Building bridges: cross-border transactions

Date: 12 Jun 2024

Ashleigh John

As the world globalises, conducting business can no longer be contained within one country. Citywealth speaks to experts on cross-border giving, taxation and US/UK wealth planning to understand the challenges faced by those building bridges for their cross-border clients.

Philanthropy

Marijana Sevic, Head of International Strategic Partnerships at Charities Aid Foundation (CAF), provides insights on cross-border giving: what drives clients to give and how their wishes are facilitated. She said: “Giving is often highly personal which means clients’ priorities can vary considerably. But in terms of needs, I’d say that clients are mainly concerned with making sure they are donating safely and according to the laws of the relevant countries, that the money they give is going to reach the charity and that their donation is going to have the desired impact.”

“We often see an increase in cross border giving in response to a humanitarian crisis, but it can be difficult for donors to know the best way to help. We work with clients to help them understand the needs of a cause or area and identify what impact they want to have, for example immediate crisis relief or future long-term resilience. Large international charities are often better set up to respond quickly at scale. However, small local charities tend to have deep networks within the communities affected and a better understanding of the support they need longer term. Crisis recovery can last for years, especially where affected communities were vulnerable before the crisis. We encourage donors to consider how they can make a difference by providing long-term funding, often to local organisations, which is needed to build permanent infrastructure, restore services, and support communities. We know that a mix of support, both for large international charities and local charities, is the key to effective disaster response, and longer-term rebuilding.”

Sevic notes that cross-border giving is not just about emergency relief. She explains: “In the last financial year (in the year to April 2023), Charities Aid Foundation (CAF) helped deliver over £1bn to over 100,000 charities in 119 countries. More than a fifth of those donations moved across borders, originating from our offices in the UK, the United States and Canada. Education and health are the most popular causes (2023 Global Tracker) but cross border giving can cover a spectrum of important issues. We recently provided a grant to a conservation charity based in Zimbabwe, which is subject to UK sanctions. In this case, the organisation is planting trees as part of its goal to address the reduction in the rate of natural woodland loss in Zimbabwe, to preserve biodiversity at scale within threatened landscapes. But the necessary and detailed verification process took considerable time and expertise, as well as cooperation and support from the charity.”

Sevic highlights the challenges that can face those wishing to spread their wealth outside their borders, and how expert advisors can help overcome these hurdles: “Despite the huge potential of cross-border philanthropy, for instance to alleviate the effects of humanitarian crises, it is often limited by a complex web of policy and tax systems varying from country to country. It can take considerable time and costs can grow substantially to fulfil these requirements across multiple jurisdictions and in various languages. This could put off donors who lack the necessary expertise, or time, from giving to the charities that need it most. CAF works with an international network of independent organisations across six continents to provide donors with the necessary expert support to carry out the essential checks and due diligence to comply with HMRC requirements. We do this by collecting the required information and assurance from the recipient organisations to ensure they fulfil definitions of charitable causes and minimise the risk of contravening anti-money laundering and countering the financing of terrorism regulations.”

Sevic adds: “Cross-border giving can become even more complex when the donor is a dual taxpayer. More than twenty years ago, CAF launched the CAF American Donor Fund (CADF), which allows dual UK-US taxpayers to take advantage of charitable tax relief in both jurisdictions to maximize their donations. This specialist donor advised fund recently surpassed £1bn distributed to charitable causes worldwide since 2000. Our deep expertise in the regulatory and tax environment around cross-border giving means that dual UK-US taxpayers turn to the CADF for knowledgeable, safe and efficient ways to grant money to causes and realise greater impact through their giving.”

Taxation

For our questions around cross-border taxation, we spoke to Sean Bannister, Partner and Head of Tax at Edwin Coe. We began by asking about the common concerns being brought by cross-border clients currently.

He answered: “The declining service standards from HMRC continue to be a concern for individuals and the industry alike. It is pleasing to see that HMRC and the Chartered Institute of Taxation (CIOT) are in an active dialogue on this issue, but the consistent under-investment from successive governments means this remains a problem. Investment into this area is required and whomsoever is our next government should see this as a priority. The poor response times and lack of overall functionality can be deeply frustrating, in particular, for individuals coming into the country.”

Are there any recent legal or regulatory changes that may help, or hinder, cross-border taxation planning and efficiency? Bannister said: “The regulatory environment and requirements faced by trustee/corporate services providers, as well as those for international banking partners, means that the timeline for establishing larger/complex structures is inevitably longer than some clients might expect. This new reality can leave some individuals in the invidious position of having to either rush certain decisions or accept that the structure will perhaps not be as well formed on day one. Whilst it is of course possible to secure advice in relatively short order, the actual creation of the agreed upon structure is now a lengthier process than it once was.”

He added: “In an ever-evolving regulatory landscape, seeking advice on the right location to hold assets is becoming increasingly important. The tax profile of these choices will generally be neutral, but the ongoing administration will be materially impacted by the regulatory regime that applies. If the wrong decision is made, frustration and additional cost inevitably ensue. It remains essential to choose well-regulated financial service centres and look for better in class service providers in those places, but the impact of the regulatory environment on the day-to-day operations of the relevant entities must also form part of that decision making.”

Finally, with changes to the non-dom regime being an inescapable topic of conversation in the industry currently, we had to ask what tax advisors are doing to prepare themselves as we anticipate news on this front.

Bannister said: “It is well understood within the profession that the current lack of information as to the potential changes to the regime that could be applicable to those individuals currently categorised as non-domiciled results in some cases on actual decision making. But preparatory steps can be taken, and often should be, in order to ensure the client is in the best possible position to act when the position is better known.”

“We are doing several reviews for clients, in particular those with assets in countries where withholding tax/foreign tax is relevant, to establish what the position will be, should they be in a situation where parts of their foreign income and gains are subject to tax on the arising basis (i.e. worldwide taxation). As part of those reviews, we are also considering the tax cost and practical implications of moving those assets in to a structure (in particular, to an overseas trust), to establish which assets would be capable of being moved and what steps would be involved to do so. Considering these issues now, will be of great assistance if there is a requirement to act with haste due to some ‘cliff-edge’ taxation change.”

“Referring to some of the points made above regarding the timeline for looking to establish structures, we are already discussing with partners timelines for establishing structures and completing on-boarding processes etc to ensure that clients are again in the best position to act should they have to. Some clients are inevitably considering whether a change in jurisdiction may be more effective for them and their family. The implications of such changes are huge, and it will simply not be a choice for some individuals, but ultra-high net worth families are inevitably globally mobile and are considering this as part of their options. The key message to all individuals who believe they may be impacted is to prepare.”

US/UK wealth planning

Cross-border clients dealing in both the UK and US jurisdictions make up a significant portion of the UHNW clients utilising the wealth management industry. Despite this being a common situation for many, significant upcoming elections in both countries could be shaking things up. As a result, we spoke to Andrea Solana, Partner and Head of Advanced Planning at MASECO Private Wealth, about what she is seeing in the industry currently.

To ascertain a general picture of the landscape, we asked Solana what the main things are that are drawing US citizens to the UK (and vice versa). She said: “I think the same things that previously were drawing Americans to the UK remain true today, despite the potential changes that may be on the horizon.  Americans are drawn to the culture and history that the UK has to offer and love the fact that it is an English speaking country on the doorstep of the rest of Europe to offer ease of travel.  The education system in the UK is highly regarded around the world and is generally cheaper than the US and London remains a thriving financial centre as well as a hub for many new tech startups. I also think that the state of politics in the US has encouraged some people to consider other options as well. We have not seen any reduction in the number of Americans looking to come to the UK, in fact we think the numbers have been increasing in recent years.  While clients are certainly paying attention to the looming elections and what the outcomes may mean, we have seen very few clients suggest that their immediate plans may change rather it seems more likely that the outcome of the elections may have a greater impact on long-term decisions to remain in the UK, perhaps during retirement.”

Solana gave us a summary of recent legal and regulatory changes that are pertinent to the industry and UHNWIs who are either already cross-border or looking to be: “Over the years there have been a number of regulatory changes within the US, UK and EU which served to increase regulatory scrutiny and change the framework in which financial institutions, asset managers and investment managers need to operate within. Legislation such as FATCA, AIFMD, MiFid II and PRIIPs have impacted many cross-border individuals and have in turn narrowed the range of suitable (and available) investment options for American citizens residing in the UK.  As different regulations have taken hold many financial institutions have chosen to either limit establishing relationships with US connected individuals or restrict the solutions that are available to the US connected individuals that they hold relationships with.”

However, Solana notes that these regulations are neither recent nor restricted to UHNWIs. She said: “The most pressing areas of potential change that are impacting cross-border UHNWIs are with respect to the proposed abolition of the UK non-domicile regime which is expected to come into force from April 2025 alongside the potential sunsetting of the US Trump tax reforms which are set to expire after the 2025 calendar year.  For UHNWIs looking to move to the UK for the first time, the proposed move to a residence based tax system from a domicile based tax system as outlined will in many respects represent a simplification of current rules and offer a window of opportunity to exclude foreign income and gains from taxation for a period of time before becoming taxable in the UK on an arising (worldwide) basis and will remove the requirement to undergo complex income segregation exercises to remain tax efficient.”

“For current residents of the UK, it will be important to understand the impact of the changes on their specific circumstances, consider the timing of when to receive income or realise gains, and begin to undergo some analysis on current asset structuring and any mixed funds that exist where there may be a desire for a future remittance. For both current and future residents in the UK, considerations will need to be given to any existing or future trust structures to understand how the proposed changes will impact future income tax and inheritance tax exposures in the UK.  For UHNWI’s that are US connected, the biggest impact of the sunsetting US Trump tax reforms will be the current lifetime gift and estate tax exemption of $13.61 million reverting back to a c. $7 million threshold after 2025 if there is no active extension of the legislation.  Any UHNWI who has not yet considered lifetime gifting strategies to utilise the benefit of the current $13.61 million allowance should do so with priority.”

We concluded by asking what Solana’s key, top-of-mind bits of advice are for those already established in both countries, and for those who are considering the move. She answered: “While political changes and announcements in either the US or the UK are not a rare occurrence and often require cross-border clients to revisit and modify planning opportunities, it isn’t often that one specific calendar year holds as much potential significance in both the US and the UK at the same time.  2024 will see contentious elections held in both the US and the UK with the results on each side holding the possibility of large-scale tax reform changes.  This has created what can only feel like a greater degree of uncertainty for Americans in the UK when it comes to making financial planning decisions and taking next steps.”

“If I could offer one piece of advice at the moment it would be to keep your pulse on the political landscape and any announcements over the coming months as the outcome of both the UK and US elections are very likely to shape future planning opportunities that may be available to Americans in the UK moving forward. While no one knows exactly how the next few months will play out, I would recommend that individuals begin to have conversations with their professional advisers to understand which aspects of the potential changes may directly impact them so that they can give thought to any action steps that they may want to take as a result once further clarity is gained later this year. Unfortunately, it doesn’t seem as though individuals will be given the benefit of time to take any active steps so becoming familiar with the proposals and thinking through some scenario planning will be helpful should decisions need to be taken more swiftly down the road.”