Taxation of High Net Worth IndividualsTaxation of High Net Worth Individualsin the UKin the UK

Taxation of High Net Worth Individuals in the UK

Complexity of UK tax lawNumerous recent changes• CGT • IHT (including IHT treatment of trusts)• Non domiciled individuals

Proactive advice requiredPersonal service

Taxation of High Net Worth Individuals in the UK3 Case Studies

Case study 1• UK domiciled• CGT, IHT, IT advice• Other issuesCase study 2• Non UK domiciled• Advice regarding offshore trusts and impact of new legislationCase study 3• UK domiciled• Anomalies regarding tax in different countries

Case Study 1

Martin Wife

C LLP Ltd Co A

E LLP Co B Co C

99%

50%

50%

90%

10%

100% 100%

Case Study 1 contd

Compliance Work

• Importance Presents picture to HMRC

Enables understanding of issues

• Self assessmentAssistance with complex rulesSufficient 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 reliefQuoted sharesTransferred to spouse at no gain/no loss ie Proceeds equivalent to pre 6.4.08

Case Study 1 contd

CGT Unquoted sharesTransfer to spouse not suitable because• Client wishes to retain control until sale• Does not preserve business asset taper reliefConsider 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 TaxLevied 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 contdInheritance 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 contdInheritance tax

Alternative route• Husband leaves his nil rate band to a discretionary trust

for the benefit of his wife and children.

Case Study 1 contdInheritance 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 contdOn wife’s death – estate left to children

Case Study 1 contd

Inheritance taxPlanning 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 contdInheritance taxPlanning to reduce IHT on deathImpact 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 taxPlanning to reduce IHT on deathBusiness 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)

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.

INDIVIDUALS1. 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 2Taxation of non domiciled individualsNicola• Non UK domiciled• Divorcee• Lives in Bermuda and Switzerland• Settlor of 2 Bermudan trusts owning property and investments

including a UK property2 children• UK domicile of origin via father • Living in UKRequired 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 200827 March 2008 - Finance Bill PublishedSummer 2008 - Royal Assent expected

Case Study 2 contd

Trust

NicolaSettlor

Trust

Co 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

children1. Capital gain – on whom?2. Funds direct to children – are they mature enough?3. Does Nicola still need access to the funds?4. Whether Nicola was likely to resume residence in the UK.5. Nicola’s lack of knowledge regarding the intended

purpose of the trusts.

Case Study 2 contd

Taxation of Non Domiciled Individuals

1. 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 issuesPrevious divorce – cautiousness New relationship – uncertainty over intentionsPlanning 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% = £400Less credit for French tax = (£400)(restricted)UK tax due NIL

Case Study 3 contd

Comparison of treatment of the SCA

‘Company’Company income = £1,000Less deduction for French tax = (£500)as an expenseNet 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 UKConclusion

Saffery Champness - our role• Trusted advisor• Technical issues• Looking at the bigger picture• No broad brush approach

Mike BeattieTelephone: +44 (0)20 7841 4000Email:

mike.beattie@saffery.com