Hannah Solel is a researcher and writer at Spear’s
It might not be top of your list of things to think about in a new year – but perhaps it should be: 2018 will be a landmark year in the realm of tax and trusts. And if you doubt that, then it’s worth considering the sheer scope of change about to hit HNWs when it comes to their affairs.
‘We are all going to go compliance crazy in 2018,’ says Stephenson Harwood tax partner James Quarmby, who also predicts that ‘compliance fatigue’ will set in before the end of year.
So what’s the cause of all this foreboding? While January is always the season of HMRC reminders, last week also saw the first of two deadlines for submitting trust details to the new Trust Registration Service (the second follows hot on its heels on the 31st January).
The Trust Registration Service came about through an EU anti-money laundering directive. Put simply, trustees are required to lodge information including when the trust was established; they are also expected to file the names of any paid advisers providing legal, financial or tax advice to them. That’s not all: the details of each beneficial owner also need to be registered.
In its current state, the register is not public, but its existence has the potential to raise privacy concerns. Down the line, changes could be made to terms of access to the register — it could become ‘public’ in other words — or it could fall prey to hackers. In addition, this is a rolling obligation: updates are required at the end of each tax year, so submitting information is not a one-off requirement.
This change must co-exist alongside another development. The remainder of the Common Reporting Standard [CRS] countries undertake their reporting obligations this year – including Australia, Canada and Japan – leaving just a few like Nigeria and Albania remaining. This will lead to the globe’s largest ever exchange of tax information; Quarmby is among those who foresee that this will bring about the largest campaign of tax investigations in history.
But there’s also a third potentially major development. You might not have noticed amid the noise surrounding the reform to stamp duty for first-time buyers, but the Chancellor Philip Hammond’s November budget sneakily contained an announcement of a consultation on the taxation of trusts. Hammond was nothing if not vague: he stated that the consultation would focus on making the taxation of trusts ‘simpler, fairer, and more transparent’.
A Treasury spokeswoman was unable to provide Spear’s with elaboration this week, making it hard to disagree with Wedlake Bell private client partner Ann Stanyer’s assessment that the mysterious consultation ‘sounds ominous’. She adds: ‘Without any further detail, it is difficult to know whether this is aimed at making a positive change for trusts, or simply to raise more tax.’
But Stanyer believes that the inheritance tax regime relating to trusts is too complex and long overdue for reform. ‘We would like to see any inheritance tax reforms focused on making a trustee's job easier and the tax rate calculation more transparent,’ she continues, ‘but it is possible that the government is going into this review process with the aim of increasing tax from trusts.’
But how would that happen? ‘One way in which they could look to do this is,’ Stanyer says, ‘is by amending the "excluded property" rules, whereby foreign assets put into trust by non-dom settlors are outside the scope of inheritance tax, even once the settlor has become domiciled in the UK.’
These three big changes need to be placed in context. The altered mood is a response to the Paradise Papers data breach, which shone an arguably ill-informed spotlight on offshore companies. In the same breath, there were also moves by the EU towards the end of 2017 to tighten up its posture on offshore jurisdictions. In December, the Commission released a ‘blacklist’ of 17 non-EU countries with ‘non-cooperative’ tax regimes, and an additional ‘grey’ list of 47 territories, including Cayman Islands, Jersey and the Isle of Man, which have told the EU they are ‘committed to improving their transparency standards’.
One might imagine that all this might have HNWs worried, but that is not the opinion of Charles Russell Speechlys private client partner William Begley. ‘The increased transparency in many respects should be welcomed because there really shouldn’t be anything at all to hide,’ he says.
Begley explains: ‘Most people have trust structures in place not to try and dodge the tax, whether it’s here or somewhere else, but actually to protect their wealth for future generations, for succession planning purposes. Whether there’s a tax benefit or not is often very much a side issue.’ In fact, the lawyer tells Spear’s that several trusts he advises pay more tax than if the assets were held individually.
We seem to live in an era where perfectly legal arrangements are regularly represented in the national media as scandalous. But there is no doubt that the tide has changed when it comes to offshore entities. Quarmby warns that the UK’s penalty scheme will get ‘very ugly’ this September, with minimum penalties of 100 per cent for cases of offshore non-compliance, where there is a failure to correct past non-compliance.
He adds that new IHT rules are taking effect too – bringing hundreds of thousands of offshore trusts and companies into the IHT net for the first time, if UK residential property is being held by those structures.
So it’s all change and perhaps it can’t hurt in among all the New Year’s resolutions to have one on your list you might actually keep: visit your lawyer, and make sure all the right preparations are in order.