A coiled spring!

Andy Haldane, the Bank of England’s chief economist, has likened the economy to a ‘coiled spring’. British households have saved an ‘astonishing’ £250 billion equivalent to 20% of normal annual household spending) while businesses are sitting on a £100 billion cash.

Noel Craven of Quartet Asset Management and our Podcast Professional of the week is also upbeat (see his predictions below).

The biggest concern to what I think will undoubtedly be a recovery, is what will Rishi Sunak do in next month’s budget.

According to figures released recently the British economy shrank by the most of any major country in the world during 2020 in a recession that was the deepest in 300 years. It therefore needs time, clarity and help to recover.

These are my ideas as to what I would like the chancellor to do next month.

Top of my list is that businesses need certainty so that they can begin to plan.

They need to know when they can operate freely again – which must be the first priority.

Once the NHS is no longer under threat of being overwhelmed businesses must be allowed to work freely again and if there are to be restrictions what will they be – a vaccine passport before you can go to the theatre, or into a restaurant, a negative testing result to be allowed back to school?

Already we have seen London covid-19 cases shrink by 90% - how much further will it need to shrink before lockdown is lifted. Bristol scientist Profession Adam Finn is on record as saying that the vaccines are now ‘definitely doing the job’ in stopping people getting coronavirus so severely that they had to be hospitalised.

Second, the chancellor must rule out any tax increases, for the foreseeable future. It is not as if the economy cannot bear the increased debt for a while longer given the low rates of interest. We need to signal to the world that we are open for business post Brexit and what sort of business that will be – needs to be clearly set out.

Personally, I think the chancellor should go even further; he should stimulate the economy by reducing taxes such as a lowering of VAT and  suspension of air travel duty. We are no longer part of the EU and therefore we can decide what taxes and at what rates we want to introduce.

Fourthly, I would also like to see a resurrection of a form of entrepreneur’s relief for capital gains tax. A lot of businesses have collapsed in the past twelve months and entrepreneurs need to be encouraged back into business. The lowering of the relief from £10 million to £1million needs to be reversed, our entrepreneurs need to be encouraged to take risks again to get the economy moving

If you have any comments or would like to add your voice to my blog, as a member of Caroline’s Club – please let me know.

“The closing of global economies in 2020 means easy comparators for economic figures will see most regions post positive GDP growth for 2021. Not all lockdowns were equal however, with localised measures in some countries, quick complete shut downs allowing sooner re-openings and elsewhere either no centralised policy or less developed economies without the structure to close. Where earlier and fuller economic re-openings from Coronavirus have been possible, economies have recovered stronger and will continue to outperform. This favours Emerging Markets over Developed and within Developed Markets, America over Europe ex-UK. It is not beyond possibility that Europe may suffer a second year of contraction with bureaucracy, an aging population and few growth drivers ahead of the economic closure all formidable headwinds.

As growth returns low base figures will not only create positive headline grabbing figures but also ones that could cause worries for investors. An inflation spike is likely as economies strengthen and particularly if this occurs during Q2 2021. Central Banks have been openly speaking about this concern in an attempt to forewarn markets and reassure that they will retain accommodative policy. Despite these actions there remains a risk that if pent-up demand, reduced supply and easy fiscal policy coincide, a longer-term inflation phenomenon could develop in some economies. A 2% US 10 year treasury yield is a key indicator for this. Currently at 1.21% there is room for markets to express inflation concerns before the level broken below in July 2019 comes into sight.

Structural changes to life in developed economies have been accelerated during the pandemic creating new areas for investment and opportunities for refreshing economies. Build back better has been the political message, with the World Economic Forum one of the leading architects of this policy. Climate goals have come to the fore for Governments with China joining European nations announcing significant green targets and, following the election of Biden, the US re-joining the Paris agreement. Much Infrastructure to facilitate the attainment of these policies needs to be built which will be resource intensive, both natural and financial. A look at past experience suggests expansionary fiscal policy coupled with a resource hungry growth leads to rising commodity prices. Some prices have already started to gain but the likely supply demand imbalances across the board and a low starting point could mean that this is just the beginning.
”

— A Note from Noel of Quartet Asset Management

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Furlough, working from home and Covid – tricky stuff

For most of us, lockdown and restrictions on travel are just boring – and we look forward to the time when we will all be jabbed and allowed to move more freely.

However, for a few not being able to travel, working from home, furlough or being made to quarantine for anything up to 21 days – could be phenomenally expensive.

In the UK, like the US and many other countries being a resident for tax purposes is all about counting the days where you spend your time and work.

With working from home, furlough, covid 19 illness of yourself and loved ones, quarantine and restriction on travel –has just got a whole lot worse.

A UK resident pays tax on his or her world-wide income, unless they are domiciled abroad, which I won’t go into now.

The UK tax-year runs from 6th April to 5th April, whereas in the US it is the calendar year.

Whether you are UK resident usually depends on how many days you spend in the UK during the tax year.

If you spend 183 days or more in the UK in the tax year you will be automatically considered by HMRC as tax resident in the UK for income tax purposes.

However before going any further I need to say that days spent in the UK are not included as days spent in the UK if those days spent in the UK were beyond your control – but personally I would prefer not to have to argue the case with HMRC, IRS or any other tax jurisdiction!

So these are the rules – hold tight!

You will also be considered UK tax resident if your only home was in the UK – and you rented it or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year.

It gets trickier – HMRC will automatically treat you as non-UK tax resident if either you spent 16 days in the UK (or 46 if you have not been UK resident for the past 3 tax years) or you work full time abroad (averaging at least 35 days a week) and spent fewer than 91 days in the UK, of which no more than 30 were spent working.

It does not stop there

You will also be treated as non-UK tax resident if you were resident in the UK for none of the previous 3 tax years before the year in question and spend fewer than 46 days in the UK in the current tax year.

This includes people who normally live abroad, but have had to come to the UK in this current year, and quarantine has taken them over the 46 days, they then face the uphill task of convincing HMRC that they remained non – UK tax resident

The third situation in which a person will be treated as non-UK resident is if that person is in full time work over the tax year and spent fewer than 91 days in the UK in the tax year, the number of days on which you work for more than 3 hours in the UK is less than 31 – and there is no significant break from your overseas work – - try working this out when most people are working from home and others are on furlough!

Then there are others for whom UK tax residence is a status they want to have maybe without being a UK resident they will not qualify under a double tax treaty tie breaker.

These are the rules which if satisfied you are automatically treated as UK tax resident

These are

·      If you are in the UK for 183 days

·      You have a home in the UK and spend a period of 91 consecutive days in the UK, and at least 30 of those days fall in the tax year in question and you have been present in that home for at least 30 days at any time during the year, and you did not have a home abroad.

·      You work full-time in the UK for any period of 365 days and more than 75% of the total number of days in the 365 day period when you do more than 3 hours work are days when you do more than 3 hours work in the UK, and at least one day has to be both in the 365 day period and a day when you spend more than 3 hours work in the UK!

So, what is the situation if you are not automatically UK tax resident or non – UK tax resident?

If you thought that the above rules were tricky – it is now going to get much tougher!

If you were not UK resident in the past three years whether you are UK resident or not will depend on how many connecting factors you have with the UK

·      A family tie

·      An accommodation tie

·      A work tie and/or

·      A 90 day tie

And if you were resident in the UK in one or more of the 3 tax years before the one you are considering you will also have to check whether you have a country tie as well.

The more ties you have the fewer days you can spend in the UK before you become UK resident.

For capital gains the same rules apply, but non-UK residents only pay capital gains tax on UK property or land, or if they return to the UK.

Add to this mix quarantine, travel restrictions, cross border issues, furlough, home working and covid 19 illness not only for you but loved ones – and the cost – not only in tax, but in getting to the right decision is monumentally expensive!!!

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here

Professional services for Family Offices

Last Thursday four leading private client professionals joined with me to record Client Stories with their Family Office clients. This will be played at our next ‘Members’ Meeting on 23rd February at 11.00 when our Members can then also share their client stories with our other attendees.

First up was Nic Arnold, Tax Director in PwC’s Private Office. She also leads the firm’s Luxury Asset Advisory practice. I have known for many years that PwC has a luxury asset advisory practice since my former tax partner at Simmons & Simmons was the global head of the direct taxation group at PwC. It was therefore a great pleasure to hear what Nic is up to and her role in her luxury asset practice with our Members.

For many wealthy families the purchase and management of their luxury assets; yachts, planes and art are their most expensive single asset (outside their business). Nic’s expertise is making sure they do not spend any more on buying and managing their luxury assets than they need to.

Unnecessarily, wasting money was also the theme of Charlotte Thorne’s Client Story.

Charlotte is a Founding Partner of Capital Generation Partners which invests primarily for clients with Family Office sized net wealth. Charlotte’s story was about a client who went to their preferred bank to buy a put option on the S&P 500. Unbeknown to her client a fee was buried in the small print of 10% of the purchase price; $57,800.

Charlotte had placed the same trade on behalf of a discretionary client through another bank and had been charged only $208. This wide discrepancy of fees is not unusual, but it takes an expert like Charlotte to know what to expect in terms of fees and what is excessive.

Charlotte managed to work with the client to claw much of these fees back. You can find her Charlotte’s Client story uploaded onto her profile on Caroline’s Club

We were also delighted to be joined by Sylvia Andreotti who was able to step in, at short notice, on behalf of Rebecca Bettany who was called up to take the Covid-19 vaccine and did not wish to lose her slot.

Sylvia is based in Monaco where she joined JTC in 2020 as an Associate Director having previously been responsible for the management of a Multi Family Office. Sylvia’s specialist subject is international corporate law, implementing cross-border instruments for multinational companies and UHNW families across multiple jurisdictions.

Her Client Story was about a family who moved from Ukraine to Switzerland together with their luxury assets.

Jonathan Gain founder and Chief Executive of Asset Management firm Stellar was also on the panel to share his three-minute Family Office Client Story. In setting up Stellar Jonathan recognized the opportunity of what he calls and inheritance economy – the transfer of £5.5 trillion of wealth to the next generation over the next thirty years.

Last but not least was my Client Story about a Client for whom we put in place an asset protection structure, good governance and smooth succession, but sadly he had struggled to implement it fully, with the result that on his death the business was split up between his eldest child and his young wife.

After we had recorded our three-minute stories, the recording machine was switched off and I asked our little group for feedback.  Two things, in  particular, struck me was that everyone found the exercise, not only enjoyable but also educational.

Nic Arnold said ‘Jonathan I have always known about the inheritance benefits of Business Property Relief, but not known where to go on behalf of my client to build a portfolio around assets which qualify’

Charlotte Thorne was also interested in what Stellar was doing ‘We are both advising clients on what to invest, but from very different and complementary perspectives’

I particularly liked, as did our other panellists the idea of choosing your own bit of forest into which to invest which can be visited as well be excluded in the estate on death which means a saving of 40% tax.

I am delighted to say that we will be hearing more of what Jonathan and Stellar do for their clients as they are sponsors for our March, April and May Members’ meetings of Caroline’s Club.

If you would like to hear the recording of our panellist client stories and attend our next meeting on the 23rd February where you will have the opportunity to share your Client Story with our Members, simply register and upgrade your account to become a member, or you can listen to our panel’s recording on YouTube or on Caroline’s Club soon after 23rd February.

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here

When death is only the start

In the first few days of this year, 2021, I received the news that one of my clients had died – it made me sad – we had worked together for many years, I built for him a family office which had stood the test of time and we had consolidated his empire into one structure which was robust and strong.

His situation was not dissimilar to another client of mine who I will call Fred, and for whom I had set up a similar family office which was also robust and strong. But both of these clients had been slow to fully implement the good governance systems I had recommended because neither wanted to choose to whom to give the reins of power, the eldest child or current wife!

 Both were founders of businesses which are household names, both had wives who they had worked with in running the business and both had children from a previous relationship who were involved in the busines, but neither wanted to bite the bullet and hand over to the next generation; a decision the current wife disapproved of!!!

Fred had married his childhood sweetheart, an attractive, long suffering woman who devoted her life to her three children while Fred worked on his business. In due course Fred and his wife became distant she was involved in her family and he in the business.

In due course, he found he had more in common with his Personal Assistant who I will call Julia rather than his then wife.

Julia made Fred feel successful, and he enjoyed her company on business trips. She knew all his concerns and the challenges he faced everyday as well as all the people he had to work with; some he liked and some he did not. Julia was also clever and manipulative, she made herself useful by directing her short temper, at people he did not like and was unafraid to litigate against them on his behalf.

As might be expected, Julia eventually persuaded Fred to divorce his wife, marry her and build a family of their own. She liked the trappings of wealth and encouraged Fred to buy a company jet and to engage a chauffeur to take her shopping and the children to school

Fred bought his eldest son, Jack into the business much against the ‘better judgement’ of Julia. He was a good hardworking boy and was keen to learn about the business following his MBA from Harvard but even though he was a talented protégé Fred did not want to upset his wife and pass the reins over to Jack.

I was brought in by Fred to set up a family office and to consolidate his business empire into one structure with a robust and strong governance. It did however have one major weakness, the decision as to who should be on the family office board after the death of Fred was left to Julia not Jack. This was put in place long before Jack came into the business. The change to appoint Jack had been drafted and was ready to sign, but Fred had simply not got around to signing the documents, for fear of a massive dispute with Julia.

Soon after the funeral, Julia used her powers to remove the family office board and to appoint a new board of acolytes with herself as Chairman.

She awarded herself an astonishingly high salary and the exclusive use of the business jet and yacht which she said she needed as the Chairperson. Jack voiced his disapproval, but his voice was drowned out by the board appointed by Julia.

The press had a field day, roundly criticising the new management and Julia in particular – she was deaf to their criticisms which saw as being leaked by Jack

It was not long after Fred’s death that the performance of the business went into freefall; Julia blamed Jack for his failure to ‘fill the shoes of his father’.

Eventually, exasperated by the high-handed approach of his mother-in law and inability to run the business properly Jack started legal proceedings, to oust her from the board and to reinstate what he understood was the wishes of his father.

As the various sides of the family engaged in combat the value of the business continued to slump and fall.  

After several years, the family was fully divided; unable to have any civil conversation without lawyers involved. Exhausted by litigation and its cost – the family finally agreed to mediate. Julia took over one side of the business and Jack the other, the company was split.

It soon became clear thereafter that Julia was unable to run her side of the business which she eventually sold to an independent third party.  Jack would dearly have loved to have bought it but Julia did not want to sell to Jack. Nevertheless, she sold the business at a record low valuation and when Jack eventually bought it back, he was able to turn it around and the share valuation once again rocketed. Julia remained bitter

From my experience of working with successful families the commercially sensible decision is not always the one which is taken, because personal and emotional issues come into play. This is why everyone who works with successful families needs to have access to the best private client professionals across a range of disciplines to recommend other professionals as and when the circumstances demand. This is why I formed Caroline’s Club; a private client professional network keen to be of better service to their clients.

I am not a litigator or mediator, but on occasions my client may need their services and if I do not have the necessary skills and experience – I know of someone in Caroline’s Club who has

If you would like to promote your services and skills to our network of private client professionals and join our Culture of Care click here to find out more and if you would like to join Caroline’s Club simply register here

Charities lose out

The loss of income of income to charities for the six months to December 2020 is estimated to be £6.4 billion due to covid-19 related causes. At the start of 2020 just over one fifth had insufficient reserves to meet more than one month’s expenditure. Most of these charities as well as others are now struggling.

Whereas many charities have proved innovative and enterprising during lockdown and some qualified for Government emergency funding not all have found ways of raising money

Most charities have had to stop fund raising activities; concerts, dinners, sporting fixtures, auctions and galas; not only did they have insufficient funds to keep going for much more than a month without raising funds most of the ways they used to raise funds had to be curtailed.

According to Pro Bono Economics one in ten of our 170,000 charities in this country are now insolvent.

If your charity is in that position – what could, or should you do?

The definition of a charity is enshrined in law, which was consolidated in Charities Act 2011 to include 12 distinct charitable purposes which must be exclusively for the benefit of the public.

It follows from this definition that any drop in income to our charities will affect the health and well-being of all or us, in one way or another, so it is in our interests to keep them going for as long as it takes until they can raise monies again for their charitable purposes.

Most charities are either formed as trusts or as companies limited by guarantee with charitable purposes. Of the two a company limited by guarantee is the more popular because if a charity should fail – with less income than outgoings – its losses are limited to the extent of the guarantee, with one notable exception which I will touch on later.

However, if a trust should fail its trustees could face unlimited liability, if found to be in breach of trust – such as not acting as a prudent man of business – and if the trust deed did not have a robust indemnity clause for its trustees.

A company limited by guarantee, like other companies is subject to the Insolvency Act 1986, which does not have a definition of when a company is insolvent other to say ‘unable to pay its debts’.

The Insolvency Act 1986 – tries to draw a balance between keeping a company going with mechanisms and processes to get it over tough times – such as applying for administration - to enable the directors to refinance – or in these covid – 19 times to hang on for better times.

 Many charities have indeed been most innovative and resilient – but these testing times will see some charities close down. One option, which is disliked by many charity founders is to merge with another charity with similar objects. The reason why this country has so many charities, 170,000, is because most wealthy founders like to set up their own charity which they can run themselves for their own purposes; in memory of a loved one, or a lifechanging event, but for some there will be no other option.

But not every charity is able to find a suitable home; some are not managed well enough, or own wasting assets that other charities do not wish to take on.

 These charities are in a tricky situation, although the Insolvency Act 1986 encourages companies to take to time to sort out their finances – not all can - even after time – these charities need to be mindful of ‘wrongful trading’. This is when a creditor can apply to a court to determine that the directors of a company are continuing to trade knowing that the company is insolvent. If on such an application the court determines that a company is indeed wrongfully trading – the directors of the company can find themselves ‘personally liable’

To avoid this, the directors can pass a resolution to put the company into insolvent liquidation and if not pursued by creditors can appoint an insolvency practitioner who needs to be licensed and authorized to act in relation to an insolvent company. Most insolvent practitioners are accountants working in a firm of accountants.

As a law firm Garnham Family Office Services, we set up charities as well as deal with tax and succession, and I find it is much more enjoyable to set up charities for clients than to close them down. However, during these difficult times some charities have no option but to seek advice if their income is falling behind their expenditure.

Like many other tasks closing down a charity needs a team of advisers – I would need for example to appoint an Insolvency Practitioner since I am not authorized or licensed to act for an insolvent company – which is where Caroline’s Club comes in – if I do not have the skills or experience necessary to complete a task, I can find someone who has through the Club

If you have concerns about a charity please contact me on caroline@garnhamfos.com or if you would like to join our club, sign up to our meetings and meet our network simply register here, or contact me on caroline@carolines.club