One of my clients Khalid, (not his real name) has been supporting a geek wizard who has developed new technology which could revolutionise the storage of energy (business details are fictional) and is now looking for investors to take it to the next stage.
Khalid phoned to ask what he should do given that the projection forecasts and the favourable response from prospective investors meant that the business was likely to have a billion dollar turn over within the next five years.
Where should he start?
Before take-off on a plane, the steward’s safety speech says, in the event of an emergency fit your own oxygen mask, before assisting anyone else. The same is true in becoming a billionaire – which is what I say in my book ‘When you are Super Rich, Who can you Trust?’
Look after your own interests first, before addressing the concerns of others.
Khalid is not primarily concerned about tax mitigation, he does not pay tax where he lives.
However, he is very concerned about keeping control of the decision making in his new business and to protect his shares from opportunistic creditors and greedy family members, such as estranged spouses, step children and current girlfriends. His close advisers he wants on his executive board, eldest son and right-hand man.
Like all billionaires I have worked each has a trusted ‘homme d’affaires’, chancellor, or right-hand man/woman who is usually professionally qualified; banker, lawyer or accountant. This person keeps the billionaire and the business up to date with regulatory requirements, business administration and follow up, once the business takes off. Without such a person, the business will inevitably fail to reach its potential.
Khalid is lucky, he has worked with an experienced banker, Matthew, over many years, who is keen to work with Khalid and is ideally qualified to support him. I suggested he start working with him right away.
Khalid already has a trust, which is administered by a professional trustee, who he has not seen since he set it up eight years ago. I suggested we set up for Khalid a special purpose trustee which could be appointed as trustee of his trust in place of his existing trustee. Matthew could then be appointed onto the executive board with his eldest son, Matthew would then be in pole position to assist Khalid and his family.
Khalid did not want a company to be his special purpose trustee, because he did not want a professional own the shares of his trustee, having a company to act as a trustee was in any event now out of date, he needed a vehicle much more tailored to what he wanted and current circumstances.
With Khalid’s concerns addressed we now needed to turn to our attention to the needs and concerns of the other shareholders and potential investors.
Although, Khalid does not live in a high tax jurisdiction, having shares in a company registered and resident in a high tax jurisdiction may not be in either his best interests or in the best interests of his fellow shareholders such as Mohammed (Mo) or future investors.
Mo has been a UK resident for three years, but is a non-UK domiciled person (he was not born or brought up in the UK). Khalid set up his company as a UK resident PLC, because he thought it would attract investors, but having shares in a UK company has significant tax implications for all shareholders including Khalid.
Khalid, Mo and any future investors in a UK company will be subject to UK income tax and UK inheritance tax. In addition, Mo, who is UK resident will also be subject to UK capital gains tax on any ‘disposal’. These taxes can be avoided, legitimately and openly, if instead of owning shares in a UK registered company they owned shares in a non-UK registered and resident company which owned the UK company.
Ideally, the UK company should be owned by a Guernsey/Jersey holding company in which the existing shareholders and potential investors would have shares in exchange for their shares in the UK company.
Assuming there is a commercial advantage in raising finance for a non-UK holding company owning the UK company, the shareholders could make an application (through a leading firm of UK accountants) to HMRC for a ‘share for share exchange’.
Mo, for example by exchanging his shares in a UK company for shares in a non-UK company could then ‘settle’ these shares in trust and appoint a special purpose trustee on which he could appoint his family and advisers as the executive board to take all the decisions. All future benefits such as income could be free of income tax, capital gains free of capital gains tax and gifts or bequests free of inheritance tax, with full disclosure to the UK HMRC. In addition, he would benefit from all the advantages Khalid wants; protection from creditors, smooth succession and a binding family constitution.
If, you would like to find out more or you would like to book a meeting with Caroline or one of her team to discuss, please phone 020 3740 7422 or write to caroline@garnhamfos.com. You can also buy Caroline’s book ‘When you are Super Rich, Who do you Trust?’ from her website www.garnhamfos.com or buy direct from Amazon.