Guide

Latest developments in the private client sector and the impact of COVID-19

Gateley Legal

In this episode, Louise O’Toole, Associate in our private client team, is joined by Senior Associate Ravi Francis, Legal Director Geoff May and Partners Richard Jordan and Mark Pearce. They discuss the recent developments in the private client sector, with a focus on the coronavirus pandemic and the impact this has had on their clients.

 

In this episode:

  • A look at the EU directive on cross-border tax arrangements (DAC6).
  • A look at the changes to the UK’s trust registration service.
  • An overview of expectations for the autumn 2020 budget, including potential significant changes to tax reliefs and rates.
  • An overview of private client’s key consideration for the coming year.
     

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Read the transcript:

Louise O'Toole: Hi everyone, and welcome to our private client update. I'm Louise O'Toole, and I'm an Associate in Gateley Legal's London private client team. Today, I'm joined by Ravi Francis, a Senior Associate in the team, Geoff May, our legal director, and Richard Jordan and Mark Pearce, who are both partners.

Between us, we cover a very broad range of private client matters. And today we are going to be talking about some of the recent developments in the private client world, with a particular focus on the coronavirus pandemic and the impact this has had on our clients.

And so, if you are someone with interest in the UK, or perhaps an advisor, trustee, or other fiduciary, for somebody with a UK interest or nexus, this podcast is definitely for you. To kick things off, we're going to start by looking at the EU directive on cross border tax arrangements, also known as DAC6, and the changes to the UK's trust registration service.

Now, both of those and non COVID related. However, the implementation has been delayed somewhat as a result of the pandemic. So directing my first question to Geoff and Mark in particular, it is clear that there is currently a lot of discussion within the private client arena regarding both DAC6 and the trust registration service changes. Which of these do you think, based on current guidance, will be of most concern to private client practitioners, and why?

Geoff May: There are a couple of EU based initiatives, which the government is partway through implementing. One is called DAC6, and the other is the update of the existing HMRC online Trust Registration Service, known for short as TRS. The DAC6 effectively is the implementation of a cross border tax information exchange agreement, which is EU wide, which the UK is part of until at least the end of the Brexit transition period. And the same with the Trust Registration Service.

DAC6 effectively means that certain transactions which are between two or more EU member states or an EU member state, including the UK and a non-EU jurisdiction, if they tick certain hallmarks have to be disclosed to HMRC. And some of those hallmarks don't require tax avoidance as part of their motive, they could, for example, include simply payment of a premium or a confidentiality agreement.

That regulation is now enforced. It's been postponed for six months, but anyone who's done any planning of this sort since the middle of 2018 has to decide where it's disclosable and have it ready for disclosure by the deadline dates, which have been postponed till the end of October.

The Trust Registration Service has been going for a couple of years. The initial version was on the fourth money laundering directive. It's been changed, updated because of the fifth EU money laundering directive. And that has widened quite a lot of the trusts to which are subject to this. There are certain exemptions, trust exempt, which weren't before. That's still uncertain what those are going to be covered. We are still waiting for the guidance for those.

DAC6 is largely going to affect those who've got cross border transactions involving one or more EU states, or the EU state including the UK plus somewhere else. The Trust Registration Service is a much wider ambit of structures covered. Anything which is a trust has to consider whether it is an exempt trust or subject to registration. And that is going to affect a lot more high street practitioners than DAC6.

It also will affect a certain number of cross border structures which have a UK connection. Those, however, have been restricted somewhat insofar as that an offshore trust does not have to go on the Trust Registration Service if it has no UK based land or any other UK connection unless it has a UK resident trustee and gets advice from a UK based advisor.

Both have a great deal of detail in them. And in order to advise or to understand what your obligations are under those two directives, you need to be quite thorough in considering whether you're caught by them and what your reporting obligations if you are.

Ravi Francis: Just add my two penny worth there, if that's okay. So I think my conversations with the Channel Islands in particular definitely substantiate what Geoff's just said. So originally when the TRS consultation came out for 5MLD, there was concern that all of their structures are now going to be caught. And as Geoff said earlier, it's obviously been a big expansion recently of the trusts that now don't need to be registered. It's only where there's a UK connection, one UK resident trustee, et cetera.

So I think that's much less of a concern now for our friends in, say, the Channel Islands than first thought. It was also I thought quite interesting just to look at the difference in the penalty regime between the two. So just to put a financial point on it, I think people will be more concerned if they're running structures that are caught by DAC6 than the TRS anyway because the penalties aren't comparable really. Generally speaking, DAC6 can be a lot more. I think there's a fixed penalty of five grand than daily penalties. And a tribunal can charge up to a million pounds in penalties for the worst cases.

Whereas I think TRS, the highest you can get is 5% of the annual tax liability for the trust, which generally speaking is going to be a lot less.

Richard Jordan: One of the questions from me is, as you and I have already discussed, is the obvious implications for our friends in the offshore industry. I came to the conclusion with you that DAC6 is unlikely to impact most of our work with those people. Is that a fair summary?

Geoff May: Yes. Both DAC ... well, DAC6 like DOTAS has a legal professional privilege exemption. Which means that any advisor who is subject to legal professional privilege is, generally speaking, not allowed by that to disclose any planning caught by it to HMRC unless the client waives that privilege.

And unless the client does waive that privilege, then the only person that the advisor can warn of the obligation to do the disclosure is the client. They're not allowed to say to anyone else, including the other advisors involved. So it's unlikely with DAC6, that lawyers will be actually doing the disclosure, but accountants and clients and other advisors certainly will. Trust Registration Service is fundamentally something which the trustees have obligations to do. And the lawyers and accountants may be assisting them with registration, advising them whether they are required to register or not.

Richard Jordan: And in terms of the accountants then, where do they sit in relation to DAC6? Is there a difference if a trustee is looking at UK tax advice and they have a choice between accountants and lawyers on this, does this impact that decision making at all?

Geoff May: The only difference it makes is who actually has to make a disclosure if the arrangement is disclosable. accountants don't have legal professional privilege, so if they are a promoter or advisor in relation to disclosable structure, they will normally have an obligation to do the notification. The lawyer may be doing exactly the same thing, but unless they are doing that outside of a retainer, they normally will not have the obligation to disclose. They'll have to tell the client if they think it's disclosable, and then the client or any other professional advisors involved with the structure who's not covered by legal professional privilege will need to do the disclosure. That is, of course, predicated on the basis that there hasn't been a prior disclosure by a previous advisor or tax-paying client in the structure, or indeed has not been done in another European country, prior to being done in the UK. Because disclosure only needs to be done once in one jurisdiction.

Richard Jordan: So are you saying in summary then, are you saying that of the two, the TRS changes are far more likely to be of interest to our friends in the offshore community than perhaps DAC6?

Geoff May: In relation to those who have offshore trust structures, TRS will be relevant for those which have a UK connection in relation to UK tax liabilities, if they have UK land. If they have ... those are where they're likely to be disclosable.

If they're simply using a UK advisor, unless they have at least one UK resident trustee, that will not oblige them to register. It certainly has implications in relation to information being given to HMRC. However, DAC6 is much more likely to affect where structures are being set up, or where our various transactions which are being undertaken which have a tax planning motive. And those are quite often likely to be disclosable under DAC6. If for example, they involve the UK and any other EU member state. Or for example, the UK or any other member state, for example, the Channel Islands or Switzerland.

Those structures actually go back to the middle of 2018. So anyone who's actually been setting up offshore transactions in the last two or so years will need to review them to see whether they are disclosable or not. So both will affect offshore trustees and fiduciaries, but they will do it for different reasons.

Louise O'Toole: Great. So moving on to the next question, we couldn't do a podcast without mentioning the dreaded C word. As I'm sure you'll all know, Rishi Sunak introduced a mini-budget towards the start of July to introduce measures which he hopes will help the economy's recovery post COVID, with growing speculation that we may see significant changes to tax reliefs and rates, and possibly some new taxes. So ignoring any hype, in reality, what do you now expect to see within the autumn budget 2020? Mark, would you like to start?

Mark Pearce: Sure. I mean, this is one of those areas where I could just say a hundred things, and I'm bound to get at least some of them right. But I think I'll just focus on what we think will be the most likely changes. And I think we'll start with capital gains tax. It seems almost certain from the information that's been disclosed to the technical bodies and in the general media, that capital gains tax is going to be subject to a substantial overhaul. Three areas where that may impact our listeners is that it is possible that we'll go back to what's known as top-slicing. Which is where capital gains tax was charged as income at the rate of income tax.

So we could see capital gains tax go from its current level of circa 20%, up to around 45%. The second area that we may see a big change is principal private residence relief. As our listeners will already know, if you sell your main home in the UK, usually that gain is exempt from tax. Now the reports to date suggest that we may not see principal private residence relief lost entirely, but we may see a smaller rate of tax, such as maybe five or 10% on your home. And that would be pretty brutal for some people unless there was an uplift in value to the current base cost, otherwise, some clients will be locked into a very large gain.

And connected with that I think to capital gains tax, is we may see a reduction in other relief, such as entrepreneur's relief, which has been again mentioned many times. So perhaps the current 10 million limit may be reduced beyond one to half a million. Or it may be like the nil rate band and come around every few years. I think we should leave the speculation there.

I will happily hand over to someone else because I think that another area that has been discussed that someone could pick up, is inheritance tax. And linking capital gains tax to that is that when you die in the UK, usually your assets are uplifted for capital gains tax purposes and you don't pay capital gains tax.

There are some exemptions to that. For example, if you have a previous hold-over relief claim, you make pay capital gains tax on death, but it's rare. This is another area where we are hearing that there may be changes, so that the recipient of an asset may not receive an uplift. And that's enough from me. So someone else can pick up the possible changes to inheritance tax that are being mooted.

Richard Jordan: I think the problem with inheritance tax Mark, is that it just doesn't generate a significant amount of revenue. It's a small contribution to the overall tax take. And for that reason alone, I think even if they overhauled it or tinkered with it and removed, for example, potentially exempt transfers, or switched it around as part of a reform of capital gains tax, it isn't going to generate any significant amount of tax. It's going to make a marked difference to recurrent finances.

The other point, therefore, to bear in mind with that, is that politically it could be disastrous. So the risk/reward basis, it just doesn't seem to stack up to me. Which is why I think that they would ... they might tinker with it, but I can't see them fundamentally changing it. What I think is possibly more likely, and it's been mooted, is some introduction of maybe a capital transfer tax or lifetime allowance, similar to Ireland, similar to Spain. Or a wealth tax generally, and I know the two are very different. But a wealth tax, either based by reference to the value of your home, which some countries have tried, or by reference to your net overall wealth.

And in some countries that have introduced a wealth tax, it actually does generate significant amounts of tax. Others less so, it's more of a political statement, but for some countries, it is actually a tax generator.

So I'm not sure tinkering with inheritance tax will make much of a difference, and I think it's such a hot potato for the Conservative party that they're unlikely to do it. I don't know if Ravi, do you have a view on that?

Ravi Francis: Yeah, I think I agree actually with those sentiments. I think if I were Rishi Sunak, I would be going for the low hanging fruit first. So I think changes to inheritance tax, as you say, it's not really tinkering. They would need to rewrite the entire legislation, which is very complex and very difficult to administer at the moment.

So what would I be doing? I think Business Asset Disposal Relief as is the name for entrepreneurs' relief now, it's been reduced to a million, I think from 10, since March this year. It wouldn't be a big leap just to remove that lifetime allowance and remove the relief. And that that could generate a lot of tax from business owners, et cetera.

Mark Pearce: I think just interjecting there, I think that's what Richard was saying about politics. And I'm useless at politics, which is why my answers are never political. But entrepreneurs' relief would be very ... or the removal of entrepreneurs' relief would be very anti the conservative statement that "We want entrepreneurs, we want to build up businesses. We want to do everything else." There's going to have to be a judgment or a fine line between the removal of that relief, and the encouragement that we will want, post-COVID in particular, people to start-up companies, to start employing people. And there has to be some form of incentive for that. Otherwise, it's not going to be something that people particularly want to follow.

Ravi Francis: I agree with that. I think taking a step back, whatever they do I think is going to have ... you're not going to please everybody. You're certainly going to upset a lot of people.

So for example, I agree with you. I think one of the things that's almost certain is going to be tinkering or removal of principal private residence relief. Now, that's a fundamental shift in the UK where your home really is sort of sacrosanct. That's part of our society, part of our sort of mindset.

Personally, I mean, Rich mentioned a wealth tax. As generative of tax revenue that might be, I would probably still prefer removal of principal private residence relief, because [inaudible 00:17:28] the taxpayer an element of choice. So if you don't want to be taxed on your gain, you don't sell your house. I know that's not much of a choice because you know, people will be stuck in their current home. But a wealth tax just seems really unfair, because it's almost punishing people for being wealthy. And particularly if there's a dry tax chart of income that they've learned or gains that they realized.

Richard Jordan: I think ... I hear what you say, Rav. But I think what ... there are some fascinating articles on the sentiment towards the wealthy. And there is no doubt that sentiment, whether it's COVID related or not, probably to a degree it's COVID related, i.e. those that have money at the moment is perhaps suffering less than those that don't. And I think the anti-wealth sentiment has grown, and that is borne out by a number of articles.

So there is a growing clamour amongst I think the population, to see the wealthy pay more. And I think there's probably an acceptance amongst the wealthier members of the population to pay more. It's awkward because the contribution already made by the top 1% of earners is a significant part of the overall tax take. And to ask them to pay more is always a bit tricky. But I do think that there are reliefs such as, you know, you've touched on some there, such as business property relief for IHT purposes, that might be something which is tinkered with or played with.

And I think it is the generosity of some of the relief, holdover relief perhaps, on the transfer of assets into a trust, all those sorts of, what do they call them? Freebies or generous gifts, if you like, by HMRC to the wealthier members of society, because they are only accessed by the wealthier members of society, are going to be subject to a review, and perhaps should be. So they are going to have to pay more, it's just where they pay more.

Mark Pearce: I think the philanthropic giving will increase. I think as Rich has said, people feel a desire to help society. And I think that will be true of everybody, whether you're giving an extra £10 or £10 million, I think people have seen that this pandemic is going to increase. But unfortunately, the philanthropic gifting will not help the tax take home. Because obviously by its nature, philanthropic activities are generally considered to be tax-free.

So I do think we're going to need some significant increase in the tax revenues. The numbers are staggering as to the amount that has been spent, the deficit and everything else. It is just a question of what. And one thing-

Richard Jordan: But my view, Mark ... Mark, I'm going to jump in. My view on this is that we are in uncharted territory here. We have never seen anything like this since the war. And even though you think I'm an old fart, I am not that old to have remembered what happened after the war. But you know, we are economically in a pretty interesting position.

And I think you need to come at this ... What I would love to see is someone to come at this from a completely novel point of view. And I think I've mentioned this to you before in passing. One of the things I'd like them to think differently, or one of the things I would like them to think about, is possible whether it's the large corporates in the financial services sector who were bailed out in 2008, making a large one-off contribution, or whether it's the individuals themselves. But you need to put it forward to them in a way that's perhaps more attractive and puts the onus back on them.

And I think one of the ideas that, you know, I haven't thought this through, that I came up with was, okay you say to those individuals, "For one year only, we are going to tax you at such and such a rate." Or there might be a one-off wealth tax for that one particular year. Or, in the alternative, "You can give X amount to charity, a UK registered charity and a fixed percentage to charity."

And the reason for that is that that is relieving some of the burden of the state in any event. It's more appealing to them as individuals. And the charitable sector's taken a heck of a pounding during the COVID lockdown.

So if you were faced as an ultra-high net worth individual of paying say 50% tax, or maybe higher, maybe 65% tax for one year only, or in the alternative, donating 15 or 20% of your income to charity, I know what I would do if I was in that bracket.

I think there'd have to be some sort of regulation though. We all know that there are some, not many, but there are some charities that have huge financial resources because they are the ones that are generally gifted to. And I'll take an example; it doesn't mean anything. But let's just say everybody donated to Cancer Research. Yeah, that would be phenomenal for Cancer Research, and phenomenal for the human population as a whole, but it's not solving the COVID crisis in the economic areas where COVID has had its impact.

And you mention voluntary choices. And I think that's the way we should go, and it's the way that I hope we go. But we must remember that there are countries that have tried to generate money through involuntary means. So the Italians, when they needed to conform with the EU budgetary requirements, simply took a percentage of the amount that was sitting in your bank account or your investment account. It wasn't optional. It was brought in with a two-day retrospective effect, to stop any anti-avoidance. So there was precedent out there for some very draconian ways to raise money.

Now, as I say, I hope we don't go there and I don't expect Sunak to go there, but I'm not sure they will go for such a voluntary process that you and I, you are older than me, significantly, but we've been around for a while. We both know that while 90% of philanthropic giving or 95% of philanthropic giving is genuine, there are ways to abuse the philanthropic reliefs, predominantly for the donor's benefit. So I'm not sure Sunak will go that far, in terms of a voluntary issue.

Louise O'Toole: So over the past year or so, me and Richard have seen a trend of non-UK domiciled clients, upon being informed that they have inadvertently incurred liability in the UK, seeking to perhaps avoid paying that liability. And for example, such clients would often come to us with a problem, but the trail will go cold when we advise them of the significant taxes payable. And I was wondering if any of you have seen anything similar, and if UK taxes are increased in the budget, do you think that there is a potential for more clients to seek to avoid tax in this way?

Ravi Francis: That's an interesting question. I have to say, I must be one of the lucky ones because I've not seen clients behaving in that way. I think, not for probably six years or so, but I think the last time that happened, we explained to the family that there's no way around getting this tax paid. That's what they need to do next before we can do any further work. And we were dis-instructed.

So I suspect if someone did behave in that way, we'd have to cease acting pretty quickly, and we file a suspicious activity report or something like that. I think when clients incur a tax liability, the discussion in my experience recently, isn't normally about how to avoid it, but it's rather how should you report it, without exposing yourself to more than you need to.

So it's more to do with the timing of any disclosure. So normally ASAP is good, because it means the inquiry window will close more quickly. What should the form of the disclosure be? So, you know, do they just put the details of the tax in the white box of the tax return? Or does it need to be more formal or more detailed than that?

And then the content, obviously, of the disclosure. This requires specialist advice. So yeah, it needs to be full enough disclosure so that HMRC can't infer that you're deliberately concealing anything. But also you don't want it so detailed that you're giving unnecessary information, particularly if it might lead to unwarranted inquiry the client's other affairs.

Mark Pearce: I was going to go and say that there have been a number of regulatory changes as well, that makes avoidance and evasion much harder. And Geoff I know is all over the DOTAS changes, so I'm going to be quiet again and hand over to him.

Geoff May: Historically, measures to counter tax evasion, avoidance have focused against taxpayers. But recent measures have focused more on the advisors. For example, the DOTAS, which is basically a Disclosure Of Tax Avoidance Schemes rules was extended in 2017. And then for IHT was recently extended, which requires advisors to disclose, subject of course to legal professional privilege, which is where lawyers are different from accountants.

There is the DAC6 regulations, which is an international variation of that, and is a lot wider than DOTAS. And also the Criminal Finance Act of 2017 made it a criminal offence for a professional person to facilitate tax evasion. And if the advisor does that, then both the advisor and the advisor's employer could get fined, and obviously, it does serious damage to their reputation.

Richard Jordan: Yeah, I suppose my personal view on this, is having sat through, as Mark quite nicely pointed out earlier, I'm a bit older than him. Not significantly older, but a bit older than him. My personal view on this is, when they've increased taxes before, they have increased the appetite for tax mitigation. And then people will turn up who will look to, or in the past have turned up, who will look to push avoidance.

Now we're in a very different environment to what we were five, six years ago. And I think you would struggle to find any reputable practitioner in the market today with any sort of, given what Geoff's just said, and given the way the world has gone, with any scheme, in inverted commas, which is being peddled. But there will be an increased appetite for mitigation.

I think the question though, that I was ... that I heard from Louise, and that I personally think is happening, is there is an ... I've picked up in my day to day work, an increasing number of inquiries where evasion, I think it's just pure evasion, is at the root of their question.

So, and it's normally to deal with non-domiciled clients, who have found themselves with a tax liability in the UK, without understanding our tax system, having not been properly advised at the outset. And then seeking to evade that tax. And I, for one, have probably had four or five inquiries this year already where, when I have explained the situation to them, the inquiry has gone cold very quickly because they did not like the answer that they heard. And I know full well that they probably have no intention of paying the tax, and I hope that they are caught.

Louise O'Toole: That's brilliant. Thank you. So to wrap up, bearing in mind, everything we've just said, I would like to ask each of you to say in one word, if possible, what you think the main concern for your clients will be over the coming year.

So Mark?

Mark Pearce: Me? Going down to one word, that's like-

Louise O'Toole: If possible.

Mark Pearce: ... a practical impossibility. But I think that, and this goes right back to the DAC6 and all our conversation about avoidance and evasion and everything else. I think the keyword for our clients this year is going to be compliance.

Louise O'Toole: Perfect, thank you. Ravi?

Ravi Francis: I think my word would be uncertainty. I think there's just so much out there that we don't know what it's going to look like in the medium term. You know, the second wave, how bad will it be? What are the longterm impacts on society, the economy, people's families? Will people still have a job in six months? So uncertainty for me is the buzzword. Not very interesting.

Louise O'Toole: No, it's brilliant. Thank you. Richard?

Richard Jordan: Mine would be tax. I think my clients are all expecting to have to pay a bit more. I think they'll all be very happy, not very happy, but they would all be content in paying an even greater contribution to society than they already do.

Richard Jordan: But I think their concern is that they will be asked to completely cover the burden of this. And if that is the case, I suspect that we will see a number of clients leaving the country. And that's already, as we know as a team, already front and centre of several of our clients' minds and they're already watching their day count with a view to that, prior to a budget. So there are several clients who are managing their day count so that if the budget is adverse, they will not be resident in the UK in the current tax year.

Louise O'Toole: Perfect. Thank you. And Geoff?

Geoff May: I would say it's complexity. Every reform we've had of tax, you know certainly the last 10 or years has been adding layer on layer upon the tax system, without any simplification. And it makes it extremely difficult for well-intentioned clients and advisors to plan and to take action. And if they were able to know what they could do and the boundaries were clearer, and the tax legislation was better drafted, we now have this tendency to have very broadly and badly worded legislation, and then trying to effectively clarify it by guidance, which is extremely unsatisfactory. And I kind of see no change from that attitude in future.

Louise O'Toole: Thank you so much, everyone. I personally found that extremely informative. And it's clear the words you've just used that over the next year, there's going to be a lot of uncertainty, tax changes, compliance issues, and complexity.

So a key takeaway I think if you pay UK tax or trust advice, or if you or one of your clients has a UK interest or connection, even more so now in this ever-changing world, please do get in touch. And we are going to supply all of our contact details along with this podcast. And even if you just want to know a bit more about what we do, please don't hesitate to call. And thank you for listening.

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