What would you do?

Imagine for a moment that you are Edward, head of strategy at the Treasury, who has been asked to increase the tax take from the 114,000 non doms living in the UK and paying £30,000 a year to claim the remittance basis of taxation.

You have been given a big budget to increase your team investigating non doms and you have been told directly by the Chancellor of the Exchequer to make investigations as painful as possible to extract revenue.

Later on this year you know that you will be sent details of the offshore assets held by non doms living in the UK and you want to be prepared.

You have taken opinions from leading tax Counsel on how best to attack offshore trusts, and have been told that the most effective form of attack is to argue that the trust is a sham. You have also been advised that if successful, the trust will be treated as ‘void ab initio’, which means, ‘wholly invalid and of no effect’ [AvA].

HMRC will then be in a position to tax the settlor, as if the trust had never existed.

Given that the rewards are high and that HMRC has the full backing of the Government, the chance of HMRC running such investigations are high. The cost to the settlor of proving that he or she had the intention to set up legally binding obligations at the time will be difficult and expensive.

For the Government tosucceed it needs to prove ‘on the balance of probabilities’ that a trust was not really intended. To do this, it could look closely at the correspondence with and the marketing literature of the professional who set it up.

Bhavik came to the UK with his family in 1985. In 1992 he was encouraged to set up a trust with his offshore assets by a friend, who recommended he go to ABC Trustees Limited.

In 1992 the marketing literature of ABC Trustees Ltd said ‘You can avoid income tax, capital gains tax and inheritance tax if you set up a trust, now with ABC Trustees Limited’. At that time, there was no hint of the Government ever getting a glimpse of the set up documents and so there was no concern then that it could be attacked.

HMRC tax inspectors ask Bhavik to disclose the correspondence entered into by Bhavik with ABC Trustees Limited before it was set up.

In an email Bhavik writes, ‘I am reluctant to set up a trust with Trustees I hardly know who will take all the decisions with regard to my offshore assets without my consent. I need to be able to have control and must be able to remove my trustees whenever I want without reason.’

ABC Trustees replied, ‘Your concerns are not uncommon. Most of our clients however are willing to proceed with a Protector of their choice who is given the power to remove the Trustees whenever they chose and appoint others……… Given the significant tax advantages of a trust, although it appears you have lost control, in practice ABC Trustees do what you want them to do.’

This correspondence shows clearly that the intention was not to create a binding obligation on the trustees, but to obtain a tax advantage. If this is then supported by a history of total compliance with the wishes of the settlor, then the Government is in a strong position to succeed and tax the settlor accordingly.

If the Government succeeds, Bhavik will naturally be furious and would want to pursue ABC Trustees Limited for negligence and the return of their fees.

But not all is lost, HMRC has not started to investigate Bhavik who can carry out an independent trust review now, to see what he can do to stop HMRC investigating his trust or succeed in its arguments against him. This review will save him many thousands of pounds in legal and accounting fees, not to mention the time and anguish in defending such an unwelcome investigation from HMRC.

If you would like to find out more contact the trust specialists:  

e mail:              svetlana@garnhamfos.com

Telephone:       020 3740 7423

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Caroline’s book ‘When you are Super Rich who can you Trust?’ can be bought on Amazon  or on our Education Tab ; or from Svetlana.