Each week, Spear’s sits down with an adviser in the world of wealth to talk about an issue that directly affects the lives of high-net-worth individuals. This week Camilla Wallace, partner at Wedlake Bell, explains how HNWs can simplify and streamline their tax affairs across multiple jurisdictions. When relocating or planning an exit, Wallace tells Spear’s that HNWs should be proactive in seeking advice (preferably before the tax year begins) to ensure they avoid complications down the line.
How can HNWs and wealthy entrepreneurs streamline their tax affairs?
When you are selling a business, it’s easy to get excited about valuations and corporate finance, and deals, partners and opportunities, but they often forget about personal tax. Estate planning is particularly overlooked.
To avoid this, HNWs need to get their personal tax advisers around the table early in the process. This gives us time to do any necessary restructuring or access reliefs, whether that is BADR (formerly known as entrepreneur’s relief), or any other sort. The longer you have on the lead in the greater the chance of successful tax mitigation. So, if you’re selling, remember to think about the personal tax aspects as well as the corporate.
Sometimes, people get in touch, and say something along the lines of, ‘I have just relocated to the UK, and I’ve taken lots of tax advice in my former home authority.’ But it’s a bit late for us then.
Many HNWs get immediate tax advice but do not think further down the line. If you are looking to relocate, for example, you need advice in the home jurisdiction as well as the intended jurisdiction. Some people will read about the non-dom regime and think, oh that’s fine, I’ll just tick the box and it will all be okay, but this is a major risk. Before you get to the UK, you may need to set up clean capital accounts or put in place an offshore trust or bond. There are lots of things you can do to fund your life in the UK tax efficiently.
HNWs often have tax affairs spanning multiple jurisdictions – what should they know about wealth structuring?
Some HNWs have their structures in America, where they have their powers of attorney (or “durables”), and that’s great. But when they come and relocate to the UK, they don’t realise that, absent any proper cross border advice and action, that power of attorney they have in the US is worthless, we don’t accept it.
If they were to lose capacity, we’ve got nothing in place. So, looking at estate tax and capacity planning cross border, we ask: where are your assets, what documents have you got in place, and what do you need in the UK to make sure you can access all the reliefs, and make sure the right people are appointed to do the appropriate jobs.
Cross-border advice streamlines everything when an event happens. We also need to think about what happens when you die: where will inheritance be taxed and what happens to your estate? You will need to think about looking at succession and restructuring wealth to mitigate taxes.
So that leads onto restructuring wealth quite neatly, and there are two main ways to do this.
One is called ‘windows of opportunity’: pre-arrival, perhaps pre-change or post-change of a tax year, (because your reliefs renew annually) and pre-deemed domiciled status. These are windows of opportunity when you need to take tax advice to make sure that your structure is sound, and to give you the opportunity to put a structure in place.
And then the second aspect of restructuring wealth is timing – so, beyond windows of opportunity you need a holistic strategy.
The term ‘nom-dom’ has entered the wider consciousness after it was revealed that Akshata Murthy, wife of Chancellor Rishi Sunak, held the status. What implications might there be for HNWs if the non-dom regime changes?
I just feel dreadfully sorry for Mrs Sunak at the moment, because, you know, she hasn’t done anything wrong – she hasn’t done anything wrong in tax terms.
So basically, where you are a non-dom and you have tax overseas, there is often a double tax treaty. Now, she won’t apparently claim the remittance basis, which means she’s got some income in India, which is tax paid, she then pays tax in the UK. Ordinarily, we would say, right, you’ve paid tax in India, what’s the rate? And if there’s a shortfall, she gets a tax credit and pays the shortfall. So with a double tax treaty, you don’t pay tax twice, you pay tax at the highest rate.
So let’s say you paid at 30 per cent in India, and it’s 45 per cent here, you get credit for your 30 per cent. But you owe the UK Government 15 per cent. So you don’t pay twice, but you pay at the top rate between the two jurisdictions.
I think for her, the difficulty was that her advisors and his advisors possibly should have said, although there is absolutely nothing wrong with you claiming the remittance basis, you could claim the arising basis, which does not affect your non-dom claim. So you could still be a non-dom – that is not a problem. But you would have this issue of paying tax at the top rate, and it would be a strategic, moral, and political decision to do so.
And they should have had advisors around them saying, look, of course you can claim the remittance basis legally, it’s your right. But actually, if this gets out in the press, how would you feel? They should have said that immediately when he became chancellor… how would you feel if your wife’s non-dom status was on the front page of the Daily Mail?
So either they weren’t advised or they were and they took a risk and it hasn’t paid off, which is a real shame. So I do feel quite sorry for them.
But I guess what I’m saying is that the timing of structuring is crucial, but also the detail of the structuring – whether it’s the right thing to do. We’re seeing this a lot with crypto because of the lack of regulation in some jurisdictions. Some clients say ‘Oh, I want to use Panama for crypto’. And we say ‘really, you want to use Panama as a jurisdiction? This is not good if it gets out into the press’. From a strategic perspective, it is also important when looking at structuring wealth for tax.
A lot of HNWs are living in the UK because of the generous remittance basis regime. I’ve relocated those that set up companies here and employ staff, and rollout big businesses here in the UK. And part of the decision for that will have been quite a favourable corporation tax rate, teamed with the benefits of the non-dom regime. So we are open for business, we’re trying to look competitive. And it will become increasingly more difficult to do that if we don’t have these perks.
And politically, it’s going to come under scrutiny. We’ve had a lot of changes to the non-dom regime since 2008, and I think, unfortunately, this incident will trigger closer inspection.
Is there anything else HNWs should bear in mind?
About six months ago, I would have said that the government has got to hike up CGT to get more revenues in and to help pay for COVID debt. They’ve said that they’re going to tinker with IHT and some of the generous rules there, such as the seven-year rule on unlimited gifts of capital.
We see millions of pounds worth of capital passing down generations with no tax at all, provided there’s a survival by the parent of seven years.
And we were worried about all of that, but actually, for as long as he’s the Chancellor, Rishi has said that their government is not in favour of tax hikes, and they’re not looking to tinker with the IHT regime any further. Rising taxes have been on HNWs’ minds as the government looks to repay COVID debt.
How can HNWs get the best out of a tax adviser?
What makes me most happy on a client mandate is being given the time to address the issue in an appropriate way.
It’s also really nice to have a client who is an open book, who’s listening, who will be advised, who will take advice, and who comes to us, certainly the tax year before, so we can get everything in apple-pie order for them. Once they get here, or once the event – whether it’s the sale of the business or the divorce – whatever it is, we’ll be in good shape.