This last year has been one of great contrasts – trying and largely succeeding to keep business going as usual but also this sense of ‘stopping the clocks’ and there being time to reflect on priorities.
For individuals and families, estate and succession planning, usually in a cross-border context, has never been more important. This has been a time to get wills completed, governance reviews undertaken, planning in regard to businesses considered. What have been the main trends and developments?
At the outset, what was immediately thrown into sharp relief was the effect of the pandemic on the residence of individuals, companies, and trusts.
Days spent by an individual in the UK are a factor in determining their tax residence status. This in turn can affect the residence status of any company of which they are a director or have control, and any trust (including will trusts) for which they are a trustee. Some clients were unable to leave the UK as they had planned or decided not to and the implications of this for their tax residence (and possibly their deemed domicile) will only become apparent over time.
Under the UK Statutory Residence Test, up to 60 days’ presence in the UK in a tax year can be disregarded when this is due to ‘exceptional circumstances’ beyond their control, such as national or local emergencies or life-threatening illness or injury. So, this permits a maximum of 60 days’ unplanned residence. The question then is whether issues caused by COVID-19 will be regarded as ‘exceptional circumstances’. HMRC issued guidance about what should qualify but as the year became even more disrupted it may be that 60 days will simply not have been long enough.
What if the individual is trustee of a trust? The individual’s change of tax residence might cause the trust to become UK tax resident. Not only might this cause tax complications in the tax year in which the individual is UK resident but also when they become non-UK resident again, as this will cause the trust to be exported.
Equally the extended residence in the UK of the individual might also affect the ‘management and control’ of a company for which they are director, or which they control in practice even if not a director or lead to the possibility of there being a permanent establishment in the UK of a non-UK company. This does not flow directly from the tax residence of the individual but will be linked to this because they might find they have to make decisions in respect of the company while in the UK, rather than in their place of usual residence, or that they are carrying out their work and duties in the UK. The situation could be particularly complicated if the company is also tax resident in the jurisdiction where the individual usually lives. The OECD view is that these circumstances should not affect the residence status of companies under the international tax treaty rules. HMRC have said that they are sympathetic to the disruption but consider that the existing legislation and guidance already provide flexibility in relation to changes in business activity caused by COVID-19.
The paradox is that the pandemic has shown the ease of global communication but in the meantime, individuals will have to resolve their tax filings for 2020/2021 and consider the impact of the continuing disruption.
While not pandemic related, the recent UK Court of Appeal decision in HMRC v Development Securities PLC is a further case on the question of how to determine where central management and control of a non-UK incorporated company lies. In this case a Jersey incorporated company with Jersey resident directors with a UK resident parent was held to be UK resident as it was considered that the Jersey subsidiary had followed the instructions of the parent to enter into a transaction and had not itself given proper consideration to the decision. In this context the minutes of board meetings will play a significant role in demonstrating the position.
Moving on to regulatory compliance, there has been a quiet continuum with further initiatives on exchange of information and the development of beneficial ownership reporting through registers.
So, on 21 July 2020 notice was given of a measure to be introduced in the next Finance Bill which is now incorporated in clause 122 of Finance (No.2) Bill and which extends HMRC’s civil information gathering powers. A new Financial Institution Notice (FIN) will be used to require financial institutions to provide information to HMRC when requested about a specific taxpayer without the need for approval from the Tax Tribunal. This is expected to speed up the time HMRC takes to deal with international exchange of information requests where we are well behind international standards (the target is six months and it takes the UK on average 12 months). The loss of the approval safeguard is a concern for the taxpayer.
On beneficial ownership reporting, the UK has three main pillars. Since 2016, Companies House has run the register of Persons with Significant Control (PSC) identifying those who have significant influence or control over a company which can mean tracking back through a structure to the very top.
The intention now is that Companies House should also run the register of overseas entities which own UK property and which the government intends to implement in 2021 through the Registration of Overseas Entities Bill. There will be similar requirements to the PSC regime and the same restrictions on public access to the information. Overseas entity means a body corporate, a partnership or other legal person governed by the law of a country or territory outside the UK. So not trusts as they do not have legal personality.
Each entity will receive an overseas entity ID and this will be the key to making successful registrations of dispositions at the UK Land Registry. The Bill also aims to capture current owners who will be given 18 months to provide the information.
The final register is the UK trust register (TRS) which serves a dual purpose. It met the EU Fourth Anti-Money Laundering Directive (AMLD4) requirements to have trust registers showing beneficial ownership and met the UK’s wish to capture data digitally about express trusts with a UK tax liability.
AMLD4 was swiftly followed by the Fifth Anti-Money Laundering Directive (AMLD5) and in July 2020 the government published the outcome of its technical consultation on the impact of AMLD5 on trust registration. There are several exempt trusts and, helpfully, non-EU trustees of express trusts which form a business relationship in a Member State will not have to register unless there is at least one UK resident trustee.
The original deadline of 10 March 2021 for further registration has just been put back by HMRC to at least the autumn of 2021 as there have been delays with the upgraded register. Public access will continue to be on a legitimate interest basis, requiring evidence of money laundering or terrorist financing activity.
Meanwhile, a UK government Policy Paper was published on 14 December 2020 looking at the progress of the inhabited Overseas Territories in adopting publicly accessible registers of company beneficial ownership. This, along with the similar commitments from the Crown Dependencies, means ‘that some of the most significant financial centres in the world are committed to this important measure that will improve transparency.’
So, for any structure it will be necessary to consider the beneficial ownership registers in the UK if there is any relevant association with the UK and equally to consider the requirements in other relevant jurisdictions. Generally, service providers should not only review what information they are providing but how they are communicating about this to their beneficial owners.
Moving to tax, much has been written about possible alignment of income tax and capital gains tax rates, reforms to inheritance tax and capital gains tax, and the possible introduction of a wealth tax, in the context of the need to pay for the government assistance expended in the pandemic. None of this has yet happened. But the reduction of corporation tax from 19 per cent to 17 per cent was shelved early on and it was announced in the recent Spring Budget that the rate would increase to 25 per cent from 1 April 2023, albeit with a small profits rate and some other relief measures.
The non-UK resident stamp duty land tax surcharge on purchases of residential property in the UK by non-UK residents also came into force on 1 April 2021, taking the maximum rate to a very high 17 per cent and also muddying the waters by having its own test for residence.
For the international client who may become resident in the UK or has a family member resident in the UK, the tax legislation remains a complex maze and rapid changes in recent years have not helped. These complex rules mean that the compliance side depends on very good record keeping and understanding of the nature of assets and receipts. The UK Treasury wishes to create a tax system for the 21st century and its report issued on 21 July 2020 ‘Building a trusted, modern tax administration system’ set out a 10 year vision of what it meant for policy (making Tax Digital work), systems (looking at the timing and frequency of taxes and the technological infrastructure required) and law and practice (a reform of the tax administration framework). The Command Paper issued on Tax Day, 23 March 2021, sets out measures to deliver this 10-year vision.
In broad terms, HMRC want a modern and resilient framework which taxpayers can navigate, uses technology well, and enables tax to be paid on time and correctly. They are looking at what can help the taxpayer including pre-populated tax returns, digital prompts, and education about what they should be returning to shift the onus from enquiry after the tax return has been filed to getting more accurate returns in the first place. Bearing in mind that errors involving offshore matters accounts for over 10 per cent of the overall UK tax gap and that HMRC now have significant quantities of data from the regulatory initiatives, it can be understood why there is a shift in emphasis, exemplified in the discussion documents ‘Helping taxpayers get offshore tax right’ and ‘Preventing and collecting international debt’.
Understanding the nature of assets and receipts brings me to the final noticeable trend. Traditionally, we are used to dealing with tangibles and intangibles and the financial world has produced many developments in intangibles. But the digital world is where the developments are now – for example, crypto-currency, the sale at Christie’s of a digital work (Everydays: The First 5000 Days by Beeple) with a unique non-fungible token and the offer to accept crypto-currency in addition to more conventional means of payment, and digital influencers - all raising questions of situs, nature of receipt, record keeping, and taxation.
Notwithstanding all these aspects and complications, for the international client the cross-border dimension will always require consideration and planning and probably some kind of structure in relation to their assets. The reasons for setting up a trust remain pretty constant – succession planning and asset protection being the chief goals but philanthropy and a wider societal purpose also featuring (see the STEP report issued earlier this year on Social and Economic Benefits of Trusts). If anything, these very human responses have been reinforced by the pandemic.
Helen is a Senior Partner at BDB Pitmans LLP. She specialises in estate and tax planning for individuals, families and trustees, usually with an international dimension. She regularly writes and speaks on trust and tax topics.