The UK is the world’s leading financial centre and is a destiny of choice for many ultra-high net worth (UHNW) individuals
If the UK wishes to capitalise on its strengths and send a consistent and clear message to the world that it is open for business, it needs to understand where it is, where it wishes to go and how to get there, post Brexit.
Now that the world has shrunk through easier travel and the abolition of exchange controls, the UK is pioneering the drive worldwide on anti-avoidance of tax and transparency of information. The OECD initiative on the automatic exchange of information (Common Reporting Standard, ‘CRS’) to be introduced in 2017 should be an incentive for the UK to reunite tax residents with their wealth and trusts in the UK, rather than continue to advocate a system of tax for non doms which is opaque, promotes investment and business offshore and is not based on any specific debate or consideration.
The UK could take this Further Consultation as an opportunity to look afresh at its attitude to wealth creators and the Taxation of Non Doms in the light of what is best for Britain, post Brexit.
The beneficial tax treatment for those for whom the UK is not their ‘home country’ (non UK doms) was not planned as a benefit or a relief. It was not therefore properly debated or considered as to what was best for Britain. It came about by bringing all UK doms into charge to tax on their worldwide income and gains as it arises following the Great Wars. The former remittance basis was reserved only for non doms. Similarly, estate taxes (inheritance tax - IHT) followed the same demarcation. Non doms were only charged IHT on their UK situs assets, whereas UK doms were chargeable on their worldwide assets.
Changes to taxation must, in our opinion, not only be considerate to the UK dom taxpayer, but also be fair to the wealthy non dom taxpayer who must pay it. If not, less instead of more tax will be raised; the Laffer curve.
A good example of the Laffer curve in operation is seen in the increase in residential property taxation, the collapse of the upper residential market and the fall in tax collected. The boroughs of Westminster and Kensington and Chelsea in 2012, contributed more to HMRC through stamp duty land tax (SDLT) than Northern Ireland, Wales, Scotland and northern England put together. Now that SDLT has risen to 15% at the upper end of the market the tax take for SDLT has dropped by one third. This does not only affect the tax taken by HMRC, but also affects the profitability and tax paid by estate agents, interior designers, plumbers, electricians, removal companies, architects and many others.
The tax collected has not fallen due to clever tax schemes or failing to declare what is due, it is simply because home owners are not prepared to pay these taxes at this rate on buying or selling homes. This hike in taxation has therefore made it difficult, if not impossible, to sell with the result that those who want to ‘get out’ are locked in.
It is suggested therefore that a root and branch strategy is needed which is politically correct, fair and attractive for non UK doms, but also in line with the Government’s other initiatives and strategy. It should encourage wealthy foreigners to reside in the UK, live in their homes and bring their monies and trusts into the UK with them. These individuals and their wealth will then be transparent, will promote the professional services in the UK rather than offshore financial centres such as the Channel Islands, Bahamas, Singapore and Switzerland and can easily be trackable without the co-operation of whistle blowers. The strategy should also encourage wealthy individuals to spend their monies in the UK for the benefit of the entire economy.
Questions 1-7 Fine
Do stakeholders agree that these steps will effectively ensure compliance?
No, the steps suggested are unfair, harsh and in the long run will be counterproductive.
Advisers to UHNW individuals are already weighed down by the burden and expense of compliance as the unpaid whistle blowers to HMRC. They have accepted this burden without complaint, but to make them liable for the taxes of their clients in addition is harsh, unfair and counterproductive.
The profession does not object to the Government’s insistence that advisors ‘know their client’ and to report any suspicious transactions, but there are circumstances where liabilities could arise about which an adviser may not be aware, and therefore could not be expected to report. To make him or her then liable for this tax is unacceptably harsh.
To give an example: Mark is the UK resident director of an offshore company which owns a residential home in Knightsbridge for Abdullah who was given it by Asim, his father. Mark’s client is Abdullah, not Asim. Unknown to Mark, Asim treats the home as his with a full wardrobe of his clothes, personal belongings, paintings and his fishing and shooting clothes. Abdullah is rarely there, given his work commitments and relationship with his fiancée who lives much closer to his office than his home in Knightsbridge. Asim has no assets in the UK and so it is hardly surprising that Mark was unaware of his sudden and unexpected death and so does not report the IHT liability of Asim to HMRC. Several years later the gift with reservation of benefit comes to the attention of HMRC at a time when Asim is no longer resident in the UK. If the Knightsbridge home was worth £20 million at the time of the death of Asim it is unfair and harsh that Mark be made liable for £8million when he did not and could not have known of the death of Asim which gave rise to this liability.
Are there any hard cases or unintended consequences that will arise as a result of there not being any tax relief for those who want to exit their enveloped structure
To give an example. Jacques came to live in the UK in 1992 and has been living in the UK and paying taxes in this country for more than twenty years. In 2006, he set up two trusts in Jersey one for his optical instrument business and his investments and the other to buy his home in Knightsbridge through an offshore company. Provided the trustees remain non UK resident, the assets are non UK situs and he keeps his income and gains offshore, he has UK tax advantages, for income, capital gains and inheritance taxes.
Assuming the trust in 2006 bought his home in 2005 for £5 million, in 2008 was valued at £6.5 million, in 2012 was £8million and in 2017 will be valued at £12 million, he is faced with some harsh tax consequences under the proposals.
If he continues to own his home through a trust and company structure he will be liable to pay ATED next year at the higher rate band in excess of last year’s rate of £109,050. There are numerous situations where the ‘home owner’ in circumstances such as Jacques do not have the funds to pay this tax. In such circumstances and given the difficulty in selling the property HMRC is known to have agreed to the payment of 2016 ATED by instalments.
The reason why there are so few buyers is because buyers looking to buy a home such as Jacques’s, will need to pay up to £1,800,000 SDLT for a £12million home, which for most buyers is perceived to be too much; which is why the upper residential market has collapsed.
If, Jacques decides to de-envelope under the proposals set out in the Further Consultation Paper, he faces an immediate charge to capital gains tax; ATED related CGT of £1,120,000 and s86 CGTA CGT of £420,000. Most UK resident non doms would not be able to pay this money in taxes, without selling the property – and as outlined above there are currently very few buyers with SDLT at such a high rate.
A simple solution, which would be politically correct and fair would be to provide owners of homes through enveloped structures with the benefits available to other home owners as follows
1 Homes which are lived in by UK residents and are, have been, or are to be occupied by the home owner as his or her main and only residence whether directly or indirectly should be entitled to the main and only residence exemption at the point of sale (according the years occupied as such).
2 Homes owned by non UK residents or which are not to be treated as the main and only residence of the occupier, should be chargeable to capital gains tax as from the 2012 valuation (ATED related CGT) as well as CGT under s 86/87 TCGA from the 2008 valuation at such point as the home is sold, but not at the point of the de-envelope. Home owners will then be in possession of the cash to pay the tax.
3 UK residents should be able to sell their property at the old 4% rate of SDLT so that these homes can be sold if need be, the lower rate would not be available to non UK residents and could remain at 12-15% to encourage non UK residents to take up UK residence.
4 Homes owned directly by UK or non UK residents and which are held by the occupier at death should benefit from a capital gains tax uplift.
Of course, on the death of Jacques his estate would have to pay IHT of £4,800,000.
The Government has been benefitting from unexpectedly high levels of ATED which it will lose as and when it provides relief for those who wish to be transparent and own their homes in their own names. By lowering the stamp duty land tax to 4% for all property owners who are UK residents, the market will be revitalised which will bring the SDLT collection back to its 2012 levels thereby providing work for estate agents, architects, plumbers, electricians and all other services which thrive on a buoyant high end residential property market. Also by making the sale and purchase of UK residential property more attractive the Government will recoup the lost ATED tax from the Capital Gains Tax on sale.
Business Investment Relief
In addition to the harsh and unfair consequences of the suggested proposals in the Further Consultation Paper the Government is sending out a confused message as to whether it
· is open for business post Brexit
· / is genuine in its promotion of the transfer of wealth to the country of the taxpayer’s residence,
· is genuine in its drive towards transparency, which must be the ultimate goal of CRS,
· is genuine in its support of its financial industry which will be incentivised to advice clients to transfer wealth to the UK to avoid the vagaries of CRS, and
· can be trusted by the non dom UHNW community
This could easily and simply be remedied by extending the reliefs for UK resident non doms to trusts with UK resident trustees and UK situs assets as set out below.
It has long been a mystery to us why the Government encourages non doms to become resident in the UK, but to invest in non UK situs assets in offshore trusts. The UK is the founder of the trust, and yet the trust business in the UK has dwindled to little more than administering domestic Will Trusts for widows, orphans and the disabled while offshore financial centres such as Channel Islands, British Virgin Islands and Switzerland flourish.
This non dom tax benefits for offshore trusts and assets did not come about, as a direct consequence of considered debate, but as a side product of a decision to raise taxes taken many decades ago. There should therefore be no reason why this demarcation should be allowed to continue, especially since it favours the economy of other jurisdictions over our own.
It is suggested that the Government should now, post Brexit, make some relatively minor changes to the legislation which could greatly benefit the UK economy, would be simple to introduce, would save on investigations and the administration of the assets of non doms being reported under CRS and send the right signal to wealthy foreigners that the UK is open to business.
Non doms should be encouraged to be resident in the UK, and to bring their wealth and trusts to the UK by extending the tax benefits for offshore trusts and their non UK situs assets to trusts with UK resident trustees and UK situs assets. This would neatly boost the private client industry in the UK and with it London as the world’s financial centre. It would send a strong message that, post Brexit, UK plc is open for business and can be trusted as a pioneer on transparency and anti-tax avoidance (without having to rely on whistle blowers). At the same time, it would send the message to the world’s wealthiest that provided they live and bring their wealth and businesses into the UK they can live in the UK in peace.
It would also tie in very nicely with the introduction of CRS in 2017; the automatic exchange of financial information by offshore account holders to the country of the account holder’s residence. Wealthy non doms fearing that their financial data could get into the wrong hands would be attracted to live in the UK. There would be no threat from CRS if they both lived in the UK and had their wealth and business in the UK.
CRS is seen by many as a danger to their personal safety particularly for residents of countries in some emerging markets where Governments cannot be trusted to keep private financial information out of the hands who wish to use it for criminal purposes. Already funds are leaving financial centres such as Switzerland for US bank accounts and US States such as Nevada, S Dakota and Alaska are seeing a significant increase in demand for trust licenses.
The US is an attractive destination, because it has not signed the CRS. It relies on its own FATCA provisions under which other countries provide the US with financial information about their citizens, but the US does not reciprocate. It does not not collect and exchange financial information on behalf of non US resident individuals with financial accounts in the US with the Governments in which these people reside.
Under the proposed changes the UK would become a destination of choice for wealthy individuals across the world who do not wish to invest in the US, and would prefer to invest and reside in the UK where it is safe and if fully managed and invested through trusts in the UK would avoid the potentially damaging effects of CRS.
With these simple changes, the UK would also be seen to be sending out a consistent message which is fair to all. The UK is not blind to the need of privacy of its residents. It pioneered and introduced the Data Protection Act 1998. Under this Act which has since been adopted by numerous other OECD countries, an individual is given rights to information, appeal and compensation. Data is protected from being transferred outside the EU and must not be held for an unnecessary length of time. The Data Protection Act however does not extend to organisations responsible for the assessment and collection of tax. This means that if the data exchanged with the UK is incorrect, the taxpayer could be suspected of evading tax and under the Tax Payers Charter will have no right to review the information, no right of appeal and no right of compensation.
This is clearly harsh especially if the taxpayer is encouraged to keep his assets offshore for legitimate tax reasons, which can be of no real benefit to Britain. However, if taxpayers have the option to bring their assets and trusts onshore, make all their wealth transparent and trackable as UK residents, then CRS will not apply. These simple changes would send the clear, consistent message that the UK is genuine in its policy to promote transparency, is open for business for those who make the UK their home in the UK, supports the UK’s financial services industry, is fair to all who live in the UK and pay all their taxes. Through some small changes the UK could be seen as the ideal place for the wealthy to live and a place for them to bring their wealth and businesses. It would also become the destination of choice for those who are concerned about the safety of their financial information in the country of their residence which would attract many wealthy families to relocate from emerging markets to the UK with their families.
Furthermore, whereas it is suggested that trusts of deemed domiciled settlors and beneficiaries should lose the tax benefit if additions are made in excess of a de minimise amount, trusts should not lose their protection if benefits are paid out. Trustees should be encouraged to pay out to UK resident beneficiaries and settlors, for these monies to be taxed and to encourage monies to be released and spent in the UK for the benefit of the UK economy.
Business Investment Relief
Our suggestion is that Business Investment Relief should be withdrawn in favour of the above amendments. It is too complicated, too narrow, and does not send out a strong enough message that UK, post Brexit, is open for business. It should encourage wealthy foreigners to become resident in the UK and to bring their monies with them. The UK is safe, it has good laws, is the home of trust law, and has well trained and qualified professionals.
The above changes would be welcome to foreign wealth owners who are rightly concerned about the privacy of their financial information, not because they wish to evade taxation, but because they do not want their private information being exchanged across the globe. If the above changes are made not only will all the information about their wealth be transparent but will also be safe meaning that wealthy foreigners will naturally look at the UK as the place where they want to live and bring their wealth with them.