcast ‘How to Keep your Money’ that the UK’s most significant and influential trading partner is the US. 

The EU does not have a Free Trade Agreement with the US and the relationship between the two is strained. However, the UK has a good relationship with the US and already has put in place a Mutual Recognition Agreement which could pave the way for a Free Trade Agreement – if, as Martin Territt says, there is the political capital in the US and the UK to make it happen.

Brand Sussex by basing themselves in North America for part of the year could be just the brand strategy Britain needs to create the necessary political capital needed between the US and the UK. Britain, post Brexit needs to find a way to get a leg up onto the global stage and Brand Sussex could be just what Britain needs to kick start this challenge.  Click here to listen to Martin Territt.

Martin Territt will also join our panel of speakers on 25th February 2020 to discuss Wealth Creators Post Brexit. He will be joined by next week’s podcast speaker Dr Cristian Kalin, the ‘Passport King’ and CEO of Henley & Partners. The third speaker will be Setu Kamal leading tax barrister who will talk about tax and EU freedoms and the forth Alex Scott speaker in our Episode 2 podcast on ‘How to Keep your Money’. If you would like to register your interest to join us for this debate click here.

And if you would like to meet with Caroline for advice on Good Governance or any other concern to which she or her network can assist simply call Deborah on 020 3740 7423 or contact her on deborah@garnhamfos.com

Mrs Smith hits the jackpot

A recent Office for National Statistics report estimates that the top 10% of earners own 45% of Britain’s £14 trillion total wealth. Most of these earners are business owners, but 70% of their wealth will not last beyond the third generation.

In our podcast this week, Episode 6, I talk to Hakan Hillerstrom about the ‘Survival of the Family Business’. Hakan highlights how good governance and planning can lead to the survival of the family business and the preservation of the family wealth – to six or even seven generations.

Mrs Smith, better known as Denise Coates, is Britain’s highest paid CEO with a take home pay last year of £323million.

Like Hakan, Denise worked in the family business from a young age. Her father had a betting business, Provincial Racing and she worked as a young girl in the cashier’s department where she would mark up bets.

However, unlike many of the families Hakan has worked with, she was allowed to take over the small chain of shops after leaving university and it did not take her long to make the business profitable enough to acquire other local betting businesses.

In 1995 she became MD of her betting empire and took time to develop an online betting platform. When this was fully operational and tested, she sold her betting estate for £40 million and gambled on the online betting platform Bet365, making more money than her offline business – her bet paid off.

In 2015 Denise moved Bet365 to Gibraltar where the regulations for online betting are more favourable. At that time the UK was part of the EU and Denise could take advantage of our EU Freedom of Establishment to move the business offshore Although Gibraltar is a UK colony it also has a ‘special relationship’ with the EU and the move paid off.

The question wealth creators are asking now is will this Freedom to Establish remain when we leave the EU?

I put this question to leading tax barrister Setu Kamal of 15 Old Square as part of our mini-series ‘Post Brexit and Wealth Creators’. How much scope is there to re-establish when we leave the EU?  Setu will give his opinion as part of our podcast series on Wealth Creators Post Brexit and will also take part in our Panel Discussions on the 25th February.

If you would like to join us, you can register your interest here

If you would like to find out more about how you can be part of our vision to create the definitive library of information for the UHNW community simply register your interest here

And if you would like to meet with Caroline for advice on Good Governance or any other concern to which she or her network can assist simply call Deborah on 020 3740 7423 or contact her on deborah@garnhamfos.com

deborah@garnhamfos.com

Another swipe at the rich!

One would have thought that the Government in the lead up to and following Brexit, would want to use tax incentives to attract and keep entrepreneurs and farmers in this country but it appears not – it continues to be short sighted; myopically looking at ways to raise revenue regardless of the message it is sending out.

The Office of Taxation Simplification under the guise of simplifying Inheritance Tax seems hell bent on finding ways to increase taxes.

Inheritance Tax, as we know is levied on death. The tax rate is a hefty 40% which is imposed on all value over and above the nil-rate band of £325,000.

When the Government introduced inheritance tax in 1984, it said it did not want to break up businesses or farms on death and so provided an exemption for ongoing trading businesses and farms, called Business Property Relief and Agriculture Relief respectively.

These reliefs are very valuable for the entrepreneur and farmer.

·      16,380 estates over five years (which sounds much more than 3,276 a year) are said to benefit from the relief

·      with an estimated £5.98 billion (£1.2 billion per year).

Given that the total tax collected from Inheritance Tax is only £30.4 billion over the next five years this is a significant amount.

Where an estate includes a trading business which qualifies for relief BPR reduces the amount chargeable to Inheritance Tax, either by 100% or by 50%.

One hundred per cent relief, if it is a

·      A business

·      An interest in a business

·      Unquoted shares in a company, including share trades on AIM

Fifty per cent relief if it is  

·      Quoted shares or securities where the owner has a controlling holding

·      Land or machinery owned personally and used in the trade of a company controlled by the owner or a partnership in which that person was a partner.

To qualify the investment must have been owned by the deceased for two years up to the date of the death.

APR is available for the following types of property:

• agricultural land or pasture

• woodland or buildings for the intensive rearing of livestock or fish, where occupied with and ancillary to the agricultural land or pasture

• cottages, farm buildings and farmhouses which together with the land, are of a ‘character appropriate’ to the property

While both APR and BPR might potentially apply to farms, APR is wider than BPR in some respects and BPR in others. APR potentially applies to the farmhouse and to let land, but only applies to agricultural property in the UK, Channel Islands, Isle of Man or an EEA state. This contrasts with BPR, which has no such restriction. Where a property qualifies for both APR and BPR, APR applies in priority.

As for BPR, to qualify for APR, property must generally have been held and used for agricultural purposes for 2 years up to the date of death where the property is occupied by the owner, or 7 years where it is let.

The relief is 100% of the agricultural value if the owner farmed it themselves, or it was let on a tenancy that began on or after 1 September 1995. The relief is 50% in other cases.

The most important exception to BPR is that the business must not consist ‘wholly or mainly’ of holding investments.  While the term ‘wholly and mainly is not defined, it is taken to be a test of greater than 50%. This means that where the business has both investments and a trading business, provided the investment is not the main part of the enterprise the entire investment will qualify for BPR.

For Capital Gains Tax purposes, where a business is given away as a gift or sold to a third party, gift holdover relief or entrepreneurs’ relief may apply. For these reliefs, the test for eligibility in relation to companies is not the ‘wholly or mainly’ test but whether there is ‘substantial’ trading activity in the business. HMRC guidance suggests that this will generally involve an 80:20 split of trading vs investment, with several indicators to look at, including assets, income, expenses, time spent by officers or employees, and the history of the business.

The difference between the Capital Gains Tax rules and BPR the OTS says can distort behaviour. This is due to gifts in life being treated differently under the Capital Gains Tax rules from bequests on death, to which the Inheritance Tax rules apply.

The OTS suggests that given the policy rationale for APR and BPR to grant relief to trading businesses, government should consider why the level of trading activity for BPR is set so much lower than the comparable reliefs from Capital Gains Tax.

It recommends that ‘government should, as a package consider whether it continues to be appropriate for the level of trading activity for BPR to be set at a lower level than that for gift holdover relief or entrepreneurs’ relief’. Hmmm – I thought it was just looking at simplification!

If you would like to find out more or you would like to arrange a consultation with Caroline call 020 3740 7422 or write to caroline@garnhamfos.com

A whiff of pleasantness?

Last week I questioned how the Office of Tax Simplification on Inheritance Tax could recommend the part removal of a Capital Gains Tax exemption.

There is no clear stated policy as to how the tax should be amended and why other than to make it simpler. However, in 1984, when Inheritance Tax was introduced, the policy was to encourage lifetime giving.

Reading between the lines – is not the real policy of the report to increase the tax take? Inheritance Tax affects only 5% of deaths a year and raises a measly £4.38 billion is not the policy to raise more tax?

The most important exemptions in inheritance tax as the report points out, are:-

1.     Gifts which fall within the nil-rate band of £325,000

This takes a whopping 64% of ‘transfers of value’ made within seven years of death or on death out of the charge to tax despite the fact that this threshold has been frozen since 6th April 2009. At today’s value the threshold would be £423,000

2.     Small gifts of £250 per person

This is an exemption per recipient and has not been changed since 1980. In today’s value this would be £1,010. It is now almost impossible for executors to track small gifts from bank account records and presumably HMRC time and resources are expended to do so, at low margins?

3.     Annual Gifts of £3,000

This is also difficult for Executors to track from bank accounts of the deceased, since Deeds of Gift are rarely drawn up. This exemption catches gifts over £250 but which cumulatively do not exceed £3,000. For example, 6 gifts or £500 one to each grandchild in a specific year. Again, the threshold of this exemption has not moved since 1981. In today’s money this exemption would be £11,900

4.     Gifts in consideration of marriage or civil partnership

The threshold of these gifts has been frozen since Capital Transfer Tax, the tax before Inheritance tax, was introduced in 1975. It is still £5,000 for gifts made by parents, £2,500 from a grandparent and £1,000 from anyone else.

5.     Regular gifts out or income

This threshold is unlimited– see below

6.     Gifts to political parties

Unlimited and no comment made in the report – read into that what you like

7.     Gifts to Charities

Unlimited and no comment made in the report

8.     Gifts for the maintenance of a spouse or children under 18.

Again unlimited – more about this below

9.     Gifts to a spouse or civil partner

Unlimited if the spouse is UK domiciled

(Plus three more exemptions which I have left out)

The Office of Tax Simplification makes a number of general comments about the confusion and complexity, as supported by quotes from one or two of the small number of respondents (less than 3,000) which the OTS received from what it admitted was not ‘a representative sample of society’. Hmmm.

For all its simplification rhetoric the OTS seems very focussed on the unlimited exemptions, in particular the regular gifts out of ‘normal’ income and gifts for maintenance.

It noted that there was no definition of ‘normal’ expenditure. True, but this exemption has been in operation for some 35 years without much concern. It goes on to say that ‘normal’ could also vary ‘widely over time and from person to person’. True but, then the exemption was to encourage lifetime gifts, rather than what I now appears to be evident - to increase revenue regardless of the impact on the taxpayer.

The OTS recommends that changes be made to this exemption, either a percentage of annual income, or the annual gift allowance should be increased to absorb the normal expenditure out of income. If it turns out to be the later, this will greatly curtail the scope of giving by the very wealthy into trust during their lifetime – but more about this next week.

The OTS also focussed on the plethora of small exemptions; gifts in consideration of marriage and annual gifts.  It recommended that these should be merged into a simple annual allowance which would include the gifts for maintenance of a spouse or child under 18. Fine – but why then remove the hold-over of the surplus of annual exemption to the next year, if not to raise tax?

When inheritance tax was about encouraging lifetime gifts a hold-over made sense. But not if the main driver is to increase tax?

With regard to small gifts, the OTS recommends that the threshold should be increased to £1,000 per gift. If the main driver is to increase revenue it must also be the case that it must keep its costs down. It should not therefore waste time and resources chasing small gifts of £250 and on gifts below the annual £3,000 limit.

The only positive element in the report is that the exemption for gifts made more than seven years of death should be increased to all gifts made more than 5 years before death. Again, not stated directly it is clear that following changes in the data protection rules personal data cannot be kept for more than six years so the executors cannot be expected to disclose details of gifts when records are no longer available?  

Call me a cynic, by all means – for thinking that the main thrust of the report is to raise revenue and not to simply it, but I would be interested in your views, whether you agree or not.

In the meantime, if you would like to discuss your tax and succession concerns with Caroline, please call 0203 740 7422 or write to caroline@garnhamfos.com