Advising private clients: current issues and future trends
On 18 May 2020, Alastair Glover, partner in International Tax and Private Wealth team based in Dubai, Hannah Wailoo, partner in International Tax and Private Wealth based in London and Helen Briant, partner in Commercial Litigation based in Birmingham, hosted STEP Arabia's first ever virtual seminar.
They discussed some of the issues facing private clients, their families and advisors in light of the current COVID-19 pandemic, and the travel restrictions implemented to stop its spread. They were joined by 50 STEP Arabia members and non members, with the audience largely consisting of offshore trustees and trust companies, lawyers, accountants and family offices.
The Webinar focused on Wills, Tax Residency and Trust related issues. For those unable to join on the day, we have set out the headline points of the discussions and a link to watch the full webinar recording can be found here - STEP Arabia webinar: Advising Private Clients.
Wills and Powers of Attorney
We have seen an increase in Will and Power of Attorney enquiries since the outbreak of the pandemic. Individuals have been increasingly concerned about having a Will in place or ensuring existing Wills are updated.
Hannah discussed how self-isolation, social distancing and quarantines pose challenges to effectively complying with formalities for the preparation of and execution of Wills. She examined some of the issues that arise and solutions to address those issues, more of which can be found here: Protecting your family – Wills, estate planning and the coronavirus (Covid-19) pandemic.
One such legal requirement is that a Will must be signed "in the presence of two witnesses who must be present at the same time." She explains that "in the presence of" in England and Wales does not currently extend to video conferencing or virtual meetings, although some historical cases seem to permit witnessing a Will through an open window or on an individual's doorstep. England and Wales have not changed the legal position in light of coronavirus but there are other jurisdictions that have updated their rules. For example in the DIFC, virtual registration of a Will at the DIFC Court is now possible. Hannah and Alastair discussed some of the legislative changes and guidelines in some other jurisdictions. More detail can be found here: Covid-19 and Will signing in the social distancing era.
Ensuring that Wills are executed correctly is highlighted further given that there have been some changes in rules and variations across jurisdictions, which could lead to mistakes where advice is not taken and followed. Helen Briant commented that litigious issues are more likely to arise around Wills that were prepared or executed during the pandemic, including the practicalities around obtaining capacity assessments, issues surrounding duress and undue influence and further scrutiny on lawyers to carry out checks to ensure the formalities are complied with. Unfortunately challenges to estates tend to also peak in times of economic crisis when beneficiary expectations on financial provision from estates are not met. Practical advice includes lawyers keeping clear records of the process that was followed, and to meet with clients for a face to face meeting as soon as possible ideally to resign Wills that may have been signed in unusual circumstances at the height of the pandemic.
Alongside the importance of a valid Will, estate planning in general is also an issue that many clients and their families have been addressing at this time. Hannah recommended that individuals and their advisors take the opportunity to review their existing structures and take advice on lifetime planning, for example through the creation of family investment companies, trusts and foundations to ring fence assets away from their estates and to provide for families and heirs now. Given the decline in asset values, it may be an efficient time from a capital gains perspective to transfer assets into structures whilst the CGT exposure is potentially lower.
Hannah also raised the importance of having Powers of Attorney in place. In particular, in relation to business decisions, to ensure that operations can still proceed uninterrupted despite the position of a main decision maker. For personal affairs, to make it easier for family members to deal with finances; and for directors and trustees, to ensure their availability does not impact on decisions to be made for their companies or beneficiaries.
Tax residency is another issue that many international individuals are facing which is directly attributable to the COVID 19 travel restrictions. Due to lockdown restrictions, individuals are being forced to spend additional time in a country which could make them tax resident resulting in complex tax situations.
In the UK, residency for tax purposes depends on the number of days spent in the UK as well as other connections such as a permanent home, family or work ties. Alastair Glover sets out some more details for the criteria to determine tax residency in Coronavirus, UK tax and immigration. The rules contain an existing relief for "exceptional circumstances" which allows up to an additional 60 days spent for reasons beyond an individual's control. HMRC have clarified that these can be coronavirus related circumstances which Alastair sets out in HMRC guidance issued to help non UK residents stranded in the UK.
Rishi Sunak has also recently written to the Treasury Select Committee on 20 April 2020 to recommend that the legislation is changed so that days spent in the UK between 1 March and 1 June 2020 will not count towards the residency test , for certain individuals with the required skillset to assist with coronavirus.
Hannah and Alastair highlighted that this is the only current change to the existing rules that has been implemented in the UK although this has in some cases been reported in the media as being a change to give the wealthy an extra tax break. Alastair pointed out that this puts a misleading spin on the "exceptional circumstances" issue. As the legislation has always included a 60 day allowance, this arguably would have always extended to cover the current pandemic. The 60 day allowance per tax year has not increased and there is no sign of HMRC increasing the allowance. It has also not been made easier to claim such "exceptional circumstances" (which HMRC notoriously investigate) and detailed records must be kept.
Hannah also discussed the wider impact of becoming tax resident in the UK. This can bring worldwide income and gains into the UK tax regime and although there are some options for mitigating that (for example remittance basis election) this would still complicate the affairs, filing and reporting requirements. Company directors should also take care, as their presence in another jurisdiction could affect the company's tax residency. Similarly, the tax residency of individual trustees can impact on the residency of a trust. Trustees should also check the tax residency of beneficiaries when distributions are being made from trusts, particularly for the previous tax year 2019/2020 when the pandemic began and the current tax year.
A downturn in the economy and financial pressures can often leave trustees in difficult positions or exposed to claims from their beneficiaries. Helen Briant suggested that it is a good time for trustees to conduct a "health check" with their advisors to ensure they are complying with their duties and that the trust deed enables them to take appropriate or necessary steps to protect themselves and the beneficiaries. Helen sets out some recommendations.
If a trust is an investment fund and such trust has taken a substantial financial hit due to the current climate, Helen advised trustees to review investment agreements, ensure fund managers are performing properly, review distribution policies and maintain communication with beneficiaries to manage expectations.
If a trust is a corporate structure, trustees must ensure the companies are being managed properly unless the trust deed contains an "anti-Bartlett clause". This clause is intended to disapply certain trustee duties. For example, it would disapply the duty to supervise company affairs, therefore the trustees would not have the power to interfere with the management affairs of a company. The ability to rely on such a clause has been reviewed by the Final Court of Appeal in Hong Kong, in the case of Zhang Hong Li v DBS Bank 2019 which concluded that such clauses do protect trustees provided they are drafted properly.
Helen recommended taking legal advice to assist with reviewing the trust deed and trustee obligations.
Helen explained that trust and estate disputes are often family disputes. For example, when the matriarch or patriarch dies and there is sibling disagreement or second wives emerge. This issue has been brought into sharper focus by coronavirus, for instance where the head of the family is vulnerable. Helen stressed the importance of making arrangements to ensure letters of wishes are up to date and to have discussions with family members about the purpose of the trust. She recommended putting family constitutions in place to protect for the future. Hannah agreed that these are good planning tools to protect different interests within the family structures and can protect vulnerable members.
Helen discussed safeguarding measures, in the event something happens to a trustee. She mentioned having powers of attorney in place for trustees if they become incapacitated although trustees are unable to further delegate the powers delegated to them by the settlor, unless permitted by the trust document or statute. Helen also raised a point to note for UK trusts and trustees who may have had to leave the UK due to coronavirus. Under section 36 Trustee Act 1921, it is grounds for removal if a trustee is out of the UK for 12 months.
Helen explained that during the coronavirus pandemic, court hearings are being held by video link or telephone, in the event there are disputes in relation to the trust. Other points to bear in mind were practical difficulties in complying with deadlines given the lockdown and trustees will have to be seen to be reasonable in accommodating extensions. Consultations with beneficiaries should take place and attempts to seek agreement should be made. Care should also be taken to ensure proceedings are held in private where appropriate. Finally, Helen mentioned that some cases have been postponed and extended by delay which will put pressure on the court systems.
If you wish to discuss any of these issues with our specialists then please get in touch using the contact details above.