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Sovereign Published Articles

It may be cold comfort for those who have seen their net worth shrink in the past 18 months, but precipitous falls in asset values and ruinous losses on investment portfolios do at least off er opportunities for tax savings, particularly for those planning for future generations.

If not exactly an antidote to the crisis, the asset price meltdown does open a window to undertake the sort of restructuring that in recent years may have been prohibitive from an inheritance or capital gains tax perspective. Sophie Dworetzsky, a partner at international law fi rm Withers, says: “While the market turmoil has infl icted signifi cant pain on many, this is a golden opportunity for tax planning. It is possible to turn investment losses to a tax advantage, if decisive, co-ordinated steps are taken rapidly.” She cites two specifi c opportunities: transferring assets into succession vehicles and ensuring that losses are crystallized to …ayour advantage.

TRUSTS

In the UK, the use of vehicles such as trusts or the new “family limited partnerships” to pass assets on to the next generation can yield big tax savings. A fl at capital gains tax rate of 18% is levied when assets are transferred into them. But because many investment assets have fallen in value, the tax payable on such a transfer will be signifi cantly reduced, maybe even to nil, with the possibility of good capital growth over time.

Investors who realise a capital loss in any one year are generally able to carry this forward to off set against tax payments in subsequent years. Investors who have assets which are currently in the red should therefore consider how best to crystallize these losses.

For resident non-domiciled individuals in the UK, Dworetzsky says inheritance planning has become more complicated with the introduction of a new tax regime.

From April last year, off shore losses became allowable for nondoms adopting the new remittance basis for overseas assets, as long as they elected to include losses from the outset. Such losses could off set gains on off shore and even UK assets subject to taxation, but electing to disclose them means providing more information on off shore wealth to the UK tax authorities.

EUROPE

Beyond the UK, the situation can be more complicated but similar opportunities exist for tax and succession planning, both for residents and non-residents.

Howard Bilton, chairman of international tax planning fi rm Sovereign Group, says: “High net worth individuals should certainly be reviewing their structures to see if there is any advantage to be extracted from a diffi cult situation. This is particularly important where individuals own assets in two or more countries. It should be remembered that capital taxes, such as inheritance tax, fall outside the scope of many double tax treaties. There may also be some foreign properties held in structures that are no longer compliant with legislation and now might be a good time to address this.”

Steve Sokić, head of development and strategy at RBC Wealth Management’s trust operations in the Channel Islands, says: “In those countries that have some form of wealth transfer taxation, the combination of global depressed asset values and low interest rates presents opportunities to transfer wealth on a very tax benefi cial basis.”

Sokić suggests that with prudence back in vogue many people are examining the potential to transfer wealth using tax effi cient trusts. He says: “Even in countries where tax systems are still relatively young, as in parts of eastern Europe, and where tax planning may not yet be a primary consideration, we are seeing plenty of wealth transfer structures – although in those cases, security, preservation and protection from political or social uncertainty are still among the primary motivations.”

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