It drives me mad!

Before I set off on a business trip last week, I had some meetings with a client and his trustees which made my blood run cold. The obligations imposed on trustees by the OECD in their eagerness to raise more taxes are unreasonable and the consequent erosion of privacy unjustified.

Trevor left the UK in the mid-eighties and has not returned to live in the UK since. In the early nineties a close business colleague Atif, settled a large sum of money on him and a slightly lesser sum on his three children. The trustees have now to account to their governing body in Jersey as to who is the settlor which it will then exchange with the tax authorities in Trevor’s country of residence – which is Hong Kong.

In order to satisfy these reporting obligations, the Trustees have to dig deep into the facts leading to the creation and funding of the trusts, they need to analyse the original trust deeds, which were declarations by the trustees with no mention of the identity of the settlor and the sequence of transactions and entities through which the funds were transferred from Atif to the trustees.

Luckily the trustees had not changed since inception, but since I drafted the documents I had moved firms and the trustees needed to recover my files from my former firm. It also became necessary for the trustees to travel to London to talk to me, and to meet with Trevor on his visit from Hong Kong to London, to work out exactly what had happened twenty years ago. This involved weeks and weeks of work, which was all billed to Trevor’s children’s trust fund.

At the end of this exercise and at vast cost, it appeared most likely that Atif was the settlor of Trevor’s trust, but that Trevor was the settlor of the trust for his children, even if at first glance Atif was the settlor of both trusts.

If, however, Trevor was UK domiciled at the time he set up the trust for his children the trustees would need to make a report to HMRC and declare his liability to Inheritance Tax and the subsequent ten yearly charges. 

On a quick calculation the cost of the tax, the work done to date, fines penalties and the cost of an investigation with the UK HMRC would wipe out Trevor’s children’s trust and it may also be necessary to claw back some distributions made so that the children could buy homes to live in.

At the time Trevor allegedly funded the trust for his children, he had severed all ties with the UK and was living in Singapore. However, two years later his job took him to Hong Kong where he subsequently settled. The question then arose as to whether he had formed the necessary intention to settle in Singapore which would give rise to a domicile of choice there or whether, his later move to Hong Kong was evidence to disprove this.

Trevor came to see me and we went out to lunch. ‘What can I do to stop this legal gravy train?’.

I told him the only way the trustees could get comfortable with their obligations to the Jersey authorities was to get an opinion from a leading QC.  ‘What if the opinion goes the wrong way’ asked Trevor. I told him bluntly that ‘We cannot determine the outcome of leading Counsel’s opinion, but we can give the best interpretation of the facts as set out in the instructions’.

Luckily, I told Trevor, there has been a recent case on domicile which it could be very useful. It was re Gulliver. The case, heard this year, decided that each year must be looked at separately; subsequent events should not determine the settlor’s domicile at the time of funding the trust.

I said to Trevor that the costs of engaging a lawyer to draw up the instructions was a glimmer of hope to save his children’s trust fund – there was no other way. Trevor finally agreed.

‘Trevor is lucky’ said the lawyer engaged to draw up the instructions to leading Counsel ‘He has experienced and pragmatic trustees able to see what can be done to act in the best interests of Trevor’s children. Most trustees, however, live in fear of their governing body taking away their license and will declare everything regardless of the consequences.’

We live in difficult times – but we shouldn’t lose our sense of responsibility – do you agree?

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