Despite successive governments moving the goalposts by increasing restrictions, there has been no decline in offshore work for private clients. Both threatened and implemented changes often have a knack of turning into opportunities – consequently private client lawyers are busier than ever.
What are and what have been the main changes, and what has been the response?
The UK, US and Canadian tax systems have been systematically reorganised in order to restrict tax-saving opportunities.
The first major attack in the UK took place in 1991, restricted the freedom of the UK entrepreneur to create an offshore trust for tax-free gains. This was abolished for new trusts in the UK’s 1991 Finance Act.
Another major attack in the 1998 Finance Act on pre-1991 trusts, which had been protected from the 1991 changes, made many UK domiciliaries with relatively small trusts either restructure these trusts or collapse them and bring the assets back to the UK.
The flow of new UK trust business to Jersey and Guernsey was significantly reduced after 1991, eventually leading to a certain amount of consolidation among institutions serving private clients, which had drawn most of their business from the UK. In addition, recent problems with conflicts on the audit front have led the trust operations of large concerns, such as Ernst & Young, to seek partnerships and further consolidation elsewhere.
However, the resulting fallout and consolidation offshore, and additional regulations onshore, have increased the average value and complexity of strategies required to operate successfully in the new environment. The challenge for the specialist is to make the most of the remaining opportunities. As families become more diverse there has also been an increasing need for advisers to understand and adopt ideas developed in other foreign jurisdictions.
New money laundering regulations, which have been extended to catch fiscal crime, have added to the cost of doing business offshore. Advisers have increasingly had to take on the difficult and unenviable role of acting as quasi-policemen in respect of the tax systems of other jurisdictions.
This June, the Organisation for Economic Co-operation and Development (OECD) is due to publish a blacklist of offshore jurisdictions it considers to have adopted policies that amount to “harmful tax competition”, which could be classified as a “tax haven”.
So far, the OECD has disclosed the criteria for the blacklist, but has not said what action will be taken against countries that appear on the list. Hopefully, the purpose of the list will be to encourage the countries on it to be more open, and that the goal is to provide information and not to aim for tax harmonisation.
Issues such as these mean private client lawyers must remain flexible and keep up to date with international and domestic developments. While it is never easy to operate in a changing environment, some offshore jurisdictions are going out of their way to co-operate with these international developments and are making a virtue out of this. Some clients welcome the additional comfort (both real and perceived) that an effective regulatory environment brings and prefer to use advisers who have strong links with quality offshore jurisdictions.
The growth of private banks and more recent developments such as the promotion of the ‘family office’ concept have made an impact on the way private client lawyers now attract work. A family’s first port of call for advice might once have been a solicitor or an accountant, but in recent years there has been a growing tendency to look to private banks to take a lead. Many larger families have had a family office to provide trusteeship and other services for years. Some private banks are now offering a family office service.
In order not to lose out on such work, legal advisers need to develop good relationships with both the client and the institutions, and to deliver a tailor-made and corporate-style service to both. The ability of the private client lawyer to call on corporate, banking and corporate tax colleagues for co-ordinated advice can be particularly valuable.
Legal advice is particularly expensive for the private client as it is not tax-deductible and bears non-refundable VAT charges.
If private client lawyers frequently charge similar rates to their corporate colleagues, then they have an even greater incentive to make sure the client gets good value for money. Strength in depth, expertise and cost-effective solutions are required to succeed in today’s complex and ever-changing environment.
The aftermath of R v Dimsey and R v Allen [1999] All ER (D) 745 has generally made life more difficult for the private client and, in particular, for those foreign families who own UK property through offshore companies. This decision resulted in the Inland Revenue receiving far more support for some of its arguments than it could have envisaged at the outset of the case and has reinforced the need to monitor the management and administration of offshore trusts and companies.
Clients (and their advisers) must now take even more care to ensure that offshore trusts and companies are run properly and effectively outside the UK. As a result, offshore structures require a higher degree of continuing support from the legal adviser than might previously have been the case.
So while the climate might be more restrictive now, opportunities remain and clients themselves have more freedom, so demand has increased substantially. Since the end of World War II, there has been a phenomenal growth in private wealth. The increased availability of information and general competitive environment have meant that while there are now fewer offshore strategies, people are more aware of those benefits that do exist and they are no longer restricted to a few extremely wealthy individuals.
Clients – and their offspring – are more mobile, and are consequently more ready, willing and able to change their place of domicile or residence. Mobility often opens an opportunity for review and reorganisation. Consequently, there is a growing demand for advice, for example, to French citizens who are taking up residence in the UK, attracted by its lower tax rates and the more welcoming business and entrepreneurial climate, as well as by the general lifestyle offered by London.
It is also not only people who are on the move; there is more mobility of ideas, such as the greater use of offshore insurance in creative estate planning, notably by US citizens. These developments tend to spread across the Atlantic in due course.
Private client practice never stands still. Each opportunity has only a limited shelf-life. For example, the UK Budget in March introduced limitations on tax treaty companies and imposed wide rules restricting the use of ‘flip flop’ or parallel trust schemes. There is no simple alternative to either that can simply be slotted into its place.
The adviser’s response on the client’s behalf will be a complicated one: as always, taking each situation and working though the relative merits of any proposed solution. But even if the agreed strategy is simply to accept the new regime and not to adopt complex structures to mitigate the impact of the changes, the larger client is likely to want to retain his assets offshore as the ‘entry costs’ have already been spent; he is in no worse a position going forward; and he is prepared to incur the higher administrative costs to preserve the additional flexibility.
Jonathan Conder is a partner in Macfarlanes’ tax and financial planning department.
