Jane Shaw, private wealth lawyer and director in the dispute resolution team at law firm, Pannone Corporate, commented:

“Despite a flurry of activity from individuals and business owners in anticipation of changes to CGT and IHT, the Chancellor has unsurprisingly delayed making any big decisions at this point, given that the economy is still in a fragile state. This has provided people with another window of opportunity to prepare and plan forany changes, such as the alignment of CGT and income tax rates, as well as changes to IHT and the introduction of a gift tax for all lifetime gifts over a low threshold.

“While the proposed tax reforms have been kicked into the long grass once again, it’s only a matter of time before CGT and IHT receive the kind of tax treatment that’s been on the cards for the last couple of years, with reports by the Office of Tax Simplification (OTS) and the Wealth Commission amongst others, demonstrating that a move is highly likely. In the last few weeks, an increasing number of people have been setting up Trusts in order to trigger a gain in advance of any CGT rise, or at least putting themselves in a position to pay it should they need to. This trend will undoubtedly continue in anticipation of future changes.

“It’s essential for people to take stock and get their affairs in order if they believe any changes to CGT and IHT are likely to affect them, particularly for those business owners where a third-party sale is on the horizon.

“Despite a recent rush of activity, it’s important to note that individuals and business owners can trigger a gain at any point, by transferring a property or shares to a Trust of which they are the Trustee and the main beneficiary. Where there is a proposed gift – for example, the individual is happy to give the property away – it’s also possible to dispose of that asset to a Trust that they are not a beneficiary of and, as such, ‘holdover’ or defer the CGT charge.”

Once again, the controversial topic of ‘wealth tax’ has reared its head – this time as a potential solution to the ever-increasing bill caused by the coronavirus pandemic.

The Wealth Tax Commission believes that a one-off tax on millionaire couples – taxing those households an extra 1% above a £1 million threshold – could raise £260 billion over five years.

The Commission has suggested that this would prevent the need to increase income tax or VAT, as the government desperately searches for answers on how to repair UK public finances that have been battered by COVID-19. In the last nine months, the government has reportedly spent £280 billion in a bid to conquer the pandemic and support the UK economy. 

While the mere notion of a ‘wealth tax’ is likely to cause great concern amongst those above the threshold, the idea is fraught with problems – one of the reasons why, to date, it has not been introduced. 

Firstly, it would represent a double charge – unfairly taxing money that’s already been subject to tax. This could include income, property or assets that people buy. Secondly, there has been little agreement so far on what the threshold should be. While the Wealth Tax Commission has said £1 million – which would include all assets such as main homes and pension pots, as well as business and financial wealth – this would capture a significant number of people who would not regard themselves as HNW individuals, particularly in the likes of London, where property prices are so inflated. In addition, it would also include any UK resident, including ‘non-doms’, which in itself is steeped in controversy. 

Most experts agree that it would be too complicated to enforce, with the valuation of assets alone causing a considerable headache – meaning people would be required to declare their assets every single year. However, the idea of a wealth tax is not unrealistic and is reasonably common in other European jurisdictions, such as France. But, in its current format it would create significant issues. 

It’s very clear that the level of public spending is unsustainable. While the idea of a ‘wealth tax’ may disappear once again only to appear again in a few years’ time, what it does signal is that change is on the horizon. Next year’s Budget is set to impact on current inheritance tax (IHT) and capital gains tax (CGT) arrangements. 

A number of reviews, commissioned by the Chancellor, have already suggested that changes need to be made to how these taxes are administered – it’s only a matter of time before we see rate increases by the government. 

For example, the Office of Tax Simplification and an All-Party Working Group of MPs, have both suggested changes to IHT, that could impact HNW individuals and business owners if they were to be implemented – with one recommendation stating that all life-time gifts over a modest, but increased, annual allowance should immediately attract IHT and no business property relief should be available.  

The writing is on the wall. There will be changes to the current tax regime. As such, it’s essential that people review their affairs, prioritise estates planning, and put structures in place before any amendments are made. In the past, when significant tax changes have been announced, the cut off date for making plans to mitigate those amendments is the date of the Budget itself – once that happens, the opportunity is lost. Clients need to take advice now. Waiting until the Chancellor makes an announcement in the Spring, regarding specific tax changes, will be too late. 

If you would like further advice on tax planning, speak to our private client team.

If you have assets in different jurisdictions it is important to consider the implications when estate planning.

Consider Issues Prior to Acquisition 

You should consider the implications of owning foreign assets before making any substantial purchases so that you are able to structure the purchase in an efficient way which could simplify transfer on death. In order to achieve this it is imperative that you take local specialist advice and cross border estate planning from your UK advisor.

During Estate Planning

When considering your estate planning, it is vital that you disclose all assets – foreign or otherwise – to your solicitor. If your solicitor is unaware of particular assets, they will not be able to guide you on what appropriate estate planning measures to take.

Multiple Wills 

Depending on your circumstances, it may be appropriate to have more than one will. Again, it is important to have the benefit of local specialist advice. For example, some countries may not recognise the legitimacy of a trust, thereby making it difficult to transfer assets into trust following your death if this is stipulated in your Will. By taking local advice, the Wills can be drafted appropriately and should make the probate process run much more smoothly when the time comes.

However, one Will could potentially revoke your Will in another country if drafted incorrectly. It is therefore essential to have a holistic approach to your worldwide estate planning. 

Domicile

One final thing to consider is your domicile, as non-UK domiciled clients could gain significant tax advantages. Clients domiciled in certain jurisdictions (even if long-term resident in the UK) can have particular opportunities to shelter non-UK situs assets from UK inheritance tax.  

Overall, there are a number of ways that you can work to protect your foreign assets with comprehensive estate planning. However, your chosen method will depend on your personal circumstances. Get in touch with the Pannone Corporate team on 0800 131 3355 or fill out our contact form. 

It is easy to believe that estate planning “is only for the wealthy ”. However,  most people want to ensure that home, savings or other belongings of value pass to the right people in the right way and at the right time. A properly drafted Will ensures that your assets are available to benefit the people you choose and that if necessary, are protected for the future

Below are some common traps clients fall into:

Not Planning

This sounds obvious, but one of the most common mistakes is to not have a Will at all.  This usually has undesirable tax implications and often means that your assets will not pass to the people you want them to. Death does not always come when expected and none of us knows when we are going to die!

An Outdated Will

Marriage, divorce and changes in relationships mean that many people’s Wills become invalid or unenforceable without them realising or making a new Will. We advise clients to review their Will every five years to ensure that it remains appropriate.

Inheritance tax (IHT)

Many clients fail to appreciate the impact of inheritance tax and miss out simple steps such as making lifetime gifts (outright or to trust) or structuring their Will appropriately to minimise IHT. Specific opportunities exist in relation to clients with business assets. Specialist advice is always required to mitigate any tax payable. A worse mistake is deciding yourself without the benefit of advice to make gifts. For example, many clients give away their home and continue to live there, not realising that it is not only useless from an inheritance tax perspective but also creates other significant tax problems and increases the amount of tax payable overall.

Second Marriages

Children from first marriages often get disinherited because assets have passed to a stepparent first.  A properly drafted will can enable you to provide for a spouse during his or her lifetime whilst still making sure that on their death your estate passes to your children and not anyone the spouse may choose to leave it to.

Powers of Attorney

Failure to make a Power of Attorney in time means that clients will not be able to choose who handles their estate if they are unable to do so themselves. Choosing the right person for this role can have a significant impact on how assets are protected for the next generation.

Picking the Wrong Executor!

It is vital that you trust your executor(s) to deal fairly, practically and cost-effectively with your estate and avoid any possible disputes which can give rise to significant delay and legal costs.

Our specialist Estate Planning Team ensure that our clients deal with all of the above issues in good time and minimise the overall cost of inheritance tax and legal fees relating to death and the transfer of assets to next generations.