New tricks
With more changes to the government's rules on tax and trusts and the arrival of commoditisation, private client practitioners have to up their game if they want to stay on top, says Jenny Ramage
Two words: The Budget. Finally, we are clear about the government's plans for the nation's wealth, aren't we?
Jo Summers, a consultant at Penningtons and sole practitioner at PWT Advice, a service for other professionals seeking advice on wealth management issues, isn't so sure. 'It seems strange to have changed the capital gains tax,' she comments. 'A lot of people feel it's hard to see what the strategy is.'
This isn't surprising when you consider the juxtaposition of the new 50 per cent tax on income over £150,000 with the reduction in capital gains tax (lowered from 40 per cent to 18 per cent). Naturally, clients hit by the 50 per cent rate are looking to convert income to capital.
And the upshot? 'You know the Revenue are retroactive,' says Summers, 'they are guaranteed to act pretty quickly if they see a lot of revenue being lost from the Exchequer.'
The decline of UK trusts
The impact the new rate will have on trusts '“ where the dividend income is subject to tax of 42.5 per cent '“ will make trusts even less attractive than they became after the government's dramatic changes to the tax rules in 2006.
Couple this with the changes to the non-domicile regime last year (not to mention the credit crunch), and the environment for UK-based entrepreneurs and high-net-worth individuals starts to look rather less attractive.
Matthew Bennett, head of private client at Wilsons, wonders what the long term effects of that might be, and what it could mean for private client solicitors. 'After the 2008 budget lots of clients were talking to us about where else they might go, but very few actually went. But now the nail is being driven into the coffin.' Private client practitioners, he says, inevitably will see their workload affected if these clients move abroad or transfer their assets to another jurisdiction.
Bennett feels it's time for lawyers to 'become much more aware of what other jurisdictions offer and of the interaction between those jurisdictions. Now, you may find that your client's base becomes Geneva, for example, rather than London.
'The opportunity is quite strong offshore,' says Bennett, 'as the new rules introduced either don't affect offshore trusts, or the trusts are of a size that they can do something to mitigate the effects.'
Graham Barber, head of financial planning at Rensburg Sheppards Investment Management, also thinks that lawyers and trustees need to be more alive to the investment structure within trusts. 'Some lawyers and trustees will already be aware of this, but some are not as aware as they might be, and it is incumbent upon trustees to think about how they might structure the trust investment to defer tax.'
One option he thinks lawyers should consider is the use of non-income producing assets such as offshore investment bond wrappers, which allow distributions to be made from the trust to the beneficiary in a tax efficient manner: five per cent per year can be paid out without being subject to tax at the point of payment.
More tax to come?
If the UK sees further increases in income tax, clients will be even more likely to look to offshore solutions. Peter Nellist, private wealth partner at Clarke Willmott, is certain there is more taxation to come. 'There are serious problems in the economy; the government is borrowing massive amounts of money on behalf of the taxpayer and needs to balance the books. I think we will see a compulsory rights issue for the UK by way of a taxation hit.'
Nellist's cynicism is understandable, given the myriad changes the government has made over the last couple of years. 'If I was the government, I would be looking to get another couple of billion out of inheritance tax for a start. And what if the seven-year gift rule was abolished and the capital transfer tax concept of the 1970s brought back in? I think it is a possibility. Or, the government might increase the Potentially Exempt Transfer period from seven to ten years. 'If clients are thinking of making significant gifts to family, I would advise them to do it sooner rather than later, and protect the downside with insurance.'
Julie Hutchison, an estate planning specialist at Standard Life, thinks gifting is certainly a very significant issue in today's economic climate. 'It's worth remembering there is an extremely valuable IHT exemption for gifts from surplus income. In the current environment, clients may not be able to afford large gifts to a trust, but regular smaller gifts might be attractive.'
She does however feel that lawyers need to look at their clients' wealth much more closely than before. 'Often lawyers know about clients' capital position; the assets '“ the house, the valuables etc., and the mortgage position '“ and will calculate IHT based on this, but they will not necessarily take any consideration of what the income expenditure is. It is only by looking at this in a detailed way that you get into exemption, so it needs a different sort of conversation with the client; gifts from income may be more appropriate.'
The opportunities
What opportunities are there for people who want to do estate planning in the downturn? Practitioners are finding that many clients are holding off from doing anything, but Graham Barber thinks there are opportunities to be had while investment conditions are dire. 'Clients can move assets about without suffering CGT as they would have done previously.
'One client we have is looking to move property into their pension fund. They first tried to do this three years ago, when the value of the asset was around £1m, and they paid £700,000 for the property. So they would have had to pay 40 per cent tax on £300,000 upfront, which would have negated the benefit of the transaction. CGT made this unattractive back then, but now that the asset has lost value, the client can move it without any immediate tax consequences, and they are hoping that with any upturn in the economy in future, they will benefit from it.'
Patricia Gadd, a professional private client locum currently with Surrey high street firm Nichols Marcy Dawson, thinks that elderly clients, whose finances she says have been particularly hard hit by the recession, may be more tempted now to look at equity release schemes. These have always been treated with caution, she says '“ and rightly so '“ but now equity release is being looked at much more closely as a method for older people to release capital from their home without having to move. However, says Gadd, 'these schemes do need very careful investigation and they could, for example, have an effect on any means-tested benefits clients are entitled to'.
The most important thing, she feels, is that clients should ensure they don't underestimate the importance of having tax-efficient, up-to-date wills. 'There is a greater emphasis on lifetime tax planning to reduce IHT liabilities on death and, with the advent of the transferable nil rate band, more people may well think wills are less important than before.
'But even with the increased limit on intestacy (up to £250,000 and £450,000 for bereaved spouses and civil partners), wills still matter. They are necessary for people wanting to shield assets from care home fees, maximise agricultural property relief (APR) and business property relief (BPR), and maximise the use of the transferable nil rate band '“ especially where there have been previous marriages.
More relief?
Clients with overseas property may find some comfort in the extension of the agricultural property relief to property in the European Economic Area (EEA). Richard Frimston, a partner at Russell-Cooke LLP who specialises in cross-border wealth management, thinks this is a significant change that deserves more publicity than it is currently getting. 'The relief has been backdated to 2003, so if somebody died in 2004 with a farm in Italy, for example, and tax has been paid, it is possible to go back and claim agricultural property relief.
'If the Revenue had agreed an installment option where tax was payable over, say, ten years, then you could be looking at deaths that occurred much earlier than 2003.
'With this being a very specialist area, the public hasn't quite caught up with it yet; it has certainly not been flagged in the main papers. We have been talking to specialist surveyors in relation to how best to raise awareness of this '“ and of the fact that it is backdated.'
Frimston feels that the change to capital gains tax on holiday homes run as a letting business is another area worthy of more attention. 'There has been quite a lot in the press that the reliefs are being abolished from 2010, but again there has been an extension back to lettings throughout the EEA '“ and backdated, so for example if you sold your holiday home in Czechoslovakia, it wouldn't have qualified at the time for UK relief, but now it may do so. So people who may have sold holiday homes in Europe may be able to claim this relief back, depending on the jurisdiction and the time limits.'
Versatile and flexible
Onshore, the family investment company (FIC) is becoming a favourable alternative to the UK trust. 'They are definitely flavour of the month,' says Jo Summers, 'but most law firms have only done one or two '“ not nearly the same as the volumes of work they would have done had UK trusts still been viable. So there is definitely a drop in the workflow; and this has a huge impact on lawyers.'
To combat this, she says, 'practitioners need to be as versatile and flexible as possible. You need to have as many different tools in your toolbox as you can, so, whatever the changes are, you will keep up to date and up to speed. If not, and you continue to do only traditional trusts, your business will be dramatically reduced.
'You have to learn new things, and pretty quick, or you will have nothing to offer your clients.'
The need to learn new tricks is compounded by the fact clients are getting more demanding. 'They are becoming a bit more selective about which lawyers they choose,' says Matthew Bennett, 'which is fair enough, but you have to up your game. High-net-worth individuals pay good money for lawyers and they do expect a top level of service. You need to continue to evolve the way you deliver value to clients; don't charge them loads for plain vanilla work. It will probably eventually reach the stage where that kind of advice is available free, but in areas you can really offer your expertise '“ that is where clients will be prepared to pay.'
On top of all of this, we cannot forget about the impact of the Legal Services Act. Peter Nellist thinks this will make a huge difference for private client solicitors. 'Many lawyers don't recognise that it will really up the competition, and solicitors really need to ask themselves what market they want to be in.' Like Bennett, he thinks that private client lawyers need to move away from earning income just by dealing with transactional processes; 'you need to be a considered thought leader'.
Nellist predicts that in five years' time, 'probate work will go the same way as conveyancing is now; the value elements will go because of competitive pressure. There will be specialists giving specialist tax advice, but the process will be devalued very significantly in income-producing terms for solicitors.'
Practitioners need to move up the ladder, he says, 'or watch their incomes dwindle'. And incomes have dwindled quite enough already.