A word of warning from Lou

Lou, a former client of mine, called last week, he insisted on a meeting.

‘I want to warn your readers about the terrors of a tax investigation’.

Lou has three trusts in Jersey, which I set up for him in 2004. He had appointed Jeff as his accountant four years ago when his former accountant Giles retired. He was pleased, Jeff was much cheaper than Giles.

As a former client, I had written to him on several occasions suggesting he review his trust structure; but he ignored my suggestion. As far as he was concerned Jeff was doing a good job.  

One trust held his business interests, one his financial assets and another owned three properties through three Jersey companies in which he, and each of his two children lived.

Unbeknown to Lou, several years ago, a client of Jeff’s who I will call Tom, was investigated by HMRC and they found a letter written by Jeff on facts given to him by Tom to say that the companies owned by his trust were held as a nominee and therefore no tax was payable. The ‘facts’ given by Tom, it turned out, could not be substantiated by correspondence and documents, so HMRC found Tom guilty of tax evasion and Jeff of criminal conspiracy. HMRC then decided to investigate all of Jeff’s other clients, including Lou.

One day, out of the blue, Lou received a letter from HMRC enquiring about his three trusts in Jersey. And that was the beginning of Lou’s three-year terror of tax inspectors and his trusts.

HMRC wanted to know everything, it wanted to see all correspondence with his trustees, the trustee minutes, and all bank transactions.

HMRC made it very clear that tax evasion was a criminal offence and if found to be serious would culminate in criminal proceedings and a custodial sentence. Lou was concerned, he appointed the best lawyer he could find. The lawyer wanted to go to Counsel for an opinion and appointed an accountant to crunch the numbers and carefully check what tax was due.

His trustees were also worried, they appointed their own local lawyers who were nearly as expensive as Lou’s lawyers. They also insisted on going to Counsel and charged for their time even when travelling to London at hourly rates, as well as their accommodation and living costs which they greedily got out of the trust fund they administered for Lou. They also appointed a tax adviser for a second opinion who they also paid out of Lou’s trust monies.

The investigations found income in the property trust which should have been declared as a benefit, distributions offshore which bought art which was then brought back to the UK and sold, and UK situs assets in his financial assets trust which should have been declared as subject to inheritance tax at the ten-year anniversary of the trust.

Lou was furious, he had been paying Jeff frightful fees to ensure that he paid all taxes due and was now being treated like a criminal, labelled by HMRC as a tax evader and threatened with custodial proceedings! He had engaged Jeff to ensure he paid all his taxes, but his good intentions ….  was no defence.

With legal fees escalating at an exponential rate, Lou wanted to sue Jeff, he took a legal opinion. Did he have any right against Jeff’s professional insurance policy? He was advised that he had a good chance, and so started litigation against Jeff – who unable to cope with the claims committed suicide.

At this point Lou was stressed; the investigation, the haemorrhaging of his wealth in fees and the death of Jeff, had taken its toll, which his wife could not tolerate. She went to live with her daughter and started divorce proceedings. Even more fees were payable; even more lawyers, even more legal wrangling.

Eventually a friend suggested Lou offer his wife a luxury holiday in the Maldives as a second honeymoon and an emerald encrusted eternity ring. Good advice, Lou managed to save his marriage and stop the frightful fees from fleecing his funds.

He retreated, reputation ruined, wrongly accused, rightly angry – defeated and destroyed. ‘If only I had entrusted you to review my trusts, none of this would have happened. I would have saved hundreds of thousands of pounds!’.

It had not occurred to him that his trust was not trustworthy, and that Jeff was cutting corners to save costs. It never occurred to him that he could be guilty of tax evasion when he intended to pay all his taxes.

Lou had not expected HMRC to be so merciless, mean and menacing towards him as a suspect tax evader. He learned the hard way that HMRC cares little about how much it cost him to fight his corner. HMRC is tasked to fill its coffers, by whatever means, however long it takes – and at whatever cost.

By the time I saw Lou, last week, he had paid HMRC; tax, interest and penalties, the ordeal was ostensibly over, the nightmare apparently ended, the worry largely lifted, but he was a shadow of his former self, he looked older, had lost weight, and stood stooped.

‘You must tell your readers to do what they can now to avoid the terrors of tax investigation; a paradise for professionals.’ Lou had paid a total of £781,361 over a short three years.

Caroline Garnham is CEO of Garnham Family Office Services – The Trust Specialists

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be bought on Amazon  and her book ‘Winning Business from Private Clients’ can be bought direct from the website or from Svetlana.