I was speaking last week with a client who I will call Santos. He lives in Brazil, but has business interests around the world and bank accounts in Liechtenstein and Switzerland.
‘I had a great relationship with my private bankers for years’ he said, ‘but now they are afraid to give me advice about my concerns on privacy, succession, asset protection or mitigating taxation. It is as if the whole financial world is conspiring against anyone who is rich.’
I told him that financial institutions the world over are fearful of ‘big brother’; tax authorities in the jurisdictions in which they do business. However, just because governments have successfully scared financial institutions into silence, they will not stop people like Santos from planning. Santos is free to find professionals such as GFOS, which are picking up the pieces left by the financial institutions. Of course we are bound to report if we are suspicious as to the source of funds, or if anyone who is evading tax, but we are not gagged into giving advice.
The truth of the matter is that the world is made up of jurisdictions which have the sovereign right to make such laws as they chose; there is nothing to stop them creating laws to attract wealthy families to live in their jurisdiction and /or hold their wealth there.
A sophisticated high tax jurisdiction such as the UK would appear to be hell bent on taxing and reporting on wealthy individuals’ resident in its country, but there are numerous other countries eager to step into the shoes so eagerly vacated by the UK. The latest country to introduce benefits for foreigners is Italy and it joins a long list of similar countries such as Malta, Singapore and Portugal.
It is not always necessary to emigrate, by putting money in another country in a specially designed structure vast benefits can be achieved. However, it is unlikely to be good enough to set up a mere investment holding company and hope for the best. For example, if Santos were living in the UK, and had a company in the British Virgin Islands owned by himself and his children they could be taxed on the income and gains arising to that company under our anti avoidance rules which deems the income and gains to be that of the shareholders.
However, if rather than putting the asset into an offshore company, he puts it into a discretionary trust for his children – who owns the asset? – the trustees. But unlike a company with defined shareholders, the beneficiaries have no rights to the capital and income – their interest is in ‘spes’ or hope. Governments are generally agreed that they do not tax a person who may or may not receive a benefit.
To give an example, if Santos were to name Theresa May as a beneficiary as well as his children – would it be right that Theresa May be taxed on income she may never receive – no! So in general, the income is only taxed when it is paid out provided the settlor and his spouse are excluded from benefiting.
Trusts are therefore an amazing invention. Santos, can give his wealth to trustees, say in Guernsey who then own the assets – but not for themselves – for others – the beneficiaries – such as Theresa May, and his children. If he wishes to retain control such that Theresa May never gets a penny, he can do so through good governance principles, which I will not go into here.
The UK is the mother of trusts, and yet it cannot find a way to charge offshore trusts on its non UK source income. Just think how much harder it is then for less sophisticated jurisdictions which have little knowledge of the trust concept to tax beneficiaries living in its jurisdiction to the income earned on a trust offshore. The trust can and is therefore still being used most effectively in planning. But the benefits of a trust go far beyond tax mitigation. Trusts are also used for privacy planning, succession without the need of probate, asset protection and many more.
Of course, governments are eager to fill their coffers with a greater slice of the rich man’s cake, but while jurisdictions are free to make such legislation as they chose, there will always be ways to plan which do not involve evasion or aggressive avoidance techniques.
Governments if they want to make more revenue, to attract the wealthy to their country they need to lower taxes and amend the rules which give rise to concern. Squeezing the rich hard and at rates they will not tolerate only drives them away or into structures which are impenetrable.
Sadly, restricting some of the best institutions from giving advice, means that structures are being set up which are not fit for purpose. I know from experience how much heartache a family can go through in unravelling shoddy structures. I can only weep at the loss of good advisers in this market and the prospect of costly litigation.
Lady Thatcher got it right – lower taxes and the revenue goes up. Will Theresa May be as wise? Given the legislation recently published on the taxation of non doms – I fear not!
If you would like to find out more, or book a meeting or conference call with Caroline please call Svetlana on 020 3740 7423 or write on firstname.lastname@example.org
You can also buy Caroline’s book, When you are Super Rich who can you Trust?’ either from Svetlana or Amazon