In the UK many private banks and wealth managers are currently looking at upgrading or outsourcing all or part of their tax capabilities.

In the UK many private banks and wealth managers are currently looking at upgrading or outsourcing all or part of their tax capabilities.

A number of factors are driving this including:

1. Clients are seeking a broader financial and wealth planning service which includes a certain level of tax advice and need more information and support with their tax compliance.

2. The tax environment is changing. In the UK there have been important rule changes for non-doms and capital gains tax.

3. An increasing amount of product development and innovation is taking place within the industry. Products are becoming more complex and, as a result, need to have the investor tax implications factored into the product development phase.  In turn, the tax consequences must be explained to clients.

Breadth of Service
Given a more challenging and competitive environment, private banks are also seeking to upgrade their value added client services, including offering them some form of tax advice or tax compliance assistance.  

However, banks’ aversion to risk generally prevents them from giving tax advice to their clients and to overcome this they are increasingly seeking to work with an external partner for the provision of these services. Typically, the client’s investment advice is ring-fenced so that banks know for certain that any clients referred to a third party tax service provider will be referred back to them for any investment advice required resulting from that advice.

This partnering approach can also be combined with a tax return service. For example, Ernst & Young currently prepares over 3,000 UK income tax returns for banks’ clients.   Subject to properly adhering to the Data Protection Act, this tax compliance support can highlight additional opportunities that can benefit the banks from the additional data which they are able to obtain which extends beyond just those investments which the bank manages. 

Where private banks are not providing a tax return service, they increasingly need to be able to provide their clients with sufficient information to allow their returns to be prepared. This need has led some banks to invest in technology to provide this in a suitable format.

Changing Environment
Although banks may not be able to give tax advice to their clients, they should be in a position to react to and highlight certain tax law changes that are pertinent to their clients.

One example is the recent change to the remittance rules affecting UK non-doms. There is a general lack of awareness of the new rules that have been introduced by the UK’s recent Budget as they have been overshadowed by the headline £30,000 charge for non-domiciled individuals to keep their remittance basis of taxation intact. These changed rules are critical for private banks to understand and communicate to their clients.

The old rules were benign in that they assumed that a prudent person would fund remittances first out of funds where there was a low risk that there would be a further tax liability in the UK. However, the Budget has introduced complex new rules that will offer a strict order in which funds are deemed to be remitted to the UK.  

One option for dealing with this is to offer segregated accounts so that funds can be easily identified. However, clients will still require clear advice around the management of these accounts. This is an area where there may be benefit in seeking an external tax services partner that would provide effective remittance planning. 

In addition, some private banks are entering into contracts with professional services firms to update them on a periodic basis on relevant tax – or indeed regulatory – developments generically of interest to their clients or specifically to their product range.

Product Development
Product innovation has rapidly increased as clients have become increasingly sophisticated in terms of product knowledge.  Tax is an integral part of the development process – not only as a matter of design, but also from the banks’ risk management perspective which requires that they make sure that clients’ tax risks are highlighted appropriately. 

Furthermore, banks have to constantly review their product portfolio to consider whether it takes account of any changes in tax law. For example, the change in UK CGT rate to 18 per cent is likely to mean that UK resident clients will favour investments with a capital, rather than an income treatment for tax. 

Tax is an increasingly integral part of a private bank for the ultra high net worth clients with bespoke and often cross border needs. In this market, most private banks will need to work with an external partner to develop required tailored solutions.
Success Factors

Several factors are driving a recent trend for private banks and wealth managers to upgrade their tax capabilities. Although the track record to date has been patchy, successful private banks and wealth managers demonstrate three characteristics:

1. They have upgraded their internal tax capabilities for business development and risk management purposes;
2. They are increasingly working with external tax specialists to complement or upgrade their in-house capabilities.  This is being achieved either through an ad hoc arrangement or increasingly through a more formal outsource type arrangement with a third party provider; and
3. They take advantage of technology enabled tax support, where possible, utilising proven update services.
              
Conclusion
Private banks and wealth managers that have succeeded in realigning their tax services to deliver in this way are finding that tax can be a key strategic enabler to enhance their client relationships and drive successful new product development. This contributes to improved revenue growth and enduring client relationships, which is increasingly important in a more challenging environment.