After UK Chancellor Rachel Reeves released the Autumn Budget last week, including an abolition of UK non-dom system, hikes in capital gains, Inheritance Tax and other taxes, a law firm discusses the effect on generational wealth. And UK wealth manager St James's Place examines how Asia is positioned to draw in high net worth individuals.

Tax hikes by the UK government last week, raising taxes by ÂŁ40 billion ($52 billion), will likely deliver a generational shift in wealth, as parents start gifting wealth earlier to avoid the amount their children inherit being shrunk by new, punitive inheritance tax rates, according to JMW solicitors’ private client team.

“It’s something of a given that a person in their twenties is unlikely to ever be as wealthy as the so-called “golden generation” – often referred to as Baby Boomers – before them, who would have found it much easier to get on the property ladder and build their wealth through the property market increasing over time,” Russell Kaminski, partner with JMW Solicitors’ Private Client team, said in a note.

“There is, therefore, a lot of equity and wealth locked up in that generation, who are now living longer than ever, which means, given the changes announced, that generation may well now gift more during their lifetime to help their children – who simply can’t afford to buy properties – much earlier than they would have otherwise. The outcome of the Budget changes will likely see those Baby Boomers, who would have simply waited until death for their wealth to pass on to the next generation, reconsider their position and gift wealth earlier,” he added

Current figures show that fewer than one in 20 estates – just over 4 per cent – pay inheritance tax, meaning that the tax is paid on about 27,800 estates a year. Yet economists at the Institute for Fiscal Studies think tank predict that about 7 per cent of estates could be liable for inheritance tax by 2032, external, under current rules.

Under current rules, small family farms – including land used for crops or rearing animals, as well as farm buildings, cottages and houses - have been handed down through the generations without attracting IHT. This will no longer be the case. Agricultural and business property business relief will be reformed with assets over ÂŁ1 million facing a 20 per cent rate. This is going to have a big impact on landowners, farmers and entrepreneurial clients, making it important for those affected to review their will and wider structuring.

“Wills need to be carefully structured to maximise the relief – the allowance of £1 million is not transferrable between spouses and so clients’ wills need to cater for this and create tax efficient and flexible structures,” Joe Cobb, head of JMW’s Private Client team, said.

“Any clients who have agricultural and business property business relief qualifying assets in trust already need to seek legal advice as to what the changes are likely to mean for ongoing taxation of the trusts, and whether any restructuring would be sensible. Now is the time for anyone holding these types of assets to consider their wider IHT mitigation strategies,” he continued.

Reeves also said that shares listed on the Alternative Investment Market (AIM) stock exchange in estates would be taxed at 20 per cent, due to the IHT relief on AIM shares being restricted to 50 per cent as opposed to the current rate of 100 per cent relief. This had been a popular method of IHT mitigation – particularly as it only required the client to survive two years rather seven. But now, anyone who holds significant AIM portfolios should seek legal advice because alternative IHT mitigation strategies regarding this planning may no longer be appropriate, JMW continued.

Pensions have also been targeted. There will be a consultation on implementation, but at its most basic level, it would appear that the value in a pension is now going to be part of the taxable estate for IHT purposes. Given that married clients have – at best - £1 million of IHT allowances between them to cover all of their assets, this is going to bring many more estates into the scope of IHT. If the pension counts as part of the £2 million taper threshold for the Residence Nil Rate Band (RNRB), the availability of the RNRB will be severely curtailed for many estates. Clients should seek advice as to ongoing IHT mitigation – a combination of measures may be possible to limit the impact of this change by having a will drafted to utilise allowances efficiently and to structure the inheritance of the pension by using a protective trust structure, JMW said.

The Asia angle
This year’s UK budget also saw increases in employer National Insurance, capital gains tax hikes from 10 per cent to 18 per cent and 20 to 24 per cent, and the abolition of the non-domicile tax regime. UK wealth manager St James's Place thinks that many business, non-domiciles, or high net worth individuals (HNWIs) are now likely to reassess their plans to return to the UK or send foreign income to UK shores, presenting an opportunity for business-friendly jurisdictions, including Asia, such as Hong Kong and Singapore.

The abolition of the non-domiciled tax regime, to be replaced by a system based upon UK residency, doesn't just remove the ability for non-domiciles to establish trusts to hold non-UK property and escape UK IHT: “It renders existing trusts, set up in good faith, redundant for most, and subject to IHT anniversary and exit charges,” Tony Müdd, divisional director – development and technical consultancy at St James’s Place, said.

The Budget heralds a significant change in UK tax policy as the first Labour government in 14 years seeks to leave its mark. “There are still unanswered questions, and individuals connected to the UK or expats planning to return will have time to consider their options as many of the tax changes do not take effect until April 6 next year. Those residing outside the UK will have some flexibility to review their options,” Müdd continued.

“Issues around non-dom trusts, the repatriation of income to the UK and the mitigation of IHT will all require expert financial advice, and the Budget is likely to prompt internationally mobile individuals to reevaluate their plans to return to Britain or send income back home,” he said.

Even before the changes were announced, many predicted that the UK would see millionaires and billionaires leave the country for business-friendly financial centres with competitive tax regimes, including Hong Kong and Singapore. “Now that the sheer quantum of the tax changes has been unveiled, the UK’s loss could be Asia’s gain,” MĂĽdd concluded. See more commentary on the budget here.