The biggest legislative changes that affect the wealthy relate to the constant changes in taxation laws. One of the more controversial changes was the Finance Act 2006, which aligned the tax treatment of accumulation and maintenance trusts with discretionary trusts. The former were introduced as a tax efficient way to provide funds for young people. With tax now levied on payments into these trusts, wealthy people have the alternative to give the money outright and avoid tax by living for seven years.

“Accumulation and maintenance trusts were the favoured way for people provide for their grandchildren’s school fees,” says Jeffrey Nedas, head of family law the BDO Stoy Hayward, the accountants. “The original objective of trusts was to protect wealth, although some people use them to mitigate tax. Suddenly we have the issue of whether to allow the ‘tax tail to wag the wealth protection dog?’ The alternatives are to ‘bite the tax bullet’ and protect future generations or avoid tax and risk them squandering the money. It is a big debate, but wealth protection is still of paramount importance to our clients.”

Tim Gregory, partner in the private wealth team at accountants Saffery Champness, advises clients to take the tax hit. “Trusts are still an effective structure in which you can hand over wealth to your children, whilst preventing them gaining control immediately,” he says. “You only need to improve the investment performance of the assets by 0.6 per cent per year to meet the cost of the tax.”

Some experts anticipate that wealthy families might consider using companies rather than trusts. Problems arise with existing accumulation and maintenance trusts, because they were intended to make small but regular payments, such as allowances or school fees. Tax will now have to be calculated and accounted for in respect of each payment.

“Many trusts will now find themselves having to comply with a tax regime that places an excessive administrative burden on them,” warns Paul Davies, trusts and tax associate in Addleshaw Goddard’s Manchester office. “Information could be needed from 15 or 20 years ago. The amount payable is often very small, but a return has to be made regardless.”

Mr Davies has done one example calculation that shows a liability of £12 in respect of three payments for school fees. The cost of a professional completing the return might be £250, plus value added tax.

Chris Groves, partner in the wealth planning team at law firm Withers, recommends considering using a family limited partnership, which allows assets to be given away whilst the settler maintains control. The gift will comprise a potentially exempt transfer, provided the donor survives for seven years after the partnership is created.

The general partner is usually a limited company established by the parents and the children are limited partners. Partnerships are regulated by the Financial Services Authority and many of the functions of the general partner will have to be delegated to an authorised person, such as an investment bank.

“This is an innovative, flexible and tax-efficient wealth transfer and asset holding structure,” he says. “It is expected to have a significant impact on the way family wealth is managed.” Parents can gift shares of partnership interests in the trust to their children.”

Non-domicile

The UK is a tax haven, with wealthy individuals domiciled overseas able to live and work here and only be taxed on the income and capital gains that are remitted to this country. Although they might seem an obvious target, such individuals still make a significant contribution to the economy.

“Super-rich individuals come to reside in the United Kingdom because of its attractive and relaxed tax regime,” says Mike Quinn, head of private clients at lawyers Hill Dickinson. “I have a client who is moving to London from his native country because he would be taxed on almost 70 per cent of income there as opposed to paying little or no tax here. The issue was being fudged by the government: the Treasury urges us all to pay our fair share of taxes, while not acting to increase the tax burden on the super-rich, because if they do they threaten to sell up and leave half of Mayfair and Belgravia empty!”

Business asset taper relief

The capital gain on the sale of a family-owned business is reduced by business asset taper relief to 10 per cent after two years. This also applies to private equity firms, whose owners are being much criticised for paying so little tax.

“If the Chancellor decides to do something about private equity firms,” says Mike Trueman, editor of Taxation magazine, “the difficulty will be how he hits them without at the same time hitting small family businesses.”

Tax amnesty

A government amnesty on declaring offshore funds has recently ended. “Now the amnesty is over, they are going to be much harder,” warns Helen Jones, tax director for private clients at BDO Stoy Hayward. She warns that European bodies are now sharing information about bank accounts, so revenue will be find out.

Mr Quinn warns that even in the UK there has been a severe erosion of bank confidentiality. “The Inland Revenue now has extensive powers to compel disclosure of an individual’s bank account details,” he says, “as many customers discover to their discomfort and cost.”

Mr Gregory warns that by June 19, only 25,000 of 400,000 offshore account holders had notified their intention to disclose. “A vast number of people could be in for a call from the taxman,” he warns. “Even though the deadline has passed, making full disclosure voluntarily is still likely to lead to a much lower penalty than waiting for the tax authorities to contact you.”

Errors

There has also been a change in the way that mistakes in tax returns are handled, whether made by the taxpayer or their adviser.

“If a mistake is deemed to be careless or deliberate, penalties are currently levied of 10-25 per cent of the tax due,” says Mr Trueman. “From 2009, it looks as if more minor mistakes may escape completely. More serious mistakes, particularly those that involve a cover-up, look as if they will get penalised even more. However, it should be good news for most people.”

Mental Capacity Act

There is no point in having wealth if you end up being ill in poverty. Many people have taken the precaution of signing an Enduring Power of Attorney. In the unlikely event that they become mentally or physically incapacitated, it appoints a family member or adviser to manage their financial affairs.

In October 2007, the new Lasting Power of Attorney will be introduced under the Mental Capacity Act 2005. Enduring Powers of Attorney will remain valid for financial matters, but the new document will also address healthcare and welfare issues.

However, it may need to be registered with a new Public Guardian when signed. An independent person must certify on the document that the donor understands the document and that no undue pressure has been used. There is also a statutory duty for the attorney to act in the best interests of the donor and they must follow a statutory checklist when making decisions.

“The government was concerned that Enduring Powers of Attorney were open to abuse,” explains Paul Davies, trusts and tax associate at law firm Addleshaw Goddard. “A very simple and cost-effective procedure will become time-consuming and costly. The new rules make sense for the elderly and vulnerable, but for young married couples who simply want to appoint each other to run their affairs if the worst happens, the cost may be a major disincentive.”

Mark Keenan, a solicitor at Mishcon de Reya, says the “new Court of Protection will face a constant balancing act between protecting vulnerable mentally incapacitated people and promoting their empowerment”.

Third Money Laundering directive

The Third Money Laundering directive requires professionals to identify the beneficial owner in respect of a transaction with which they are involved. “Trusts are extremely common in English law,” says Mr Davies, “but in Europe they are seen as a mechanism for hiding ownership. It has caused palpitations for the UK trust industry, because there can be enormous difficulties in identifying the beneficial owners, since they may not yet have been ascertained.”

He says that there was a fear that ministers would wave through the directive without giving it proper consideration, either because of a lack of understanding of the issues, or as part of a political “quid pro quo”.

“It is only intensive lobbying by the Society of Trust and Estate Practitioners and the Law Society, who threatened to seek a judicial review of the decision to implement the directive that persuaded the Treasury to listen to the objections,” he says.