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How to plan for the known unknown: tax increase and capital controls

Paired with concerns around Brexit, is the increasing possibility of a Corbyn Labour government, which in turn has led many to consider what policies he will bring. Perhaps more specifically, we should say what policies shadow chancellor John McDonnell will bring. There is a real concern that such a government will focus on raising more tax from ‘the top 2%’ and from companies through increases in income, capital gains, corporation and inheritance tax – perhaps even an outright wealth tax. Extending on from this, McDonnell has highlighted the subsequent risk of capital flight from the UK, as individuals and companies seek to avoid such increases and has indicated that they would put in policies to counter or discourage such attempts.

Many are therefore casting their mind back to the capital controls that were in place in the UK as recently as the 1970s. That is before, in 1979, Lord Howe of Margaret Thatcher’s government announced the end to all capital controls. However, you don’t need to look that far back in time to find controls in nearby locations such as Iceland, Greece and Cyprus, to appreciate that governments are still willing to use such mechanisms.

That said, it is interesting to note that the IMF decided to insert the following quote taken from a speech by the governor of the Bank of Mexico into the beginning of their 2016 paper on the history and efficacy of capital controls.

“I have only eight seconds left to talk about capital controls,” Agustin Carstens told his audience. “But that’s OK. I don’t need more time than that to tell you: they don’t work, I wouldn’t use them, I wouldn’t recommend them.” 

We have a bit more than eight seconds, so, what can someone do to prepare?

Without knowing what might be introduced or to what extent, it is actually difficult to take definitive action in advance. One must weigh the unknown ‘potential’ future benefit of any action verses the certainty of incurring costs, taxes and disruption now.

Clearly the ultimate option available to anyone is to up and leave the UK entirely for a more desirable jurisdiction. However, other than the ultra-wealthy, or those that are already internationally mobile, this is likely not a realistic solution.

Moving assets to offshore locations, whilst remaining in the UK yourself, may in part help. However, remember that other than for non-doms relying on the remittance basis, the UK taxes individuals globally on all assets. Certain relocations may reduce the impact of tax increases or capital controls if the right structures and locations are used, but again, assumptions need to be made on what changes might be put into place.

There is a big risk here of acting and incurring costs, which end up not helping at all

Some of the potential options we have been discussing with clients include:

  • Accelerating IHT planning in order to spread out wealth across more individuals.
  • Using tax deferral structures like offshore bonds.
  • Review the structure and jurisdiction of Trusts, Companies, Pension Plans.

For many, taking no action may end up being the conclusion, as there is no certainty that a highly adverse scenario materialises. Instead if it does, they will attempt to wait out the five-year term and hope for a government to come in and reverse any adverse changes.

Having a well-reasoned and flexible financial plan is required in order to consider any of the above

Please speak with your Partners Wealth Management advisor if you have concerns about how your personal financial plan might be affected, or contact me on the details below.

Nathan Prior, Partner and Head of PWM International
nprior@partnerswealthmanagement.co.uk
020 7444 4053

 

 

The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information.