You live in the UK, and have been given to understand that you are non-UK domiciled, but UK resident. You set up a trust in Jersey in 1998 to which your mother, who was living in Canada on her death, left half her substantial estate for you and your two daughters. Your brother Joseph, who also lives in the UK, is your Protector and business partner. You inherited the cosmetics business built up by your father in Canada on the death of your mother and now run it out of an office in Surrey with Joseph.
A local firm of accountants in Guildford do your tax returns and as far as you are concerned you are, and intend to be, totally tax compliant. Your trustees in Jersey, in accordance with their compliance obligations, have collated the information about your business and liquid investments held in trust, including some funds and insurance products and have sent them to the Jersey authorities which has forwarded them to the UK tax authorities who will in due course investigate you.
When you set up your trust your banker in Switzerland advised you with regard to your domicile and asked all the right questions about your father’s domicile at the time of your birth. However, he failed to ask whether at the time of your birth your father and mother were married. If he had asked he would have asked the same questions, but not about your father, but about your mother.
Unlike your father, your mother was born to English parents in England and always kept close ties with her family in the UK. She always intended to return, but soon after her husband died, she became seriously ill and died before she could return. It is more than likely that she retained her UK domicile of origin.
When your mother left her estate to your trust, you did not think to seek UK tax advice, since it did not seem relevant. Given that you do not know you are not tax compliant – you will not think to ask independent tax specialists to review your offshore trust arrangements.
However, if you do not make a full disclosure to HMRC before 30 September 2018, you will not escape the onerous penalties introduced in the Finance Bill 2017.
These penalties are called ‘Fail to Correct’ penalties and are significantly more onerous than the tax penalties which used to be levied on deliberate tax evasion. The ‘FTC’ penalties are
· 100% to 200% financial penalty of the tax undeclared
· 50% uplift in the event of any attempt to move assets to a more opaque jurisdiction, moving the penalty to 150% to 300%
· An additional 10% for every year that the tax which was non-declared exceeds £25,000, and
· Potential ‘naming and shaming’ if you have more than 5 FTC penalties
The problem is that you do not know that the advice you were given in 1998 was wrong – you did not know that it was important to tell your adviser that you mother and father were not married at the time of your birth.
This simple oversight is likely to result in a claim by HMRC that you were UK domiciled at the time of your birth and that the trust you set up in 1998 was in fact set up by a UK domiciled person. You are therefore subject to income tax on all the income which arose to the trust since 1998 under section 720 of the Income and Taxes Act 2007, and to all the gains made by the trust under section 86 of the Taxation of Capital Gains Act 1992. Your mother’s estate may also be liable to tax at 40% on her estate on death, payable by the trustees, subject to any double tax treaty there may be in Canada.
If your trust is worth £72million and the income tax and capital gains tax over the last 19 years has been £19million, you could face in addition to the tax, £39,900,000 of penalties with additional late payment interest at the official HMRC rates, a total tax bill in excess of £60,000,000, which excludes the cost of the legal and accountants bills and excluding a claim against the trustees for 40% inheritance tax on your mother’s inheritance.
The only way you can mitigate this penalty to 100% post 30th September, is to have a ‘reasonable excuse’.
Case law makes it clear that a reasonable excuse is available only if you sought suitably competent independent professional advice to review all of the non-UK assets and activities for any potential UK tax oversights and that you provided such advisers with all relevant information. In your case, you sought advice from a Swiss banker who would not be treated as ‘suitably competent’ and you did not give him all relevant advice. Furthermore, you failed to seek UK tax advice on the death of your mother, but you did not know that you should have done.
Given that the trust holds half of the chocolate business owned by you and your brother, this will need to be sold to pay the tax, which will then put both you and your brother out of a job and business.
The only sensible course of action is for you to engage an independent tax specialist, to tell you what taxes are due and to make a full disclosure before 30th September next year. Although it may be expensive – it will be nothing like £40million which will become due if competent advice is not taken.
You can write to us direct if you would like to discuss this Note with Caroline or have questions relating to HMRC's position.
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