Spotlight on private wealth - September 2024

Welcome to spotlight on private wealth

This update is designed to keep you up to date with developments in the private wealth world. In this edition, we explore a broad range of topics including the new Labour government's proposed changes to the taxation of non-UK domiciled individuals and in the art world, an important recent High Court decision on beneficial ownership.

We hope you find this update helpful and interesting. As always, if you would like to find out more about the issues covered or discuss anything else, please do get in touch.

The big question

The Spring Budget 2024

The Conservative government's announcement at the Spring Budget in relation to the taxation of non-UK domiciled individuals (whose domicile, is considered to be outside the UK) represented a major change to the current system. The proposed changes meant that the concept of domicile would be removed from the UK tax system and replaced with residence-based tests. The remittance basis of taxation would be abolished and replaced with a four-year period for new UK residents in which their foreign income and gains would be exempt from tax.

There was some uncertainty as to how these proposals were going to be implemented given that there was no draft legislation and consultation had been limited. These concerns have been supplanted somewhat following Labour's victory in the recent general election. Prior to the election result, Labour also pledged, in support of the Conservative plans, to abolish the non-domicile status and address perceived tax avoidance.

The proposals under the new Labour government

In a recent policy paper¹, the Labour government confirmed its commitment to Labour's pre-election pledge. The government has stated that it is committed to addressing what it regards as unfairness in the tax system, so that everyone who is long-term resident in the UK pays tax here. The government therefore intends to remove the "outdated" concept of domicile status from the tax system and implement a new residence-based regime which it considers to be internationally competitive and focused on attracting the best talent and investment to the UK.

The four-year foreign income and gains (FIG) regime, proposed in the Spring Budget, will take effect for all foreign income and gains arising from 6 April 2025, but with some changes to what was planned under the previous Conservative government. For example, the government is mindful that the proposed approach left several advantages for existing non-UK domiciled individuals, which the government is committed to ending.

In broad terms, the key features of the government's proposed new regime are:

Four-year regime

The government will remove what it considers to be preferential tax treatment based on domicile status for all new FIG that arise from 6 April 2025. This is consistent with the Conservative government's proposal to provide relief on FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in any of the 10 consecutive years prior to their arrival.

Trust structures

From 6 April 2025, the protection from tax on income and gains arising within settlor-interested trust structures will no longer be available for non-domiciled and deemed domiciled individuals who do not qualify for the four-year FIG regime. This is also consistent with the previous Conservative government's proposals.

Transitional arrangements

In contrast to the previous Conservative government's proposal, the new government does not intend to provide a 50% reduction in foreign income subject to tax, for individuals who lose access to the remittance basis, in the first year of the new regime. UK resident individuals who are ineligible for the four-year FIG regime will be subject to capital gains tax on foreign income in the normal way.

Inheritance tax

As discussed above, the government intends to replace the current domicile-based system with a new residence-based system from 6 April 2025. This will affect the scope of property brought into the UK inheritance tax regime for individuals and trusts. This is in line with the proposals made under the Conservative government. However, by contrast, the government has said it will end the use of excluded property trusts which are often utilised to keep assets outside the scope of inheritance tax.

Offshore

The government intends to conduct a review of offshore anti-avoidance legislation. It is not anticipated that this review will result in any major changes before the start of the 2026/27 tax year. This appears to go further than the Conservative government's previous proposals.

Planning for the changes

The government intends to continue engagement sessions on inheritance tax and overseas workday relief. The government also intends to seek technical comments on the draft legislative provisions, with details of this process to follow in due course. As such, the precise scope of the planned changes is expected to be clarified later.

Accordingly, whilst non-UK domiciled individuals should begin to consider the potential impact of the planned changes on their personal circumstances, it may be prudent to delay any major planning and action until the intended changes become clearer on publication of the proposed legislation.

What's new

Court of Appeal reduces wife's award from £45m to £25m

In a landmark recent judgment², the Court of Appeal has significantly reduced the financial award granted to Anna Standish from her former husband, Clive Standish. The Court reduced the initial award of £45 million to £25 million. This case has attracted considerable commentary due to its implications for the application of the 'sharing principle' in divorce settlements.³

The couple, who had been married for 20 years, amassed considerable wealth during their marriage, primarily through Mr Standish's successful business ventures. In the original High Court ruling, the judge awarded Ms Standish £45 million, which included a substantial share of the family assets under the sharing principle.

Mr Standish appealed the decision, arguing that the award failed to reflect the contributions of each party and was overly generous to his wife. The Court of Appeal agreed, finding that the original judgment had not adequately accounted for the fact that a significant portion of the wealth had been generated through his individual efforts, particularly after the couple's separation.

The Court emphasised that while the sharing principle remains a cornerstone of matrimonial finance law, it must be balanced with considerations of fairness and the contributions of each spouse. The Court therefore reduced Ms Standish's award to £25 million, reflecting what it considered to be a more equitable distribution of the matrimonial assets.

This judgment highlights the importance of individual contributions and the need for a balanced application of the sharing principle. It is important to remember that there is, however, no guarantee as to outcome of the application of this principle as cases will turn on their own facts.

Court decides that residential property acquired by husband was held on trust for wife

In a recent case,⁴ the High Court had to determine whether the estate of the late Nafisa Hasan held a beneficial interest in a London property that was legally owned by Digit Limited, a company in liquidation. If a beneficial interest existed, the Court was asked to determine what the nature of that interest was, and whether it was held under an express, constructive, or resulting trust, or through proprietary estoppel.

The property in question, used as a family residence in London, was legally owned by Digit Limited, a company established by Ms Hasan's former husband, Colonel Mahmud ul-Hasan, during their marriage.

The Court ruled that Ms Hasan was the beneficial owner of the property through a resulting and/or constructive trust. Despite the absence of written evidence of an express trust, the Court found that Ms Hasan and her former husband had a common intention that she would own the property, which was to be funded by her share of profits from the company she owned with her former husband, namely Integral Resources (Private) Limited.

Although the property was registered in the name of Digit Limited, this was a matter of discretion and not to deny Ms Hasan's beneficial ownership in the property. The Court emphasised Ms Hasan's significant financial contribution to the property, including her payment of expenses relating to the property. Digit Limited did not provide satisfactory evidence to contest Ms Hasan's claim, strengthening the case for a trust. Furthermore, the Court acknowledged Ms Hasan's detrimental reliance on the promise of ownership, which justified the imposition of a constructive trust. The principles of proprietary estoppel were also considered to be met, reinforcing the conclusion that Ms Hasan held the beneficial interest in the property.

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RPC asks

What if a partner resigns without agreeing any financial terms?

A dispute⁵ arose after Suzanne Elaine Procter, a partner in a family farming partnership comprising her two brothers and her father, resigned from the partnership in 2010. Whilst the partnership agreement provided for one-quarter profit shares, it did not provide for the financial terms of a partner's unilateral resignation from the partnership and these terms were not discussed following Ms Proctor's resignation from the partnership. The remaining partners continued the business, implicitly accepting her resignation.

The central issue was whether Ms Proctor was entitled to her one-quarter share of the partnership assets after the death of her father in 2014. The High Court found in her favour, and the Court of Appeal has upheld the decision finding that Ms Proctor's resignation led to a "technical" dissolution of the partnership. This did not result in a general dissolution of the partnership, which carried on without her involvement.

Every partner has a proprietary interest in partnership assets, which includes their share after liabilities are settled. In an ideal world, a partnership agreement would provide for partners' entitlement to payment on retirement. In this case, in the absence of an express provision, the brothers took Ms Proctor's resignation from the partnership to mean that she was surrendering her share of the partnership assets without payment and continued to use her share without accounting to her for it.

The Court ruled that this use of the assets was unjustified, and it could not be assumed that Ms Proctor had forfeited her share upon resignation from the partnership. She was therefore entitled to the actual value of her one-quarter share in the partnership assets as of the date of her resignation, plus interest at 5%.

This case serves as a timely reminder of the importance of a formal partnership agreement which makes express provision for such eventualities, so avoiding disputes of this nature arising.

When can a taxpayer apply for the hearing of their appeal to be held in private?

In a recent case,⁶ the taxpayer requested that their appeal hearing before the First-tier Tribunal (FTT) be held in private, and the final decision to be anonymised. Under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, public hearings are the default position, but they can, in exceptional circumstances, be held in private if certain criteria are met.⁷ In reaching its decision, the FTT referred to a previous decision where it was emphasised that the principle of public justice is paramount, and privacy would only be granted in exceptional circumstances.⁸

However, in the present case, the taxpayer suffered from bipolar disorder, including episodes of psychosis, depression, anxiety, and risk of suicide. The taxpayer argued that their right to respect for private and family life must be protected (one of the five specific grounds for private hearings). A psychiatrist advised that the stress of a public hearing could cause a relapse. Based on this objective assessment, the FTT decided that the risk to the taxpayer's health was sufficient to justify an exception to the open justice principle, and granted the anonymity request.

The taxpayer also claimed that public proceedings would result in financial harm, but the FTT found the evidence in that regard to be insufficient to support the claim. It noted that tax cases often involve significant sums and as such "to allow anonymity on the basis of a fear of commercial consequences based on circumstantial assertion is significantly more challenging". Nonetheless, it separately acknowledged that the case's commercial sensitivity, involving a confidential settlement with a former employer, might justify anonymity in principle. The existence of a confidentiality clause in a settlement could therefore be a valid reason for granting an anonymity application.

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And finally in the art world …

Court considers ownership of painting by Sir Anthony van Dyck

The Van Dyck painting, "Double Portrait of the Cheeke Sisters", today valued at around £4 million, was at the centre of a dispute involving the bankruptcy of James Stunt.[9] The dispute concerned whether the beneficial owner of the painting was James, or his father, Geoffrey Stunt. Geoffrey had paid the purchase price of £600,000 by cheque in 2013, and James corroborated his father’s claim to ownership by providing evidence that he was “rather saturated by Van Dycks at the time” – he had previously purchased several Van Dycks and was not in the market for more.  

However, the High Court held that the painting was owned by James and was therefore part of his bankruptcy estate, dismissing his father's claim of beneficial ownership. The judgment demonstrates that establishing that you are the payee is not necessarily conclusive in determining who is the beneficial owner of the artwork in question. 

The Court applied the Sale of Goods Act 1979, concluding that James was the contracting buyer. The fact that his father paid for the painting did not automatically make him the owner, given the presumption of advancement in father-son relationships, which assumes that a father intends to gift property to his child unless proven otherwise. Geoffrey failed to provide sufficient evidence to rebut this presumption.

The Court further noted that James had treated the painting as his own, including attempting to sell it at auction and displaying it publicly. Evidence, such as invoices and export licences, listing James as the owner, were also considered by the Court to be “evidentially decisive”.

¹Policy Paper – Changes to the taxation of non-UK domiciled individuals.

²Standish v Standish [2024] EWCA Civ 567

³The principle, established in English law, provides that matrimonial assets should be divided equally between spouses unless there is a compelling reason to do otherwise.

⁴Estate of Nafisa Hasan (deceased) v Digit Ltd & anr [2024] EWHC 1127

⁵Procter v Procter [2024] EWCA Civ 324.

⁶L v HMRC [2024] UKFTT 401 (TC).

⁷Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, Rule 32.

⁸Banerjee (No 2) v HMRC [2009] EWHC 1229 (Ch).

⁹Hyde v Stunt [2024] EWHC 630 (Ch).