Waiting for Brexit
Wealth management practitioners will need to pay close attention to the implications of the Leave vote for the Fourth Anti-Money Laundering Directive and to the outcome of the revised DOTAS consultation, write Victoria Mahon de Palacios and Sally Spicer
It will take some time to assess what impact the Brexit referendum will have on the wealth management industry, but it
should not significantly (if at all) affect the
UK's legislation on wills, probate, trusts,
and tax, such laws not being dependant on EU membership. It does, of course, remain to be seen whether personal tax rates are increased
in the Autumn Statement as a result of Brexit.
There is doubt over the status of pending EU directives and the extent to which the UK would
be required to implement them if it is to leave the EU. The Fourth Anti-Money Laundering Directive (referred to later in this article) is one such example.On a different note, a full Brexit would clarify the issue of whether the UK is a 'member' or 'third' state for the purposes of the EU Succession Regulation 650/2012 (the latter). This would mean that, in respect of EU assets owned by a UK citizen, an election for national law is essential if that individual wishes to avoid the forced heirship regimes of EU member states.Taxation of non-domiciliaries
Despite Brexit, and the anticipation that the government may reverse its plans to change the taxation of non-domiciliaries ('non-doms') who
are resident in or have links to the UK, HM Treasury published on 18 August 2016 the long-awaited second consultation on the proposed reforms due to come into force on 6 April 2017, with little overall change in direction.
The proposals include new 'deemed domicile' tests, which will cause an individual to be deemed domiciled in the UK for the purposes of income tax, capital gains tax (CGT), and inheritance tax (IHT), even where they are a non-dom under general law. The new tests will replace the existing deemed domicile tests for IHT. Residence in the UK for
15 out of the last 20 tax years will trigger deemed domiciled status, as will any period of UK residence where an individual was born in the UK with a UK 'domicile of origin'. There are proposed concessions which will help reduce the impact: these include (for some non-doms) rebasing of assets as at 6 April 2017 for CGT purposes and a one-year window from 6 April 2017 for deemed doms to 'cleanse' offshore mixed funds to allow remittances of clean capital without triggering UK tax.
The impact of these tests on offshore trusts has been clarified. It is proposed that where a settlor becomes deemed domiciled on or after April 2017 and has an interest in an offshore trust, the gains and income arising to the trust will be attributed to him or her (with no ability to use the remittance basis). However, in certain circumstances, the trust can be 'protected' from this attribution rule where the trust was set up before the deemed domicile date broadly until an addition is made to the
trust or benefits provided to the settlor or family members. The IHT 'excluded property' status of
the trust will not be affected where the settlor is deemed domiciled under the '15-year rule'.
Finally, as from 6 April 2017, it is proposed that shares held in an offshore company holding UK residential property be subject to IHT. Currently such 'enveloped' property is outside the IHT net. Affected non-doms will need to urgently review their residential property structures; it may be advantageous for some to de-envelope.
Beneficial ownership information
Following the introduction for UK companies of the 'persons with significant control' regime on
6 April 2016, the drive for transparency in relation to trusts is accelerating, made more urgent by recent terrorist attacks as well as the Panama Papers scandal.
The government issued a joint statement in
April 2016 with 20 other EU countries confirming its commitment to establishing a register of beneficial owners of trusts and calling for a
global standard for sharing beneficial ownership information in relation to trusts, companies, and other structures. The G20 has since called on the Organisation for Economic Co-operation and Development to put together proposals on
such a global standard by October 2016, and this
On 5 July 2016, the EU Commission published proposed amendments to the Fourth Anti-Money Laundering Directive, including the requirement for member states to set up and maintain central registers of trusts. In the May 2016 version of
the directive, only trusts which generated tax consequences were to be included on such national registers, and the information only available to authorities and 'obliged entities',
not the general public.
The amended directive proposes that the register of 'business-related' trusts be made accessible to
the public, and this appears to catch any trust with a corporate trustee. It is proposed that 'non-business' trusts be accessible to competent authorities and parties with a 'legitimate interest' only, but this could nevertheless include investigative journalists. The proposals have potentially significant ramifications for UK trusts in terms of privacy, data protection, and the safety of minors and vulnerable persons; wealth management practitioners will need to follow developments closely.
Of course, following the Brexit vote, there is a question mark over whether the UK would (or would need to) implement the directive, but the UK's leadership so far in the drive towards greater transparency in this area suggests that change in some form is likely.
The government published the revised consultation on extending the disclosure of tax avoidance schemes (DOTAS) regulations to cover IHT planning in April 2016. Under the proposals, 'contrived' or 'abnormal' arrangements, where
one of the main purposes is to obtain an IHT advantage, will constitute a scheme within the DOTAS hallmark, rendering the scheme user liable to receive an accelerated payment notice requiring advance payment of the tax deemed to be due
The initial 2014 consultation was criticised as
the IHT hallmark was too widely drafted and could potentially cover all forms of IHT planning, even the simple act of gifting to relatives. The revised consultation that closed in July 2016 has not
been wholly well received due to the lack of
clear definition of what constitutes 'contrived'
or 'abnormal', which may cause practitioners
to disclose all but the most straightforward of planning in order to play it safe '“ an unattractive option for both clients (adding to professional costs) and an already stretched HMRC.
We must wait to see if the regulations will
be more tightly drafted following the latest consultation. We otherwise face a regime where there is confusion as to whether plain vanilla IHT planning is within the scope of the hallmark and a potential situation where those who plan to leave their estates to the next generation in an IHT-efficient manner have to disclose their 'schemes'
to HMRC on the basis that they are 'tax avoiders'.
Wills for dementia sufferers
The case of Lloyd v Jones  EWHC 1308 (Ch) follows a couple of recent cases in confirming that testators who suffer from a clear loss of mental ability can still have capacity to make a will.
In this case, a daughter challenged her late mother's will, which left her farm to her son with
a comparatively minor cash gift to the daughter,
on the grounds that her mother lacked capacity. The court accepted that there was clear medical evidence that the mother had suffered from dementia and had delusions from time to time,
but held that these factors did not necessarily indicate a lack of understanding which meant
that she would fall below the capacity threshold
to make a will.
Similarly, the court had found the deceased testator in Simon v Byford  EWCA Civ 280
to have capacity to make her will despite having dementia and significant memory loss.
An important factor in the finding of capacity
in Lloyd was that the level of understanding of the will on the testator's part was sufficient for a will that was clear and simple, as in this case. A similar finding had been made by the court in Burns v Burns  EWCA Civ 37: the testator, suffering from mental impairment including forgetfulness and confusion, had sufficient capacity to make
her will as it was simple to understand as well
as rational. Where a testator suffers from a loss of mental ability, consideration should therefore be given
to drafting a simple will as opposed to a more complex one '“ for example, one that includes trusts '“ to seek to ensure that there is the requisite understanding on the testator's part.
Victoria Mahon de Palacios, pictured, is a senior associate and Sally Spicer a professional support lawyer at Wedlake Bell @WedlakeBell wedlakebell.com