What does the Budget mean for the rich?

For all the swipes at the non doms and high end property owners, George Osborne seems to have taken a break and made a few thin concessions.

As from 6th April 2016 capital gains tax will go down from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate taxpayers.

This is of course welcome – but the extraordinary thing is that from our studies capital gains tax at 28% was the tax that most UHNW individuals did not mind paying. The taxes they really resent are the tax on the remittance basis for the non doms, Stamp Duty Land Tax on the purchase or their homes in the UK and most disliked of all is 40% inheritance tax.

If the government showed just a glimmer of understanding of the Laffer curve, it would understand that to cut capital gains tax – a tax which is of least concern to the wealthy and therefore less likely to try to avoid it will just result in less tax in the Government’s coffers. If, however, they were to reduce the tax rate of what the UHNW individuals most dislike and are at pains to avoid, such as inheritance tax at 40% or stamp duty at 15% they would be more likely to increase the tax take for the Government.

As I have said in previous notes the tax taken on stamp duty for Westminster and Kensington and Chelsea has fallen since 2013 by about one half since the stamp duty went up. How do people avoid this tax? Simple – the market has dried up for residential properties above £4 million. In 2013 the tax take from stamp duty from these boroughs alone accounted for more than the total tax taken from Northern England, Scotland, Northern Ireland and Wales put together. If the Government was really serious about raising money for the Treasury it would do some serious research into what taxes are disliked to the point at which people will change their behaviour to avoid them and which taxes are tolerated. It would then reduce the rates of those which taxpayers want to avoid and up the taxes taxpayers were happy to pay. The Government needs to find the rate at which the maximum return can be made for the Government. Sadly the Government would appear to be keener on clinging on to power than raising revenue.

The other measure we tend to gloss over – but at our peril is the continued drive to crack down on ‘all forms of tax evasion and avoidance, and aggressive tax planning and non-compliance’. The Government press policy statement goes on ‘There should be a level playing field for the majority who pay their tax, and everyone should make their contribution.’

These are sentiments with which everyone can agree. However for those running businesses or who have more money than they need to maintain their lifestyle paying the right amount of tax is not always so straightforward.

The UK has more tax legislation than any other country in the world other than India and every tax payer is expected to know and understand every word. Most professionals do not know every nook and cranny and even if they did may have misinterpreted the legal nature of the facts and come up with the wrong assumptions with the result that the taxpayer does not declare what he should or puts in the wrong amount in his tax return.

To give an example, Roger owns his house in the UK through an offshore company and trust structure. He took advice from Blink and Co in 2014 which said that based on the facts before them the company owned the property as a nominee for the children and therefore the Annual Tax on Enveloped Dwellings did not apply (furthermore Blink and Co advised, the ATED payment in 2013 was incorrect and should be recovered). Furthermore they advised, the property was not a trust asset and therefore not subject to the 10 yearly inheritance tax charges.

Blink and Co relied on the facts provided by Roger, but Roger does not fully understand the legal difference between whether a property is held on trust for the children or for them as a nominee. Blink and Co did not verify the facts with the trustee ABC Trust Co; they simply relied on what Roger told them.

If they had asked ABC and Co to verify the facts, they would have discovered not only that the property was owned by the company beneficially but also that the company was owned as an asset of the trust which was used as security to a bank for borrowings. They would also have discovered that ABC Trust Co was very concerned as to the lack of payment of ATED on the property and were refusing to continue as Trustees unless and until ATED was paid.

It is therefore only a matter of time before HMRC finds out that ATED was not paid for a few years and at that time it is likely that the advice given by Blink and Co based on the facts provided by Roger will become known. With the funding from the Government and a clear endorsement to pursue non tax payers, it is more than likely that Roger will then face a full tax investigation together with fines for assisting to evade tax which will then extend to Blink and Co.

In 2014 when Roger took advice neither he nor Blink and Co thought that their actions were evasion of tax – it would have then been considered tax avoidance – not now.

If you would like to comment on this or book an appointment with Caroline please contact svetlana@garnhamfos.com or phone 020 3740 7423.

Tomorrow's budget

In 1985 I was ill in bed when the Budget was being read in the House of Commons. At the strike of a pen Development Land Tax was abolished – that was my area of expertise. I wondered whether it was worth going into work when better.

There must be many advisers – accountants, private bankers, lawyers, financial planners, estate agents and trustees keen to see what George Osborne will say tomorrow about the taxation of non doms – their clients. He seems hell bent on killing the golden goose; cutting down the tax reliefs which have made the UK such an attractive place to live for non doms.

Given the pace of change, most non doms living in the country, or who have homes in this country are not rushing to unravel their offshore structures. Many are sitting on their hands, even if it means paying more tax. They have not decided how they want to structure their investments or whether to stay or leave. Living in the UK has been so good for so long they are not convinced that they can no longer do whatever they want and not pay tax.  They talk to their friends, neighbours and colleagues – who are also bewildered and waiting.

Their advisers are also waiting; waiting for the small print in the legislation. Will there be an exemption or planning opportunity?

If not then this rich community is still likely still to do nothing until after the referendum on Brexit.

David Cameron and George Osborne may be keen to stamp out the tax advantages for rich non doms – but will this policy be adopted by Boris Johnson and Michael Gove. If Boris and Michael are concerned about the country and serious about reducing our horrific debts, they should consider how best to use our new independence to attract more monies into the country; which must include making the country attractive to wealth creators.

As I wrote in last week’s blog, if following the referendum we see Britain leave the EU, there will be an opportunity to alter our policies to be more in line with Switzerland. If the new Government does so, in such a manner to give the UHNW community confidence and the electorate see the changes as fair we could see monies flooding into the UK; away from Switzerland and offshore tax havens. This will make everyone happy including accountants, lawyers, trustees, estate agents, architects, bankers, wealth managers and all manner or tradesmen shopkeepers and other service providers.

There are good reasons to introduce the changes. As a result of George Osborne’s hike in stamp duty land tax we have seen a dramatic fall in property sales above the £4 million mark and a consequential drop in the tax take in Westminster, Kensington and Chelsea by about one half since 2012/13.

Whatever George says tomorrow in his Budget statement, I doubt whether we will see a return of confidence or a boost to our economy. The next date for optimism will be the referendum. If we are out of the EU, then we will again need to wait to see what policies will be adopted by Boris and Michael.  I for one will be lobbying hard for them to take a leaf out of the Swiss book to attract foreigners to not only come to the UK, but to bring their wealth with them.

Having been an ardent follower and commentator on budgets over many years – I would like to see politicians axe taxes and lower rates. The irony is that the fewer taxes and lower rates we have– the more tax is collected and the more work there is for everyone – apart from a small handful of nerds.

If you have any comments or would like to book an appointment with us, please call 0203 740 7423 or email svetlana@garnhamfos.com

Planning for Brexit

Now that Boris Johnson and Michael Gove have thrown their hats out of the EU ring, maybe we should think of how we could make our country and economy great again.

Switzerland is a safe haven for investors. Lorne Baring of B Capital based in Geneva and London in last weekend’s Spectator said ‘Around 35% of clients are UK based non-doms, so they need to put their money to work in a safe place that’s outside, but not far from Britain, and a place that is in Europe, but not part of the EU. Switzerland fits the bill perfectly.

It also has the ability to attract wealthy individuals to live there and bring with them their wealth for the country to manage.

As a result Switzerland has one of the highest wealth per head.

If Johnson and Gove were to win the referendum, ousted Cameron and Osbourne and had the guts and far sight to do so – they could easily shape the UK along the lines of Switzerland; outside of the EU.

What would I do if asked?

1. Extend the exemptions for remitting monies into the UK tax free, to encourage non doms not only to live here but to bring with them their monies to invest in and with the UK. In this way the country would attract monies out of Switzerland to be invested in the UK for the benefit of the UK economy. 

2. Make the remittance basis of taxation fairer. Currently if Francois who is UK resident but non UK domiciled received an inheritance from his uncle, on which he had earned no interest or made any gain – this money could be remitted into the UK totally tax free, if Francois were eligible for the remittance payment of taxation. This is because only income or gains which are remitted to the UK are taxable – pure capital is not.

Huge amounts of time and money go into people like Francois trying to keeping their capital pure, so that when it is remitted into the UK no tax is payable. Similarly, HMRC spends huge amounts of time and money trying to prove that Francois has in some way got it wrong. If it succeeds in proving Francois has remitted taxable monies he will then have to pay interest and penalties on what he did not declare.

All monies whether capital, income or gains should be subject to income tax  when remitted, with broad exemptions for monies invested in the UK; property, equity, debt or alternative investments. This is fair because it taxes what they spend, but not what they invest, in the UK.

This simple change would cut expenses and make the UK much more attractive for non-doms to live and bring with them their monies

3. Remove the levy on the remittance basis of taxation.

4. Change the excluded property settlement rules for inheritance tax. Currently if a trust is set up offshore and is treated as an ‘excluded property settlement’ all assets treated as non UK situs are outside the scope of inheritance tax. Why not therefore treat such trusts with  trustees and management in the UK resident as if they were offshore. In this way excluded property trusts would be much more transparent to everyone, would create jobs for our trained and skilled trustees and bring more monies into the UK to be managed. The UK invented the trust but we do so little trust work now in the UK. All disputes affecting such trusts should also have access to our UK court system.

5. Introduce an amnesty, for all non doms who bring their excluded property settlements onshore. Most excluded property settlements were set up such a long time ago that not only are records impossible to find, but also the distinction between capital and income has become impossibly blurred. For all excluded property settlements which migrate to the UK there could be an amnesty for any tax liability incurred as a result of inaccuracies in accounting and administration. This would be particularly attractive when the Common Reporting Standard becomes fully operational in 2017 when taxpayers would prefer to locate their wealth to a jurisdiction where the administration and compliance rules are well understood and properly applied.

6. Change the Stamp Duty Land Tax on residential properties to a more modest rate. Currently the rate introduced by George Osborne is at 12% (15% for second homes) which has had a negative impact on the collection of tax. It would appear that the tax take for Westminster, and Kensington and Chelsea, which used to account for more than Scotland, Wales, Northern Ireland and Northern England has since 2013/14 fallen by half. This is a great example of the Laffer curve, which shows that if the rate of tax is put up to a level at which the taxpayer will not pay the collection of tax goes down.

Our country needs to find the rate of stamp duty land tax at which the maximum tax is collected and not just what rate is likely to win the most votes.

If you have any comments please please call on 020 3740 7423 or email svetlana@garnhamfos.com 

If you think any or all of the above could increase your ability to win business in the UK and thereby improve our economy please forward this to your MP or to any influential politician, journalist or friend so that we can start to formulate a strategy post Brexit.

Litigation is looming

To be a good tax adviser you need not only to have the right qualifications, and the best is to be a member of the Chartered Institute of Taxation, but you also need a good dollop of common sense and legal knowledge.

One succession plan I was asked to review involved a married couple John and Jane. Both had been married before. John had two boys, Jason and Kenneth and Jane two girls Mary and Susan with previous relationships. The succession plan drawn up for them was that the estate of the first to die was to be set aside to pay the income to the survivor.  If John was to die first his estate – which is considerable, would be set aside for Jane and as trustee she could at any time, decide to cut out Jason and Kenneth.  John’s wealth accumulated over his lifetime would then go to Jane’s children on her death. John was horrified. However the situation was easy to remedy. John and Jane simply needed to revoke their Wills and rewrite them specifying to whom their estate should be left on the death of the surviving spouse.

Rewriting Wills is easy; however restructuring offshore structures for non UK doms is not always so straight forward.

Last week I was asked to look at a letter of advice written for Aditya who has an offshore trust which owns his extensive businesses across the world through a network of companies. Within the structure he also owned his home in St John’s Wood worth in excess of £15 million. The advice given to Aditya assumed that the company which owned his home held it as a nominee and therefore despite having paid ATED in 2013, he had not paid ATED in 2014 and 2015.

I asked the trustee to provide the evidence that the property was held as a nominee – there was none. I then asked who, on the sale of the property, would receive the proceeds the company or the trustee. If it was the trustee would the property be available for creditors if there was a claim against one of the businesses owned by the trustee?

Furthermore the trust was set up in December 2006, if the property was held direct by the trustees would they be paying the ten year charge in December 2016? Aditya had not been told about the ten year charge.

My advice to Aditya was to accept that the company owned his home beneficially and to pay the tax for 2014 and 2015. He should then plan to mitigate Inheritance tax and transfer the property out of the company before 1st April. HMRC would no doubt want to raise interest for late payment, but may not raise penalties given the fact that Aditya was following advice. HMRC could also decide to go against his adviser for fines for assisting Aditya in evading tax.

Aditya is able to rectify the position without too much trouble and before HMRC investigates. What worries me however is the exposure of tax advisers who may not have been properly trained to analyse the legal nature of a structure and have given advice based on wrong assumptions. Not only could they be pursued by HMRC for assisting in the evasion of tax, but could also be sued by their clients for misadvising.

HMRC is not kind, it cares little whether a taxpayer was misadvised, or that the adviser was negligent in finding out the true nature of the structure. It needs to collect tax and is determined to stamp out evasion regardless of how innocent it may have been.

If you would like to book a meeting with us please contact Svetlana on 020 3740 7423 or at svetlana@garnhamfos.com

Who can advise on tax?

From whom should you seek tax advice? Should you go to an accountant, a solicitor, a banker or a financial advisor? 

I was asked this question three times this week – and would like to share with you my reply.

If the tax in question is not well understood and documented, the planning opportunities are not tried and tested and time is short, the tax payer does not have the luxury of shopping around.

Probably the highest level of UK tax education comes from the Chartered Institute of Taxation. This is the Institute which is focused exclusively on tax legislation. It has 17,000 members some of whom are Fellows and others Associates. Its members set out clearly the areas in which they specialise and these people are the undisputed experts in their field.  

I am a Fellow and am required to have indemnity insurance, comply with anti-money laundering regulations and complete the necessary set hours of training on my area of tax every year. My expert area of knowledge is on estate and succession and it is in this area that the law has been changing at an exponential rate with extremely tight deadlines.

Take the new higher rates of stamp duty land tax (SDLT) which are due to come into force in April 2016 on additional homes in the UK. The consultation paper was published on the 28th December 2015 and was closed on 1st February 2016 with results due to be announced in the Spring Budget Statement on 16th March.

For those with residential homes in offshore companies on which there is a mortgage, decisions need to be made now if the home is to avoid the higher rates of tax if the home is not their main home. However the details of this higher rate of SDLT will not be known until next month and it becomes law only weeks after. Any planning therefore needs to be started now. Of course some people say they would prefer to pay the extra tax and have certainty, but not everyone is so sanguine.

The increase in the rate of SDLT by 3% on any home in the UK which is not the main residence is expected to be as follows:

Band                        Existing        New

£0*-£125k               0%                3%

£125k-£250k           2%                5%

£250k-£925k           5%                8%

£925k-£1.5m           10%              13%

£15m+                      12%              15% 

Transactions under £40,000 do not require a ta x return to be filed with HMRC and are not subject to the higher rates.  

However, unlike capital gains tax where a home owner can elect within two years of acquiring the second home which is to be the main home, for SDLT purposes the main home is question of fact dependent upon a number of objective factors such as where the children go to school and the place of work.

Furthermore as the rules currently stand the acquisition of a second home to enable a couple to separate is not exempt from the higher rates of SDLT which is clearly not fair. Hopefully this will be picked up in the consultation.

There is also concern amongst the professionals who have to certify that the home is or is not the main residence. The professional will not know other than what he is told by the purchaser. Why the professional should be made to certify something which he cannot be expected to know independently from the purchaser.

The higher rates of SDLT are not limited to homes in which the purchaser wants to live – it extends to homes they let out – which is likely to increase the cost of renting accommodation. This may also be an area in which we may see some amendments. If not, the only way in which the higher rates can be avoided is to have more than fifteen properties available for let.

When planning, it is always the reliefs which are of most interest and SDLT is no exception. Where a property has mixed use such as an apartment which includes an office – or a doctor’s surgery, the rate of SDLT drops to a maximum of 4%. This needs careful thought not only as to whether the relief could be used, but how to ensure it is accepted.

There are a lot of advisors and many are experienced and knowledgeable about tax, but when it comes to something new, the deadline is short and the tax high – it is wise to got to the expert whose governing body is focused exclusively on tax because they are the undisputed experts.

If you would like to make a comment, find out more or arrange an appointment with Caroline please write to us on contact@garnhamfos.com or phone 020 3740 7423.