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Plunge In Asset Values Creates Opportunities For Tax Planners

Wendy Spires, 27 October 2008

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Drops in asset prices means now is paradoxically a good time to look at tax planning via trusts and other vehicles to mitigate imposts such as inheritance tax.

Pulling the banking sector back from the brink has put UK public finances under immense strain, causing speculation that inheritance tax and non-domiciliaries might be high on the UK government’s revenue-raising agenda.

However, it has also been suggested that the depressed state of the markets might actually provide significant benefits in terms of inheritance tax mitigation.  WealthBriefing spoke to trust and tax lawyers, and wealth managers to find out more about this issue.

Christopher Groves, a private client solicitor at Withers, the law firm, said: "If you look at the figures for 2007/08, the amount raised from inheritance tax is estimated at only £3.9 billion, so even if this doubled it would be insignificant in comparison to the £155.6 billion the government expects to raise from income tax. Inheritance tax is not a major revenue raiser."

Moreover, inheritance tax is not seen as a particularly efficient means of raising revenue. “It’s a difficult tax to collect, as it’s very difficult and costly to administer.  It actually represents a small amount of revenue when compared to direct taxation and capital gains tax,” said Haydon Bailey, a specialist trust and tax solicitor at Boodle Hatfield, another law firm.

There may, however, be more cause for concern among non-domiciled high net worth individuals.  St John Robbilliard, a Guernsey advocate specialising in trusts and offshore tax matters for Ozannes law firm, said: "The people who are non-domiciled and living in the UK need to think very seriously about their position – they are an obvious target.”

“The rules may well be changing and they need to look at their positions.  The government will have to raise a lot of revenue to pay for their obligations.  The speed with which they’ve undertaken powers underlines the speed at which things can change,” he said.

Mr Bailey said: “It’s difficult to know in the current climate what the government will do, but no doubt it will wish to target those with substantial wealth.  This may apply to high net worth, non-domiciled individuals, but as London has come to be known as something of a tax haven, this could also affect foreign investors.  If the government can target the rich, they will do so.”

However, other wealth professionals think it unlikely that non-doms will be subject to further taxation, in addition to the £30,000 annual charge introduced in October 2007. 

“The introduction of this annual charge has caused a great deal of anger amongst the non-dom working population and there are reports that some wealthy non-doms have threatened to leave the UK as a result. Only time will tell whether these threats turn out to be reality,” said Ian Harper, head of tax services at Close Wealth Management.

Louise Somerset, tax director of international wealth planning at Royal Bank of Canada, said:  “The Government has hammered the non-doms so badly, that to do anything further would be tantamount to saying ‘we don’t want you here.’” Furthermore, it would arguably not be in the best interest of the economy to push non-doms away.  “Many of the non-doms are wealth creators, and in the current financial environment it is likely that the UK will need these wealth creators more than ever”, said Mr Harper.

Paradoxically however, the financial turmoil of recent months may actually have created a significant upside for clients who wish to settle their assets in trust. 

In the current financial climate, with the markets yet to bottom out, the outlook for many investors’ portfolios might look quite bleak.  Yet the collective action being taken by governments around the world does suggest that share values will rally in the medium term.  This predicted bounce-back means that some wealth management professionals might see rock bottom equity values as a useful means of mitigating inheritance tax. 

Paul Wilcox, chairman of financial services group WAY Fund Managers, said: “By gifting at currently depressed values, gifts can be made at lower taxable values and inevitable, subsequent growth will occur outside the donor’s estate.”

“With assets being depressed, it’s a good time to be moving them around”, said RBC's Ms Somerset.  However, while managing assets in this way might be advantageous for clients, it may not have much appeal at a time when uncertainty and a fear of illiquidity are prevalent.

Camilla Vivian, solicitor at London law firm Wedlake Bell, said: "We would always consider settling assets on trust when their values were depressed, so that future capital growth is ring-fenced by the trust and out of their taxable estates.” 

“However, currently certain clients are reluctant to pay the costs of setting up and running a settlement, now being a time when cash flow is for some people restricted.  Due to the markets and general economic climate, a number of clients feel that they neither have the assets nor the financial security to be giving away their wealth, be it to a trust or anyone else,” Ms Vivian said.

Aside from the fact that once funds are transferred into a trust there is no access to them, it was also pointed out that the affairs of high net worth clients are often affected by a range of complex factors that might preclude settling assets in trust. 

Mr Bailey, of Boodle Hatfield, said: “It’s not something we’re generically advising clients to do.  With high net worth individuals there are cross-jurisdictional issues to consider, along with the fact that recently, assets in trust have proven to be susceptible to attack in cases of divorce and the like.”

The professionals who spoke to WealthBriefing did agree however, that while they could not generally recommend a “ring-fencing” technique, it was something that could be beneficial for specific clients.

“Taking advantage of currently depressed asset values is a way of growing them, and so putting assets in trust is something that we would consider for clients who were already considering making a gift,” said Mr Bailey. 

Furthermore, it was pointed out that low current equity values could provide tax savings, and that this could be a deciding factor in clients opting to put their assets into trust.  Mr Groves, of Withers, said: "One of the barriers to clients restructuring their affairs is capital gains tax. If their assets are currently showing a loss, you could find that people are much more willing to give away their assets, as there is less upfront cost."

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