Taxation of High Net Worth Individuals in the UK

Taxation of High Net Worth Individuals in the UK Complexity of UK tax law Numerous recent changes CGT IHT (including IHT treatment of trusts) Non domiciled individuals Proactive advice required Personal service

Taxation of High Net Worth Individuals in the UK 3 Case Studies Case study 1 UK domiciled CGT, IHT, IT advice Other issues Case study 2 Non UK domiciled Advice regarding offshore trusts and impact of new legislation Case study 3 Anomalies regarding tax in different countries

Case Study 1 Martin Wife C LLP Ltd Co A E LLP Co B Co C 99% 50% 90% 10% 100%

Case Study 1 contd Compliance Work Importance Presents picture to HMRC Enables understanding of issues Self assessment Assistance with complex rules Sufficient disclosure to avoid ‘Discovery’

Case Study 1 contd Tax Planning Capital Gains Tax Inheritance Tax Income tax

Case Study 1 contd Capital gains tax with effect from 6.4.08 Abolition of: Indexation Taper relief Reduction in capital gains tax rate From 40% to 18%

Case Study 1 contd

Case Study 1 contd CGT – Banking Indexation relief Quoted shares Transferred to spouse at no gain/no loss ie Proceeds equivalent to pre 6.4.08

Case Study 1 contd CGT Unquoted shares Transfer to spouse not suitable because Client wishes to retain control until sale Does not preserve business asset taper relief Consider a transfer to trust To retain control as trustee Crystallises indexation and taper relief No lifetime inheritance tax on creation of trust (as shares qualify for business property relief)

Case Study 1 contd CGT Unquoted Shares Comparison of pre 6.4.08 transfer to trust and subsequent sale in Dec 08, with just a sale in Dec 08

Case Study 1 contd Inheritance Tax Levied on chargeable transfers at 40% on death at 20% during lifetime which exceed the nil rate band (currently £312,000) A transfer to a spouse is exempt.

Case Study 1 contd Inheritance tax Prior to the changes, each individual had their own nil rate band. If a husband left his entire estate to his wife this was an exempt transfer his nil rate band was wasted

Case Study 1 contd Inheritance tax On husband’s death Estate worth £1,000,000 Left to wife: no IHT On wife’s death – estate left to children

Case Study 1 contd Inheritance tax Alternative route Husband leaves his nil rate band to a discretionary trust for the benefit of his wife and children.

Case Study 1 contd Inheritance tax

Case Study 1 contd Inheritance tax Position with transferable NRB On husband’s death Estate worth £1,000,000 Left to wife no IHT

Case Study 1 contd On wife’s death – estate left to children

Case Study 1 contd Inheritance tax Planning to reduce the IHT due on death Reduce the value of your estate by making gifts to family/friends etc Survive 7 years and the asset is not included in your estate Survive 3–7 years and, although the asset will be included in your estate, the IHT charged on it is reduced by a taper relief Maintain an element of control over the asset by gifting to a trust of which you are a trustee

Case Study 1 contd Inheritance tax Planning to reduce IHT on death Impact of lifetime IHT Due on chargeable lifetime transfers (CLTs) in excess of the nil rate band (£312,000 08/09) Previously a trust which gave an interest in possession was not a CLT but a PET, meaning any amount could be gifted to trust with no lifetime IHT (and no IHT on death if survived 7yrs from gift) Following Finance Act 2006, all transfers to trusts are chargeable and therefore any transfer over the nil rate band will trigger lifetime IHT at 20%

Case Study 1 contd Inheritance tax Planning to reduce IHT on death Business Property Relief If shares qualify for BPR no IHT on death whilst owned. On sale > conversion to cash > loss of BPR ‘Bank’ BPR by a transfer of shares to trust now Chargeable to IHT but with full BPR so no lifetime IHT due Can hold over capital gain so no CGT due Continue as a trustee so retain control

Case Study 1 contd Income Tax Ensuring that borrowings do qualify for tax relief Borrowing in wife’s name Ensure wife will have taxable income Pension contributions Pension contributions for children (gifts out of income = IHT exempt)

Case Study 1 contd Income Tax Use of offshore unit trust to generate capital allowances Ensuring sufficient taxable income to utilise the capital allowances Consider income yielding investments (“non distributor”/”non reporting” funds)

CONTROL CENTRE EXEMPT UNIT Case Study 1 contd 1. A Jersey resident trust which owns land and has an agreement to develop office buildings. 2. Gains are not taxable in the UK. 1. Not UK resident. 2. Owns land and has entered into agreements to develop Fire Control Centres. 3. Not a trading entity – carries on a UK property business. 4. Gains are not taxable in the UK. 1. A Jersey resident collective investment scheme with distributor status. 2. Gains made on disposal of units in the Capital Trust are not taxable in the UK. INDIVIDUALS 1. Individuals hold units and loan notes. 2. Capital gains/losses arise on these when disposed. 1. Structure is transparent for income tax, so individuals should be treated as carrying on a UK property business. 2. Profits, losses and capital allowances flow through to unit holders on an arising basis. 3. A loan note holder is taxable on interest income. CONTROL CENTRE EXEMPT UNIT Owns all units in a partner in CAPITAL UNIT TRUST CONTROL CENTRE PARTNERSHIP Both have contracts to acquire and lease UK properties

Case Study 1 contd Other issues Going forward Gain client’s trust Proactive advice Work with clients

Case Study 2 Taxation of non domiciled individuals Nicola Non UK domiciled Divorcee Lives in Bermuda and Switzerland Settlor of 2 Bermudan trusts owning property and investments including a UK property 2 children UK domicile of origin via father Living in UK Required advice regarding how the new rules will affect her, the trusts and her children.

Case Study 2 contd Taxation of non domiciled individuals – Timeline October 2007 - Pre Budget statement December 2007 - Consultation paper January 2008 - HMRC ‘Frequently asked questions’ February 2008 - ‘Clarification’ from HMRC 12 March 2008 - Budget 2008 27 March 2008 - Finance Bill Published Summer 2008 - Royal Assent expected

UK House and Investments French house Case Study 2 contd Trust Nicola Settlor Co UK House and Investments French house House for Sale

Case Study 2 contd Taxation of non domiciled individuals UK property to be sold Funds to be utilised to purchase property in the UK for children Capital gain – on whom? Funds direct to children – are they mature enough? Does Nicola still need access to the funds? Whether Nicola was likely to resume residence in the UK. Nicola’s lack of knowledge regarding the intended purpose of the trusts.

Case Study 2 contd Taxation of Non Domiciled Individuals Capital Gain Disposal prior to 6.4.08 Finance Bill now makes it clear that no pre 6.4.08 gains will be taxed on non domiciled individuals Payments to UK resident UK domiciled children will still be taxable?

Case Study 2 contd 2. Nicola’s concern over claims against children on divorce Use of a loan by Nicola No outright gift to children Use of a trust to protect assets Existing trust – problem with stockpiled gains New trust – cost of setting up and maintaining

Case Study 2 contd 3. Nicola’s need for funds Did Nicola want to make outright gifts or would she prefer loans to the children so that funds remain in the family pot? What were her anticipated needs?

Case Study 2 contd 4. Nicola’s residency Would Nicola resume residency in the UK? If so – how long before she had been in the UK 17/20 years and therefore deemed domicile? If deemed domicile – no longer able to create a relevant property settlement If resident – how would payments from the trust be treated? Consider action before arrival? Make payments before arrival?

Case Study 2 contd 5. The purpose of the trusts Nicola’s view She settled them, therefore the funds are essentially ‘hers’ Did not understand their ability to shelter the UK properties from IHT on her death Focussed only on the costs of running the trusts. Resented trustees ability to dictate what to do

Case Study 2 contd Worked with Nicola to explain a constantly changing position Understanding her issues Previous divorce – cautiousness New relationship – uncertainty over intentions Planning to provide access to family wealth for her children

Case Study 3 Wealthy UK domiciled client Taxable on worldwide income Interest in French Société Civile Agricole (SCA) How to obtain relief for French tax suffered

Case Study 3 contd HMRC chose to audit the SCA and examine its constitution Neither a UK company nor a UK Partnership Treated as a partnership when declaring income on UK tax return Conclusion by HMRC – treat as a company

Case Study 3 contd Impact on foreign tax credit available Tax paid by SCA belongs to the SCA and is not available to set as a credit against our client’s tax liabilities Tax paid by SCA to be treated as an expense, to arrive at a different net income figure for our client

Case Study 3 contd Comparison of treatment of the SCA Income of £1,000, French tax at 50% ‘Partnership’ UK tax at 40% = £400 Less credit for French tax = (£400) (restricted) UK tax due NIL

Case Study 3 contd Comparison of treatment of the SCA ‘Company’ Company income = £1,000 Less deduction for French tax = (£500) as an expense Net Income £500 UK tax at 40% = £200 Total tax suffered £500+£200 = £700 = effective tax rate of 70%

Case Study 3 contd Inequality ECJ anti-discrimination? Cross border issues have significant impact Important to take advice at the outset

Taxation of High Net Worth Individuals in the UK Conclusion Saffery Champness - our role Trusted advisor Technical issues Looking at the bigger picture No broad brush approach Mike Beattie Telephone: +44 (0)20 7841 4000 Email: mike.beattie@saffery.com