One of my longstanding friends who I will call John, is the founder and director of a global business, which I will call MPP Ltd. Over a few decades MPP Ltd grew to become spectacularly successful and both John and his fellow founder and director Jack became very wealthy.
However, Jack was able to afford a boat moored in Monaco, a house in Cap Ferat and a private jet, John only had a farm in the UK. John may have wanted a lifestyle equivalent to that of Jack; he deserved to, but he simply could not afford it.
John was UK domiciled and paid taxes on his world-wide wealth, whereas Jack was non-UK domiciled and paid taxes only on what he remitted to the UK.
John was often tempted to look at ways to accumulate his wealth tax free using other reliefs – but I always advised him against it. He did not always follow my advice, he had top accountants managing his financial affairs – but each time he tried, in due course he regretted it.
The UK has wide and extensive reliefs for non-UK domiciled persons, which although have been whittled away in recent years, can still provide extensive tax planning opportunities for those who are not domiciled in the UK.
For UK domiciliaries however, there are only a handful of tax reliefs and exemptions; capital gains tax exemption on your main or only residence, spouse exemption for transfers of value for inheritance tax, but they are, by comparison few and far between.
In the good old days, the skill of a tax adviser was to look at the reliefs and exemptions to see how they could be utilised to save tax, often in artificial and complex ways. It was a skill I enjoyed, and put to good use in the ‘double trust scheme’ as well as others. Schemes were a game, and they had legal backing.
Lord Clyde in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764 opined
"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"
However, in the past ten years, governments have not only used tax legislation to make it an ‘unfair game,’ but have also become super aggressive towards anyone who tries to play.
For example, in 1935 legislation was introduced which brought income to charge to UK taxation if a transfer (usually of a capital investment) was make to a person, company or trust abroad as a result of which the income arising from it, could still be enjoyed by the UK taxpayer. There was, however, a let-out clause for ‘genuine commercial reasons’ which were not undertaken for ‘the avoidance of tax’.
In recent years, some tax practitioners have turned their attention to life policies (a personal portfolio bond) or say, a Qualifying Non-UK Pension Scheme (QNUPS). The argument being that these structures are fully subject to UK tax, albeit deferred, and therefore could be used as a holding structure offshore for a commercial transaction, since tax was not in fact being avoided.
This argument came before the Tribunal in September this year in the case of: (1) Andrew Davies (2) Paul McAteer (3) Brian Evans-Jones V R & C Commrs [2018] TC06733 and was dismissed.
The Appellants had taken out life policies with a Bermudian provider, which held shares in a company which was engaged in property transactions. The arrangement was designed to defer UK income tax on the income generated by the property development until such time as the life policy was cashed in. The company was based in Mauritius, to take advantage of the beneficial UK/Mauritius double taxation agreement under which income would be solely taxable in Mauritius, at an effective rate of 3%.
The Tribunal agreed that there were commercial elements to the transactions, but decided that the structure was put in place primarily so that UK tax was deferred on the profits of the property development. It decided that the arrangement could therefore be looked through and taxed as if the income arose to the Appellants in the UK with no double tax treaty relief and no life policy. This is particularly harsh for anyone who has entered into such an arrangement, because from September to October 2018 the deadline to report a tax liability passed.
Any taxpayer, who until this decision believed his planning was tax effective will not only be looking at paying UK tax on the underlying income – but in addition, a maximum penalty of 200% for the Failure to Correct (FTC). The deadline was 30th September 2018, just after the Tribunal decision. Under the FTC rules if no disclosure was made before the deadline – whether the taxpayer was aware of a liability to tax or not – s/he will be subject to a minimum penalty of 100% on top of the tax due.
And if a taxpayer thinks that what ‘happens offshore, stays offshore’ s/he should think again. With the Automatic Exchange of Information now in place, all governments will know about all transactions and structures offshore and if what you declare does not match up with the information HMRC is given, it will get you!!!
If you would like to find out more or to book a meeting please contact caroline@garnhamfos.com or phone on 020 3740 7422
You can buy Caroline’s books ‘When you are Super Rich who can you Trust?’ and/or ‘How to win business from Private Clients’ from www.garnhamfos.com or from Amazon.