Caroline Garnham on the quandaries that face HNWs looking to move abroad, from the quality of life and culture of the potential destinations to the complex tax implications
MR AND MRS Smith invited me to lunch at Mosimann’s, just off Belgrave Square. Over the years I have learned that an invitation to Mosimann’s from Mr and Mrs Smith usually means something is on their minds.
The first time they asked me there, Mr Smith informed me that he intended to sell his household appliances company within the next two years, and he wanted to know not only how to go about it but also what he should do with the cash. Were there any traps of which to be careful?
I still remember the look on their faces when I told them that the majority of people who sell their companies lose between a quarter and half of their wealth within five years! I explained to them, over a few weeks, what the different types of investment manager were and the advantages and disadvantages of each and what to beware. Now, well past five years, not only have Mr and Mrs Smith increased their wealth, but they have also adjusted well to the transition from mortgages to management.
The first course arrived; Mr Smith adjusted his napkin; I waited. ‘We have decided to emigrate, Caroline. We are not getting any younger, the children live abroad and there’s nothing much to keep us here. We want somewhere in the sun, with a good quality of life, nice restaurants and plenty to do.’
My mind raced through the options. The Bahamas would be too far away, with not enough culture or activity; Singapore has lots of culture, but again it’s too far away. Mrs Smith interrupted my thoughts. ‘I would ideally like to live in Cannes, close to the sea.’ Oh, I sighed, not knowing quite where to start. ‘When you say emigrate, do you mean selling up in England completely and starting a new home in a new country?’ Both nodded enthusiastically. ‘We would welcome the challenge of making new friends, learning a new language and living in a nicer, brighter place. England is for making money, not for enjoying it, unless of course you enjoy gardening, killing animals and going to the opera.’
Emigrating is a very serious decision. I explained to them that it’s not just a matter of moving home — moving countries means another culture, a different mindset, a different way of doing things. Many people who move to Geneva, for example, love the country but cannot live in a place where they are forbidden to put the dishwasher on at night or hang out their washing.
Moving countries is also a matter of taxation and jurisdiction. France is a high-tax jurisdiction which imposes an annual wealth tax on its residents, as well as a tax on death. It is also a civil-law country, which means that Mr and Mrs Smith would be obliged to leave the majority of their wealth on death in equal shares to each of their three children. Their wills had complex trust arrangements embedded in them, which French law would not understand or respect.
‘Have you thought about Monaco?’ I asked. Monaco’s laws on succession make it attractive to people like Mr and Mrs Smith. Like France, it insists that all residents leave the majority of their wealth to their children in equal shares. But unlike France, when a person is a resident of Monaco but holds the passport of a country which has a law of trusts, the wealth put into the trust will be outside the succession laws of Monaco (provided certain formalities are complied with and all the Monégasque fees are paid).
Mrs Smith looked excited. ‘Can we set up a trust now, so that we can run it during our lifetime rather than leaving it to sort itself out following our death?’ The answer is, of course, yes, and that is a very good idea, but it is not advisable to transfer any wealth to this trust for at least four years following the year in which Mr and Mrs Smith leave the UK. Any transfers of wealth to a trust within four years of leaving the UK to take up a permanent home abroad would result in a UK charge to inheritance tax of 20 per cent on the value transferred, and this would increase to 40 per cent if the transferee were to die within seven years of the transfer.
However, after four years, provided the UK accepts that they had made their permanent home in Monaco, Mr and Mrs Smith could transfer all their wealth to a trust and not pay any tax (other than modest fees in Monaco) in the UK or elsewhere. Setting up a trust during their lifetime meant they could pick investment managers, trustees and legal advisers during their lifetime and bed them in properly so as to ensure a smooth and stress-free transition on their death.
As we got up to leave, Mrs Smith touched my arm: ‘Why doesn’t everyone go to live in Monaco?’
‘Because not everyone is as fortunate as you are, or as wise in taking advice before embarking on a major decision,’ I replied. She smiled, looking pleased with herself.
Caroline Garnham is a private client partner at Lawrence Graham and the founder of Family Bhive