Offshore trusts began to emerge the moment exchange controls were lifted which in the UK was in 1979. There were clear benefits in setting up trusts offshore; tax advantages, smooth succession, privacy and asset protection so it wasn’t long before thriving fiduciary businesses in most offshore financial centres was established.
Now nearly forty years later cracks are beginning to emerge. Who really takes the decisions as to what to invest in and how and to whom to distribute?
I will give you three case studies to explain just how tricky some situations can be. All are based upon real scenarios but, with the names and details changed
Mohammed has lived most of his life in the UK and has a UK domiciled father. His mother and father are still alive and living in the UAE, where his father runs a successful business. When Mohammed’s children reached school age, his mother who is non-UK domiciled set up a trust in Guernsey for Mohammed and his children, primarily for their education and well-being.
Mohammed recently received a letter from HMRC claiming that the trust should be treated as a gift from his father to Mohammed and would be taxed accordingly. The amount of the claim is £2,345,162, but in addition HMRC is claiming £4,790,324 as a 200% penalty which virtually wipes out the fund.
Money held offshore is no longer out of sight and out of mind since 2018. HMRC now has all the information it needs to make such a claim against Mohamed. The professional trustee of his trust is obliged to collate all financial details, which it then gives to the Guernsey authority. It then exchanges this detail with HMRC in the UK. HMRC then compares this with what Mohamed has declared in his self-assessment and put in a claim.
Most taxpayers hope that HMRC will follow the letter of the law. From the documents it is clear that his mother was the settlor, but HMRC takes the view that she would have received the funds from her husband and therefore he is the economic settlor. HMRC like any other tax authority does not merely accept what a deed says at face value – and if it can raise more revenue by reinterpreting the facts it will do so.
Mohamed is not convinced that his professional trustees are the best people to handle the investigation. They want to pursue this matter by challenging HMRC’s reinterpretation of the facts. However, Mohamed would prefer to negotiate with HMRC in face to face meetings with a team of former HMRC inspectors.
The second case involves Charlotte. Her mother, Maureen, lived most of her life in Monaco. She set up a Will trust for Charlotte and her brother Mark. The professional trustees Maureen appointed used the trust fund to invest in Charlotte’s property development and interior design business. Over the years the trust fund quadrupled in value, from £4,382,267 to £19,347,423. She was now very concerned that on her death the trustees would distribute the trust fund equally between herself and Mark.
Charlotte is very fond of her brother but, does not wish him to share in her hard-earned business which she wants to leave to her children. She would like her team of lawyers to negotiate with her brother, rather than allowing her trustees to handle the negotiation. She has the highest opinion of her trustees, but is simply not convinced that they are the best people to negotiate on her behalf
The third case involves Farouq. He had worked closely with Tim a Fellow of the Chartered Institute of Taxation for many years and they both shared an interest in golf often slipping away for a swift round of 18 holes. He wanted to use Tim to set up a trust structure for him now that he was coming up to fifteen years of UK residence but, was concerned that setting up a trust may not be Tim’s area of expertise.
I directed Farouq to Chapter 6 of my book, ‘When you are Super Rich who can you Trust?’. When dealing with your entire estate, it is essential to appoint the right adviser, and not just someone who is a golf buddy of Farouq’s. To make the appointment objective Farouq needs Tim to give him three recent case studies, ask if he has an appropriate precedent, enquire whether his precedent includes good governance provisions and how much it will cost. If Tim struggles with any one of these tasks, he may not be the right adviser for the job.
If you would like to find out more or wish to book a meeting with Caroline or buy a book e mail firstname.lastname@example.org or phone 020 3740 7422