Many clients don’t know what it is like to be investigated or have authorities breathing down their necks – and they shouldn’t! The uncertainty and confusion which the Common Reporting Standard is bringing to the industry is grave but there are solutions which, if executed properly, can mitigate most of the concerns a typical UHNWI faces today.
The issue is that CRS has disrupted not only the client but also the professional. I was talking last week to Tom, a professional trustee from the Channel Islands. ‘What is the biggest challenge you and your company facing at the moment?’ I asked him.
‘The margins’ he said. ‘Having provided professional trustee services for more than two decades I now feel squeezed and am looking for solutions’.
‘Each year we see more legislation with which to comply. First was the anti-money laundering rules then there came FATCA and now CRS. On top of this I need to act as professional trustee, reviewing and considering all requests for distributions and investments, or risk being set aside as a sham’. I talked about shams in one of my previous notes where I mentioned that if a trust is set aside as sham the consequences are disastrous! Not only will the trustee have to claw back all distributions made since the inception of the trust (which may not be easy if the settlor is dead), they will also have to refund the settlor of all the fees they’ve accumulated over the years (imagine the sums these could reach for large, complex trusts that have been managed for decades and decades) and to top it off the settlor will be treated as the real owner all along (the trust never existed) so he will have to pay back tax on all the funds and make these available to any creditors he may have.
I asked Tom how trust businesses like his were responding to these challenges.
‘In all major offshore trust jurisdictions, the number of professional trustee companies is shrinking. Until recently businesses like mine, were bought by equity houses, but now these houses are looking at the risk side of the equation. If a big trust is investigated by a tax authority and is found to be a sham the repayment of the fees could be ruinous’.
Tom, as the CEO of the trust company, has been tasked with reducing the risk in his business and to make it more profitable.
We looked at the main types of clients Tom had in his business, 75% were UK resident, non doms, who were paying the remittance charge, many of them at £90,000 a year. Of these trusts, 12% owned houses on which ATED was being paid.
I explored with Tom the options. He agreed that the trusts on which the margins were too low and set up by non doms, should be invited to come onshore to the UK. All the others should be restructured on which we could work together.
With regard to the compliance costs generally, Tom would look into using a computerised digital solution which would take a huge burden off his shoulders.
Before we ended our call Tom voiced his concerns; he said ‘any professional trustee which does not anticipate what is around the corner deserves all it gets, but I pity their clients who will of course sue them for not looking after their best interests’.
I encourage professionals in the industry to come together and collectively work towards what should be our common goal to protect clients rather than throw them under the bus when times get tough. We have to educate our clients of the difficulties we are faced so we can work together on the solutions.
Yes, we are faced with challenges but those trust businesses which can find a way to de-risk their trusts will be the winners.
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