Private Client—looking ahead to 2017
Monday, January 9th, 2017
Nick Dunnell, partner at Farrer & Co
Charlie Tee, partner at Withers
Andrew Goodman, partner at Osborne Clarke
Nick Dunnell (ND): I am not aware of any cases in the pipeline but HMRC seems to be waging a bit of a campaign on residence, challenging the claims of individuals of being resident outside the UK. I suspect we will see an increasing focus on the application of anti-avoidance provisions to tax planning and, more generally, HMRC challenging tax structures and planning on the basis they lack commerciality and, hence, go against the intention of Parliament (surely an artificial construct).
Looking further ahead, I anticipate there will be an increasing number of professional negligence cases and that the seeds are being sowed now in the run up to the tax changes coming into effect on 6 April dealing with enveloped dwellings and changes to the non-dom rules, particularly the former. I say that because there is likely to be significant pressure to de-envelop—basically, take residential properties out of companies—before 6 April 2017. Clients will leave it late (they already are), there will be plenty of cases, so issues will be overlooked in the pressure to meet the deadline. The issues where I suspect mistakes will be made relate to the property aspects of de-enveloping, especially in relation to valuable leaseholds. There are bound to be cases when settlors and beneficiaries mistakenly believe they are non-resident, so gains on de-enveloping could be attributed to them, perhaps as a result of advisers not probing enough. We are also bound to find significant cases of reservation of benefit, particularly with foreign resident ultimate owners because I don’t believe they are yet attuned to the restrictions of UK estate planning.
I suspect we will see a greater focus by HMRC on tax events in relation to residential property, such as disposals for CGT, chargeable transfers for inheritance tax (IHT) (on death, on exits from trusts and on ten-yearly anniversaries), annual tax on enveloped dwellings (ATED) and stamp duty land tax (SDLT). Some of these cases are bound to make it to the courts in the next few years, particularly in relation to the latter two taxes.
Charlie Tee (CT): While there will doubtless be certain important cases which come out in the course of 2017, currently the most important changes in 2017 are being driven by new legislation and regulatory developments.
Andrew Goodman (AG): We will see a flurry of judicial review challenges to follower notices, accelerated and partnership payment notices as individuals exhaust the minimal appeals available to them. As we have seen from the press, huge sums are at stake and some of those investing in film schemes have received demands for tax far in excess of the cash they originally committed. Taxpayers have lost the cases that reached judgment in 2014 and 2015 fairly comprehensively. Two of the first, R (on the application of Rowe and others) v Revenue and Customs Commissioners and R (on the application of Walapu) v Revenue and Customs Commissioners, will be heard in the Court of Appeal and collectively they cover the majority of arguments run by those in receipt of such notices including technical points, human rights and whether the Revenue process is up to scratch. A lot of individuals and advisers will be following the outcome keenly—albeit I suspect few are very optimistic. More first instance hearings are on the horizon and are likely to hit the Administrative Court throughout the year.
ND: We are seeing an increasing focus on anti-avoidance and transparency. To bolster the extension of IHT to enveloped dwellings (or, typically, the shares in companies holding such properties), expect a register of ultimate beneficial owners of foreign companies that hold UK dwellings. This will enable HMRC to track IHT events (principally, the death of the ultimate beneficial owner (UBO) or chargeable lifetime transfers) and enforce payment of the IHT due. Strictly, I do not believe that this register needs to be public but it would be in keeping with the spirit of the times if it were.
We will probably continue to see movements of funds to the US to sidestep the Common Reporting Standard (CRS) but I don’t anticipate Uncle Sam doing much about it, particularly following Trump’s election. As the government tries to reduce the tax burden on the JAMs (those ‘just about managing’) and companies, it will have to raise tax from other sources. We can already see it in relation to the restrictions of interest deductions against rent and the recently announced extension of corporation tax to the UK income of non-UK companies. I suspect higher rate income tax reliefs will be restricted, as we have seen with pension contributions over recent years. Family investment companies (FICs) have become a (relatively) popular means of holding investments and trapping the income in the FIC, where it is either untaxed or taxed at the (lower) corporation tax rate. Expect this to change. It looks like a fairly easy target. Perhaps we will see the imposition of a withholding tax on UK dividends paid to non-residents. I remain unsure why that never happened following the furore over Lady Green’s £1bn untaxed dividend.
CT: As trailed at the beginning of 2016, 2017 will see some major legislative changes in the fields of the taxation of ‘non-doms’ and the taxation of UK residential property and these will have a massive impact on private clients of a more international nature. With effect from 6 April 2017, any non-domiciled individual who has been resident in the UK for 15 out of the previous 20 years will become deemed domiciled for all tax purposes and so will no longer be able to claim the benefit of the remittance basis. This is a real game changer and such individuals and their advisors are currently giving a lot of thought as to how to react to it. Some are planning to leave the UK, while others are looking to stay but want to rearrange their affairs, taking advantage of some of the relatively advantageous transitional provisions that have been introduced during the course of 2016 (such as the ability to rebase certain foreign assets and to ‘clean up’ mixed offshore accounts). It promises to be a very busy start to 2017 for a lot of advisors and many firms are already looking to crack down on holidays.
Away from non-doms (and a whole host of new rules and laws concerning offshore tax evasion and other related issues), we will see a lot of legislative and regulatory changes in the field of disclosure of information. 2016 saw the introduction of the Persons with Significant Control Register for UK companies while the CRS was also adopted formally by a number of countries and matters will continue in the same vein in 2017. The first reporting under CRS is due in 2017. Aside from this, the Fourth Anti Money Laundering (AML) Directive 2015/849/EU is due to be implemented by June and this will give rise to a register of trusts in the UK, though it remains to be seen what the final form of this will be (a consultation on transposing the Fourth AML Directive into UK law closed in November 2016). Already, though, the Presidency of the Council of the EU has proposed amending the Fourth AML Directive and replacing it with the Fifth AML Directive, and recently published a third compromise proposal on this. The current draft provides for all Member States to bring this into force by June 2017 and it looks to widen the obligations for a register of all trust interests (not just those with a business function), so that it is accessible to all those who can prove legitimate interest. These are potentially very wide ranging changes indeed and appear to very much have prioritised public access and disclosure over an individual’s rights to privacy or the right of data protection, a fundamental right under the EU Charter of Fundamental Rights. A similar register has recently been challenged and struck down in France by the constitutional court and it is very likely that this inherent tension and conflict will come under increased scrutiny in 2017.
AG: Without doubt, the changes to IHT for ‘enveloped’ residential properties and the introduction of deemed domicile for non-domiciliaries. The IHT change is the final nail in the coffin for the use of companies to hold residential property and a rather cruel blow for those who have been paying ATED since 2013 in order to maintain the IHT shelter. The government’s final review has introduced many more changes, some beneficial, but some rather unpleasant such as those bringing the situs of loans to the UK.
2017 will see a lot of restructuring and de-enveloping but also work to take advantage of the rebasing and ‘un-mixing’ provisions for those becoming deemed domiciled.
ND: I don’t see a direct and immediate impact of Brexit on my clients, except those whose asset base is in the UK, suffering from the drop in sterling. Perhaps we will see yet more foreign purchases of residential property as the foreign buyer now has a discount, but that also means any rent is discounted. The recent changes to the taxation of UK residential property are bound to have an effect on the willingness of some foreign purchasers to buy residential property.
Once we have left the EU (assuming that happens), HMRC will be able to push for stronger anti-avoidance provisions, reversing some of the watering down that the European Commission required in order to make those rules non-discriminatory. There are likely to be some indirect restrictions on the free movement of capital, so I would anticipate the agricultural property relief will be confined to property situated in the British Isles, as it was historically. Charity relief will be restricted to UK charities, rather than extending across the whole of the EU (which HMRC clearly hated).
Sadly, I cannot see the government ditching VAT once post-Brexit. That might have made Brexit worth it! Then again, another tax would have come in to take its place.
Otherwise, Brexit will have an indirect effect. If the UK becomes a less welcoming, tolerant place, fewer wealthy individuals may choose to spend their time here. If we can’t get some deal on passporting, will the City be as attractive a place for the financial services industry and, if the banks move abroad, who pays the corporation tax? Sorry—must stop this train of thought.
CT: It will be very interesting to see how the UK responds to the draft Fifth AML Directive. The UK has been opposed to the wide-ranging register of beneficial interests that the Fifth AML Directive envisages and so how the UK Parliament will respond to the requirement that it shall bring into force the laws, regulations and administrative provisions necessary to implement the Directive will be an interesting development to monitor. The UK remains a Member State of the EU for now but it is an open question as to how well the proposed draft Directive will go down with certain parts of the electorate and the House of Commons.
AG: I don’t expect Brexit to have a major effect on the personal tax system as EU law forms such a small part. The wider picture is unknown. High net worth EU citizens will still find a way in, perhaps via investor visas, but the UK will be less attractive as compared to the current situation when they could move here as of right with very little bureaucracy.
ND: Undoubtedly, there will be a very busy first quarter to 2017 with the non-dom changes and taxation of enveloped dwellings coming into effect on 6 April 2017. I suspect there will still be a lot of de-enveloping post-5 April 2017. There will be plenty of compliance and tax to pay.
There will be increasing advice on what to do with offshore trusts, particularly once we get more clarity on the rules applying to protected settlements. This may involve splitting trusts into ‘spending trusts’ and ‘savings trusts’ so as to limit the exposure to tax on trust income and gains. No doubt offshore trusts will continue to have a role to play in estate planning, so I anticipate more being set up ahead of individuals becoming deemed domiciled under the new rules. There will be some individuals who choose to leave the UK but probably fewer than might be expected.
There will be an increasing focus on compliance and transparency—plus attempts to resist them.
I suspect there will be more trust litigation as that seems to be a trend and I would not be surprised to find HMRC seeking to intervene in more Hastings-Bass cases in the offshore world and, where they are not given a hearing, then perhaps refusing to recognise the decision of the foreign court if it conflicts with Pitt v Holt; Futter v Futter UKSC 26,  3 All ER 429.
The trend of focusing on threats to wealth will continue, be the threat tax, divorce, forced heirship, political instability, vulnerable or feckless beneficiaries or third party claims generally wealthy individuals will continue to seek square control of their wealth with orderly succession (controlling from the grave, if need be).
CT: Disclosure of information is going to become more and more a part of everyday private client life and those who are uncomfortable with this are going to have to get used to the new realities. 2017 will see the first reporting under CRS, while as mentioned above the Fourth AML Directive and the potential Fifth AML Directive may also have a very wide-reaching impact. When coupled with the PSC register for companies, a lot of information is going to be made available in respect of a lot of people and their structures. Taking account of this is going to be a more and more important part of any planning alongside the traditional issues of succession and estate planning and tax which have to date had the most impact on such planning.
AG: The division of the industry between those serving mostly domestic clients and the international high-net-worth (HNW) market will continue to grow. The ever expanding legislation and anti-avoidance provisions such as the general anti-abuse rule (GAAR), the new IHT rules and deemed domicile will mean that advising the top end clients will become even more specialist as the planning opportunities for domestic clients reduce. Bespoke advice will become more expensive as advisers have to consider many more issues and taxes—there are few standard solutions anymore—so the level of wealth that clients must have to justify City rates will increase.
ND: For the private client practitioner, the key challenges will probably be about resourcing. We see changes to the tax code and compliance, which we need to digest then communicate to our clients. This takes time. The volume of work is anticipated to increase and getting enough capable and qualified associates to help do the work is a challenge as the pool (compared to corporate or property) is quite small.
CT: Keeping abreast of the changes which are being introduced in all areas remains a key challenge for all practitioners in the field and it certainly seems that this will not get any easier in 2017. With far-reaching tax changes being introduced on the one hand, and ever increasing reporting obligations being introduced on the other, the life of the private client practitioner seeking to assist their clients and to help them ensure they are 100% compliant in all areas will certainly become more complex.
AG: Key challenges will be getting to grips with the many anti-adviser and widely drafted anti-avoidance mechanisms due to be introduced over the next 12 months, including the proposed expansion of disclosure of tax avoidance schemes (DOTAS) to all IHT without the usual scheme indicators and the new provisions seeking to impose penalties on enablers of tax avoidance. The latter is particularly onerous as the definitions of avoidance again go far beyond the usual marketed schemes and will make advisers (and their firms) nervous about providing tax advice even in bespoke cases where there is any doubt as to the true position. This could cause problems in many grey areas where HMRC have resisted providing an interpretation or have published views that contradict the general view.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.