Last week, we looked at Jack, the M&A specialist who works with ABC bank in London. As I outlined already, his sister living in Dubai, paid him commission on successful deals he put in LPT Bank in Dubai. It was his ‘rainy day’ money which he had not declared to HMRC and on which he had not paid tax. This was clear tax evasion and I told him to declare it immediately.
Before I go into the detail, I would like to stress that these issues are very complex and most people approach tax as a straightforward, a black and white matter, but in actual fact it all depends on the detail; playing with ‘what ifs’ is always a dangerous game.
Jack had asked ‘what if’ his non UK domiciled status would make any difference to his tax liability – I told him to be effective, this would need to have been claimed, and if not then it should be considered very carefully.
Jack came back to me with more questions – ‘What if his sister had put his commission in trust for the kids?
Although Jack needed no warning he was a professional, I made it clear that any thought he may have to backdate ‘legal papers’ was not worth any tax savings. Without detailed correspondence to support his case it would be unlikely to pass even the most superficial of investigations by HMRC.
He still pressed for answers.
The first thing to consider was from whom did the monies come from when the trust was funded. Was there an agreement between Jack and his sister such that Jack expected his sister to use the commission earned to set up a trust for his children?
If this was not the case, Jack needed clear evidence in writing and clear proof that she treated his children as her own.
Without such written and clear evidence there was the presumption that Jack’s commission was in fact an indirect gift to his children.
Under the law of the presumption of advancement, only a transfer from a husband to a wife, or a gift from a father to a child is a presumption of a gift. In all other cases, without contrary evidence it is to treated as a loan, which needs to be repaid.
Note that the presumption is gender specific. Therefore, even if Jack’s sister treated his children as her own, there would still not be a presumption of advancement, just as a transfer of monies from a woman to her husband will be presumed to be a loan, even if the woman is an heiress or the main or only breadwinner. However, these factors may be taken into account to rebut the presumption.
Then, of course, HMRC would need to look into the domicile of Jack’s sister, if tax was not to be paid and which adviser set it up for her.
We looked into the case of Jack’s domicile last week and that of his sister may be assumed to be similar. However, it is likely that HMRC will also make enquiries as to who set up the trust. If it was a UK based adviser, that person would have had report the trust at the time if Jack’s sister was or could have been UK domiciled.
Jack threw up his hands in disgust. ‘How can anyone know the relevance of this sort of detail when making a tax return. My sister has no children of her own, she often takes mine on holiday to exotic places in the Middle East, and has more than enough money of her own. If she had settled the trusts for my kids, I would never think of declaring these trusts as set up by me, and she would not have given a second thought as to the possibility of tax being paid in the UK. This is crazy’.
‘This is why,’ I said ‘you need something which I like to call “a Ring of Confidence”. It is not enough to have an ad hoc team of advisers; they need to be consulted not just when you think you need them, but regularly, in case your common sense approach is not reflected in law’.
Jack was silent – ‘I suppose this is appropriate not just for tax matters, but in all areas of concern such as direct investments. I can see how beneficial it would be to have an independent expert look over my investments once a year, to make sure I took profits at a good time and reinvest them appropriately. Maybe this would also be true of succession plans as well as tax?’
‘The world in which we live is so complex’, I said to Jack ‘Having and using good advisers is no longer a ‘nice to have’ but a must have, and not just when you think you need their advice’.
Our Protection Packages we liken to insurance – you need protection all the time – not just when you think you may need it – and in actual fact it is more competitive than insuring against the risks!
In my book ‘When you are Super Rich who do you Trust?’ I guide my wealthy readers to analyse, first their goals for their wealth, and then to do a SWOT analysis. This information can then be fed into a bespoke Protection Package to ensure they get their own bespoke ‘Ring of Confidence’.
Both books ‘When you are Super Rich Who do Trust’ and ‘Uncovering Secrets of Winning Business from Private Clients’ are being relaunched on 11th October. If you would like to get a copy please visit our Education tab or get in touch with us either by phone on 020 3740 7420 or email email@example.com