Looking forward, individuals becoming deemed domiciled.

Forward Group Director, Alun Griffiths, recently had the opportunity to have a Q&A session with Richard Perry, Tax Director at Calibrate Law to discuss the subject of individuals becoming deemed domiciled in the near future.

Hello Richard, so tell us about Calibrate Law? I read that you are looking to disrupt the legal industry.

We are indeed looking to disrupt the legal industry Alun, there’s significant opportunity for the strategic providers of legal services to gain share.

Calibrate Law was established as a unified approach to managing clients’ legal and non-legal affairs, across the spectrum of litigation and dispute resolution, tax advisory and family law. Our core client-base is wealthy individuals and families and entrepreneurs, business owners and their businesses.

I think some law firms have a reputation of being very traditional, perhaps old fashioned.  Calibrate feels different.  The world has changed and, like you, as professional service firms I think we have to change with it.  That’s one of the reasons Forward is named Forward – we have to move that way.

Our view is that now many law firms’ existing business models do not always have their interests fully aligned with their customer. We recognised an opportunity to address this with increased transparency across matter management and pricing, superior service and increased collaboration with adjacent business services which we can offer as a multi-disciplinary practice.

Primarily, we wanted to approach the market with a clear and transparent pricing policy. Within the tax team we have eliminated hourly rates, only charging a fixed fee for projects. A similar fixed fee approach is adopted by our Family Law team and our Litigation team endeavour to enter into damage-based agreements where possible, aligning our incentives within those of our clients. Not having charge out rates and timesheets to complete also frees us to invest time in our clients, without worrying about how that time might be accounted for at the end of the week.

Whilst we haven’t managed to get away from time sheets and hourly rates, that definitely is the direction of travel and something that also rings true at Forward Group, we too carry out certain work on a scoped fixed fee basis when possible.  We certainly feel there is a movement away from time charging so that’s nice to hear, and certainly not the norm for law firms!

Another area of focus is technology and specifically artificial intelligence. Our view is that there is huge value associated with adopting technology and that the legal industry has been incredibly slow in doing so. We therefore intend to invest heavily. We believe that this technological innovation and adoption will give us a sustainable competitive advantage. For example, technology can be introduced to process many forms of precedent and cases which might have an impact on a commercial litigation matter. This may allow for a normal distribution of potential outcomes to be shared with both parties, including the judge. Our view is that this should expedite negotiations and provide significant efficiencies, to the benefit of our clients.

That’s very interesting and something that a lot of professional firms, not just lawyers, will need to consider in the near future.  AI is either an opportunity or a threat to the traditional way of doing business and I believe will be a real disrupter in the coming months and years.  The most progressive firms will thrive, but it will leave some slower firms behind. 

What should clients be thinking about heading into the end of the UK financial year?

When approaching the end of the financial year, it is important for clients to ensure that they have maximised their allowances and reliefs where possible. For the 2019/20 tax year, each individual has an annual exempt amount for capital gains tax purposes of £12,000. Therefore, to the extent clients have liquid investments sitting at a gain, they may wish to consider disposing of them to make use of their exemption or perhaps the exemption of their spouse or civil partner. Crystallising capital losses may also allow them to shelter other capital gains realised earlier in the tax year.

Maximising the annual ISA allowance of £20,000 per tax year can also be beneficial, allowing future investments to grow free of UK tax. Similarly, additional contributions may be made to pension schemes, benefitting from additional tax relief. However, care should be taken as the availability of tax relief can depend on the individual’s level of income.

It has been a rough few weeks in the markets with CV19, I suppose there might be some opportunities for a wider rebasing of some older historic holdings pending any upswing.   What about those individuals who are now going to become deemed domiciled?

This is an area where we have advised many clients. An individual will become deemed UK domiciled in the UK for all tax purposes once they have been UK tax resident for all, or part of, 15 out of the previous 20 tax years. It is not uncommon for individuals coming up to that point to ask which country they should consider moving to. However, it is not at all that bad and with appropriate planning it is possible to actually put them in a better position than they have currently.

Individuals should consider whether to settle a non-UK discretionary trust before they become deemed UK domiciled. This can allow the trust to qualify as a ‘protected settlement’, ensuring foreign income and gain arising within the structure are sheltered from UK tax. Where the assets held by the trust are situated outside the UK (with the exception of shares in companies deriving significant value from UK situated land), their value can also be kept outside the scope of UK inheritance tax. Going forward, care must be taken not to ‘taint’ the trust and professional advice should be sought in this regard.

It is important for the individual to decide how much money they require access to outside the trust structure. These funds may be lent into the trust and invested, with the debt being repayable free of UK tax as and when required. Careful structuring can limit the cost of the loan, often lower than the remittance basis charge which had otherwise been paid annually.

We often find that many UK resident, but non-UK domiciled with non-UK discretionary trusts are needlessly paying the remittance basis charge annually, not knowing about the protected settlement status of their trust.

We encourage all individuals with non-UK tax resident trusts to check the position with a professional tax advisor.

15 years was a change from the previous 17 out of 20 back in 2017 so that might catch a few people out that are not regularly reviewing their tax position.  I would of course mention anyone looking to establish a protected settlement should talk to Forward.  As an independent Trust Company based in Jersey that is something we would be very happy to assist with.  

What are your thoughts on the changes to ER announced in the Budget?

The Government’s focus on Entrepreneurs’ Relief had been well publicised ahead of the Budget. Initially there was talk about it being abolished all together, later moving to rumours of significant curtailment of the lifetime allowance, which is what in fact happened. The Chancellor announced that the lifetime allowance would be reduced from £10m of gains per individual to £1m.

This change is very understandable given the significant spending announced by the Government in the wake of COVID-19. It was quoted that ER was costing the exchequer approximately £2.3bn a year. Furthermore, the relief was often criticised as not being targeted, with many believing that it did not necessarily impact an entrepreneur’s decision to start a business.

One interesting point within the detail of the change was the retrospective effect of the anti-forestalling measures. Where individuals entered into planning with the view of accelerating a disposal to ‘bank’ the relief ahead of the Budget, legislation will be introduced that may set aside such transactions. We strongly recommend anyone who undertook planning of this sort undertakes a detailed review to understand what the current position is and whether corrective action is possible.

That’s very sensible advice.  ER was a generous allowance and I can see why it was up for review, but I felt it was actually quite an effective tool.  It will be interesting to see how the changes affect those wealth creators that are now looking at an exit strategy.  Taking advice on how to do that will be even more important now.

Do you still see benefit in family investment companies?

Family investment companies have become popular in recent years as a tax efficient vehicle for income producing investments and as a succession planning tool, with the view of mitigating inheritance tax exposure. In late February, it was announced that HMRC has set up a new team to investigate the use of Family Investment Companies with a focus on inheritance tax.

Whilst the differential between income (up to 45%) and dividend tax rates (up to 38.1%) and the rate of corporation tax (19%), family investment companies will continue to be attractive. However, we advise clients to consider these structures carefully and to consider a range of planning options. There is value to diversifying structures as well as your underlying investments and having one eye to exit strategies, in the event tax changes make these structures less attractive.

Any upcoming changes clients should be aware of?

The Chancellor’s Spring Budget announced an additional 2 per cent surcharge on stamp duty land tax for foreign investors from 1 April 2021. This charge will be in addition to the 3% surcharge that already applies to the acquisition of residential property where the purchaser already owns a residential property anywhere else in the world. Non-residents may therefore wish to accelerate their property searches or factor in this additional charge to their calculations.

Also from 1 April 2020, all UK tax resident individuals selling a residential property in the UK will be required to report the disposal and pay any associated capital gains tax to HMRC within 30 days. This is significantly earlier than was previously the case, being the 31 January following the end of the tax year in which the disposal arose.

Finally, from 1 April 2020 a significant change will come into effect for non-UK tax resident corporate landlords. Such companies will cease to be assessed on their UK rental profits under the non-resident landlord scheme but instead will be assessed under the UK corporation tax regime. This will require different forms of reporting and deadlines, which clients will need to be aware of. Furthermore, there are differences between the income tax and corporation tax legislation, which can have significant tax implications. For example, the companies may fall within the scope of the corporate interest restrictions where they have significant debt. This could lead to a significant restriction on the deductibility on interest expenses going forward.

We also expect that the HMRC will look to close the perceived tax advantages the self-employed benefit from over employees on the payroll as the quid pro quo for the COVID-19 bailout offered to the self-employed. Some commentators believe this will be limited to closing the rate differential on employee’s national insurance. However, we feel the treasury may use this as an opportunity to go further and close the differential on the employer side also, so that all workers whether employed or self-employed face a similar tax and national insurance burden. This in turn may make partnership and LLP structure much less attractive as business structures going forward and lead to a wave of incorporations.  

As you say there is a lot going on, especially on the property side, and with CV19 these are really extraordinary times. 

That just leaves me to say thank you, Richard, really appreciate you taking time out of your busy schedule to talk to me. It’s clear the Calibrate Law really are forward thinking in their approach and I wish you all the best with your strategic aims to innovate and question the traditional norms of the industry.

Thank you, Alun.

We would like to thank everyone at Calibrate Law for their support in producing this article, for more details of the services offered by Calibrate Law please visit: www.calibrate-law.com

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