Why Tax Advisers Must Consider the Global Outlook When Estate Planning

Over more than three decades in private client work I have seen that as globalisation impacted the lives of many (if not most) clients, the work in tax changed. The frictionless trade borders coming in and then hardening as protectionism was enacted by some of the world’s major economic powers has seen families spread across borders and then get locked in by them. This has made cross-border transactions yet more difficult and convoluted.

A consequence of this movement of people is the increased movement of personal funds. Cross-border remittances are now worth more than foreign direct investments to lower middle-income countries with an estimated $689bn transferred across the globe in 2018, according to the World Bank.

The picture created is a complex web of currency passing over borderlines and weaving economies deeper into each other. This is before inheritance, which is usually the largest one-off transfer of assets made by a person, comes into question. And lifetime wealth transfers – for example through trusts – add another layer of complexity again.

This world in constant flux with borders opening and tightening and generations of families having migrated across borders leaves tax advisers in a difficult position. Unable to apply one strategy to a single estate planning case, we have to take account of multi-jurisdictional factors which mean that sensible measures in one place can cause problems in another.

The potential pitfalls became very apparent when I was advising on a trust structure for a family originally from the UK, where the main beneficiaries had emigrated to Canada. In structuring distributions to the beneficiaries, it transpired that sensible planning for Canadian tax purposes was inefficient for UK purposes and vice versa.

This is where having the experience to seek out the right knowledge is vital. Personally, through years working in the international sector of the market, I have gained knowledge of a variety of tax systems and have to spot where foreign tax issues arise even though I do not advise on them. But as tax lawyers, we know that knowledge is an entirely different thing to expertise and the ability to advise on the intricacies of tax models built over years.

The world we now live in, and the one after coronavirus has reshaped the globe, requires tax experts to have access to more than just the knowledge within the confines of our borders.

It is because of this that I believe that one of the most useful aspects of working internationally isn’t just spotting an issue, but developing the overseas networks of trusted talent to rely upon for advice and collaboration.

The traditional model of being part of an international firm or an international network, surprisingly, can be no real advantage when it comes to taking overseas advice. In fact, it can be a disadvantage or a restriction as there is an obligation to use the offices of your own firm or network and they may or may not be the best people for the job. In this case, working with a UK-based firm such as The Wilkes Partnership is liberation as I am free to involve whoever I think is right for the client and the advice required.

Knowing how to spot an issue and seek out the right expertise from within a jurisdiction is the skill when creating the right, sensible succession plan for clients. Some of those issues can arise:

• Where a UK client (without other overseas connections) has overseas assets.
• Where an overseas client (without other UK connections) has UK assets.
• Where an overseas client coming to the UK, or already here but only for a relatively short time, plans to remain for the longer term.
• Where an overseas client from certain countries (especially India and Pakistan) has been in the UK for a long time and has overseas assets or assets that can be transferred overseas.
• Where a UK client is emigrating or has already emigrated.

It’s not just certain scenarios to be aware of when working internationally. There are, of course, some foreign tax systems that are especially difficult to navigate. For example, the USA has its estate or gift tax (like its income tax) based on citizenship, not residence or domicile. And the taxes in some jurisdictions work on a very different basis to our inheritance tax and can be difficult to understand. For instance, the capital acquisitions tax in the Republic of Ireland falls into this category and given large numbers of UK residents have families in the Republic of Ireland, this is an area that tax specialists must be aware of.

In contrast, there are some are helpful jurisdictions like India and Pakistan, whose domestic tax laws give rise to tax planning opportunities in the UK.

The UK has a small number of estate tax treaties with other countries (separate from the normal double tax treaties) but there are only ten of these. Their main purpose is to prevent double taxation where the same assets could be subject to tax here and abroad. Where there is no treaty, the UK gives unilateral relief for foreign tax but the conditions which have to be satisfied mean that it does not always work perfectly.

Four of the treaties are “old” (India, Pakistan, France and Italy) and in theory, give rise to tax planning opportunities but in the light of the countries’ domestic tax systems, it is often only Indian and Pakistani clients who can avail themselves of these.

Finally, it is always essential when undertaking an international estate planning assignment to take account of other taxes as well as inheritance tax – e.g. capital gains tax - or their overseas equivalents.

As remittances increase, generations continue to migrate, and protectionism and globalisation fluctuate, cross-border tax will be a vital part of estate planning. This has created a climate where tax experts need to not only know their own jurisdiction but also have the knowledge to see barriers and call in expertise from other jurisdictions. The world we now live in, and the one after coronavirus has reshaped the globe, requires tax experts to have access to more than just the knowledge within the confines of our borders. In this climate, we need personal connections overseas and the ability to foresee barriers if we are to deliver private and business clients the best service possible.

For more information on The Wilkes Partnership, go to www.wilkes.co.uk