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

 

Another one bites the dust

One of the last Inheritance Tax planning opportunities in the UK is headed for the bin, under the slender disguise of simplification.

 

The Office of Tax Simplification; an independent adviser to government, issued in July this year it’s second report on simplifying the Inheritance Tax system. In Chapter 4 it recommends the removal, in part, of a capital gains tax relief. Hmmm!!!

 

How does simplification of Inheritance Tax justify the removal in part of a Capital Gains Tax exemption?

 

In 2015/16 there were 590,000 deaths in the UK, of which only 270,000 estates were required to file an IHT tax form. This means that most estates are too small to warrant completing an IHT form.

 

Of the 270,000 estates which did file an IHT form, only 14% paid any tax. This is less than 5% of all deaths in any one year.

 

The reduction from potential tax payers to 14%; 86%, is due to the broad scope of the exemptions. 64% rely on the nil rate band of £325,000, 2% rely on Business Property Relief (BPR), 1% rely on Agricultural Property Relief (APR), 14% on spouse relief and the remaining 8% on other hotchpot reliefs.

 

But, of the 14% of estates which do pay tax the annual tax take is £4.38 billion.

 

In the beginning of the Report the Office of Tax Simplification is at pains to say that it does not address matters of ‘policy’ such as whether, Inheritance Tax should be replaced by Capital Gains Tax. Hmmm!

 

Could it be that inheritance tax affects only 24,500 people and raises £4.38 billion, whereas if it were replaced by capital gains tax 55,000 people would be brought into charge to tax with an estimated £1.3 billion in tax, a shortfall of £3 billion.  

 

This strategy straight-jacket does not however restrict it from exploring ways in which more tax could be raised through the interaction of IHT and CGT.

 

Bequests on death benefit from an ‘uplift whereas gifts during life benefit from only a ‘hold over’.  

 

If for example, Tom acquired shares at £102,000 and waits until his death to bequeath them to his son Rory, when they are worth £202,000 – Rory will receive them at a base cost of £202,000. He can sell them the next day, for £202,000 and pay not a penny of capital gains tax. The gain in Tom’s shares of £100,000 has been ‘uplifted’.

 

However, if before Tom dies, he gives his shares, to his son Rory, when the shares are worth £202,000, Rory receives the shares at Tom’s base cost of £102,000. The gain has been ‘held over’. This means that Tom does not pay Capital Gains Tax when he receives them or on Tom’s death. Tom’s gain has been held over until Rory sells them. At this point Rory will pay Capital Gains Tax as if he had acquired them at Tom’s base cost of £102,000 and will pay Capital Gains Tax on the gain made while Tom owned them of £100,000.

 

Furthermore, if Tom’s shares were in his family business it is likely that they will qualify for BPR; 100% exemption from Inheritance Tax.  If Tom hangs onto the family business until death, neither Capital Gains Tax nor Inheritance Tax is payable – an attractive proposition.

 

The OTS claims that the difference between lifetime ‘hold over’ and the death ‘uplift’ distorts the decision making of wealth owners. True.

 

 The report goes on ‘A similar issue arises where the spouse exemption from Inheritance Tax applies. The capital gains uplift can apply when assets are transferred on death and are covered by the spouse exemption so that capital gains are wiped out and no Inheritance Tax is paid. However, lifetime transfers between spouses do not benefit from the uplift. This can also distort the decisions couples make about the timing of asset sales.’

 

The report having highlighted the ‘distortion’ then goes on to make a recommendation ‘Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died’.

 

The report points out that the reason why the Inheritance Tax exemptions are available for spouses, farms and businesses is because the payment of tax could affect the lifestyle of a surviving spouse, or the viability of a farm or ongoing business if tax had to be paid at that time. A hold-over of gain would delay the payment of tax until such time as the asset is liquidated but would not eliminate it.

 

All of this makes sense.

 

But what puzzles me is how the Office of Tax Simplification tasked with looking into Inheritance Tax and restricted in strategic scope, can recommend the removal of a Capital Gains Tax exemption?

 

If you would like to find out more or explore how you can plan now, before this recommendation becomes law contact caroline@garnhamfos.com com or phone 020 3740 7422

Be warned!

In 2016/17 the tax take levied by HMRC on offshore assets was £325 million. However, in 2018/19 this tax rose to £560 million, an increase of 72%. What happened between then and now to cause this dramatic rise?

 

In 2015 HMRC set up an Offshore, Corporate and Wealth Unit to look into the information revealed by the 11.5 million documents related to offshore entities revealed from a leak orchestrated by the German newspaper Suddeutsche Zeitung – now known as the Panama Papers. This information was then shared with the International Consortium of Investigative Journalists.

 

The Unit is part of HMRC’s Fraud Investigative Service, which targets rich individuals and businesses with undeclared offshore interests and is staffed by lawyers and accountants. When a rogue employee stole 4.4 GB of sensitive private details of the clients of the Liechtenstein Bank which he then sold to governments around the world, it took between 2-3 years before tax authorities processed this information and the victims started to receive tax claims.

 

This is about the same time it has taken tax authorities to process the information received from the Panama Papers to raise tax claims on the clients of Mossack Fonseca the law firm in Panama from which the information was leaked. The quantum of information, from the Panama Papers leak is, however  50 times more extensive than the information received from the Liechtenstein Bank. The tax take from the information sold from the Liechtenstein Bank is quoted as being in excess of £100 million (in the UK) while the tax take from the Panama Papers leak is expected to raise $1.2 billion across the world.

 

Since the Panama Papers leak the two founders of the Panama based law firm have been arrested in Panama, and four former employees arrested in the US; the forty-year old firm has now closed down.

 

Without doubt, Mossack Fonseca had some dodgy clients; convicted prime minister of Pakistan Nawaz Sharif and his daughter, Ayad Allawi ex-prime minister and former vice president of Iraq, Petro Poroshenko president of Ukraine and Aloa Mubarek, son of Egypt’s prime minister.

 

But not all its business was dodgy. Mossack Fonseca acted for the father of David Cameron the British Prime Minister. He set up a fund which was fully disclosed to HMRC on which he managed to avoid paying UK tax, due to a ‘small army of Bahamas residents who signed all its paperwork in the Bahamas’.

 

These headlines paint a picture of a gaggle of unscrupulous politicians and greedy business men eager to use an offshore financial centre to hide ill-gotten gains and avoid tax. But this is not the whole picture. Many innocent entrepreneurs and wealthy international families have also got caught up in the scandal and taxed as if their structuring had not taken place.

 

I have seen first-hand what tax authorities do with information gleaned from rogue activities. The prima facie assumption of any tax authority is that the main reason to set up a structure, such as a trust and company, offshore is to avoid tax. Many professionals are concerned about the ongoing involvement of the settlor. However, this is not of particular concern to me since the Trustees need to be guided as to when and to whom to make distributions and in what to invest.

 

A professional trustee has a duty to ‘act in the best interests of the beneficiaries’ and as ‘a prudent man of business’. How can trustees fulfil these duties if they do not stay in regular contact with the settlor who is the best placed person to advise them as to what decisions to take as being in the best interests of the beneficiaries and in what to invest as a prudent man of business?

 

The real concern to my mind is not the continuing ‘guidance’ given by the Settlor, but what would happen if the Settlor and the Professional Trustees fell out. Tax authorities assume that if the structure has reserved a power to someone other than a trustee to remove and replace the trustees then the ultimate power over the Trustees rests with that person who tax authorities will assume to be the agent of the Settlor.

 

Many professionals are more optimistic, but the threat of a client faced with a tax claim with interest and penalties which could wipe the majority of this wealth is of sufficient seriousness to warrant a review and stress test. We know that tax authorities have been told to undermine the structures wherever possible and to name and shame – and we have seen them do it before.

 

Many professionals are of the view for tax authorities to behave in such a manner is an abuse of power and they may eventually be proved right, but there could be a lot of blood on the walls before the line between lawful planning and unlawful evasion has been properly drawn.

 

In the meantime, if you want to know what you can do to reduce the risk of being investigated call me on 020 3740 37422 or email on caroline@garnhamfos.com

How to make a small fortune?

How to make a small fortune - as the joke goes - start off with a large one!

There are three ways to dissipate wealth quickly; tax, family disputes and third party claims. But you do not have to just sit back and wait for it to happen - you can plan to avoid it. Let’s look at each in turn.  

Tax

 

Tax authorities, until 2018, did not have the information they needed to investigate and undermine offshore structures to tax wealth held offshore.  This has now changed! The Automatic Exchange of Information introduced in 2018 by all OECD countries gives them everything they need and want to investigate and claim tax.

 

GFOS works with a family to explore what it would you do if it received a letter from a tax authority which claimed it owed tax on all the income of its wealth held offshore since inception, together with a penalty of 200%?

 

GFOS asks how would your trustee, if you have one, respond? It explores with the family whether the trustee is the best person to conduct an investigation? If not, from whom would it seek advice; a solicitor, an accountant, a barrister or a former tax inspector and specialist in resolving investigations? How would it pay for this advice, trust funds or from its insurance? How long would it take to resolve: 3 years, 8 years or 10 years – and how much wealth would be left after the investigation?

 

As a Fellow of the Chartered Institute of Taxation, solicitor and author of ‘When you are Super Rich who can you Trust?’ GFOS is well positioned to know how tax authorities undermine an offshore structure and what to do to protect the assets. GFOS also knows where to seek the best possible advice, how to save on costs and how to stop an investigation going on for years, if not decades.

 

 

Family Disputes

 

GFOS also asks what would happen if one or more members of the family were to die or become disabled? How would decisions be made; how would you choose which family members would be given a voice or vote and how would any dispute be resolved?

 

GFOS reviews the structure and the family to see where family disharmony could arise and how to deal with it.

 

What would your trustee, if you have one, do on the death of a family member? Would it take a legal opinion, call a family meeting, divide up the wealth and distribute it, how would it decide who was to get what and when?  

 

GFOS also looks at the family assets and asks how they will be distributed such as the family business, family home, the art collection, yacht and private plane?

 

GFOS recognises that making a decision is not just a matter of being prescriptive – which rarely resolves disputes. In companies, disputes are often most effectively resolved through good governance. GROS therefore seeks to incorporate good governance into all its structures which seeks not only what should be done – but also how and by whom.

 

 

Third party claims disputes or threats

 

Family wealth can also be eroded by third parties.

 

What would you do if a creditor claimed against the family assets? Family wealth can be protected by trusts, but some families prefer not to transfer international wealth into trust, because they do not wish to transfer control to a professional trustee or third party.

 

GFOS is fully aware of this concern and asks the family what control it wants and who should it be given to. It then puts in place a trust structure which provides protection for the assets without losing control and in a manner, which reduces the risk of an attack from a third party.

 

GFOS has thirty years of experience in working with some of the wealthiest families in the world and in numerous jurisdictions. It knows that wealth attracts opportunistic third parties which can lead to years if not decades of disputes and litigation which can be avoided with careful planning and structuring.

 

GFOS

 

As a tax specialist and lawyer GFOS is well positioned to work with a family, review its structure and put in place mechanisms and processes not only to protect the family and its assets but also to make sure it works with the  right people to resolve any concerns as and when they arises, to protect your wealth for you and for future generations.

 

GFOS: provides you and your family with control, substance, good governance, privacy, protection and preservation of wealth, and puts in place the right people to work with you as and when needed.

 

CONTACT DETAILS

 

Caroline Garnham :     caroline@garnhamfos.com