Is our fate in German hands?

When I say “our”, I don’t mean the fate of Britain, but that of Europe and the rest of the world.

Chancellor Angela Merkel has been at the helm of the German powerhouse economy for 16 years, 4 democratically elections later she has seen off God knows how many of her peers in the United States, Britain, and most of the rest of the western world.

Her legacy will be telling.

Her influence not just in Germany but wider afield deserves note.

She accelerated the phasing out of nuclear power, an overhang from a previous coalition government involving the Greens – no mean feat considering the dependency of German manufacturing industry on electricity to churn out cars, pharmaceuticals, and the rest.

In effect, the fate of the euro currency was in her hands –

she kept Greece in the single currency, even if the price was continent wide austerity measures, from which the bloc has substantially recovered pre-pandemic.

Unlike more recent policies in Britain, the outgoing Chancellor took the brave step to open her country’s borders to over 1 million refugees during the first migration crisis towards the end of the previous decade.

In her own inimitable style, quiet and assured, she, more than others, realised that her homeland needed highly qualified migrants to supplement the aging population nearer to home.

She took a stand in this century, for economic and compassionate reasons, just as did Prime Minister Margaret Thatcher in the latter decades of the previous century. Both won, in very different ways, both were and are tough women, taking principled and pragmatic stands, where others dared not to tread.

While on finance and economics, Merkel was and is very much a creature of her austere upbringing in the former East Germany (DDR), she was also able to see the benefit of the issuance of common European debt to fund the path out of the pandemic. Could this be regarded as a type of European Marshall Fund from which Germany so benefited after the Second World War?

At a minimum she tolerated what some may regard as the embodiment of Modern Monetary Policy as the European Central Bank basically printed money post Lehman to survive and forge ahead. Of course, the Fed in the US did similarly and more quickly.

The Bank of England followed suit, but recent trends closer to home may herald a tightening of monetary policy, and even a hike in interest rates very soon

As noted in last week’s Caroline’s note, changes to National Insurance contributions, entrepreneurs’ support, hikes in corporate tax – and now higher interest rates – put Britain in a difficult situation, at its mildest, with consequences for U/HNW individuals and families.

But was it all a bed of roses for Chancellor Merkel and her fellow citizens?

If you were just to look at the cover of this week’s Economist magazine (“The mess Merkel leaves behind”) one would just have to wonder if the woman did any good at all!

Clearly, Germany faces many challenges: decades of under investment in areas such as infrastructure (roads, rail, education), a chronic lack of digitalisation across the economy, lack of ambition on climate goals, a car industry playing serious catch up on going electric, poor national and regional governance structures and delivery, not to mention a highly liquid local/regional banking system not fit for purpose and highly politicised.

Maybe this list could be written for Britain and other larger western economies? Certainly. Like Germany, they have a lot to learn from smaller more nimble countries where these issues are to the fore of public policy.

But why are we so concerned about Angela’s successor as Chancellor and the formation of a new Government in Germany? 

If the incoming administration comes to grips with some, or all, of the foregoing cited issues, Germany will become great again – instead of MAGA, it will be MGGA (Make Germany Great Again).

This will have significant implications for regional policy in Europe: by that I mean for Britain, for the EU and the rest of Europe.

A stronger Germany means a stronger EU, all together more competitive and driving strategic autonomy on socio-economic matters within the single market. Keeping inflation at or close to 2% will continue to drive German policy, with positive implications for investment and family wealth overall.

Can Germany in the coming parliament, unshackle herself from ultra-conservative stimulus policies? Merkel serves as a serious precedent, even if in her own quiet and gentle way.

Constitutionally, Germany is hamstrung in terms of raising its public debt as, say, the Americans do. But imagine an incoming government having the verve to circumvent this “debt brake” by some inventive means (quite easy if the political will were to be there)?

This would mean a huge domestic stimulus which would flow across the continent to the benefit of almost everyone.

A stronger Germany, could also, in the foreign policy field, act as a bulwark against Russia and an increasingly assertive China, to the overall benefit of this part of the world.

And, just as importantly, the new Chancellor and the incoming Government could deepen the transatlantic bond with our friends in the Biden administration. 

While, perhaps, all of this may not play out as one might wish, there are certainly forces at play which might suggest that, at the very least, some of our fate rests in German hands!

These issues deserve to be further teased out at our next round of Caroline’s Club on 5 and 7 October – meanwhile please engage with one another to share your thoughts arising from this note.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Makes me mad

I have two adult children, both have student loans, one is a brand strategist aged 28 and the other a lawyer, aged 25. The impact of the government’s introduction of a new tax to fund more spending on the National Health Service and social care has the effect of charging my kids 50% on any monies they earn above £27,288.

This makes me mad.

Both my kids are hard-working and successful, my son got a first from Durham and my daughter a distinction from her Law University. How can they be motivated to make the most of their education and serve the country in which they live and work if the government takes half of what they earn over £27,288?

And this is not the only ill-thought-out aspect of this new tax…

From April 2022, national insurance will go up by 1.25% both for workers and employers, taking the standard rate to 13.25% for employees and 15.05% for employers. Self-employed people will pay 10.25%, compared to 9% now (on Class 4). From April 2023, the NI increase will be replaced with a separate ‘health and social care levy’ which has the same effect, but will also be paid by pensioners still in employment (who don’t pay NICs).

This tax increase affects about 29million workers and means that people earning £30,000 a year close to the average wage – pay £255 more per annum and for those earning £50,000, the sum is £505.

In addition to NICs, there is also to be introduced a new tax of 1.25% on dividend tax rates, affecting investors in stocks and small business owners who pay themselves through their company.

Basic rate taxpayers will now pay 8.75% tax on dividends, higher rate payers will pay 33.75% and top-rate taxpayers will pay 39.35% (on all dividends exceeding £2,000 dividend tax-free allowance that sits on top of the £12,570 personal allowance). 

The intentions behind the plan are good. They want to generate £12 billion a year in revenue to help clear the NHS backlog created by Covid, and then be directed towards long-term reform of social care. But raising the rate of NI on both employees as well as employers will hit firms hard after they have struggled to survive through the pandemic. These firms need to be encouraged to grow, not asked to bear new burdens and there is increasing evidence that the bounce back is stalling.

What will my kids make of this Conservative ideology?

Johnson’s tax amounts to £12 billion per year (about 0.5% of GDP) for three years. To that we can add the additional £25 billion from the upcoming increase in corporation tax (from 19% to 25% in 2023) and a freeze on tax thresholds

Together these tax rises are the biggest single increases in one year since the 1970s and will take the UK’s tax burden – tax revenues as a share of GDP- to 35.5% the highest since the 1940s!

The other irritant which will not be lost on my kids, is will this extra funding for the NHS and social care make any difference? It is obvious that the NHS has been wasteful and it’s hard to see that extra funding will make much difference to front line care. 

How will businesses respond?

The aftermath of the pandemic has already seen a rise in remote working with the possibility of saving money on the rental of office space and a continuation of working from home. But we do not know yet what the long-term effects are on the younger generation.

My kids enjoy the comradery of office live, making new friends, sharing concerns and learning from those with greater experience in the office. This continued working from home could have a damaging effect on mental health and higher insurance claims as the young don’t have such easy access to their bosses.

Furthermore, there is also the risk that their efforts will not be so easily seen and so their career progression may also be stalled.

With these increases in tax, shops will double their efforts to sell online which will have a knock-on effect on our already threadbare high streets and will further isolate the vulnerable and mentally unstable.

It will also accelerate the use of digital technology in the office. CEO’s will restrict business travel and face to face meetings if video conferencing can be used instead. It will also have an impact on the hospitality sector focussed on business accommodation, events companies, and airlines.

But in every crisis, new ideas emerge – like Caroline’s Club – ‘networking which works’. The Club which is exclusive for private client professional members is based on solid research set out in my book ‘Reimagining the role of the private client professional’ post lockdown.

This research looks very carefully at why most networking has such a poor return on investment and it identifies that most people who we meet during the break out session at an event don’t want to talk about what they do for their clients because they don’t want to arouse the ‘innate influence of the influence of strangers’ or resistance to ‘product push’. But there are ways around this on which Caroline’s Club is built.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Is privacy dead?

Everyone has something they are not very proud of, cheating on their spouse, a mental health issue, a drugs problem, a secret love child, drinking too much alcohol, a theft or fraud and on it goes…. Max Mosley had a penchant for sex parties, Matt Hancock an office romance

Most of us can rely on the fact that no-one really cares because we are not rich or famous, so our secrets are safe, but are they? HMRC knows much more than you may think or like. It has access to all your bank accounts, everywhere in the world, the passport office, land registry, where you are and where you have been, your shopping habits, your gifts and it pairs this data with artificial intelligence so that it can tell which out of 10 hairdresser shops are the three most likely to be taking cash from the till and not declaring it, it spots irregularities and investigates.

But, has this data collection gone too far?

According to the Office of Tax Simplification it has not gone far enough

Most of us have nothing much to do with HMRC, we are employed and our employer pays tax on our behalf through the PAYE system. Then once in a while we may sell a valuable asset and have to pay capital gains tax or a loved one dies and inheritance tax is paid before we take out probate – very straight forward – but not for some.

There are 11 million of us who fill out a self assessment form every year, the self employed, company directors, and those with income in excess of £100,000 and for the rich it is often a nightmare to make sure that all receipts are included, rentals, pensions, dividends, charitable donations, gifts and capital gains and no that no invoices are overlooked.

There would appear to be a ‘tax gap’, the amount HMRC collects and what it believes it is owed, of £31 billion, 4.7% of total tax liabilities. ‘Failure to take reasonable care’ is the largest reason for the deficit of £5.5 billion, followed by £4.6 billion from evasion and £4.5 billion from criminal attacks and £2.6 billion from the hidden economy.

Currently all the information collected and processed by HMRC is primarily used for compliance – checking what you say in your self assessment return tallies with the information gleaned by HMRC from its sources of information.

Compliance is good, but HMRC wants to go further still. According to the 10 year tax administration strategy of HMRC, it would like to use the information gleaned to pre-populate your self assessment return. This would mean that just as income tax is collected from millions by their employers under PAYE, so financial information would be collected and submitted to HMRC by the investee, not the investors, so for example if you invest in shares in ABC Limited, you will not need to submit your dividend income on your self assessment form ABC Limited would provide this direct to HMRC and HMRC would pre-populate your self assessment form with this information.

HMRC wants to go further still - it wants to glean the information from your business accounts and merge that with your personal information. At its most basic an entrepreneur may wish to keep profits at corporate level to avoid the higher levels of income tax  by merging corporate data with personal data it could then identify where profits are being hidden at the corporate level.

In the March Budget of this year the Treasury committed £68 billion to put in place a ‘single customer account’. Once in place there will be even less places to hide! 

But is all this information just too much?  Could it be a temptation for tax inspectors or hackers to glean personal information and sell it to the papers, or to criminal gangs for blackmail or kidnap or to the police? It is not as if it has not been done before, remember the Paradise Papers for example.

Then there is the problem of human error, what if the information supplied is wrong how can the taxpayer remedy the problem – how can he prove something over which he has no control?

Another concern is computer error – as was seen by the considerable distress caused by the Post Office scandal.

Of course, I am in favour of making life easier – and to increase the tax take where possible from cheats and human error – but there needs to be put proper checks and balances – not least because tax inspectors are passionate about raising taxes from people who they think are not paying their fair share – but that attitude does not always protect the innocent who may get caught in the cross fire and that danger can only increase with time.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Daniel Craig not leaving ‘great sums’ to kids

Daniel Craig has been in the news for saying he would not leave ‘great sums’ to his kids. Is this a good or bad idea?

In a recent interview he said he found the concept of inheritance ‘distasteful’ and does not plan on leaving his children a fortune – instead he will give it away before he dies.

Craig is not alone – there are many people who grew up with nothing and are now self made millionaires. They feel that their children don’t deserve to ‘have it easy’ and that they will be more motivated if they are left nothing and have to fend for themselves. Some also think they will be held in higher regard if they give their fortune to the less deserving or to good causes rather than to their children who will probably have had a good education and an excellent start in life

I have worked for decades with families many of whom do not want to treat all their children equally or to leave it to good causes – and this is what I have discovered families, whether rich or poor are seething with emotion – those who are lucky are brought up in an atmosphere of love where the concerns and difficulties of each child are understood and time is taken to talk in a meaningful manner – for these children they grow up secure, well balanced and motivated to make something of their lives. But for others family life teems with resentment because one child is favoured more than the others, or that wishes and concerns of one child are not understood and may even be mocked. These children grow up with worries that they are not good enough and these worries can overwhelm them so they are not able to reach their full potential – money just makes it worse.

I have seen children from wealthy families grow up to be professors, take over the family business, start a new successful business, work hard and build excellent relationships with sound secure families of their own. But I have also seen others eaten up with anger, eager to get their day – or more often years, in court to prove to themselves and everyone else that they are ‘as good’ if not better than their siblings.

One of the misunderstandings which founders of fortunes fail to grasp, is that they may have been born poor – but their children were not

As actress Tori Spelling put it upon learning that her father Aaron had left her a mere $800,000 of his $600 million fortune ‘when you grow up silver spoon it’s hard to go plastic’

The children of one of my clients have never flown in a commercial plane, or had to cook, clean up or find a job. ‘Normal’ life for them is a steep learning curve – but it is not just the adjustment to a different life style that is the main problem for many not to be given enough to maintain their lifestyle is seen – as a personal snub – ‘did he not love me to want me to live comfortably’. Theses feeling are deep and difficult.

Of course worse than giving every child nothing substantial is when some children get a lot more than others. I have seen this happen when a founder takes a child into the business and then they fall out with the result that the founder cuts out that child from his or her inheritance. 

Other situations arise when the founder favours one child over others. One founder I heard repeatedly call one of his sons a fool and stupid in front of his father’s advisers – of course by the time the father died he wanted to prove his father wrong and embarked on years of litigation at considerable cost

But the time when the gloves really come off, is when the founder has married several times and has had children from multiple relationships. Of course the wife still left standing wants to make sure that her children get the lions share, but that may not stop the other children from wanting more – at this point the saying ‘hell has no fury than a woman scorned’ can be seen in action, is very expensive, and often only gets resolved when everyone is exhausted or the key protagonist dies.

Please let me have your comments and don’t forget to register for Caroline’s Club – it’s FREE to register and you can then learn more about our exclusive award winning club of leading private client professionals who are keen to win business and build trust with clients simply register here

Oh dear – Mauritius!

The Finance (Miscellaneous Provisions) Act 2021 has, this month, been passed in Mauritius. The purpose of this Act was to bring into force the provisions the Honourable Minister of Finance made in his Budget Speech on 11th June 2021. But when the Act came out as a Bill late on Friday 16th July it included a provision which was not included in the Budget speech and sent shock waves throughout the trust and company administration business on the Island

The Bill proposed the removal of the non-residence exemption for trusts set up by non-Mauritius residents for non-Mauritius resident beneficiaries, which means these trusts will now be fully taxable in Mauritius as if it were a Mauritius resident entity at 15%. 

Mauritius is the jurisdiction of preference for most people living on the African continent. These trusts will now be looking to relocate which could see the collapse of the trust and foundation industry on the Island

Initially the inclusion of this provision into the Bill was seen as an unintentional addition and would be removed before the Bill became law – but the Bill has now made it onto the statute books and the provision to tax the trusts and foundations to full Mauritius taxes is still in the Act. 

In general a trust is regarded as resident in Mauritius if

• The trust is administered from Mauritius and the majority of the trustees are resident in Mauritius, or

• If at the time the trust was created, the settlor was a Mauritian resident

However if the settlor was a non-Mauritian resident and the beneficiaries of the trust  are non-resident in Mauritius then the trust would be treated as non-resident in Mauritius if the trust applied for a certificate of non-residence within three months of the income tax year.

The provision to remove the exemption to tax for trusts set up by foreigners for foreigners means that one of the main reasons for setting up a trust in Mauritius will be lost.

Trusts are set up by wealthy people for a number of reasons, but if the settlor lives in a country where the tax system is not sufficiently well developed to tax settlors of foreign trusts in their home jurisdiction – they look for a jurisdiction which recognises trusts and does not tax the wealth in the trust.

Charging wealth in a trust to tax on the settlor or on the beneficiaries is not easy for many high tax jurisdictions. Assets transferred into a trust are not beneficially owned by anyone – which is why they are so useful to avoid tax, provide privacy and keep the assets away from opportunistic creditors.

When a settlor transfers assets into trust, he gives the assets to the trustees so he or she no longer owns the assets. However the trustees do not own the assets either. The assets is held in the name of the trustees but they cannot benefit from the trust assets, neither are the assets on their balance sheet. The trust assets are held by the trustees for the benefit of the beneficiaries – who may or may not benefit in due course.

The only downside of a trust – is that the trustee, although it may not benefit from the trust assets nevertheless has control – and makes the decisions. This is why many wealthy people who are attracted to the benefits of a trust – do not use them because they do not wish to relinquish control.

However it is possible to set up ‘Special Purpose Trustees’ in which the settlor retains control but without losing all the benefits of the trust – which is the GFOS area of expertise.

Many small jurisdictions have introduced a law of trusts and an exemption from local taxes. It is a simple process to move a trust from one jurisdiction to another from Mauritius to Guernsey for example, and trust and company administration organisations with offices in both jurisdictions will offer this service to their clients – see our podcast professional of the week to name but one.

Naturally Mauritius plans to phase in the taxation of existing trusts over time. So for trusts set up before 30 June 2021, they can take advantage of a ‘grandfathering’ provision in which they are allowed to continue to apply for the certificate of non-residence up to the 2024/25 year of assessment.

However for trusts set up after 30th June they cannot apply for the certificate of non-residence and will be chargeable to the Mauritius flat rate of tax which was introduced in 2007 of 15%

Oak Group is a member of Caroline’s Club and has assisted me in writing this newsletter. GFOS has a number of clients who are resident in Africa and it will now advice these clients to take action if they are to avoid the 15% tax charge to be levied on the income in a few years

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

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