Do you have a crystal ball? If you do, then perhaps you can share the outcome of the UK election in 2024. Which election pledges are going to have most impact on private wealth professionals and their clients? Or perhaps you’re reading this in May or November, know who has won and are busy planning around any changes.
At the time of going to press, when it comes to wealth and taxation, there are known knowns, known unknowns, and unknown unknowns, to paraphrase former US Defence Secretary Donald Rumsfeld.
The known knowns are the things we know we know – such as the fact that the probate system has slowed to a crawl. Or that the process for making lasting powers of attorney (LPAs) completely online is likely to become reality.
The known unknowns are the things we know we don’t know. Who will win the election? What will that mean for Capital Gains Tax, non-dom status, Inheritance Tax or more? Until the results are known, it’s hard to plan with any degree of assurance.
As for the unknown unknowns, the things we don’t know we don’t know, even crystal ball owners might struggle to predict the influence of factors such as global strife, economic upheaval or pandemics.
We can, however, safely say that the worst thing to do is to do nothing.
Being alert to possible changes will make planning ahead easier. Keeping up to speed on the pledges and counter pledges of the rival parties is crucial to be prepared for every eventuality.
The focus for firms specialising in wealth management must be on helping clients be prepared and make plans ahead of time, rather than trying to react in the minute.
Whether your clients are UK domiciled or simply have UK interests, it’s crucial to be on top of both the strategic and practical implications of a changing landscape for wealth management. The bonus being that well-prepared clients not only manage risk but are also primed for opportunities.
The things we know we don’t know.
For families and investors in the UK, the outcome of the general election is likely to impact on their approach to managing wealth. Current polls indicate a Labour victory, possibly by quite a large margin. But pollsters have been proven wrong time and again and a week is a long time in politics. The prudent wealth manager will be listening carefully to all sides of the debate.
Non-dom status. Scrapped or just curtailed?
Labour propose to scrap non-dom status and introduce a shorter term scheme for those staying in the UK for up to five years. They say that the extra revenue generated will be channelled into the NHS.
The Conservatives claim that this will drive wealth away from UK shores. And indeed, internationally mobile, high-net-worth individuals may think twice about choosing the UK as an attractive non-dom regime.
But, according to research by Warwick University, past changes have not led to a mass exodus. The chances are that tax is just one factor in your clients’ decision whether to stay or go. Businesses, personal lives, children’s education all play a part.
Planning for school fees
Families with children or grandchildren at school in the UK, have plenty of cause to stay – regardless of the non-dom situation. In which case, changes to school fees may be something your clients need to prepare for.
Although Labour have recently dropped plans to end charitable status for private schools (noting this may be open to legal challenges), they have said they will remove other tax breaks if they win the next election such as charging 20% VAT and ending business rates relief, adding a significant hike to the cost of a private education. Being prepared in this instance might be paying fees up front, ahead of any changes. By getting ahead of the game, any future VAT could potentially be avoided.
Pensions lifetime allowance guaranteed?
The Conservatives have shaken up pensions allowances to allow more tax-free contributions into pensions pots and greater pots overall. On the other hand, Labour proposes abolishing recent changes, but haven’t been specific about what that would look like.
While the Conservative current changes are attractive, there is concern that backdating changes by Labour might result in tax charges levied on contributions that were non-taxable under the present rules.
If this deters clients from putting unlimited amounts into their pensions, another investment vehicle may be needed to help manage their wealth.
A wealth tax has been ruled out. For now.
It wouldn’t be the first time anyone has raised a wealth tax, if Labour were to choose this route to balance the books. France, Germany and Japan after the Second World War and in Ireland after the financial crisis, all used a one-off wealth tax to mitigate major crises.
Rachel Reeves, Labour’s shadow chancellor, has said her party wouldn’t impose a wealth tax. However, the £260bn a 1% wealth tax could raise, might be something a new government could usefully use to fund new initiatives.
The tax would be assessed on a person’s net wealth at a single point in time and payable over a number of years. The UK Wealth Tax Commission have previously recommended a possible net threshold of £1m for households. Clients may want to think about how to restructure their finances to stay near or below this.
As national debt is 100% of GDP now, and becoming more expensive with rising interest rates, a wealth tax, however distant, remains a possibility.
More likely than a wealth tax though are changes to Capital Gains Tax.
Capital Gains Tax
Capital Gains Tax (CGT) in the UK is at a historically low 20%. The Conservative government has already reduced levels with the allowance set to halve again to £3,000 in April 2024.
While the shadow chancellor has said she has no plans to align income tax and CGT rates, higher and additional rate taxpayers could see a significant increase in rates of up to 40% or 45% on both assets and property, if such changes are introduced.
Now might be an opportune time for clients to review investments and think about realising gains while CGT rates are still low.
The Office of Tax Simplification has also recommended removing the CGT uplift on death in certain circumstances. The uplift effectively resets the clock on gains for CGT and provides an opportunity to save tax. If the uplift is removed, then the CGT payable by the recipient of the asset could be payable at the historic base cost paid by the original owner.
Inheritance Tax: will it stay or go?
Inheritance Tax (IHT) is a headline issue in the UK, despite raising less than 1% of the government’s revenue with only 3% of estates paying IHT in the last tax year.
The amount of revenue is set to rise though as more properties fall into the threshold and a proposed increase to the nil rate band takes place.
While the Chancellor Jeremy Hunt did not touch on IHT in his recent Autumn Statement, there is still speculation that the Conservatives will consider making abolishing IHT a manifesto pledge in a bid to win over voters at the next general election.
The Institute for Fiscal Studies estimates scrapping IHT would cost the Treasury around £7bn a year and disproportionately favour wealthier householders.
Conversely, in line with recommendations in the IFS report, Labour may look at aspects of IHT that are seen to favour the wealthy such as agricultural and business reliefs.
Landowners investing in farming may find their estates no longer qualify for the reliefs that made them an attractive purchase.
Scrapping Business Property Relief might be more contentious as families rely on the relief to avoid breaking up a business – and Labour have pledged to invest in homegrown industries.
Business owners looking to Business Property Relief as part of succession planning may want to take advice on structuring business activities as tax efficiently as possible.
The known knowns. The things we know (almost)
The impact of digitisation on contemporary life is indisputable. Wealth planning is no exception. And, as with any new technology, the challenge is to make sure the opportunities it presents aren’t outweighed by any unforeseen downsides.
Digitising wills, the LPA system or applying for probate online should make things happen faster and allow clients to check on progress.
New digital assets and cryptocurrencies have created exciting new opportunities for investors. But how should they be incorporated into estates? How should the law treat these new assets?
A slow probate system
It’s no secret that the UK probate system has slowed to a crawl. The delays are such that, on average, paper applications take five months to process. Critical delays can happen if an application is ‘stopped’ by HM Courts and Tribunal Service (HMCTS). This can be up to seven months in the case of paper applications.
Online applications can speed this up to two months on average. But even with a faster digital service, delays are still frequent and applicants should be careful not to fall into one of the following traps where an application is ‘stopped’:
- supporting documents are missing;
- applications have been submitted too soon after sending the IHT return to HMRC;
- executors of an estate are missing/not accounted for; and
- there is a query about the condition of the will.
As well as being months faster, online applications have the advantage that clients can monitor progress on the MyHMCTS dashboard. Which means they can deal with issues sooner rather than later (as opposed to waiting to hear from HMCTS which can often take time).
It pays to think ahead during probate. Forward-thinking investment decisions that acknowledge the slow pace can help mitigate taxation. For example, the value of investments in the estate may fall during probate. While IHT relief can be claimed on shares if they are sold within 12 months of death, this claims window can prove difficult given the delays awaiting probate. In some cases, the investment manager might be prepared to sell the shares before probate is obtained but requirements vary and it is worth checking at an early stage.
LPAs made faster
Probate isn’t the only service to benefit from digitisation. The Power of Attorney Act 2023 received Royal Assent in September 2023 and paves the way for bringing the existing paper-based LPA system completely online.
While the number of people using an LPA has risen considerably over the years, the process of making an LPA has hardly changed. The new reforms, when introduced, will make the system quicker, easier to access and more secure. In particular, parties will be able to choose whether to sign the LPA digitally or on paper and there will be new identification requirements in order to help prevent fraud.
Digitisation will also speed up registration time by picking up errors earlier and allowing them to be fixed online rather than having to wait for documents to be posted back and forth between the applicant and the Office of the Public Guardian.
Wills set to modernise
Another candidate for digitisation is the making of wills. At the time of going to press, the Law Commission is consulting on allowing electronic wills.
It’s time for wills to move beyond wax, quills and red ribbons. A permanent change to allow electronic wills could bring will-making into the 21st century but comes with inherent risks.
During the pandemic, several countries, including the UK, allowed paper wills to be witnessed virtually. Since then, some countries have introduced permanent reforms to enable electronic wills, which can be created digitally using an electronic signature and without a paper version being needed. The Commission is seeking views on whether a new Will Act should permit these types of wills, either immediately or by allowing them to be introduced later. Any provision for electronic wills would need to ensure that they are as secure as paper wills.
Predatory marriage on the rise
The Commission is also seeking views on whether marriage or civil partnership should continue to revoke a will.
Predatory marriage where a person marries a vulnerable person (often someone who is elderly or lacks mental capacity) in order to inherit from their estate, is becoming of particular concern with our ageing population. Under the current law, any existing will the victim has made will be revoked following the marriage or civil partnership meaning that the potential abuser could inherit most, if not all, of their estate in the absence of a new will.
The consultation will determine how often this form of financial abuse takes place and whether wills should continue to be automatically revoked by marriage or civil partnership.
Cryptocurrency and digital assets
Our digital world has given birth to new forms of trading, art and more. As with anything new, the law needs to accommodate how they should be treated and accounted for.
The Law Commission report on Digital Assets in June 2023 made a number of recommendations for the reform of English law relating to digital assets. Encouragingly the report champions the existing flexibility of English common law to provide much needed clarity and consistency of outcomes.
Digital assets were felt to be accommodated within existing laws and it was more practical to minimise change.
However, while the report offers valuable insights and is a major step forward, there are still issues to address around taxation and regulation. More guidance will be needed from HMRC and the FCA in this respect.
In the meantime, clients with digital assets should make sure their wills are as flexible as possible in order take advantage of available tax reliefs.
Conclusion
We live in uncertain times. Political, social or technological upheavals all present their challenges.
For lawyers and the private wealth sector, certainty might not be absolute, but knowledge is power. Keeping abreast of changes, envisioning potential outcomes, and always looking for opportunities will help our clients make informed decisions.
