A lawyer talks about the impact of Brexit on cross-border wealth planning, trusts and other issues thrown up by developments in Westminster and Brussels.
Has Brexit had any affect on the use of trusts?
Particularly for clients moving themselves out of a common law jurisdiction. Figures from HMRC show trust registrations are down for a third year running. We find people generally think trusts are quite a good thing. When we are creating trusts, with maybe the slight exception of the resident non-doms, we are almost always going to do that because there is a human need.
If there is one thing that everyone knows about it is the civil code, the Napoleonic code. Broadly speaking, children need to decide whether they are happy about that or not.
If you have an industrial business where a father invented a very simple piece of technology that proved to be very marketable and the eldest son bought it to market, built the business up to an enormous degree, and he is one of five or six children, you can see the car crash when the father dies, and the other five or six show up and say we will have our fifth or sixth thank you very much.
I say to HMRC, if trusts are in operation all over the United States - and the IRS is hardly shy about taxing people - why should we have a problem with a trust? Americans use trusts like they are going out of business. One reason is some of their probate systems are antiquated and people use trusts to avoid going through probate. It is essentially a grand will. You don’t have everything grinding to halt. There is no upside in tax terms but incredible social advantage.
Dealing with more compliance and regulation, what is that doing to the cost of trusts and other wealth vehicles?
It has increased the cost. We have to file extra registration, some are quite temporary, once you put a trust on the trust register, and the hours of work to sort out the right due diligence, you have more or less done the job. There are one-off entry and one-off maintenance charges so there needn’t be a big drama.
I don’t think regulation alone is a cost factor, except in coordination where you have a clash between how the legislation is interpreted in different countries. But on the whole, this is built into the information people expect from their banks and investment managers. So yes we have to do trust registers and think about the way holding companies are registered and disclosed.
But the expectation these days is that it is painful because it is futile – it doesn’t tell the authorities anything remotely useful. There are one or two trusts in the world that relate back to me and make me look terribly wealthy just because I am the protector. Is that useful to a government authority? Not at all. That is an accident of the way the legislation is drafted.
With the drop in trust numbers and the privacy fear of being on a public register, has there been more interest in foundations as a result?
Yes there has been. There are new foundation structures invented in the Channel Islands. There is a new Cayman foundation, which is a fixed version of a company, but those are brought out in the armoury as extra tools because there are some families who would prefer to have a tangible vehicle.
I don’t think there is a particular social problem with trusts but what people do struggle with is the trustee being the owner of the assets in the vehicle itself. A company and a foundation are tangible. A company has its own life; a foundation has its own life. A trust is entirely parasitic on the trustees as it were.
Can you talk about how some of these jurisdictions, you mentioned the Caymans, are using foundations to draw in wealth?
Well I think they are offering them more to people either from civil law jurisdictions or, let’s say, the Middle East. There are one or two reasons why they may be interesting. One is their tangibility, because everybody pretty much across the world understands what a company is so they will more readily understand what a foundation is. It has a board; it has trustees; it may even have shares; so people get it. The tangibility may also have an upside in tax terms in countries where the tax code is adapted to catering for intangible vehicles like trusts.
Is there more or less transparency around foundations that make them more attractive for potential misuse?
No I don’t think transparency rules are going to make a whole lot of material difference if you are in a foundation or a trust. It is going to be down to whether the existence of a vehicle is recognised in someone else’s tax code.
In the UK, we have the reverse problem in that a great chunk of the tax code deals with trusts. We have one client who has all his assets in a Lichtenstein foundation. HMRC are going to look at this and say, "Oh dear, what am I going to do about it?" Because there is no part of the Tax Act that tells you how to deal with a foundation. So you have to assimilate it into something else and it makes your head hurt. Even if you reach an opinion, HMRC might not necessarily agree.
Has Brexit changed how you advise on cross-border tax and ownership?
I don’t think the general principles of the advice are changing, because you want to achieve two things. One is compliance and the other is a quiet life. No client is going to thank me for creating some complicated thing that requires 27 tax returns and still doesn’t get any agreement out of the tax authorities. So a quiet life is important.
Beyond that, the only thing that has improved during the course of my career is people buy into simplicity more because of all the regulation that goes with it. To the facts of how the regulation plays out, please can we keep it simple.
What is this framework of simplicity? What are you actually advising clients do in this case?
Sometimes I advise them to keep to the will. The reason is because if you actually develop a structure, get a piece of paper out and start scribbling the jurisdictions, you end up with something incredibly complicated with loads of dividends and all sorts of stuff, and it all works today - HMRC might hate it but it can’t be criticised. What you then find is that somebody dies and the daughter marries someone from Timbuktu and they buy an asset in Azerbaijan, and before you know it the structure that looked wonderful in the meeting doesn’t quite evolve as you would like.
Sometimes I say to people, just keep running as you are; what you want to ensure, if you die, is the right people will inherit and the inheritance tax is as good as it can be, and we will reassess when you have all settled down.
People tend to come to us in some moment of crisis, as if they have just moved house or to a new job or there has been some sort of sale of their company to Google, and it can become quite dramatic, and I am not sure that is always the best occasion to plan.
Before any legal or tax advice, what sort of questions do clients arrive with?
They tend to start from the premise that things aren’t as under control or efficient as they need to be. They see they are going to get a dividend, or their company is about to be sold, or their son is about to get married or there is some micro crisis on the horizon and it gets people thinking, should I do this, should I move there? The youngest child is going to leave school next term, should we move house? Or I am about to be put in charge of this division and it’s in Madrid.
Suddenly, the goal posts are moving and we are no longer playing rugby we are playing football. And either we adapt to the rules of the incoming game, or alternatively, which is what structuring is all about and why trusts in islands exist, we just opt out of the game. We centralise everything in one pot.
How do you propose they do that?
It’s difficult without a concrete example. One of the things we aim to understand is how much people want to retain for their own use – be it in the frivolous, the toys, in general expenditure, holidays, and general life – how much they want to retain for family, and how much they want to set aside for future generations. And do they feel they want to leave a legacy? Do they want to give their children anything? You have to get a sense of the strategic ranking, and from that flows decision making about whether there should be a coordination vehicle somewhere.
It is like the question of whether there should be a family office. At what point are you big enough? Well that is in the eye of the beholder. How much do you enjoy running your stuff and how much do you want someone else to run it? It is partly down to tolerance really.
One of the challenging things about it all is that it is hardly a question of scale of wealth. Somebody who lives in a suburb of an English town and has a small flat on the Algarve has a cross-border succession problem and a cross-border tax problem, and reporting in two countries has the same level of complexity as a billionaire pretty much.
How do you work along side wealth managers looking after ultra wealthy clients? Do you see that relationship changing?
For a sophisticated client, it can be very beneficial in a properly functioning relationship. A good relationship between lawyer, accountant and wealth manager produces huge dividends because you don’t have any one of us setting anything in stone or taking a decision the others are going to regret.
For example, we deal with trustees in the United States, and they are not famous for taking advice before doing anything. In this case, they sold some holdings in a portfolio with a view to making a distribution to a beneficiary to enable him to pay his tax. So far you can’t criticise. Trouble is they sold something that doubles up the tax when the accountants had already calculated what the tax for the year should be. A lack of interest from this wealth manager in coordinating with us really increased the client’s expense.
Are there areas where wealth managers aren’t necessarily up to speed on aspects of regulation, tax regimes, etc?
Yes, I think investment managers have a lot of difficulty with the tax analysis of instruments. This is not a criticism of them at all. They manage investments. They are interested in generating a profit, in so doing they are often extraordinarily creative, and they invent instruments that we don’t necessarily have a ready tax answer for because sometimes it is so new we have to work out what it is.
There are interesting situations at the high end where the investment manager says, "Well I have invented whatever, and give it some grand name, and we have no idea: Is it a loan, a share, some kind of participation thing, and what on God’s earth is the tax result? That can be a quite interesting and quite scary situation.
When you are dealing with estate planning, what are some of the most sensitive issues?
People are always sensitive to risk. One of the biggest risks is not the global financial situation, it is the archetypal creditor people get upset about - the divorce creditor. People know how to deal with a business creditor; they can weigh that risk. The fact your daughter or son may end up with a partner who tries to dispossess you of half of what the child was expected to receive can be problematic. People are not great with the prodigal sons.
Is there any aspect of your business that is growing rapidly?
Across the firm, many things, but one in my particular world is doing people’s tax returns. It has got a lot more complicated, and with the creation of different instruments, it can get quite messy. HMRC, quite naturally and correctly takes no prisoners. It has to be right.
Immigration has grown enormously. We didn’t have an independent team five years ago, now we have a team of four, who do nothing but. This is partly a spike from Europeans [leaving] after Brexit but it is not as if the number of investment visas, entrepreneur visas, future-innovator visas has gone down. We have done exceptional talent visas, for example, we brought in an actress from the Middle East who was considered an exceptional talent. The growth in that is driven by the compliance angle.
This interest people have in being here that we spoke of earlier is where the compliance angle is considerable. You can’t open a UK bank account unless your visa is up to scratch. You can’t rent a property unless your visa is up to scratch. You can’t employ people unless you can demonstrate they have a right to work here. All of those things have created a resurgence in that and the law is quite fiddly.
What takes up most of your private client time?
The biggest thing is coordinating estate planning and succession planning across several countries, and not necessarily with a UK connection. My largest challenge at the moment is a case that requires coordinating assets in 10 countries, where none are in the UK, yet we are the lawyers making sure the client’s assets will land in the right hands across any countries, from civil war countries to countries where Sharia is in charge, so there is a lot of coordination going on.
It is an interesting ringmaster type of role. It involves incredible insight into other people’s systems. To suddenly see how Luxembourg does things or Italy does things or California does things is endlessly interesting - and especially interesting to see how people do things differently to achieve the same result.