In its election manifesto the Labour Party has promised not to increase income tax, national insurance contributions or VAT. No such commitment was made in respect to capital gains tax (CGT) beyond the exclusion of gains on an individual’s primary residence.

The Labour manifesto promised two tax measures with CGT implications.

The current regime for resident non-doms will be radically recast. This will mean the end of the remittance basis of taxation which applied equally to capital gains as well as income. It seems reasonably clear that some relief from UK tax for gains on non-UK assets made by ‘short term UK residents’ will be introduced. The details of this relief may have to wait until the first Labour Budget. Perhaps there will be some consultation exercise before legislation is introduced.

Labour has also promised to change the tax treatment of ‘carried interest’ moving the profits generated from the CGT regime (where the applicable rate would be 28%) to the income tax regime (where the applicable rate would be 45% with an additional 2% NIC charge). A ‘carried interest’ is an investment by private equity or hedge fund managers (alongside client investors) acquired at a preferential cost. It is effectively a performance fee. The tax analysis can be complicated. It may be that some of those affected would simply leave the UK should the current treatment change. It is claimed that the current treatment ‘costs’ the government approximately £600 million annually although the number of individuals able to take advantage of this beneficial treatment is believed to be small.

There are other aspects of the CGT legislation which might be changed by a new government. Business Asset Disposal Relief (BADR) is a relief (currently exempting gains of a cumulative lifetime amount of £1million) given on a disposal of a business or businesses. The rules surrounding entitlement to this relief are particularly complex. It has been argued that the relief has no economic justification – it does not encourage investment – and should be abolished. CGT reliefs on business disposals have been around since the introduction of the tax in the 1960s and BADR follows in the footsteps of retirement relief and entrepreneurs’ relief.

The interaction between capital gains tax and inheritance tax (IHT), in situations where assets owned at death qualify for 100% business relief, has been the subject of much discussion. The availability of business relief means that there is no IHT charge on death in respect of qualifying business assets and the deceased’s heirs inherit those assets with a CGT ‘cost’ of the market value at date of death. Growth in the value of those business assets has escaped both inheritance tax and CGT on the increase in value during the deceased’s period of ownership. It has been argued that this can’t have been the government’s intention when raising the rate of business relief to 100% in 1992. Previous administrations, of both political hues, have ignored this anomaly but perhaps a new, reforming, Chancellor will rectify it.

Finally our incoming Treasury team might want to look at the rates of CGT. We currently have five rates. Higher or additional rate taxpayers pay;
● 24% on gains from residential property
● 28% on gains from carried interest
● 20% on gains from other chargeable assets
The rate applying to basic rate taxpayers depends on the amount of the gain, the individual’s taxable income and the nature of the asset disposed of – residential property or other chargeable assets.

Is there scope for simplification?

By Gerry Brown, trust and estate planning consultant at QB Partners

The Offshore Tax Compliance Strategy: No Safe Havens 2019 policy paper was published on Wednesday.

According to Hammond, it “sets out the direction for HMRC’s updated strategy for offshore tax compliance, bringing together the government’s response to all forms of offshore non-compliance”.

According to policy documents: “No Safe Havens 2019 builds on HMRC’s achievements so far in addressing offshore tax non-compliance and expands the scope and ambition of the previous strategy.”

Namely, beyond its key focus on offshore tax evasion.

“However, we recognise that the minority of customers who pay less offshore tax than they should, do so for a variety of reasons. Some make mistakes or attempt to avoid tax by exploiting the rules to gain an advantage parliament never intended.

“Other seek to evade tax, and in doing so commit a crime,” it added.

What will HMRC do and how?

The UK taxman outlined three overarching objectives:

• To maximise revenues and bear down on avoidance and evasion;
• Transform tax and payments for customers; and,
• Design and deliver a professional, efficient and engaged organisation.

It intends to achieve these aims by focusing on three areas:

• Leading internationally – championing international tax transparency. This includes improving international collaboration between tax authorities to ensure the correct UK tax is paid.
• Assisting compliance – helping customers get offshore tax right first time. This includes increasing customers’ awareness and understanding of their responsibilities. This also includes using new data and insights to design systems and processes to help meet everyone’s needs as we try to make tax as easy as possible.
• Responding appropriately – taking a proportionate approach to risk and behaviour. This includes helping those who make mistakes; robustly challenging those who avoid or evade tax; and applying sanctions to those who help them.

Making amends

Focusing on the third area, ‘Responding appropriately’; HMRC said it will examine how else it can encourage and help customers correct inaccuracies.

The taxman said that, using insights gained from the requirement to correct legislation and elsewhere, “we will be better able to identify risks and spot possible mistakes with customers’ tax affairs as they arise”.

“Where we suspect a taxpayer may have made a mistake, we will encourage them to check their tax return is accurate.”

In 2018, HMRC wrote to tens of thousands of customers it believed may have tax due on an overseas account or investment.

Figures released by the taxman suggest that one in 10 UK taxpayer has an offshore financial interest.

Best to ‘fess up

Dawn Register, tax dispute resolution partner at BDO, commented: “A huge change is the amount of information that HMRC now receives from overseas jurisdictions. This is exchanged automatically, en masse and in many cases without the knowledge of the individual or business involved.

“The network of jurisdictions is now over 150 countries. HMRC is keen to highlight that this work will not only continue but also intensify.”

She added: “The message to both individuals and businesses is that voluntary disclosure to HMRC will always be a better option, compared to an intrusive investigation.”

Pursuing enablers

“We will relentlessly pursue enablers using the new penalty regime for anyone who designs, sells, or otherwise enables the use of a tax avoidance arrangement which HMRC later defeats,” the tax authority said.

“Similarly, we will impose new civil penalties on those who deliberately enable another person’s offshore evasion or non-compliance.”

HMRC is using a recently introduced system that collates data on non-compliant enablers across sectors that allows “a holistic view across the department”.

“We will continue to build on existing initiatives and operational collaboration as we explore opportunities to deter, disrupt and penalise those who enable their clients to avoid or evade tax, whether they are based in the UK or overseas.”

It added: “We are actively pursuing a number of enablers suspected of facilitating cross-border tax fraud and money laundering.”

“The Middle East has a different way of doing things that largely comes down to regulatory issues,” he said during a recent trip to London.

It was on the back of some “cooperation issues” with Dubai-based advice firms that Jackson wanted to speak out about how the industry can, and should, change.

Savvier clients

Jackson said: “Everybody is trying to sell something no matter what industry you’re in. Before, you could get away with the hard sale. But nowadays, with social media and the internet, there’s far more awareness.

“[Clients] are far savvier and more intelligent, especially in the world of investment. People take far more control when handling their finances than they used to.”

The development of the industry in Hong Kong, where Berkeley Assets is setting up an office, is one Jackson has viewed with interest. “The environment was very similar to Dubai and the Middle East but now it has changed.

“A lot of the offshore advice firms have been squeezed out because of the fee-based model brought in, which means you are left with strong branded firms, such as St James’s Place.”

Taking a similar path could shake things up for the Middle East, Jackson said: “Some of the firms, like DeVere, have adapted and are still doing well. That’s testament to the work they’ve done. Globaleye as well.”

He suggests that the Middle East needs someone like St James’s Place. “Ten years ago, Hong Kong had every major advice firm. They were all there, as they were in the UAE and Singapore. Now, none of those firms are there and if they are they literally have got four people left.

“All the good ones that wanted to do things right and that were able to keep their clients moved to St James’ Place.”

Alternatively, Jackson suggests that DeVere may be the company that could provide a similar model in the Middle East.

Forcing a leadership change

A key criticism Jackson has of the Dubai advice industry is that some firms are “childish” and “petty”, having recently experienced firms blocking Berkeley’s attempts to recruit their staff.

“I want to reach out to these companies and tell them to grow up and be adults. Let’s be businessmen,” he added, saying some firms have very short-term intentions.

“There is no push for regulation. If they don’t want to change the regulation you could put the right pressure on the companies to have the right leadership.”

How to modernise

The steps Jackson recommends for modernising would likely be viewed with disbelief by advisers in more heavily regulated parts of the world.

“Don’t cold call clients 10 times a day. Look at the clients’ needs, what their demands are and how they prefer to be approached. It’s all about comfort. Look further ahead, more than ever before, look at the full process,” he said.

“Look at what it’s going to happen with the client in two, five and 10 years because they allow people to plan effectively. It’s very plain and simple. When people want to move their hard-earned money into investment, they want comfort more than anything.”

Buxton recently flew to Hong Kong specifically to announce a strategic tie-up between his firm and Chinese insurance giant Ping An, which he has high hopes for. During his trip, he spoke to our sister publication Fund Selector Asia.

What are Merian’s top priorities in Asia in the next 1-3 years?

We have a distribution footprint in Hong Kong and Singapore and a master agent agreement with Capital Gateway in Taiwan. We’ll continue to develop the Taiwanese business. [Foreign firms] probably wouldn’t attempt to enter Taiwan now [due to a crowded playing field] but if you are already there and have a presence, it’s a good opportunity to register new funds. We have only started to get into Malaysia and Thailand, so we want to continue to broaden our distribution footprint across Asia. That’s priority one.

Second, we’ll broaden distribution beyond banks. We’ve been very global bank-focused and are beginning to develop institutional and family office [clients]. We got our first sovereign wealth fund client last year.

We’ll also develop more products. There is the whole relationship with Ping An. It could develop into anything. We outsourced our China equity fund to them in the spring and they’re managing that for us. We may give our expertise on Ucits infrastructure to help them create product and may look to see how we build an investment product that could serve their client base. If the London-Shanghai Connect does develop momentum, we run £10bn ($12.8bn, €11.2bn) in UK equities. We would be able to put a product together for Ping An if they wanted access to UK equities. So I wouldn’t confine [the tie-up] to a mutual distribution benefit. I’d be disappointed if that’s all it was.

We have no Asia AUM target that we’ve quoted to anyone. We’ve got a broad overall strategic target to double AUM over five years. Currently we have £35bn ($45.2bn) in funds under management. We have not broken down where the AUM [increase] would be sourced by region.

We have no investment team in Asia and no concrete plans to do so. We want to keep the business simple. But I’d never rule anything out.

Merian has no chief investment officer. Will that ever change?

I worked at firms with CIOs years ago. The CIO would say, ‘Now is the time to be more defensive’, or ‘more cyclical’ and that had to be reflected in the company’s products. That’s potentially very dangerous. There’s a concentration risk if you get all the products performing that same dance. The onus is on the CIO to get the call right.

We have a range of different desks – systematic, fundamental, small/mid cap, etc and we have a strong risk control environment that ensures every desk continues to manage money in the way it says it manages money, not drifting in style or approach. Not having a house view is far better for business. Creating an environment where investors can flourish, with a diversity of views and disagreement, makes for a much more robust business. I can’t ever see us employing an economist or CIO!

Is Merian feeling fee pressure?

We’re not immune to it. We set out to be a high active share, alpha generating boutique and that provides a degree of resistance to fee pressure. Even if more money continues going into ETFs and passives, investors will still put capital into high alpha, high active share [strategies]. The industry dynamic is what it is. But we’re not in a position like the firms doing both active and passive.

How have investors responded to your products that use performance fees?

We’ve found it’s been very well received by clients. Products focused on North American are in a very competitive market. With our [North American equity fund], we give our clients a share class almost comparable with passive in terms of base fee, but with a performance fee. Of course, you have to manage the book and business so you’re not overly dependent [on performance fees], but I have no concerns about it. The industry will move toward performance fees. I think it’s inevitable. Get managers to back their own conviction. It makes sense.

At what point does Merian become too big to be called a boutique?

We have just under 250 people in the business and the executive committee has seven. We’ve set a loose KPI to employ not more than 300. We think our culture is a function of our size and we don’t want it to change. In London, we all sit on one floor. There are no glass offices. The atmosphere is collegiate and collaborative. There is no primacy between the investment team and distribution. I’m sure we’ll be a refuge for managers from very large firms who increasingly find [a big firm] dispiriting. Were driven to run money and plug into a great distribution platform. We’re not very big in terms of the number of people, but we’re very powerful. That will appeal to a lot of fund managers.

Will industry consolidation continue?

Yes. It is a result of fee pressure and the use of technology. You can buy beta now for nothing. So active management has got to build a wide ledge around whatever alpha-generating capacity it has. It doesn’t worry me if more money is going into passive because the opportunity to generate alpha increases. There are scale benefits in ETFs and fixed income. But no one is convinced there are scale benefits in active equity management. I could argue there is dis-synergy in economies of scale.

Will Brexit have any meaningful impact on Merian?

Our offshore range of products is based in Dublin. Our non-UK client base tends to buy our Dublin range of funds. We are in the process of setting up an Irish management company to continue to service our non-UK client base from Dublin. So we can’t see that there is any material negative impact on our business from Brexit. I actually think we will achieve a [Brexit] deal, with a reasonable transition period to work out details.

There is a danger to UK equities. I recently talked to a stockbroker chum I’ve known for 20 years. He said a global fund in New York just sold their last UK equity. Not a single listed UK company they feel is worth investing in. But at some point global investors will come back to a very cheap UK market.

The other thing people don’t recognise about the UK is that we’ve got a huge entrepreneurial dynamic. Net new business formation is running at double-digit rates, disruptive technology is being built in London. We’re in the process of launching an investment trust to invest in these companies and tap this UK entrepreneurial dynamic, which is completely at odds with headlines that say the UK is condemned to 1.5% GDP growth. I don’t think it’s quite that bad.

What is your biggest concern?

We’ve just borrowed a lot of money to buy an asset management business nine years into a bull market. What could possibly go wrong!

Our AUM is skewed to 2-3 desks. We have nascent desks that will be terrific in the future, but over the next five years we need to get to a position where we have 8-20 desks nicely profitable and contributing. Even if one is out of favour, you’ve still got others driving the engine.

From an investors view, I’ve long maintained that post-financial crisis, there is not a normal economic cycle. We’ve had 7 -8 years since the crisis and it could be 15-20 years before we get back to normal, if you define `normal’ as bonds yielding nominal GDP plus inflation.

Everyone is obsessively twitching about an inevitable US recession, coming in 2020. Half a dozen economists will tell you that today. Actually the US is on fire right now. Interest rates have only just gone positive in real terms, so I don’t think there will be a slowing US economy. This has been a very nice seasonal [correction] – it is October. It’s reintroduced some fear. If we have a down year in equities, it will be part of the process of normalising.

Equities do not go up nine years in a row. That is entirely central bank manipulation. Unwinding that extraordinary stimulus was never going to be easy. It’s inevitable there will be much more volatility in the next 3-5 years, but I think we’ve got several more years of the post-crisis economic expansion. I don’t think it’s the end of the cycle. That’s too simplistic.

For more insight on asset and wealth management in Asia, please click on www.fundselectorasia.com

Earlier this month, she was appointed head of immigration at international law firm Withers, where she specialises in advising private clients and their families on UK visa requirements.

From this position she can see the global forces driving trends in immigration law and their consequences.

Brexit, she observes, is part of wider trend in global immigration law, making international mobility more difficult with countries making emigration harder through higher fees, higher hurdles and fewer rights.

“It is so much tougher now around the world,” Evlogidis told International Adviser.

“There is abuse of the immigration processes, which leads to a lot of prejudice. When the (Brexit) referendum was coming up people who couldn’t get their children into schools were blaming migrants.

“For Europeans here (in the UK) they felt it was racist. The first workshop we held after the vote I had never seen such emotion in a corporate setting. There was screaming and there was anger.”

Cutting through Brexit noise

Evlogidis’ standing in the profession means she has access to the latest thinking on UK immigration through her membership of the Law Society’s Brexit Steering Management Committee and Home Office Business and Operational Forum.

“It is interesting to hear how government is thinking about this,” she says.

“They are homing in on things and my advice to clients is to bag what you can now. European permanent residents in the UK now should apply for that British passport.”

Through the Migration Advisory Committee, an independent advisory body commissioned by the Home Office to look at the economic impact of Brexit and help devise an immigration strategy, Withers is canvassing clients to proactively be involved in the formation of post-Brexit policy.

This kind of work leads Evlogidis to believe, with as much certainty as available, that the government will secure a two-year extension on Brexit negotiations, providing the remaining EU27 agree.

Connecting Withers immigration practices

Evlogidis is also tasked with building connections across the Withers’ worldwide immigration practice.

“At Withers the capability is there, for me it is about joining the dots,” she says. “Immigration is a team effort globally, no one person can know it all and if they claim they can, it can be dangerous.

“For example, when the Home Office republishes forms every year they can change the questions, which can make the difference to whether an application succeeds or fails.”

Part of this client work involves corporate advice, facilitating the relocation of businesses and families. Withers’ aim is to provide a one stop shop for global personal and corporate immigration requirements.

Immigration is in a different place

Evlogidis trained at Ashurst as a tax lawyer later joining Kingsley Napley, who were setting up an immigration department. She previously led the immigration teams at Morgan, Lewis & Bockius among others.

“Immigration practice isn’t sexy, but it is getting there. Brexit has made it sexy and it is different place now,” she reflects.

“When you deal with immigration it is very personal because you delve deep into people’s lives because you need to know everything [about] their background and their children.

“Once you get one visa it gets out into that community. You get the loyalty of clients and it moulds your practice.”

In 18 years as an immigration specialist, she has advised everyone from the rich and famous to staff at her local coffee shop, where she gives informal ‘counter-top’ advice over a cappuccino.

Ultimately, if you have talent or money Brexit won’t be an obstacle, she concedes, it is everyone else who will be impacted.