However, it also needs to be fair, efficient, and enforceable, while successive governments have increasingly used the tax system to drive behaviour and influence social policy, writes David Denton, technical specialist at Quilter Cheviot.

For example, pensions tax relief is designed to encourage us to be responsible for our own incomes in retirement, but it costs the Treasury in excess of £40bn per year.

To limit this, since 2006 its availability has been modified through the annual and lifetime allowances. Through frozen allowances over the next few years, more will be caught, yet the impact can often be minimised through early consideration.

The implementation of the Health and Social Care Levy, temporarily as an addition to NI, means that salary sacrifice this current tax year will be more valuable than when it becomes a separate tax.

And should basic rate tax reduce to 19% in just a few years’ time, as recently advertised by Rishi Sunak, pensions tax relief will become slightly less attractive for most.

In other words, for many who are employed, 2022/2023 could be the sweet spot for pension contributions.

And the obvious isn’t always the best. For example, couples and civil partners relying on the transferable nil rate band since its inception in 2010 are likely to leave significantly less to loved ones than those planning ‘old school’ with the nil rate band discretionary trusts. For as long as asset price inflation remains above the growth in the nil rate band, this will continue to be the case.

In 2015, the Office of Tax Simplification (OTS) identified that the impact of complexity was significantly related to the staggering quantum of reliefs, exemptions and allowances in one of the longest tax codes in the world.

The residence nil rate band, that post-dates the report, is of the most complex of the 90 plus reliefs and exemptions for IHT, and dramatically compounds this. And pensions freedoms, dating from the same year, deliver choices in decumulation, which may only prove valuable with advice.

Sadly, complexity impacts the poorest in society more than those who can afford or are willing to take advice, whilst in some areas of wealth management the paucity of specialist advisers exacerbate the problem.

As Sir Geoffrey Howe said, “simplification was like painting Brighton pier while someone else was extending it to France”. In financial planning terms, quite possibly there has never been a more important time to understand one’s options.

This article was written for International Adviser by David Denton, technical specialist at Quilter Cheviot.

Quilter International was sold to Utmost Group in November 2021, with Denton leaving the business in January of this year.

He joined Royal Skandia in 1999, with the business morphing into Old Mutual International, then Quilter International during his tenure before its acquisition. He was head of technical sales and head of sales Europe at the time.

In his new role, Denton will be responsible for delivering technical knowledge and support to the Quilter Cheviot front office, including the distribution teams, Quilter Private Client Advisers’ financial planners and Quilter Cheviot’s investment managers.

Quilter Cheviot has also hired Dylan Jacobs as a business development manager for its Bristol office. He previously spent 14 years at Royal London Life Company.

Both will report to David Butler, head of distribution at Quilter Cheviot.

Michelle Andrews, Quilter Cheviot’s managing director, advice, said: “We are in a growth period, focused on hiring highly qualified individuals who will provide unrivalled technical provision on a range of issues.

“We want to offer our investment managers and financial planners, both internal and third party, exceptional service across the UK. These two hires help bolster our breadth of capabilities and ensure we can better support advisers; with really credible solutions that help clients prosper.

“David and Dylan each bring a unique skillset and a wealth of experience from the wider market. We believe they will all be great additions to Quilter Cheviot.”

However, it also needs to be fair, efficient, and enforceable, while successive governments have increasingly used the tax system to drive behaviour and influence social policy.

Complexity impacts the poorest in society more than those who can afford and are willing to take advice.

Additionally, the lay person is unlikely to know, let alone understand, many of the hundreds of reliefs, exemptions and allowances to their advantage, while at the other extreme, in most instances, HMRC take the view that ignorance of the law is no defence.

In this article, Quilter’s head of technical sales, David Denton, seeks to debunk some examples.

The illogical

Arriving in the UK, one might reasonably expect becoming tax resident would relate to the day of physical arrival.

But according to the 2013 Statutory Residence Test, the relevant day could be the 6 of April gone, the 6 of April to come, or following the day of arrival, splitting the tax year in two.

Once that is established, one might also expect that any profits on investments up until that point would not be taxable when investments are realised, following arrival in the UK.

However, in most instances, capital gains will in fact be chargeable back until when that asset was purchased, so that any gains enjoyed but not crystallised while non-UK tax resident would become taxable.

This will be the situation for shares, mutual funds and property (with its own set of additionally complicated rules).

But life assurance or redemption bonds fare significantly better.

An individual who once owned them as a non-UK tax resident upon final encashment or other chargeable event can have a proportion of the gain removed from UK taxation.

The proportion removed is the number of days that asset was owned as a non-UK tax resident as a proportion of the total period of ownership.

This is known as ‘time apportionment relief’ and is a fundamental reason why advance planning for future UK tax residents often involves the use of vehicles that benefit from this feature.

Further, any top up to a life assurance or redemption bond will benefit from the same time apportionment going back to the inception of that investment which can have a disproportionately positive effect.

Impenetrable

The long-standing nil rate band is one of the most valuable features of UK inheritance tax legislation and in simple terms means that the first £325,000 ($459,724, €376,730) of one’s estate is free of inheritance tax upon one’s death.

However, an innovation of former chancellor George Osborne, the residence nil rate band (RNRB), adds significant complexity.

This represents an incremental allowance of up to £175,000 per person, subject to a qualifying residential interest (QRI) which is broadly ownership of a residential property that has at some point during the deceased period of ownership been occupied as their residence.

However, there are several instances where this will disapply.

For example, a QRI needs to be ‘closely inherited’, ie left to someone who is a direct descendant.

This might not be desirable, or even possible.

Also, the RNRB is reduced by £1 for every £2 by which the deceased’s net estate exceeds £2m, known as tapering. For this purpose, the estate is everything which the deceased owned after their debts, but before deducting certain exemptions and reliefs including business relief, so that many business owners can’t benefit from the RNRB.

As far as married couples and civil partners are concerned, the total value on the second death (where there are reciprocal wills) could mean that both the RNRB and transferrable RNRB are both tapered away.

This will seem a poor outcome if both partners owning half the estate each are below the £2m threshold each.

Planning well in advance can ensure that value upon the first death doesn’t swell the survivor’s estate so the relief is not lost. This can be achieved by lifetime gifts, establishing investments under trust, or simply not transferring some of the estate to the spouse upon the first death, with dramatic effect.

Irrelevant

Although irrelevant for all but a few, heritage property saves huge amounts where it applies, and is often how estates are passed on to the next generation without being broken up.

In essence, some buildings, land and works of art can be exempt from inheritance tax and capital gains tax where strict qualifying conditions are met.

They must be of outstanding historical, architectural interest, or natural beauty with spectacular views. Or land with scientific, historic or artistic interest, including special areas for the conservation of wildlife, plants and trees.

To qualify, the new owner must undertake to look after the item, property, or land, making the property in question available for the general public to view, and keeping it in the UK where moveable.

Conclusion

As Max Baucus, a former chair of the US Senate Finance Committee pronounced – ‘tax complexity itself is a kind of tax’ and is one of the best reasons of all to take timely financial advice.

This article was written by David Denton, head of technical sales at Quilter.

Understandably, there is often a strong sense of proprietary control and the desire to distribute to beneficiaries as they see fit, and with the uncertainties of covid–19, wealth transfer is firmly on people’s radar.

However, different legal systems such as the Common Law, Civil Law or Sharia Law, will impose their own rules on how the estate in a particular jurisdiction can be distributed on death. The law will affect any testamentary freedom, the freedom of individuals to dispose of their assets upon death as they see fit, and whether forced heirship rules will apply.

• Common Law – A valid will allows for testamentary freedom over who is to benefit – clients can distribute their wealth to their beneficiaries as they wish. However, in the absence of a valid will, intestacy rules determine the distribution;
• Civil Law – A codified system of rules (known as forced heirship) distribute the deceased’s estate in a set way to certain family members regardless of whether there is a will or they are the named beneficiaries. Some Civil Law countries will allow the will of a national from a Common Law jurisdiction whilst living there to take effect even on assets situated there;
• Sharia Law – Succession principles derived from the Quran and the Sunnah determine how the estate of a Muslim will be distributed, leaving only a proportion with testamentary freedom.

Succession planning solutions

As a minimum, where available, clients should ensure a valid will is in place to help avoid delays in administering their estate and possibly unintended tax consequences arising on their death. Where forced heirship rules apply, advice should be obtained before any alternative means of succession is put in place that is designed to counter the rules.

Life assurance policyholders have several options available to them that remove the need to see probate documentation. These options include:

• writing policies on joint ownership
• using beneficiary nominations
• placing the policy in trust

Individuals subject to Common Law can create succession plans that best suit their objectives, in the knowledge that wills, trusts and nominations are all recognised ways of passing on the policy benefits to whoever they wish.

Which option is used depends on the client’s actual succession and tax planning objectives, and how much control and tax mitigation is required.

Clients subject to forced heirship rules should take legal advice before proceeding with a trust or nomination. How each of these works is explained below. A key benefit of using nominations and trusts is that both avoid the cost and delay of probate before beneficiaries can receive the policy benefits.

How certain are wills?

Trusts and nominations remain private from others whilst wills normally become public knowledge after the testator’s death. In England and Wales this is currently at a cost of just £1.50 ($1.94, €1.65) for a post-1857 death, and can be ordered online.

It’s worth noting that the number of contested wills is at an all-time high probably due to increasingly complicated family structures driving competing claims, combined with the fact that others can see how the estate is distributed because of the complete visibility of the will.

According to the Ministry of Justice, the number of contested wills being heard at the High Court of England jumped in 2019, at 188 cases, an increase of 47% on 2018.

However, this is likely to represent the tip of the iceberg, as most disputes are settled or abandoned before the case gets to court, but rarely without significant cost and acrimony.

Trusts

Trusts are a product of Common Law whereby the client as settlor creates a legal arrangement with their trustees who then own and manage the trust property for the benefit of the beneficiaries and in line with the trust terms and applicable law.

Using a suitable trust jurisdiction with appropriate laws, such as the Isle of Man, can help protect the trust assets from forced heirship rules, leaving control with the trustees over their distribution.

Trusts can be created using individuals as trustees, including family and professional connections, but the complexity of trust law and the duties and obligations imposed on trustees can make appointing professional trustees a much better option.

Beneficiary nomination (with Private Placement Life Insurance ‘PPLI’ and investment life policies)

When a trust is not recommended by a client’s financial adviser as the appropriate solution, the client may consider using a contractual nomination to appoint beneficiaries.

These nominees will receive the death benefit payable from the policy or inherit ownership of the policy depending on the nomination made by the policyholder.

Nominations are revocable arrangements that can be altered in the future and it is important to note that they are not effective for reducing any liability to inheritance tax on death. During the life of the policy, the policyholder has retained their right to benefit.

Additional benefits of PPLI

Additionally, wealth owned via a PPLI policy can reflect investments held within the policy across the world’s major markets which include private company shares.

This means that the situs of the asset that the policyholder owns is merely the PPLI itself, as opposed to the multitude of geographically diverse assets within.

For example, if a non-UK domicile owns UK shares directly, this constitutes a UK estate for UK IHT, or a non-US citizen holding US shares constitutes a US estate for US estate tax.

Alternatively, if the shares are held via an offshore PPLI, what the client owns isn’t either UK or US situs.

Summary

How clients can pass on their wealth depends on the law of the country where they and their wealth is situated. This can make succession planning challenging.

For individuals subject to Common Law, wills, trusts and nominations are effective in helping clients to retain control over their wealth and potentially manage inheritance tax.

Trusts can be used with life assurance policies to ensure wealth is distributed in line with the policyholder’s wishes quickly and confidentially.

The same is true for beneficiary nominations with life policy investments, with the additional benefits that the policyholder retains control in their lifetime, can easily change their minds, and without the additional cost associated with trusteeship.

This article was written for International Adviser by David Denton, international financial services specialist at Quilter International.

Because of this, international financial planners will need to have a good understanding of the 2013 Statutory Residence Test (SRT), including what the SRT considers ‘exceptional circumstances’ in determining tax residency.

Additionally, HM Revenue & Customs has recently issued fresh guidance on what it considers to be ‘exceptional circumstances’ specifically in the context of the covid-19 pandemic, writes David Denton, head of technical sales at Quilter International.

Before we consider these exceptional circumstances in the context of the new guidance; it’s important for clients to understand this does not relate to unexpected and unplanned for personal or work related decisions, in terms of one’s own or families mobility, even if these personal decisions are significantly guided by the course of the pandemic.

It’s merely the inability to travel, either physically or through official government advice, that is of relevance.

Let’s look at the context

The current situation means it’s likely that other nuances of the SRT will also be brought into sharper focus, which I’ll look at first.

There’s little reason to expect clients to be up to date with the nuances of tax residency

Pre 6 April 2013, a slightly different set of residency conditions applied.

These conditions were not codified, and included concepts such as ‘ordinarily resident’, that no longer exist.

In other words, some people’s expectations won’t be met, because their understanding has become outdated by the SRT 2013.

Secondly, the ‘split year’.

Most people think that residence applies for the whole of a tax year, which is the case, unless the tax year qualifies as a split year for an individual.

Split year treatment may apply if an individual arrives in the UK part way through a tax year or leaves the UK part way through a tax year.

Let’s focus on those who arrive back unexpectedly, for fear of being stranded due to recent events.

Upon arrival, if under the standard SRT they would be considered tax resident for that year, split year treatment applies if the conditions of one of four situations known as ‘cases’ are satisfied.

The headlines, but not the full qualifying conditions, are that:

–       case 4 requires an individual to start to have a home in the UK only;

–       case 5 requires starting full-time work in the UK;

–       case 6 requires ceasing full-time work overseas;

–       case 7, the partner of someone ceasing full time work overseas, and

–       case 8 requires starting to have a home in the UK.

What about leavers, so those whose departure is delayed?

If for that year they would otherwise qualify as tax resident, the split year can also apply:

–       case 1- starting work fulltime overseas,

–       case 2- the partner of someone starting work full time overseas, and

–       case 3 – ceasing to have a home in the UK.

Where a tax year is a split year, an individual is subject to income and capital gains tax with respect to income and gains arising in the UK part of the tax year, but not so to income and gains arising in the overseas part of the tax year.

This can have a significant impact in terms of what tax is paid according to when income and bonuses and gratuities are paid, as well as disposals of investments.

And third

Temporary non residence rules could apply to someone returning to the UK prematurely.

Unless exceptional circumstances have the effect of reducing a UK day count.

The temporary non-residence rules exist to ensure that where an individual becomes non-resident for a short period, certain income and gains are chargeable upon their return, resulting in UK tax being delayed rather than mitigated.

What’s out of scope?

Importantly not all income and gains are within the scope of the rules.

For example, only gains realised on UK assets held at the date of departure are within the scope of the rules.

Likewise, only certain types of income are within scope, such as distributions by closed companies – limited companies with five or fewer ‘participators’.

Generally, this doesn’t include wages or other employment income.

Pension income needs to be considered, but with its own rules. Here, any available pension commencement lump sum (PCLS) and additionally up to £100,000 ($125,824, €112,177) of income can be taken within a period of temporary non-residence, without being taxed upon return.

These rules (called ‘temporary non-residence’) apply if both:

• you return to the UK within five years of moving abroad (or five full tax years if you left the UK before 6 April 2013)
• you were a UK resident in at least four of the seven tax years before you moved abroad.

Holding investments on a conventional proprietary or banking platform does not change the impact of this legislation.

However, where an insurance-based investment or redemption bond is used as an investment platform, uniquely any period of non-residency (even temporary ones) can be used in the calculation to reduce the chargeable event gain on profits through ‘time apportionment relief’ (also known as ‘non-resident relief’).

This little-known feature allows the chargeable gain from purchase to sale to be proportionately reduced by the amount of time the policyholder has been resident outside the UK during the term of the policy.

Midnight rule

So, what are exceptional circumstances following HMRC’s covid-19 announcement for tax residency purposes, and how might they be interpreted?

As we know, the SRT provides, through a series of day count and connections tests, a complex but definitive way to determine UK tax residency.

An individual is treated as being in the United Kingdom on any day where they are in the United Kingdom at midnight at the end of that day.

There are two exceptions to this ‘midnight’ rule: when travelling ie days in transit, and time spent in the United Kingdom due to exceptional circumstances entirely outside an individual’s control.

HMRC’s interpretations of these circumstances are specific and narrow (bereavement or serious illness) with travel difficulties not normally considered to be exceptional.

However, guidance in March stimulated specifically by covid-19 confirms that days spent in the United Kingdom can be disregarded for the SRT if an individual is:

• quarantined or advised by a health professional or public health guidance to self-isolate in the United Kingdom as a result of the virus
• advised by official government advice not to travel from the United Kingdom as a result of the virus
• unable to leave the United Kingdom as a result of the closure of international borders, or
• is asked by their employer to return to the United Kingdom temporarily as a result of the virus.

Currently a maximum of 60 days in the United Kingdom can be disregarded for these reasons.

In terms of being quarantined, there is no indication of whether you need to be directly or indirectly infected by the virus, nor quarantined by virtue of others around you, or what evidence may be required given the paucity of testing.

Although not entirely clear, it’s likely that the Foreign and Commonwealth Office’s advice against all non-essential travel has effect here.

And this could evolve, as all covid-19 guidance unsurprisingly states, events resulting from the impact of the virus are changing rapidly.

Also due to COVID-19 the government has taken additional and specific steps not to prejudice expertise from around the world staying in the UK, the full details of which are beyond the scope of this article. In essence, a medical or healthcare professional, for purposes connected with the detection, treatment, or prevention of coronavirus disease, and for purposes connected to the development or production of medical products, (including vaccines) devices, equipment or facilities related to the detection, treatment, or prevention of coronavirus disease, between 1st March and 1st June 2020, are likely to see a number of easements regarding the SRT.

Despite these emergency measures, it is highly important as ever to maintain records in case of HMRC scrutiny, as the concept of residence is fundamental to the determination of an individual’s UK tax liability, and recent measures are largely untested.

This article was written for International Adviser by David Denton, head of technical sales at Quilter International.