1. Taxation of High Net Worth Individuals
in the UK

2. 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

3. 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

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

5. 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’

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

7. 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%

8. Case Study 1 contd

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

10. 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)

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

12. 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.

13. 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

14. 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

15. 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.

16. Case Study 1 contd
Inheritance tax

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

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

19. 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

20. 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%

21. 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

22. 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)

23. 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)

24. 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

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

26. 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.

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

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

29. 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.

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

31. 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

32. 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?

33. 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?

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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%

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

42. 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
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