What tax planning not to do

Last week I wrote my Note on the consultation paper issued by the Government on the taxation of non doms on the 19th August and said I would write this week on what tax planning not to do.

A few months ago a former advisor to a very wealthy family, who I will call William, came to see me. He had been given an idea as to how to save tax on his client’s numerous residential properties in London owned through a series of trusts in Jersey. The trustees should grant a company owned by his client’s trustees, a lease or sub lease of the property and then give to another trust for his client’s children the residuary interest in the property. This is in essence the ‘double trust scheme’ which I referred to last week in my note, which was stopped in the Finance Act 2014 with the introduction of an annual income tax charge called POAT (pre-owned asset tax). He had been told that this arrangement would work for his client because he was not UK resident and therefore would not be subject to the annual income tax charge.

I told him in no uncertain terms not to give the suggestion another thought.

Under the terms of GAAR (General Anti Abuse Regulation) any such arrangement could be looked through and taxed, together with interest and penalties. I was right. However, rather than rely on GAAR, the Government has inserted a specific anti avoidance clause. ‘it proposes to include a targeted ant-avoidance rule in the new legislation, the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on residential property’.

I also mentioned last week that the Government is not prepared to grant concessions to taxpayers to de-envelope their property – dispose of the property out of an offshore company and hold it personally. Most advisors hoped that the Government would prefer to be able to see when a property was transferred and by whom through entries in the Land Register. However, it would appear that the Government has ducked this issue in favour, not only of making advisers report – but also to make them personally liable for the tax!

In their consultation paper the Government says ‘HMRC might have difficulties in identifying whether a chargeable event had taken place and hence whether a liability to IHT has arisen. To address this, the Government intends to extend responsibility for reporting to HMRC when chargeable events have taken place and for paying any tax which arises….’ to the directors of offshore companies, and…

‘a new liability will be imposed on any person who has legal ownership of the property, including any directors of the company which holds the property. This will ensure that IHT is paid’.

This is harsh. Let’s take an example of a company in Jersey which owns a £20million residential property in Mayfair in which Jacques and his family visit from time to time. There are three directors of the company one of whom is their London lawyer Nick.

Nick took over looking after Jacques when his partner Tom retired and in the hand over notes he was told by Mark that the company was a nominee for the trust of which Jacques’ son Mark had an interest in possession.

The facts, however, were not as Mark had described. The company was not a nominee and Jacques, not Mark, used it whenever he was in London.

On the death of Jacques, Nick should have reported the property in Jacques probate but he was not aware that Jacques was still living there and that the company was not a nominee. These omissions of fact, could leave Nick facing personally an IHT charge of £8million. Sadly, there is no defence in tax law for not knowing the facts and having no intention to conspire to evade taxes.

The world is a harsh place for the rich to live and for any adviser who is not in full command of the facts of how his clients live and how an offshore structure is, in fact, set up it could be a very costly profession to follow. As I have said before Big Brother is with us, and the ‘security police’ are the people UHNW families are expected to trust.

Next week, I will write about what I think the Government should do to put revenue into its coffers and make the UK a place where the rich want to live, spend their money and pay their taxes, without fear that their banks and advisers will snitch on them.

If you would like to book an appointment with Caroline or one of her team, call Svetlana on 020 3740 7423 or e mail on svetlana@garnhamfos.com