Steering through the fog

The financial crisis, subsequent global recession, and political and public backlash, have had two significant consequences for private clients in 2013. First, a need for hugely indebted governments to find money to reduce their deficits; second, a big shift in public sentiment (fuelled by the media) against the wealthy. This has meant new tax rates and rules across the globe, and far greater scrutiny of wealthy individuals’ affairs, particularly in the UK.

George Osborne’s Budget clarified the shift in tone. Aside from the usual glut of tax changes, the chancellor made a series of statements designed to reflect the strategic shift in HMRC and the government’s approach. He said it was “unacceptable for a minority to avoid paying their fair share, sometimes by breaking the law. The action we are announcing will help HMRC close ?in on those who seek to avoid or ?evade tax.”

Blurred vision

His choice of language was interesting. Tax evasion and tax avoidance, traditionally seen as distinct, were blurred. Individuals are now faced with three, not two, distinct categories and outcomes.

Tax evasion remains illegal. Increased HMRC spending on enforcement means evaders will be more heavily targeted. Individuals with funds tainted by historic tax evasion should seek advice on ‘cleaning up’ those funds, perhaps through the potentially attractive ‘amnesty’ options of the Liechtenstein Disclosure Facility, UK-Swiss tax cooperation agreement or the new facilities in Jersey, Guernsey ?and the Isle of Man.

Tax avoidance is now effectively split into two sub-categories. Legitimate but aggressive tax planning is firmly off limits in the eyes of the government and HMRC. “Acceptable” tax planning still exists, but the boundaries between the two have become increasingly difficult to define. This is one of the greatest challenges that advisers will face for ?years to come.

Uncertainty and lack of clarity are becoming common features of the current tax regime.

Four important changes to the UK tax code have made significant alterations to the tax planning landscape. The general anti-abuse rule (GAAR), which came into force after more than 18 months of drafting and consultation, will potentially alter tax planning in the UK, and the ?tax community remains divided over ?its impact.

Nobody knows at the moment because the legislation and guidance are (perhaps intentionally) very vague. However, a few common themes can be picked out of the discussion and commentary:

• Most individuals agree that the GAAR legislation, with its reliance on the concepts of abusive behaviour and double unreasonableness, is unclear. The consequent lack of certainty seems to run contrary to the thrust of the Aaronson Report that recommended introducing a “moderate” and “targeted” rule and was against a “broad spectrum” rule, which would undermine sensible and responsible tax planning

• There are mixed views about the role of the advisory panel, comprising senior tax professionals. Some fear that they will rubber-stamp the views of HMRC, others have concerns around potential conflict issues.

• Most people agree that it will be many years before we have any certainty as to GAAR’s ambit.

Either way, GAAR will undoubtedly make advising on tax more difficult for years to come.

The annual tax on enveloped dwellings (ATED), formerly known as the annual residential property tax, came into effect on 6 April, forming part of a three-fold tax targeting companies and certain other entities that own UK property valued at more than £2m.

It turned out to be considerably less significant than many feared with a large number of clients opting to retain their current structures and pay the charge.

While partly a result of other tax charges, which would have been incurred during restructuring, the key reason was that the proposals had been modified and made eminently more sensible after the consultation period. The result: some extra tax for the government, a high profile ‘attack’ on the wealthy, but something that proved to be just about palatable for the majority. Perhaps the government got this one about right – if only the same could be said for GAAR.

Certainly, ATED does not appear to have had an effect on the price of high-value property in prime areas. Figures published in October showed ?an annual increase in house prices of ?19.4 per cent and 5.9 per cent for the City of Westminster, and Kensington ?and Chelsea, respectively, statistics that ?are further substantiated by news from ?the Office for National Statistics that ?UK house prices reached a record ?high this year.

Unfortunately, we have experienced a number of teething problems with HMRC’s administration of ATED filings and payments. Some payment references have not been received in time to enable payment of the tax due.

Staff on the ATED helpline have openly admitted to a lack of training and that they could not access the ATED database to confirm receipt of returns. Their advice has been limited to answering basic queries or asking callers to email complicated questions.

However, we received bounce-back emails as the ATED inbox was full to capacity, so neither queries nor additional information for returns could be submitted. Hopefully these issues will have been rectified by April 2014, when the next round of returns and payments are due.

The third major UK tax change on the deductibility of debts for inheritance tax (IHT) purposes was announced in the Finance Act 2013 and caught the majority of advisers by surprise. Some considered the timing to be cynical as it came little more than a week before the deadline for ATED-related restructurings, many of which were based on strategies that involved the deduction of debts.

The new rules, targeted at UK-domiciled and non-domiciled individuals, restrict individuals from claiming deductions of debts for IHT purposes in a number of instances. This includes debts that are not actually repaid, borrowing that is used in acquiring assets subject to business property relief or agricultural property relief and borrowing used in acquiring excluded property.

Finally, the Finance Act 2013 made important changes to IHT rules that will greatly benefit non-UK domiciled spouses and civil partners of UK domiciled individuals. With effect from July, the limited spouse exemption for transfers between UK domiciled individuals and their non-UK domiciled spouse or civil partner was increased up to the prevailing nil rate band (currently £325,000), following a finding by the European Commission that the previous limit of £55,000 (which had remained unchanged since 1982) was discriminatory.

In addition, non-UK domiciled spouses and civil partners now have the option to elect to be treated as UK-domiciled for IHT purposes. The election can be made either while both of the couple are alive or within two years following the first death and can be backdated seven years from the date of the election or, in the case of an election made after death, seven years from the date of death.

The election will be irrevocable, although it will cease to have effect if the individual in question is not resident in the UK for four successive years at any time from the date of the election. Importantly, those considering making an election should be mindful that their worldwide assets would become subject to UK IHT while the election is in force.

Planning regime

May 2013 brought a raft of changes to the planning-permission regime designed to encourage growth. The new rules, which relax the old system, include (in certain circumstances) implied permission for changes of use from office to residential within a three-year window. While much of central London is exempted on the basis that these are areas of economic importance, certain prime areas, including (among others) parts of the City of Westminster, Wandsworth and Islington and the whole of Richmond upon Thames, and Hammersmith and Fulham, remain subject to the rule.

Given the continuing rise in the price of residential property in London, we are likely to see a number of freeholders taking advantage of this opportunity to convert their commercial premises before the 30 May 2016 deadline, potentially leading to an increase in the number ?of new high-value residential properties ?in the capital.

Asset protection

One of the most significant court decisions came in the case of Prest v Petrodel, noteworthy because of its ruling that a company was holding assets on trust for its shareholder, in this case a husband going through a divorce. As a result, the properties could be transferred to his wife.

Ostensibly a family law case, it was of huge interest for private client practitioners in designing structures to protect family wealth.

Other developments in 2013 The Law Society launched its wills and inheritance quality scheme (WIQS) to a divisive reception. The Retail Distribution Review (RDR) took hold of the financial advice sector forcing firms to differentiate and stand out from the crowd. It was positive for some, not for others.

Vulnerable clients

Lasting powers of attorney (LPAs) have received renewed attention following the news of the legal wrangle surrounding ex-footballer Jimmy Hill’s assets after it was revealed he was suffering from dementia. There are two types of LPA that may be granted relating either to property and financial affairs or health and welfare, and in both cases the choice of attorney(s) is evidently key.

Both donors wishing to make arrangements for managing their affairs and attorneys welcomed guidance for banks and building societies to assist them in dealing with customers who have others acting on their behalf, which was published in May. Issued by the British Bankers’ Association, in partnership with other relevant bodies, it aims to reduce aggravation and offers practical advice to institutions to help them provide a better standard of service.

But the Court of Protection (CoP), which should help empower vulnerable adults, has faced great scrutiny in 2013. The issue came to the public’s attention through the widespread coverage of SCC v JM & Ors, where it was revealed that an individual who had removed her father from a care home had been committed ?to prison for contempt of court.

The news that the CoP had exercised its powers so vigorously away from public examination created a feeling of unease among many.

Earlier this year, Justice Secretary Chris Grayling called for greater openness in the CoP to reflect the practice in the family courts, a view which appears to have been echoed by the president of the CoP and the Family Division, Sir James Munby. Speaking at the CoP Practice and Procedure conference, Sir James pressed for more transparency in the CoP, and urged for greater publication of judgments.

While the CoP plays an important role in protecting the privacy of vulnerable individuals, there is evidently a need for greater transparency and guidance to quell fears over how it exercises its powers. Looking ahead, ?we hope to see at least some of Sir? James and Mr Grayling’s suggestions ?for CoP reforms.

The right to die debate also courted headlines in the UK and around the world. The year began with Jane Nicklinson, the widow and estate administrator of locked-in syndrome sufferer Tony Nicklinson, being allowed to challenge the ruling rejecting her late husband’s assisted suicide application. And in April, Paul Lamb, who is paralysed from the neck down, was revealed as the ‘new face’ of Nicklinson’s campaign joining the legal fight for the right to die.

As 2013 was drawing to a close, Lord Falconer’s assisted suicide bill was deemed to be a “blank cheque” for suicide by Baroness Butler-Sloss, Lord Carlile QC and Lord Brennan QC, and no doubt the debate, which is supported by the Dignity in Dying charity and many well-known personalities, will continue into the next year.

Looking ahead

It’s been another 12 months of significant changes, many of which will have ?a marked impact on high net worth individuals. While on the high street, the ever-expanding alternative business market looms over traditional firms.

The year has seen some welcome reforms, but other legislative measures, such as the GAAR, arguably create more uncertainty than clarity.

So the outlook for private clients (and, even more so, their lawyers and accountants) wishing to undertake sensible planning or structuring of their assets for various legitimate reasons are facing a GAAR ‘fog’ surrounding their planning for years to come.

 

Matthew Barnett and Chris Moorcroft are associates in the private client team at Harbottle & Lewis

This article was published in the December 2013/January 2014 issue