Inheritance Tax - the killer!

Last week, I spoke to a friend of mine, an experienced estate agent in Mayfair – ‘House prices are on the way up, and once the borders are open in a few months –we expect a buying frenzy!’

But before our guests reach into their deep pockets to buy their dream house in Britain spare a thought as to who should buy it and who should inherit

Joshua and Lea bought their dream home in Upper Brook Street in Mayfair for £10 million and furnished it with art and furniture worth £650,000. Joshua was born in the UK but Lea was born and grew up in S Africa where they both live and have a family of two teenage girls.

Joshua decided to buy the house in his name – but is this a good idea?

If Joshua were to die first, the house would be subject to tax of £4million which with a bit of planning could be avoided that is total exemption from inheritance tax if a gift is made between spouses, unless the donor was born and grew up in the UK of UK parents, and the other spouse was not, which in technical terms means that a UK domiciled person was married to a non UK domiciled person.

If Joshua were born and raised in S Africa like his wife – or Lea had been born and brought up in the UK no tax would have been payable at all.

Before 2013, the spouse exemption was £55,000 for gifts made by a UK domiciled spouse to a non UK domiciled house in addition to the nil rate band of £325,000. In 2013 this was put up to the same sum as the nil rate band of £325,000. Joshua can therefore leave Lea all the contents of the house – (which we have assumed were all owned by him) tax free – but the value of the house would still remain chargeable to tax at 40%.

Lea could at the time of his death elect for Joshua to be treated as UK domiciled at the time of his death – but given that his wealth outside the UK is considerable this would not be worth doing.

However, if at the time of the purchase of the house, Joshua and Lea had taken advice- they may have decided to buy the house in Lea’s name.

If then Joshua were to die – the property is already in Lea’s name so no tax to pay (assuming that the house were bought 7 years before Joshua’s death). If however, Lea were to die first leaving the house to Joshua then again no tax is payable because a gift from a UK domiciled person to a non-UK domiliced person is tax free!

Let’s take another example of how planning can save a lot of tax.

Bertrand and Betty are planning to buy a house in Ascot for £10 million. Both Betty and Bertrand were born and brought up in Asia and have two young children despite not being married. In fact Bertrand is still married to his first wife Jane.

They only plan to keep the house while the children are at school in the UK and would sell it if either were to die before the children left school.

The spouse exemption is not available since Bertrand and Betty are not married, but they could still take advantage of the spouse exemption by leaving the proceeds of the sale of the house to Jane in trust for three years, paying all the income to her during this time and thereafter to transfer the capital in the trust fund to the children of Bertrand and Betty.

This can be set up very simply with a carefully crafted Will over their UK property.

Of course, Betty may not be too keen that Jane benefits from Bertrand’s Estate but a saving of £4million can make this sentiment less painful.

Sadly not everyone takes advice when buying a home in the UK, and by the time they decide to take advice the property may have gained in value and any transfer may give rise to a capital gain – and depending on who is to be given the home may give rise to capital gains tax.

But all may not be lost. On death there is a capital gains tax uplift – and there is also the opportunity for some post death planning through a Deed of Variation – provided all the parties due to inherit agree.

Mandy was married to Maurice who owned a large estate in Oxford worth £10 million. In his Will Maurice left his estate to his three children. On his untimely death £4million of taxes would be payable.

However, Mandy and her three children took advice soon after Maurice’s death and the children and Mandy agreed to vary his Will to leave the Oxfordshire Estate to Mandy for life and thereafter her children.

After three years the Trustees of her estate agreed to advance the interests of her children and overriding Mandy’s life interest. If then Mandy survives a further seven years no tax will be payable on this ‘advancement’.

Caroline’s Club recognises that wealthy people need good advice from a range of private client professionals from estate agents, tax advisers, lawyers, accountants and so on. It’s aim is to connect better private client professionals across the globe in a more meaningful way to build trust with clients and win business

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 where you can see what we are up to and if you would like to join simply upgrade your membership.

If you would like to find out more simply register here

Are private client services luxury goods?

Are private client services luxury goods, insurance, tax advice, accounting, succession advice, litigation, tax investigation?

A ‘luxury good’ in economic terms means if income goes up by 1% demand goes up by 2%. This compares to a necessity good where demand increases proportionately less than income.

But I struggle with the word ‘luxury’ in this context. Luxury is defined as having great comfort or elegance at great expense.

When J.K. Rowling the author of a boy wizard story about Harry Potter, first came into wealth she is on record as saying she was terrified. This does not sound like someone who is about to indulge in a luxury purchase.

Private client services may come within the definition of luxury goods in economic terms but for people who have wealth, private client services are more like a necessity.

For people like J.K. Rowling when faced with significant wealth engaging an investment manager does not feel like a luxury but more like a necessity - they must do something with the money – but they do know who to trust and research indicates that most lose up to one third of their wealth in the first five years. They make mistakes, fall foul of swindlers, opportunistic litigation, tax investigations and the like.

Then of course there is the language. I had a client QB who said to me when he first came into wealth that he did not know what anyone was saying. He felt intimated by well-dressed bankers in fancy offices and had not a clue what their services would cost him!

On another occasion I went with a client to a litigation lawyer. We spent the meeting going through the facts and processes and I was pleased with the progress made.

After the meeting I asked my client what he thought of the meeting, he said ‘I did not understand a word!!!’

In 2016 Trusted Review carried out a research into the emotional context behind a purchase – which includes engaging a private client professional.

First there is the distress purchase. J.K. Rowling got her first cheque and panicked, I have seen this reaction on many occasions, on an inheritance or the sale of a business, this syndrome in my book ‘Reimagining the role of the Private Client Industry’ post lockdown I call the adjustment from ‘mortgages to management’.

The research revealed that in cases like this the purchaser needs an anchor, someone they can turn to who will guide them safely. Often, they turn to a friend – because they do not know any private client professional well enough to go for a recommendation – this is a sad indictment of our industry and can be remedied very easily with a Culture of Care

David and I were the trustees of a trust of whom Mrs T was the life tenant. He was an investment manager and I a lawyer. Once a year we would meet with Mrs T, David would tell us how well her portfolio had performed, and I would make sure we knew the family circumstances so could advise appropriately. She always came back to either David or me when an issue or opportunity arose – this is what I call a Culture of Care in operation.

The other type of purchase according to the 2016 research is the emotional purchase when someone wants to upgrade their service provider or product. In this situation 95% of people check online before deciding and 85% (like my daughter) will check out reviews before buying

The wealth management industry has been going through a transformation with the use of digital technology designed to replace human cost with a computer. This is a typical example of an emotional incentive to switch investment managers.

Robo advisors employ automated portfolio management based on computer generated algorithms. It’s an online service and thus eliminates the need or cost of a human advisor.

However, from my experience of working with clients, the human touch is still essential. The computer is needed to digest large amounts of data, but the client also needs a human financial advisor to care for their wider needs and concerns to provide reassurance and an anchor in times of need.

It is therefore important to cover both if you are to be a successful private client professional post lock down.

You need to build trust with your clients so that they will come to you in times of need but also make sure a prospective client come to you if they want to upgrade their service provider. The key to this is ‘story telling’ according to the 2016 research.

Caroline’s Club recognises this need post lockdown. A few weeks ago, I sat down with Charles Garland to carefully craft a personal interview podcast for him to share with his clients, contacts, and colleagues which we uploaded alongside his profile on our platform. This interview spreads the word about what Charles does for his clients but also reassures those eager to save money on Foreign Exchange Deals to use his services.

Where do we go from here?

Last week we held the first Caroline’s Club Committee meeting to hear what some of our members had to say with regard to the services we provide and how to improve them.

I was joined by Joe Field of Pillsbury in New York, Glen Atchison senior partner of  Harbottle Lewis, Charles Garland of Claremont Services, Karen O’Hanlon of JTC in Jersey, and the meeting was chaired by Martin Territt of Territt Associates in Ireland

Martin set out the background and purpose of the Club before opening it up to our Committee Members for their comments.

Caroline’s Club was spawned a year ago in response to the pandemic. Digital technology has changed the way we work, and Caroline’s Club sees this as an opportunity.

For example, Zoom is now worth $117 billion, and we all use it, but we are also familiar with podcasts which have been trending and webinars. Flight travel is down 60%, face to face meetings down 80% and productivity up 54%.

The private client industry is keen to get back to normal, but can it justify the costs of face-to-face meetings, travelling and networking events to the board?

We have already seen tech disrupting many businesses such as Air BNB in the hospitality sector now worth $80 billion and Spotify to the music business now worth $67 billion. Surely it is now time for a tech disruption in the private client industry?

The draft mission statement of Caroline’s Club is ‘to use digital technology; webinars, podcasts, zoom and a digital directory to match Private Client Professionals across the globe in a more meaningful way and provide the industry with a platform and the instruments they need to build trust with clients and win business’.

The Private Client Industry as defined by businesses which serve wealthy individuals and families is huge; accountants, lawyers, passion investment providers, wealth managers, bankers, and insurance as well reputation managers, security advisers, health and lifestyle and on and on it goes,

The success of STEP which has 20,000 members as a networking club is because it serves a range of disciplines but, is in essence an industry body which serves trust and estates practitioners. The idea behind Caroline’s Club is to form a Club using digital technology which spans all businesses which serve the HNW community not just the few that surround the trust and estate practitioners.

Martin then asked the Committee for their comments

Jo Field said that wealthy families needed different services in different jurisdictions, but the need for security services were certainly on the rise. He also saw that families were on the move to new jurisdictions and would need to find new service providers in different jurisdictions. He welcomed the Caroline’s Club initiative

Karen O’Hanlon said that she had enjoyed being a member of the Club and had met some great people, although, as yet, had not monetised any connections – although she knew that other members had. She pointed out that most of the members were ambassadors of their firm and already had a well-established network, but that the less senior professionals who would now be restricted in meeting other professionals post lock down may also welcome a platform to make new connections and a network.

Filippo Noseda enjoyed the podcast interview he had with Caroline. He said that Caroline brought out the human element in the work of professionals which he welcomed. Although as a lawyer he was skilled in resolving legal issues he said he was a person dealing with people. Many other networking organisations are educational such as STEP or they prey on our egos with awards and prizes, but what is missing in much of the other networking organisations is the focus on the human element which is why Client Stories are so enjoyable. Of course, Client Stories are not unique to Caroline’s Club other organisations incorporate Client Stories into their mix of education but not to the same extent.

Glen Atchison said he was new to the Club but was keen to find out more about what differentiated this Club from the multitude of other organizations eager to connect professionals and educate its members so they could better serve their clients and build trust. He found the meeting informative and looked forward to learning more about the initiative and contributing further to the ongoing work of the Committee

Charlie Garland said the obvious goal of the Club was to save time and win business with a good ROI. To make it easier he would like to see within the directory a list of needs and requirements to his clients such as legal and tax needs. Caroline responded to say that as part of the upscaling she would want to incorporate sophisticated AI to map out such interests as members scoured the directory for suitable professionals to serve their clients.

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 where you can see what we are up to and if you would like to join simply upgrade your membership.

If you would like to find out more simply register here

Extraordinary

This week I would like to share with you the views of Akhil Patel which I read in the 9th July edition of Money Week – and which are quite extraordinary – but probably true.

In his view the pandemic and increases in public debt will not affect the cyclical basis of our economy. Our current circumstances though significant, are only surface deep, and they cannot ‘stop the tectonic forces that drive our economies through cycles of boom and bust’ 

He cites the years of 1920/21 which he says was a ‘mid-cycle recession’. ‘It was preceded by a war that killed millions. And the trenches in which it was waged incubated a deadly virus that returning soldiers brought home, leading to a pandemic that killed millions more. There was a major stock and commodity market crash. But the property market and banking system held up and the economy came out of sharp recession into what proved the most celebrated boom of the 20th century.’

He attributes this cyclical economic pattern to land and to what Mark Twain said ‘they aren’t making it any more’ Winston Churchill also recognised the role played by land in the economic cycle and called it ‘land monopoly’. Land in good locations where economic activity takes place is finite.

Lizzie Magie a suffragette in the 1900’s wanted to demonstrate the importance of land to the economy through the game she invented which she called ‘The Landlord’s Game’. The player who owns land wins, and those who don’t go bust.

Ironically a man stole her invention and sold it to Parker Brothers making millions from the royalties of a game he called ‘Monopoly’, which I loved as a teenager.

Patel explains that over the last 200 years in the UK and US, an economic cycle can be observed which lasts on average 18 years. The cycle consists of about 14 years of expansion and then boom, followed by four years of contraction and bust.

The 14-year expansion is roughly divided into two halves, with a mid-cycle recession in between. This recession tends to be less severe than the four-year contraction and bust episode.

Patel says the cycle is driven by the finite nature of land.

Land is needed in locations close to people and economic activity. As an economy expands and becomes more productive, prime land becomes more keenly sought after and because it is in short supply the price goes up. It goes up as fast as people are able to pay for it and as governments and businesses invest, the price of land goes up.

Banks love this boom time as their security for their loans is increasing and so are prepared to lend against what they perceive to be a growing asset. In particular, banks want to lend on any project based on land such as land development and construction. However, eventually the price of land just gets too high, and the economy runs out of steam – it simply cannot afford these high prices and the cycle flips.

Construction and development companies go bust and with them the banks which lent to them. The banks then stop lending, and a full-scale banking crisis ensues which inevitably leads to a recession or depression, until properties begin to look cheap and the cycle starts all over again which history reveals takes about 4 years

So where are we in this 18-year cycle?

According to Patel 2021 saw a mid-cycle wobble, which he says coincided with a pandemic but would have happened anyway!

By 2022 the economy will start its second phase of growth and by 2024 will see it moving into a manic phase until it reaches its peak in 2026. The peak Patel says is usually marked with the development of landmark constructions.

In 2008, the last peak, Patel says, we saw the building of the Shard in London and the Burj Khalia in Dubai. 

Patel’s advice is that now is a good time to buy prime land and to invest in any land-based business such as construction and development because prices will not be going down – but you should sell up in 2024/5 to avoid the bust phase.

In real terms, property prices tend to fall in the bust period by 30% and the deepest time of the bust period is two years after the peak.

Of course, to sell up just as everyone else is piling takes courage; bank borrowing will be cheap and everyone will be making theirs fortunes which is contagious – but dangerous!!! 

We are social creatures, and we tend to follow the crowd even if we, like lemmings, then fall over the cliff. Richard Oldfield a friend and former investment advisor to family offices, in his book ‘Simple, but not Easy’ makes this point most clearly. 

So, if you believe in Patel’s theory, you should set a date in the diary to sell land and land based businesses and then set a further date in the diary 3-4 years later to buy – and make an early commitment because following the crowd is SO tempting!!!

Let me know what you think and good luck

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 where you can see what we are up to and if you would like to join simply upgrade your membership.

If you would like to find out more simply register here

Easing of lockdown

The UK inflation rate hit 2.5% in the year to June, the highest for nearly three years. Economists’ debate as to whether this a spike, a trend or a statistical error. Time will tell but one thing is certain the rise is because of lockdown.

Inflation is a worry, not least because it increases the tension between the haves and the have nots – the haves can absorb the increases in price and the have nots cannot.

Inflation is the rate at which prices are rising – if the cost of a £1 jar of peanut butter rises by 6p peanut butter inflation is 6%.

The effect of inflation on people’s behaviour and mood is well documented if inflation goes up and your income stays the same – you can buy less which leads to tension and stress. This will affect the young saddled with student debts trying to buy a home, the poor and those with fixed overheads but who may have lost their jobs due to covid and struggle to reduce their costs.

For some wealthy homeowners with a mortgage, they may see the value of their houses increase as the debt remains the same which makes them feel good. For those trying to buy a home for the first time – they see house prices go up disappear and are miserable as they see their dream of home ownership slip ever further away.

A bit of inflation is seen as good, which is why the Bank of England like to keep the target of inflation at 2%, it encourages people to spend – to buy now rather than wait for a few months – when the price may be higher which is good for business and the economy.

However, if prices start rising too quickly it is a sign that demand is outstripping supply and the economy is running into difficulties. The Bank of England at times like this will often tackle this by raising interest rates. This affects the cost of mortgages, student loans, and other borrowing costs thereby restricting the amount of money people have to spend, it affects demand and dampens prices rising.

For inflation proofed business owners or professionals with inflation linked incomes – they may not have financial concerns, but they may fear for their safety as the have nots turn to crime, theft, and burglary and in extreme cases other forms of violence – such as kidnap.

Of course, not all businesses are inflation proofed, and many simply cannot pass on the increase in costs from their suppliers to their customer because the customer simply will not buy at the higher price – so for products and services the cost goes up for the customer and for others the business takes the hit, and the price remains the same.

The ongoing debate amongst economists is whether the increase that we have seen is a spike due to covid which will peak and then go back to normal, or whether this is a trend which will continue.

Some reckon that inflation is likely to reach 3% but not much higher, before returning to ‘normal’ of 2%. Others reckon it could continue to rise to 4% by the end of the year – due to global supply shortages due to the pandemic which will take much longer than a few months to readjust.

Interest rates are currently at 0.1% and are unlikely to change for the rest of the year

The Office of National Statistics (ONS) keeps an eye on the prices of thousands of everyday items, from car cleaning to petrol. This is known as the ‘basket of goods’ and is constantly being updated or ‘weighted’, according to what is being bought by the average household.

As you can imagine items such as hand sanitisers and home exercise equipment has been adjusted to reflect lockdown this year but was it done at the right time and accurately? Others take the view that the ONS did not react quickly enough to the impact on human behaviour and spending under lockdown and the increase in inflation is merely a statistical error in reweighing certain products and items to reflect this, working from home, not able to go out to restaurants, travel or go to any social activity and so inflation appears to have spiked but could be a statistical error!

Who is right time will tell – and the debate will no doubt continue?

In the meantime, Members of Caroline’s Club keen to win business and Care for their Clients, will meet next week on zoom Tuesday for an EU focus and Thursday for an Americas focus.  

Although most private client professionals are sick of zoom and can’t wait to get away or meet each other face to face, the great thing about zoom networking is that it is not limited to geographical location, does not involve time wasted in travel and speeches and has proved effective in winning business – Caroline’s Club is for private client professionals to meet and market their services and products using digital technology in a meaningful way to win business and serve their clients better.

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 where you can see what we are up to and if you would like to join simply upgrade your membership.

If you would like to find out more simply register here