The best and worst laws in private wealth
Whatever you think about Elon Musk and Donald Trump, they made a fair point in their recent YouTube missive about outdated laws not being updated
Current laws – Rip it up and start again
Musk opined the never-ending list of laws that business had to follow. His point was that laws have been copy and pasted on top of old laws (for decades) without consideration of how they fit together or whether they are obsolete and should be removed. As Trevor Egan below says, “The brave and once-in-a-generation solution would be to rip the whole thing up and start again.”
No Fault Divorce’ took nigh on ten years to make it to law
In the UK family law sector, ‘No Fault Divorce’ took nigh on ten years to make it to law, which shows the considerable time it can take to improve or adjust statute and perhaps the reason for the lag. Our advisors here also point out that cross border law or reporting schedules being different and out of sync is also a hard terrain to navigate.
Moneyval has also put enormous pressure on trustees offshore
One of the complaints heard from multiple advisors is the raft of AML obligations following sanctions on Russia which has had far reaching tentacles and continues to create many grey areas where clients can fall into its remit. Atop of this, advisors themselves are now culpable. Moneyval has also put enormous pressure on trustees offshore with reports of ‘over zealous’ local regulators.
As we await the UK budget and US, Citywealth wondered what laws raise a sigh from their lips and which ones make them smile.
UK Stamp Duty – “making losses on the Laffer Curve”
James Quarmby, Partner at law firm Stephenson Harwood, says, “The UK’s most useless and counterproductive tax is SDLT (Stamp Duty Land Tax), the rate of tax is so high that it’s passed the point on the Laffer curve which takes it into loss making territory.” The Laffer curve is a bell-shaped model that shows the relationship between tax rates and the amount of tax revenue a government collects. “In other words, Quarmby says, “At the higher end of the scale the rate of tax suppresses the tax revenues. It also suppresses transactions and gums up the higher end of the property market. In my world you would abolish the tax altogether and replace it with a progressive property tax.”
Dan Neidle, Founder at Tax Policy Associates backs up James Quarmby saying, “Our property taxation system is a disaster. SDLT stops people moving, and blocks the labour market. Business rates often tax out of all proportion to economic value. Council tax under-taxes £100m penthouses in Mayfair and overtaxes semis in Blackpool. We should sweep it all away and introduce a sensible tax on land value.”
UK Remittance basis – “senseless rules”
Michael Lewis, Partner at EY Private Client Services based in London says, “I fully agree with the problems discussed with SDLT,” Continuing he says, “One thing which has bothered me for my entire career is the rules concerning the remittance basis. Only the UK would have senseless rules which discourage the wealthy from bringing funds into the country. The fact that such rules are incredibly complex to understand and implement – with no relief for innocent mistakes is simply the ‘icing on the cake’. Even when the government does try to improve things such as with ‘business investment relief’ they then add needless restrictions such as not allowing the relief for partnerships. The whole thing is contrary to the interests of the country and just seems to exist to maintain jobs for HMRC and the accounting industry,” Adding with wishful thinking, “Hopefully this will be scrapped as part of the upcoming expected domicile changes.” Roy Campbell, Senior Partner at Druces law firm in London concurs saying, “Many laws are not designed to encourage foreign investment – Brexit is also making movement within Europe difficult, and the Employment Rights Bill is not great for employers.”
Inheritance Tax – “a double dip”
Trevor Warmington, Partner at accountancy and tax firm Rawlinson & Hunter says “I think IHT (Inheritance tax) is by far the most hated tax, especially by those who come from countries that do not have the concept. They view it as a second dip on net income.” Campbell, Senior Partner at Druces agrees saying, “Fourteen years ago an incoming Conservative government promised a positive reform of IHT which didn’t happen.”
Warmington adds, “I also think the abatement of the personal allowance on income above £100k should be reviewed because it creates a penal top tax rate of 60% (higher including NIC on top) on a slice of income for those who earn between £100,000-£125,140, whereas the top rate is only 45% for the highest earners. I am not sure if this was deliberate or an unintended side effect of tapering the personal allowance away.”
The personal tax return – “US simpler than UK”
On that matter, Trevor Egan, Partner at accountancy and tax practice Buzzacott sees eye to eye saying, “Whilst I don’t speak for my firm, I have some observations in the interest of getting a healthy debate started. The layout of the personal tax return itself is very poorly constructed, counterintuitive and makes it extremely difficult for the lay person to have a good understanding of how their tax liability arises. Perhaps that’s a good thing! The US personal return is far superior. It flows. Classes of income, deductions, taxes, reliefs, payments, net amount due (or refund).” Continuing he says, “For what is purported to be a simple system there are too many tax rates. Multiple CGT (Capital Gains Tax) and dividend rates for instance. This is a consequence of a never-ending process of successive budgets tinkering with the system. The brave and once-in-a-generation solution would be to rip the whole thing up and start again. A fundamental back to basics approach.”
UK out of sync with the rest of the world
“With regards to the UK tax year, we are out of sync with the rest of the world (not just Europe) which is crazy. It leads to all sorts of problems such as fiscal year reporting of foreign income and the foreign tax credit regime. In moving to current year reporting (for the self-employed) and Making Tax Digital (whenever that happens) we had the idea opportunity to bite the bullet (or embrace the chaos) and move to calendar year taxation.” Egan adds, “The HMRC referring to taxpayers as ‘customers’ I find to be at best disingenuous, at worst offensive. “
“And additionally, our pension taxation system is rather a mess – particularly in terms of what people can contribute to tax effectively. Once again this is the consequence of endless iterations of governmental changing of minds.”
Forum shopping for “court privacy”
Gilead Cooper, KC, barrister at Wilberforce Chambers, London moved us on from tax saying, “In my area of contentious work, I think the single worst feature of English law is the near impossibility of having matters heard in private. This has been a growing trend over the time I have been in practice, and it reached a high point – so far – in a Court of Appeal case in 2019 called MN v OP. It is based on a fetishisation of Jeremy Bentham’s over-quoted line about publicity being “the very soul of justice”.
“The offshore jurisdictions have, for the most part, remained more accommodating. One of the first questions I get asked by clients when they are considering going to court over a trusts matter is, “Will it be heard in private?” This is the point at which “forum shopping” really does come into play, and I invariably recommend choosing a jurisdiction such as Bermuda, Cayman, the BVI or the Channel Islands, if there are grounds for doing so. The other way out is arbitration, and I sense a growing interest in the possibility of arbitrating trust disputes.”
Jutta Gangsted, Senior Associate at Lenz & Staehelin, Switzerland added to the legal woes on privacy saying, “What many of our clients’ “hate” in private wealth are the more and more complicated and extensive regulatory rules including compliance, KYC and other invasive rules requiring my clients to give out private information. This raises many privacy but also security and cybersecurity concerns. They are not immune to hackers and make our clients feel very vulnerable.”
Testamentary freedom in the UK – “provides good flexibility”
“On the other hand, laws that people “love” in private wealth I guess I would say anything that makes the lives of my clients simpler and that gives them more flexibility. For instance, being flexible in terms of determining who is to inherit his or her property and to what extent. The testamentary freedom in the UK is a favourite amongst many of our clients as opposed to the forced heirship rules we have in Switzerland.” Testamentary freedom allows people to leave their estate to whoever they choose in their will. This means that there is no legal obligation to provide for any specific family member or individual.
Preventing family fights
Joshua Rubenstein, Partner, National Chair, Private Client, Katten Muchin Rosenman, New York agrees with the Testamentary Freedom law as well, saying, “The argument against forced heirship is that if you made the wealth, why shouldn’t you have the right to decide what to do with it on your death? The argument in favour of it is that if everyone had fixed shares that are inalterable, there would be less to fight about after death. I favour testamentary freedom because I think that heirs will always find something to fight about, but I can argue it both ways.”
Tax forfaits in Switzerland and Italy – “another favourite”
Gangsted continues, “Another favourite is tax forfaits, essentially a fixed fee, as we have in Switzerland and also Italy as well as other countries, Then clients can avoid the hassle of preparing extensive returns and the concerns linked with listing all their assets on paper.” Continuing she says, “If the intention is to attract wealthy people, then ideally, laws should aim to be more privacy-focused, allow for more flexibility in terms of deciding who should inherit or receive from donors or deceased but also how, so for instance through trusts, foundations or otherwise.”
More laws that don’t make sense
Switching to the Isle of Man, John Rimmer, Consultant, at law firm, Advocate John Rimmer adds his view on his local likes and dislikes in the law. “The three laws that get on my nerves are the following: “‘Family provision claims against a deceased person’s estate by certain individuals’. English law (and Manx law, for that matter) allow an individual to dispose of their assets by will after they have died. These orders allow some individuals to ask the court to reopen the case. This is often understandable, but perhaps goes too far – such as when allowing claims by people with little connection to the deceased except that they deceased made some ongoing financial provision for their maintenance when they were alive, or claimants who have behaved in a petulant way towards the deceased.” He continues, “Then there is the rule against self-dealing. This broadly affects trustees who might be perceived as having a personal interest, or a competing obligation, that might poison the exercise of their power. It regularly means that trustees cannot easily be family members, or trusted advisers. It should not apply, and the exercise of the powers should instead rest on whether they are proper or not.”
Gifts to paid carers
He says, “Further to this you have, ‘Vulnerability to financial abuse by carers’.” He picks up on previous comments about the benefits of the UK’s Testamentary freedom. “This law is great, it means that an individual can leave assets how he wants after his death. However, where the individual has been guided into making gifts to the undeserving beneficiaries, it is generally difficult or risky to try to prove undue influence or duress, even where the carers, especially paid carers, have had exclusive access to the individual for most of their final years.” He adds, “There should be a presumption against gifts to paid carers, rebuttable by independent advice and subject to professional oversight.”
Courts assist trustees from being ‘paralysed’
On the positive side of local law Rimmer says, “The fundamental law of trusts is a good law. An English invention, centuries ago, it has permitted great flexibility to protect the interests of beneficiaries and to allow supervised stewardship of assets for many purposes, in many situations. It has proved far more flexible than civil law has managed. Its helpfulness has been profound.” He adds, “I also like, ‘Powers of the court to give guidance on, or to vary, trusts’. It gives the authority of the court to bless trustee decisions before they act on them and potentially incur liabilities, and even to vary trusts in some circumstances. Trust law can involve strict liability for trustees, or hamper administration of a trust, and a trustee can often be caught between a rock and a hard place: these jurisdictions of the court makes for far more pragmatic trust administration when a trust might otherwise be paralysed.”
Love hate laws
Rubenstein adds some further comments from a US and global perspective, “The following is a list of what strikes me as the top laws with which the trusts and estates field has a love/hate relationship, from tax to nontax:
Wealth taxes: “This is the closest to a hate hate relationship among professionals. It is espoused mainly by governments desperate for more revenues and by socialist politicians who want to use it to redistribute wealth. They forget that wealth redistribution is the purpose behind estate and inheritance taxes. An annual wealth tax on assets that individuals have managed to accumulate after paying their annual income taxes strikes most of us as unfair. If income taxes have too many loopholes, fix the loopholes.”
Estate and Inheritance Taxes: “No one likes to pay estate and inheritance taxes, but no one has to pay them, if they don’t want to. Unlike income taxes, which are revenue based and must be paid, estate and inheritance taxes are policy based (not revenue based) designed to be avoided by redistributing one’s wealth in ways that are tax favoured or even tax free. Estate and inheritance taxes just need to be modified so that they apply only to individuals who have enough to afford to give things away. In that regard, the UK nil band is way too low. There are also some gimmicks to permit control after assets have been given away that should probably be curtailed.”
Getting assets out of trusts every couple of generations for a reorganization
Rubenstein continues, “With the law on Rule against Perpetuities – if you are a control freak, you want your hard-earned wealth to last in perpetuity for your progeny. This encourages dead hand control, however, and assumes you will have responsible progeny. There is something to be said for having assets come out of trust every couple of generations, so that they can be reorganized based upon the 20:20 hindsight of what makes sense in the future.”
Statute of Elizabeth: “I think it is fair to say that this is a real mixed bag. Should you be able to create a trust to defeat not only the creditors of your beneficiaries but also your own creditors? For centuries the Statute of Elizabeth said no, but many jurisdictions have repealed it in order to promote trusts in their jurisdictions.”
Community Property: “Great for the non-titled spouse. Not so great for the titled spouse.”
And a final word? Contingency Fees: “It helps people who can’t risk having to pay large fees if they do not win. Winning cannot be guaranteed, and at least with contingency fees, they can have their day in court. But it also promotes frivolous litigation. On balance, I’m not a fan, but I suppose it has its place.”
As to whether Musk and Trump are right about laws getting in the way of business, obviously laws also protect bad behaviour of which both have had fair swipes on that count levelled at them. Nevertheless, it seems our industry has provided plenty of fodder, as Trevor Egan says, for debate and a quick insight into what works and what doesn’t from the people who work with the laws every day. As another advisor said though things are likely to change quite quickly with an election in the US, China stimulus; Italy putting up their forfait fees by surprise and the UK awaiting a very different type of government budget – so let’s see what happens next.
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