What next for offshore?

Offshore PerceptionsSTEP has published Offshore Perceptions, a major new piece of research looking at the current state of the offshore world. It paints a picture of a sector adapting rapidly to a new regulatory and institutional environment. It also confirms that measures designed to tackle abuse by a few, are actually having a major impact on costs for the legitimate clients who are the overwhelming majority of users of private client services both offshore and onshore.

The research, sponsored by First Names Group, is based on a survey of over 1,000 respondents, fairly evenly split between the offshore and onshore world, and with a very broad geographical reach.

Over three quarters of the offshore respondents to the survey report that compliance has become a burden to a ‘great’ or ‘large’ extent. Not surprisingly, this rising burden of compliance is driving up costs to the client and the report highlights a shift away from smaller clients and lower value work, both of which are no longer economically viable in the new cost environment.

Another major factor impacting the industry is the move by banks to de-risk their business. Half of all offshore respondents identified this as impacting their business to a ‘great’ or ‘large’ extent. Intriguingly, the de-risking issue was seen as important by even more onshore practitioners, with 60% telling us that it was having a ‘great’ or ‘large’ impact on the offshore worlds.

This mix of rising costs and the major banks withdrawing from many areas as they lower their risk appetite is, not surprisingly, expected to produce yet more consolidation in the offshore world, with most offshore respondents expecting the pace of consolidation to accelerate still further.

This inevitably raises fears about employment prospects, although there is still considerable optimism about business opportunities, not just in Asia and other traditional offshore markets but also, increasingly, from Africa. The survey confirms that family offices are also seen as an important growth area within the overall offshore environment.

Measures to improve transparency and tighten regulation have been one of the key global themes of the past few years, impacting offshore and onshore practitioners alike. The Offshore Perceptions report confirms that industry concerns have proved accurate in predicting that these measures, aimed at tackling abuse by a few, would result in sharply higher costs and less choice for the many.

The report also suggests, however, that the offshore world is busy adapting to the new environment and is far from gloomy. Over three quarters of offshore respondents feel optimistic (to a ‘great’, ‘large’ or ‘moderate’ extent) about the prospects for their jurisdiction and a broadly equivalent number are also optimistic about the prospects of their business sector. Many of the offshore centres have had to adapt to major challenges in the past. Generally they seem well placed to do so again.

George Hodgson is Interim Chief Executive of STEP

STEP puts CRS, transparency and public registers under the SIG spotlight

SIG Spotlight Session Nov 2016STEP hosted its annual Special Interest Group (SIG) Spotlight Sessions on 14 November in London, a day comprising six conference streams. SIGs provide opportunities for members to connect and advance their focused area of practice.

I attended the International Client SIG session, which focused on the needs of practitioners serving international clients with complex planning needs. The presentation was entitled ‘Moving Out, Moving In and Moving On: Key Movements for International Clients’. STEP members John Riches, William Ahern and Dr Angelo Venardos spoke on the topical issues surrounding CRS, transparency and public registers.

The Common Reporting Standard (CRS) continues to cause confusion in some key areas, and STEP is seeking clarification on a number of points surrounding settlors, beneficiaries, protectors, what constitutes a trust, controlling persons that are entities, charitable trusts and private trust companies. William Ahern and Dr Angelo Venardos discussed how CRS is being applied in Hong Kong and Singapore, and they touched upon the inconsistencies in the legislation compared to the UK, for example, anti-avoidance legislation, which is not as comprehensive as the UK’s.

Automatic exchange of tax information on a wide basis will unleash a deluge of confidential and highly sensitive personal financial information for transmission around the world. Differing jurisdictions may have differing issues to consider under these circumstances. Some jurisdictions may also need to consider if their data-protection laws are consistent with the commitments they have made with respect to CRS implementation. Conversely others may have to consider if the confidentiality obligations contained in their trust and banking laws are consistent with their CRS commitments.

The emergence of many corporate and non-corporate trust registers across the globe has caused privacy and compliancy concerns among most practitioners, although the recent non-constitutional ruling of the French trust register may have an influential outcome across Europe in that respect. We continue to wait and assess the new challenges as they arise in this upcoming new era of transparency.

However, the consistent theme across most jurisdictions is the urgent need to consider which jurisdictions are fit and proper to be granted access to an individual’s financial details.

About STEP’s Special Interest Groups

STEP’s SIGs focus on some of the more complex issues families face in planning for their future, including international families, protection of vulnerable people, family businesses and philanthropic giving.

The groups aim to benefit the practitioner, their area of specialisation, the clients they serve, and the industry at large. They are also open to professionals who are not STEP members.

The SIGs are:

• Business Families
• Charities
• Contentious Trust and Estates
• Cross-Border Estates
• International Client
• Mental Capacity
• Philanthropy Advisors

Please see this page for more details: www.step.org/sigs

 

Emily Deane TEP, STEP Technical Counsel

CRS and Charities October update

Emily Deane TEPHMRC hosted another Charities CRS working group on 12 October. The following issues were on the agenda for discussion:

Human Rights Guidance

  • HMRC has been collecting examples from the working group to increase transparency and address concerns where the exchange of information could put individuals at risk. Its new guidance has addressed some of these concerns.
  • It was pointed out that HMRC has highlighted the absolute rights within the Human Rights Act, but it does not refer to the qualified rights of individuals, and these should also be considered.

Discretionary Management

  • Some discretionary management scenarios were discussed by the group and it was suggested that HMRC provide examples of these in its guidance.

    HMRC noted that it was difficult to provide examples to cover every scenario, because the facts of each individual case will determine whether or not it falls within the scope of CRS. However, it agreed to continue to refine its guidance where possible.

  • HMRC confirmed that simply setting parameters for an investment manager (for example that he/she may only invest in ethical investments) does not mean that discretion is retained by charity trustees.

Communications

  • HMRC will be producing a webinar for charities setting out a basic introduction to CRS, which should be available before December.
  • HMRC was asked to produce a proforma for charities to use when completing the self-certification process. It advised that while this was not possible, some examples on the OECD automatic exchange portal might be useful instead.
  • HMRC has been hosting some CRS Charity events in conjunction with STEP. If you would like more information please contact Emily.Deane@step.org

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC. The next meeting is in January.

 

Emily Deane TEP, STEP Technical Counsel

STEP Annual Tax Conference looks at deemed domiciliaries

aeroplane and departure signSTEP hosted the last in this autumn’s series of Annual Tax Conferences on 21 October in London. Some outstanding STEP members spoke on topical matters including John Barnett TEP, Emma Chamberlain TEP, Robert Jamieson TEP, Edward Stone TEP, Paula Tallon and Chris Whitehouse TEP.

Emma Chamberlain provided a much needed update on deemed domiciliaries – the basic rules and transitional provisions. She raised some pertinent points on the rules of deemed UK domicile for long term UK residents, such as:

  • A taxpayer resident in the UK for 15 out of 20 years will be deemed domiciled for all tax purposes. The individual could also become deemed domiciled in a year when not UK resident, for example, if they moved abroad in their 16th year.
  • Split years count as years of UK residence and count even when the person is a minor.
  • If a taxpayer arrived here in 2002/3 or earlier and has been resident ever since, he or she will become deemed domiciled on 6 April 2017.
  • Once deemed domiciled a taxpayer must spend six tax years abroad to lose deemed domiciled status for income tax and capital gains tax purposes.

Emma went on to explain that the deemed domiciled status can be lost if the taxpayer leaves the UK by April 2018 and is non-resident for six consecutive years. The status will fall away at the start of 2024/25.

If that individual returned in May 2024 he or she would not be deemed domiciled again until 2039/40 after another 15 years of residence.

Emma suggested that the individual in question might be able to retain foreign domicile under general law, but nothing is certain at this stage. In any event, it seems very likely that domicile queries would be raised by HMRC and we strongly suggest that clients and advisors keep accurate domicile records.

STEP has recently submitted responses to HMRC’s reforms to the taxation of non-domiciles consultation paper dated 19 August 2016 which can be found on the STEP consultation tracker:

 

Emily Deane TEP, STEP Technical Counsel

Legacy giving: the role of the practitioner

charity jarOn 18 October, my colleague Beatriz Brockhurst (STEP News Editor) and I attended the launch of Legacy Giving and Behavioural Insights – a research report which examined how will writers discussed charitable giving with their clients.

Bridging the gap

The research illustrates the gap between clients expressing an interest in leaving charitable gifts (35 per cent) and those who actually do so (6 per cent). The event considered the ways in which practitioners can encourage greater giving by testators, drawing on evidence gathered from eight law firms and 31 solicitors, as well as 2,600 wills that were analysed during the two-year study.

Having the conversation

As a starting point, professionals should be talking about charitable legacy with their clients as part of the will preparation process.

But are clients comfortable with having this conversation? The study found that 69 per cent of clients generally deemed it acceptable for such a topic to be raised – and 46 per cent regarded it as the duty of the professional to mention it.

Different approaches

The research trialled three different ways of talking to clients about charitable legacies:

  1. Social norm framing – informing the client that charitable bequests was something many people did, and to ask if they would like to do the same. Legacy giving increased by 40 per cent for people making their first will.
  2. Emotional framing – asking the client to think about charities they or their families were passionate about, and/or had benefited from. This type of messaging was found to increase donations from clients both with and without children.
  3. Posthumous benefit framing – highlighting the good work that would result from a charitable bequest. This was regarded as the least acceptable and least effective form of messaging.

Tax incentives

The study also found that, in most cases, the tax advantage of legacy giving due to inheritance tax thresholds was not a motivating factor.

A TEP’s perspective

Jo Summers TEP, a member of STEP’s UK Practice Committee, offered a practitioner’s point of view. She emphasised the need to broach the subject of charitable legacy carefully and sensitively, not least to protect against being regarded as having exercised undue influence. Jo cited the initial client questionnaire as a good way to introduce the topic, with scope for a further conversation, if the client indicated this would be appropriate.

Practitioners also need to be aware that the charity the client would like to leave a donation to could change over time. As a practical solution, Jo suggested the will could contain a clause stating a percentage legacy, or a fixed sum to be split between charities chosen by the executors, with a letter of wishes to indicate where the money should be donated, depending on the client’s family circumstances at the time of their death.

Conclusion

The study concludes that will clients are generally open to having a conversation about charitable legacy. Practitioners can therefore play an important role in raising the level of charitable donations as legacy gifts.

The report offers interesting behavioural insights around legacy giving – I encourage you to read it:

 

Sean Smith, STEP Policy Manager

Making Tax Digital update

UK mapSTEP attended a meeting held by HMRC on 11 October to obtain feedback on its plan to make tax returns reportable on a quarterly basis, and completely digital.

HMRC’s stated objective is to improve the level of service for the public, reduce the cost to the taxpayer, and increase the revenue’s compliance and accuracy.

It says the new system will be the most digitally advanced in the world, and will enable a user to check their PAYE status, their State Pension forecast and any tax credits or allowances.

Apparently there are already close to seven million UK personal users, and HMRC is streaming webinars for basic users, as well as more complex tax users such as unincorporated businesses and landlords.

However, we learned during the meeting that many users with more convoluted businesses and multiple income streams, such as farmers, may find the new system challenging.

Although it seems unimaginable that someone would want to submit their tax return on their smart phone, HMRC points out the software will be mobile friendly, for those who do not have access to a computer or a laptop.

STEP has already flagged that the new system may not be accessible to less capable users, including elderly, or digitally excluded and vulnerable people.

Many may be unable to afford the extra burden of professional advice, a computer, laptop or smart phone, or indeed, the software required to comply.

HMRC recognises that there may be some transitional costs and potential cyber security risks, but believes customers will be pleased with the ‘real time’ system to keep taxes up to date, and notes there will be fewer inaccurate calculations.

HMRC’s webpage hosts a collection of consultation papers for all individual and business customers, agents, software developers, employers and all other organisations that need to provide tax information.

If you would like to provide feedback, please contact me at emily.deane@step.org by 3 November.

 

Emily Deane TEP, STEP Technical Counsel

April 2017 changes to the UK’s taxation of long-term resident, non-domiciled individuals

Update on discussions relating to the treatment of trusts

Following the consultation paper issued on 19 August 2016, members of STEP’s UK Technical Committee have been closely involved in discussions with HM Treasury and HM Revenue & Customs in relation to the latest proposals.

The most difficult area is the treatment of offshore trusts set up by non-domiciliaries who become deemed domiciled in the UK as a result of having lived there for 15 years in a 20 year period.

When the changes were announced in the July 2015 budget, much was made of the fact that assets held in trust would be protected from inheritance tax, capital gains tax and income tax (other than in relation to UK source income which would continue to be taxed as it arises). A deemed domiciled settlor would only be taxable on benefits received from the structure or conferred on close family members.

One significant surprise in the August consultation paper therefore was a proposal that a deemed domiciled settlor would be taxed on all of the gains of an offshore trust once the settlor or a close family member has received any benefit from the trust – ie the receipt of the benefit would mean that the capital gains tax protections would be lost for the future.

As part of the consultation discussions, a paper has been prepared by a barrister with input from colleagues from various representative bodies including STEP. The paper is very much in draft form but sets out a potential alternative approach to legislating the trust protections. A copy of the paper can be found below.

We have been asked to make it absolutely clear that the paper was not commissioned by HMRC or HMT. Nor does it represent an approach to trusts preferred either by HMT, HMRC or the government. The paper was prepared to facilitate discussion at a consultation meeting between HMRC/HMT and various representative bodies to consider alternative approaches to how it is best to legislate the protections and it should be read in that context.

Having said this, it is important that STEP members are aware that alternative proposals are being put forward and discussed and that the final proposals may well be different to those made in the 19 August 2016 consultation paper.

We are expecting the government’s position to be announced as part of the Autumn Statement on 23 November 2016 with draft legislation being available by 5 December as part of the draft Finance Bill.

 

STEP UK Technical Committee

STEP in Brussels to discuss money laundering and terrorist financing risks

bank notes, laundered

STEP was invited by the European Commission to attend a second private sector consultative meeting on Wednesday 5 October to discuss the supranational risk assessment of money laundering and terrorist financing risk in the EU.

We represented the trust sector and legal professionals in the first consultative meeting with the Commission in March 2016.

The Commission presented the preliminary results of its risk analysis relating to the threat and vulnerability of certain sectors to money laundering and terrorist financing across Member States.

The initial results found that some sectors, including the real estate sector, legal professionals and trust company and service providers (TCSPs) are at significant risk to infiltration by money launderers and terrorist finance activities.

STEP was keen to provide feedback on the methodology of the assessment, the inconsistency of regulations by service providers across Members States, and the lack of understanding towards trusts in some jurisdictions. We will continue to provide feedback to the Commission until the end of the year, and a follow up meeting will take place in March.

• STEP would like to remind members that HM Treasury’s consultation paper on the Transposition of the Fourth Money Laundering Directive will be closing on 10 November. You may provide feedback directly to the Treasury or via ourselves, via emily.deane@step.org.

Emily Deane TEP, STEP Technical Counsel

Invitation to members – LPA discretionary investment clauses

Emily DeaneThe England & Wales Office of the Public Guardian (OPG) published an update in September 2015 providing guidance on financial lasting powers of attorney (LPAs) and how attorneys can delegate investment management decisions to a discretionary investment manager.

Under this guidance an attorney can appoint a bank or an IFA to act on their behalf to make investment decisions; however specific wording must be incorporated into the LPA. Since the guidance was issued in 2015, STEP and other professional bodies have contacted the OPG with their concerns.

The primary issue is that if an attorney is currently using a discretionary manager without explicit permission in the LPA, then they need to apply to the Court of Protection to obtain retrospective consent.

The suggested wording within the LPA can be similar to the following, ‘My attorney(s) may transfer my investments into a discretionary management scheme. Or, if I already had investments in a discretionary management scheme before I lost capacity to make financial decisions, I want the scheme to continue. I understand in both cases that managers of the scheme will make investment decisions and my investments will be held in their names or the names of their nominees’.

Tell us your views

STEP would like to invite members to provide examples of how the OPG guidance may be difficult to apply in practice, so that we can present a test case to the OPG and underline that the impact of this issue is potentially far-reaching.

Issues that have arisen include:

  • There is no guarantee that your bank or IFA will accept this wording, and you may need to confirm their agreement in writing before the LPA is registered.
  • HSBC has specific wording that it will not stray from, while other fund managers are willing to continue acting without the delegation clause. Other banks and IFAs may switch to the stringent guidelines in future.
  • You can re-do the LPA where the donor still has capacity, but this option may not be well received by the client, and is time consuming and costly.
  • If the LPA has already been registered without the express wording, the attorney can apply to the Court of Protection for the retrospective authority to appoint an investment manager.

This is also time consuming and costly.

If you are currently acting as an attorney and you have already delegated investment making decisions, there are some options available to you:

  • You could change your discretionary manager to an advisory manager so that you are still ultimately making the decisions, although you should check any potential liability issues that may arise.
  • You could speak to your discretionary manager about the firm’s policy and what their requirements are.
  • You could re-do the LPA where the donor still has capacity, or alternatively apply to the Court of Protection when the existing discretionary manager is not willing to continue/or start acting in accordance with the OPG guidance.

However, it might be prudent to wait and see whether the OPG will consider amending its guidance before taking any action. Currently, the OPG feels discretionary investment management accounts for a tiny percentage of registered Powers of Attorney, so the number of Attorneys affected is relatively small.

STEP is hopeful that by providing the OPG with a test case of practical working examples, then it might recognise and review the difficulties that attorneys and their advisors are facing in this connection.

The best case scenario would be the determination that the delegation of investment management by an attorney to a discretionary investment manager is already legally permissible, without the need to retrospectively apply for it through the court.

STEP will provide an update when further information is available.

We would very much value your input. Please send your examples to policy@step.org by 31 October.

Emily Deane TEP, STEP Technical Counsel

STEP – the reality

STEP logo iconThere have been a number of recent press articles about the role of STEP, a leading professional body, in the wealth management industry. Some of these articles have presented a highly distorted view of STEP and the activities of our members.

STEP members, known as TEPs, spend their professional lives helping families plan for their futures: from drafting a will or advising family businesses, to helping international families and protecting vulnerable family members who may have mental capacity issues or other forms of disability. With around 20,000 members worldwide, TEPs are the acknowledged specialists in giving advice to families in these areas.

Some TEPs focus on servicing very wealthy families, often with a range of international interests, who need expert advice to manage their affairs to ensure all tax and legal requirements are met in multiple countries. Most TEPs, however, are engaged in helping ordinary families deal with everyday problems. All are committed to the high technical and professional standards that STEP promotes and insists on from all its members.

Internationally, STEP has an important role to play in improving professionalism among all those working with families in areas such as inheritance planning and the care of vulnerable relatives. We are thus proud to be actively involved in helping raise standards in jurisdictions where there have to date been few, if any, equivalent professional bodies.

STEP also works constructively and transparently with a range of policymakers. As acknowledged global experts in their fields, STEP members have an important role to play in ensuring that policy development is informed by the practical experience of professionals working in the relevant area. STEP’s responses to official consultations are all publicly available on the STEP website (see www.step.org/consultation-tracker/1).

George Hodgson is Interim Chief Executive of STEP