Tom came to see me last week, in a state of high anxiety. He is a beneficiary of a trust based in the Cayman Islands and ABC Trustee Limited is the professional trustee administering it.
Tom is resident and domiciled in the UK, and has been receiving regular and substantial distributions from the trust, which he has always declared and on which tax has been paid.
The trust had been set up by his uncle, Brian fifteen years ago. Brian had been born and raised in the UK, but had left the UK to live in Spain, where he had developed a substantial property development business, he lived with Martyn in a villa which they owned jointly.
Fifteen years ago, after a health scare, Brian called Tom, to say that he had transferred £20million to a nominee account for him. Tom suggested they seek advice from a professional in Spain to see how best to structure the gift to mitigate tax. As a result, Bran set up the trust, and the monies were transferred to ABC Trustee Limited.
Although Brian lived full time in Spain, he had however, kept his membership at the Lansdowne Club, where he liked to stay when visiting London, which he did every year to attend the tennis tournament at Queen’s and watch the racing at Ascot, where he had entry into the Royal Enclosure.
ABC Trustees had contacted Tom about the setup of the trust, because from their due diligence into the source of funds, the monies appeared to come from Tom’s account before being transferred to ABC Trustees Limited. Under the CRS rules, ABC Trustees Limited were obliged to report on who was the settlor, and they were unsure.
It had spent £250,000 of the trust fund in seeking legal advice, but were non-the less certain as to who the settlor was. The legal opinion had been obtained in Cayman from a member of CIOT, but it was not helpful in that it set out a list of options; what would the tax treatment be, if Brian was the settlor and was at the time a non-UK domiciled person, what the tax treatment be if he were a UK domiciled person and what the tax treatment be if Tom were the settlor. ABC Trustees Limited made it clear to Tom that if he were the settlor he had a duty to notify HMRC before 30th September 2018, and failure to do so would result in up to 200% fine on the tax he failed to report, plus interest.
The first thing I told Tom, was that HMRC was not mucking about – the minimum tax penalty was 100% of the tax he failed to report, and the percentage would be dependent on the extent to which he co-operated with HMRC, the quality of the disclosure and the seriousness of the failure.
Given that the monies transferred was £20million the tax charge would be c £4,000,000 and the penalty could be as high as £8,000,000 plus interest and a possible additional charge at 6% for the ten-year charge. The total tax charge could therefore be as much as £13,200,000 excluding interest charges and professional costs in dealing with the investigation.
In short, Tom would be left with very little in the trust fund after the tax investigation.
The second thing I told Tom was the necessity to put in place a ‘reasonable excuse’. Again, strict attention, would need to be taken as to who he appointed to do a review. HMRC has laid down strict rules as to what comprises a ‘reasonable excuse’ and what it will treat as disqualified.
The advice taken by Tom and Brian in Spain, is clearly disqualified, because the advisers they went to see were not a ‘member of a UK recognized legal, accountancy or tax advisory body’.
The advice sought by ABC Trustees Limited was from a member of CIOT a UK tax advisory body, but will be disqualified, because it was sought by an ‘interested party’; it ‘participated in the relevant avoidance arrangements.
Avoidance arrangements are ‘any arrangements where in all the tax circumstances it would be reasonable to conclude that the main purpose of the arrangements is the obtaining of a tax advantage’. Clearly this was the intention behind Tom and Brian seeking advice in Spain so Tom must act independently from ABC Trustees Limited.
I told Tom that he needed to act swiftly and seek out a first-rate tax accountant to do an audit and report. The accountant must be given all the facts relevant to the matter. Seeking out such independent advice I told Tom was critical if Tom was to avoid these excessive penalties for a failure to correct.
If you or your trustees are concerned as to the correct interpretation of the set-up of your trust and as a result you could be liable personally, you need to take independent advice from a person suitably qualified, because if you fail to do so, you could be significantly worse off.
HMRC has taken its gloves off and is not pulling its punches.
If you would like to find out more, simply contact firstname.lastname@example.org