A lawyer talks about the impact of Brexit on cross-border wealth planning, trusts and other issues thrown up by developments in Westminster and Brussels.
At a Law Society event in Chancery lane in March, Macfarlanes’ private client partner, Edward Reed, was asked to deliver a talk on Brexit - Competitive Destinations For HNWI: The Tax Competition Landscape In Europe - and offer guidance on suitable alternatives for people perturbed by Brexit and its potential fallout – a left wing government.
Following that talk, and a blown March 29 deadline to leave with a withdrawal agreement, we asked Reed to talk about Brexit again. Specifically, what countries have benefited most from this prolonged uncertainty and courting opportunity by replicating in their own jurisdictions what makes the UK so attractive. Also to what degree are disclosures on trusts and cross-border tax compliance weighing on offshore wealth decisions?
You recently talked at the Law Society about “the Brexit effect”. What did you tell them?
Well I was careful to present as neutral a picture as possible. It is not my job to tell people to go or be a prophet of doom. First I don’t believe it is the case and, second, I don’t find it edifying to panic clients in their private struggles about whether the UK is a good place to be.
But is it? Are many clients leaving?
There are certainly clients who are perturbed, but for those people leaving there are also people arriving.
Who is arriving? And what is driving their decision?
I have lived through French arrivals, from the days when France was considered unstable, over taxed, and aggressive towards the wealthy. Now we are seeing, in the aftermath of regulation, people choosing to leave Mexico and Brazil.
A client, threatened by criminal gangs with a fate worse than death, moved himself out [of Mexico] because of the danger. Complete transparency with the government where people are resident is fine and dandy from a tax compliance point of view, what it doesn’t tell you is how those individuals who are now being disclosed, with names attached, are going to protect themselves.
You are talking about the crackdown on money laundering and the 5th ML Directive and such?
Not strictly, also around the CRS (the Common Reporting Standard). When the tax situation is under control and the source of funds are legit, no one has a problem. What we do have a problem with is leaky government registers or the fact that somebody can buy the data. In parts of the world, they have the wonderful GDPR (The General Data Protection Regulation) to keep the data safe, but what if the data can be sold on the dark web and criminal gangs can get to people?
We have come across many people we can demonstrate are tax compliant, who are terrified of threats to their personal safety and of their children and other halves. They come to the UK out of some sort of misguided (I shouldn’t say misguided) view that it is a beacon of democracy and the rule of law.
After they decide to come, they say, "I wonder what I should do tax wise?" HMRC thinks people are coming here because of the non-dom (non-domicile) tax system, but that is not true in my experience. They come first and say, "Oh you have a resident non-dom system, that’s marvellous", and it is after the event that people think it could be quite useful.
Are you seeing a net inflow among ultra wealthy clients in spite of Brexit uncertainty?
There are significant numbers from east of the European Union and the Middle East. Middle East turmoil is making people just interested in parking themselves here.
So it is mostly geopolitical?
It is extraordinarily geopolitical and, of course, with Brexit on the horizon, people find this a good place to do business. We have clients, for example, with a part of their business in the Caribbean and a part in South Africa, and the only rational place with good links and suitable geography was London and Heathrow.
The departures are people having got comfortable with the resident non-dom system who are now finding the UK incredibly expensive once those advantages start to wear out, effectively after 15 years.
What countries have you seen aggressively courting wealthy clients since Brexit, and using what sort of incentives?
Essentially, a lot of people who considered leaving and acted on it, in some part of their being still hanker after being back here because of the rule of law and all the doing-business-here advantages. That doesn’t change just because your tax has gone horrible or we are going through a period of Brexit turmoil. So people don’t want to go too far afield. They can go to Singapore and the US, they can go to a small island but....
Where are they going?
There is a bit of variety. The Channel Islands and the Isle of Man as Crown dependencies type places. Offshore in the European Union it is France, Italy, Portugal, and maybe Spain and Switzerland, and the newer EU jurisdictions such as Malta and Cyprus.
What those newer jurisdictions reflect, which I think is interesting, is a measure of ongoing tax competition. Once upon a time in the European Union, tax competition was a swear word not to be tolerated. For a long time, the OECD and the EU tried to crush the idea of tax competition before common sense prevailed.
What do you primarily weigh up for clients considering a move?
When considering where to go, I could do a table on all the variations - whether a country has capital gains or not, because a lot of people have a business to dispose of. Whether there is ongoing wealth tax. Whether there is wealth tax plus inheritance tax or whether wealth tax is a substitute for inheritance tax. Whether there is gift tax, which we broadly don’t have. It is an incredibly joyous thing for the French to give their assets to their kids in this country without the tax implications there would be in France. I assess all that. I can also assess whether there are visa regimes, for example, there are golden visas in certain countries, and we have one.
Yes, and the UK was going to suspend it.
They announced they were going to put it on hold but, rather confusingly, they didn’t actually do that. What I think happened is the Home Office was smacked down by the Department for Business. The Home Office seemed to be concerned about whether individuals were entering the country for money laundering purposes.
In terms of money laundering and visas, the mechanics of an investment visa means you can’t get one unless you open a UK bank account, and you can’t do that unless you have given quite a lot of information. You don’t just have to explain your identity but genuinely the source of your funds. I don’t think an investor visa is a vehicle to launder money.
What you look at is whether a country gives special tax status, as we do with resident non-doms to people who are arriving for the very first time, or for the first time in a decade. That’s when regimes start to enter into competition, because they start to take you out of the standard tax rules, technically, and give you special status for a period.
Can you give country examples of this rise in tax competition?
The key example for a while has been Portugal. It lightens your tax for the first 10 years of residence. You pay tax on your local income. You can control that in a low-income sense for the first 10 years. If you keep a company in Switzerland or the BVI, for example, you are not paying tax on whatever your wealth is generating. It is only 10 years but that is a reasonable amount of time.
The most recent is the regime Italy created in 2017. They have essentially taken the good features of the non-dom system in this country and said they will give people who have not been resident in Italy for the last decade the ability to pay a flat tax of €100,000 ($111,700), which is known as a substitutive tax, and that is all the tax you will pay basically. If you are generating millions from your businesses offshore, you can bring those funds into Italy and you still only pay €100,000. What is more, they will charge the relatively simple sum of €25,000 for a dependent, and they will give it to you for 15 years, the same time period as ours. They have taken the headline attractions of the UK and melded it with what makes Switzerland attractive, which is certainty.
A challenge with our country is you can’t get the Revenue to sign off in advance that your tax is here and you will pay X. That uncertainty is what drives people mad about the UK. They don't quite know whether the Revenue are going to be sensible about it.
The big attraction of Switzerland is that once you have been introduced to them and you have explained yourself and what your expenditure base is going to be, and it has reached a minimum level, they will sign an agreement with you that if you follow the rules they will only charge you X. It is the certainty and the regularity of it that people find attractive.
How do you rank places within Europe for those leaving the UK looking for this kind of certainty?
The two top competitors at the moment will continue to be the French and Italian speaking cantons of Switzerland; there are also a couple of German cantons still doing it. Second rank is probably - it is very difficult to rank - but slightly strangely France and Portugal. The third rank is Spain.
Why I don’t mention Malta and Cyprus with quite the same alacrity is because we have literally not seen people up and go there. They are a bit newer, smaller, and people often have other prejudices against them. So there is a huge variety.
I have reached the conclusion after studying this for various clients, done the tables, compared the inside leg measurements for each jurisdiction that, at the end of the day, the person has to want to move there. You’ve got to want to live in that country. You‘ve got to like the food, trust the regime, trust the authorities – you’ve got to get around the place.