The article was originally published in FT Adviser.
Written by Lana Mallon TEP, Senior Wealth Planner, Lombard International Assurance
While almost half of today’s high net worth individuals (HNWIs) have lived in one country only, it may surprise people to know that 22 per cent have lived in two countries, 12 per cent have lived in three countries, 4 per cent have lived in four countries and 4 per cent have lived in five or more countries, according to the Barclays Wealth Insights 2018 report.
This report shows that a HNWI community which is increasingly more mobile and younger, impacts on wealth planning needs; flexibility and compliance in multiple jurisdictions is becoming a staple requirement.
However, these statistics mean little unless we understand the growth trends within this group of individuals.
The global number of HNWIs grew to 18.1 million in 2017 (an increase of almost 8 per cent) and was matched by a growth in HNWI wealth by 10.6 per cent to breach the $70trn mark, according to Capgemini’s 2018 World Wealth Report.
Understanding why HNWIs are more mobile is easy –education, lifestyle, family, international careers, healthcare, marriage, climate, retirement and political security are a few and the list could go on.
However, HNWIs understand that to be globally mobile, they need a solution to preserve the transferability and portability of assets and wealth.
High wealth and high income bring specific challenges in balancing legal or tax compliance, transparency, privacy and – importantly – safety.
For example, the tax and retirement needs, cost of living and possible care costs of HNWIs are different from other investors. These individuals and their advisers understand that dealing with these requirements in a foreign jurisdiction can create additional challenges.
This has led to competition from offshore structures on how to handle growing mobility in line with tax-related pressures, and intricate global family networks.
Understanding the tax implications of moving jurisdictions and the potential impact on succession planning is an essential exercise for HNWIs looking to move countries or continents. Indeed, expatriates make up 11.4 per cent of the global HNWI population, according to GlobalData, a research consulting firm.
For clients, including HNWIs, chasing new horizons here are some points to consider before they move:
Knowing when a move to a different jurisdiction will happen can help assess when wealth, succession or estate planning needs to begin. But even if precise timing is not known, planning early for what your client wants and needs in the future will allow you to consider how best to meet those needs with the right tools and solutions.
The benefit of a life policy is not being restricted on when it needs to be taken out. However, it can be a tax-efficient solution now and adapt as circumstances change.
2) Have you taken advice?
Without the right advice, it is difficult to make informed decisions for long-term protection and comfort. The right advice also allows clients to put succession plans in place to reflect their intentions in the event of death.
Although absolute certainty on future tax or regulatory changes is rarely attainable, getting the right advice for a cash and asset portfolio is the best way to understand the risks to it on moving to another jurisdiction. In addition, succession laws differ from country to country, and expatriates may inadvertently get taxed twice.
It is worth noting that technology will change the nature and delivery of advice and services to HNWIs. Expectations will change and demand will become more immediate.
Generations of HNWIs to come will be tech-savvy and social media focused, valuing opinions from sources other than technical/financial experts and will become equally as important – we have already seen how the delicate balance of privacy and transparency has become a key issue of concern for HNWIs in the face of media scrutiny.
3) How long does your client plan to stay for?
As an old Yiddish proverb states: “Man plans, God laughs”. You don’t have to be religious to understand the real sentiment here; you can make all the plans you like, but nothing is certain.
Different jurisdictions with different rules impact on how people are taxed in the short and long-term. For example, new UK rules on deemed-domiciled individuals in April 2017 have reduced the amount of time an individual can remain resident in the UK and outside the scope of inheritance tax.
It is therefore important to have a solution in place to tackle the long-term or unexpected changes to clients' plans, therefore managing the impact on their wealth as those plans change.
For those UK-domiciled or deemed-domiciled individuals, wealth invested in a life insurance policy could be written into trust to be outside the scope of inheritance tax in the UK.
Non-UK domiciled HNWIs who want to ensure that wealth, that should not form part of a UK tax estate even after they become UK deemed-domiciled, continues to be protected and excluded, may consider taking out a life policy and placing this into trust while still non-domiciled, making it excluded property for inheritance tax purposes.
4) Are funds accessible?
Different vehicles and structures will have different capabilities and rules on accessing funds.
Investments in certain vehicles or funds may restrict an investor on when and how sums can be released, which may be difficult depending on the jurisdiction.
In addition, persons who in one jurisdiction may be used to taking money out of certain investments or vehicles without encumbrance, can find that accessing funds or investments in another jurisdiction may create an unexpected tax charge.
5) Know the uncertainties
Rapid changes in political, legal and tax landscapes can move the goal posts for the choices we make today, tomorrow or next week – never mind next year.
Keeping compliant with those changes can be burdensome for multi-jurisdictional individuals.
This includes knowing whether a current structure is recognised in another jurisdiction and how it would be taxed. For example, trusts are not recognised in France despite their wide use in the UK.
The last decade has seen sweeping changes to the regulatory framework, particularly surrounding the financial services world. An example of such change is in the introduction of GDPR, impacting financial services providers and individuals alike.
With added focus on tax and legal reporting, and stricter rules on how personal data is used, stored and processed, data protection will transform how an adviser operates, but will also impact the amount of information available to advisers, and where that information can be used or sent.
Handling regulatory changes – and the pace of change – as an individual is a big task. However, there are some financial solutions that can act like an ‘an umbrella fund’, allowing the investment in different funds with reduced administration to happen one place, under a single asset for the HNWI.
7) Does family come first?
Whether clients are young, married, divorced, with children – or none of the above – knowing who the people that will benefit from their estate are, will allow you, as their adviser, to plan efficiently for the future as the tax implications for different classes of beneficiaries can be stark.
Equally as important is knowing where these individuals are. Many HNW families are spread across countries and continents.
Therefore, cross-border planning and cross-border solutions are key to implementing structures that will follow them across the globe, but also those who will benefit from their estate – and subsequent generations.
Suggest a financial product that can be used to allocate wealth to particular people as beneficiaries or, as in the UK, put into trust to cater for future generations who may not be born, particularly where trustees have ongoing duties to produce, preserve and manage generational wealth.
8) Identifying concerns and goals
Understanding what is important to your HNWI clients will help identify the solutions matching those needs.
A mobile HNWI might value efficient estate planning, legal and tax compliance, asset protection and growth, reduced reporting and administrative burdens, tax deferral or structured family succession.
As in point one, Generations Y and Z (those aged 18 to 35) tend to think differently about advice, putting value on unique or tailored advice to them and their circumstances.
They want ‘goals based advice’ and frequently insist in understanding, and controlling, the financial advice they receive.
Growing up in the ‘digital revolution,’ this includes advice on demand, anywhere and at any time. As older generations age, these groups will one day make up the largest percentage of HNWIs with the format and audience of advice changing with it.
9) Playing the long game
Life is, we all hope, a long-term game and ensuring that wealth is preserved, grows and is available in years to come is essential.
This includes preserving access to historical, or creating new, relationships with investment managers who manage and invest (earned and inherited) wealth and asset portfolios.
Advisers increasingly service clients across the wealth and age spectrum, comparing “when can I retire?” with “will I outlive my wealth?”.
The common factor is retirement security, complicated by life expectancy, healthcare costs and the fact advisers cannot see the future.
Advisers should not then focus on one or either, but both. Encouraging a balance of long and short-term financial goals and planning.
While the tax, legal and political landscape continues to change, HNWIs will need to adapt to a world focusing more and more on transparency, compliance and anti-avoidance.