Worse than you could ever have thought possible

This morning I gave the key note speech to a packed IBC conference on Family Offices.

The role of a Family Office is to act for an UHNW family in the preservation of their wealth, but should not be restricted to investment.

There are three ways in which family wealth can be eroded

  • Poor investment
  • Heavy taxes, and
  • Family Feuding

Families need independent, neutral and strong advice on tax planning and family governance, as well as on investment. They need a new type of family office; dedicated to serving the tax planning and succession concerns of the family, a family office which is on the same side of the table as the family.

My talk on the second day of this conference will focus on how to prevent the erosion of family wealth through family feuding and the benefit of family governance, but in my Note today I want to pick up on the attitude of HMRC to tax evasion and how it affects all of us.

Over the last two years the UK has led the drive in Europe, in the G20 and through its G8 Presidency to revolutionise international tax transparency. It now has agreement, reached among 94 countries, to exchange information on financial accounts automatically every year. This is called the Common Standard of Reporting, which will start in September 2016 with the country’s Crown Dependencies and Overseas Territories, and will be completed in September 2018.

Under these agreements, HMRC will receive a wide range of information on offshore accounts held by UK tax residents, including names, addresses, account numbers, interest and balances. This will be an unprecedented step change in HMRC’s ability to tackle offshore tax evasion.  Taxpayers and their advisers will have no right to see what HMRC gleans; some of it may be incorrect.

HMRC says it will give evaders one last chance to come forward and put their affairs in order. If they choose not to, ‘it is right and fair that we make sure that the penalties they face, and the penalties for those who help them, reflect the wider harm caused by their actions and act as an effective deterrent to others. Penalties for evasion range from 100% of the tax due to 200% and could also include a prison sentence’.

According to HMRC, it has given people ample opportunity to regularise their affairs. True, but what about those who are not aware that tax is payable. They do not know that they are committing a crime. The taxpayer does not know the intricacies of the law, but the adviser who set up the structure for them does as do the professionals who run them do.

Joshua and Jennifer came to the UK in 1988. In 1995 they set up an excluded property settlement in Jersey with the assistance of their bank which also acts as the trustee and their lawyer. This trust was used to shelter capital gains, accumulate income and provide protection from inheritance tax. The beneficiaries are themselves and their three children. Over the years, trust income has been used to buy art in New York which was has then shipped to the UK. Joshua and Jenny now have an enviable art collection and have recently been making some changes as opportunities present themselves. On the sale of the art in the UK, this is a remittance of the income on which tax is payable. Neither Joshua nor Jennifer had any idea that they had been remitting income on the sale of any piece of art in their collection.

From the attitude of HMRC set out above, it is not just the taxpayer it will be targeting it will go after the advisers; the banks, accountants and lawyers who set up the structures and then fail to warn these families of the dangers of not carrying out a thorough independent review.

Joshua and Jenny need to be advised to carry out an audit to see whether:

  • There has there been any inadvertent remittance of income or capital gains to the UK which has not been declared?
  • The trust was set up before the seventeen years of residence or after? Had Joshua and Jenny formed the intention to live in the UK in the tax year before they came to live in the UK? Has theseventeen out of the previous twenty year rule for forming excluded property settlements been calculated properly – if not they could be treated as tax evaders and could well have an action for negligence against their advisers.
  • There is any information which HMRC could get hold of which could lead to an investigation. At the very least to carry out a thorough review could prove to HMRC that they did not intend to evade tax and could provide some form of defence against an investigation and mitigation of penalties.

My advice to all advisors who have ever advised on creating offshore structures for their clients, are managing offshore structures or administering offshore structures is to contact existing and former clients immediately to inform them of the changes. If advisers do not they may find themselves embroiled in a tax investigation and penalties for assisting to evade.

In addition they may find themselves defending a case for breach of their duty of care to their clients. Advisers are much more knowledgeable than their clients and need to be warned about any inadvertent breach, for which they could face a claim for damages.

What is around the corner needs to be thought about now. If not what is coming could be worse than anyone could ever have imagined and much more costly – both for the UHNW family and their advisors.