Worse than you could ever have thought possible

This morning I gave the key note speech to a packed IBC conference on Family Offices.

The role of a Family Office is to act for an UHNW family in the preservation of their wealth, but should not be restricted to investment.

There are three ways in which family wealth can be eroded

• Poor investment
• Heavy taxes, and
• Family Feuding

Families need independent, neutral and strong advice on tax planning and family governance, as well as on investment. They need a new type of family office; dedicated to serving the tax planning and succession concerns of the family, a family office which is on the same side of the table as the family.

My talk on the second day of this conference will focus on how to prevent the erosion of family wealth through family feuding and the benefit of family governance, but in my Note today I want to pick up on the attitude of HMRC to tax evasion and how it affects all of us.

Over the last two years the UK has led the drive in Europe, in the G20 and through its G8 Presidency to revolutionise international tax transparency. It now has agreement, reached among 94 countries, to exchange information on financial accounts automatically every year. This is called the Common Standard of Reporting, which will start in September 2016 with the country’s Crown Dependencies and Overseas Territories, and will be completed in September 2018.

Under these agreements, HMRC will receive a wide range of information on offshore accounts held by UK tax residents, including names, addresses, account numbers, interest and balances. This will be an unprecedented step change in HMRC’s ability to tackle offshore tax evasion.  Taxpayers and their advisers will have no right to see what HMRC gleans; some of it may be incorrect.

HMRC says it will give evaders one last chance to come forward and put their affairs in order. If they choose not to, ‘it is right and fair that we make sure that the penalties they face, and the penalties for those who help them, reflect the wider harm caused by their actions and act as an effective deterrent to others. Penalties for evasion range from 100% of the tax due to 200% and could also include a prison sentence’.

According to HMRC, it has given people ample opportunity to regularise their affairs. True, but what about those who are not aware that tax is payable. They do not know that they are committing a crime. The taxpayer does not know the intricacies of the law, but the adviser who set up the structure for them does as do the professionals who run them do.

Joshua and Jennifer came to the UK in 1988. In 1995 they set up an excluded property settlement in Jersey with the assistance of their bank which also acts as the trustee and their lawyer. This trust was used to shelter capital gains, accumulate income and provide protection from inheritance tax. The beneficiaries are themselves and their three children. Over the years, trust income has been used to buy art in New York which was has then shipped to the UK. Joshua and Jenny now have an enviable art collection and have recently been making some changes as opportunities present themselves. On the sale of the art in the UK, this is a remittance of the income on which tax is payable. Neither Joshua nor Jennifer had any idea that they had been remitting income on the sale of any piece of art in their collection.

From the attitude of HMRC set out above, it is not just the taxpayer it will be targeting it will go after the advisers; the banks, accountants and lawyers who set up the structures and then fail to warn these families of the dangers of not carrying out a thorough independent review.

Joshua and Jenny need to be advised to carry out an audit to see whether:

• There has there been any inadvertent remittance of income or capital gains to the UK which has not been declared?
• The trust was set up before the seventeen years of residence or after? Had Joshua and Jenny formed the intention to live in the UK in the tax year before they came to live in the UK? Has theseventeen out of the previous twenty year rule for forming excluded property settlements been calculated properly – if not they could be treated as tax evaders and could well have an action for negligence against their advisers.
• There is any information which HMRC could get hold of which could lead to an investigation. At the very least to carry out a thorough review could prove to HMRC that they did not intend to evade tax and could provide some form of defence against an investigation and mitigation of penalties.

My advice to all advisors who have ever advised on creating offshore structures for their clients, are managing offshore structures or administering offshore structures is to contact existing and former clients immediately to inform them of the changes. If advisers do not they may find themselves embroiled in a tax investigation and penalties for assisting to evade.

In addition they may find themselves defending a case for breach of their duty of care to their clients. Advisers are much more knowledgeable than their clients and need to be warned about any inadvertent breach, for which they could face a claim for damages.

What is around the corner needs to be thought about now. If not what is coming could be worse than anyone could ever have imagined and much more costly – both for the UHNW family and their advisors.

Are you committing a crime?

To quote the Government: ‘Tax evasion is a crime which this Government is determined to stamp out because it deprives the country of much needed funds to run our public services, unfairly placing a greater burden on the vast majority of people who pay their fair share of tax. This Government will be relentless in its pursuit of evaders. For too long it has been too easy for people to hide their money overseas to evade tax.’

Everyone agrees with this, but wait a minute.

One of our clients, who is French, has two homes in London which he visits once or twice a year. His wife wants to decorate them before she visits, whereas he doesn’t because he views at as a waste of money considering they come to London rarely and spend most of their time in France. I wrote to him about his liability for ATED and he replied that he didn’t even know he is subject to the tax.

Under French tax law he only has to pay tax if his centres of economic interests are in France. It hadn’t occurred to him that by having a residential property in the UK owned by a company in Jersey, he is now subject to an annual tax. However according to HMRC he is evading tax and committing a crime.

As with Francois, the most vulnerable are the non doms. They have a home in the UK and might be living in London for most of the time, but were not born here, so are not familiar with our laws and ways of doing things. Most will not have formed the intention to evade taxes they do not think to ask or even know who to ask. However, HMRC now has the powers to find out who these people are, whether from exchange of information from other countries, or by working with the land registry.

Is the taxpayer’s charter of any help?

Frankly – no.

HMRC promises to treat taxpayer’s with respect, allow them to be represented and try to keep costs down provided they do not suspect them of evading tax.

In fact one of the rights published in the February 2009 draft was to ‘pursue relentlessly those that break or bend the rules’.

The only redress these unwitting taxpayers have for tax evasion will be against their advisers. The professionals who advised them to set up a structure to avoid tax and then did not subsequently warn them of the change of law.

These professionals may also come under attack from HMRC in being complicit in a taxpayer evading tax; knowing a structure was set up and operated for a client and then failing to contact them to tell them that tax was due may be enough for HMRC to go on the offensive to professionals whether lawyers, accountants or trustees who have set up these structures for their clients.

To give an example; ABC and partners advised Bhavik in 2008 to buy his home through an offshore company XYZ Limited. Chester Bank Ltd has offices in Jersey, London and Singapore and manages XYZ Limited for Bhavik for which Bhavik pays a fee. Bhavik is neither resident nor domiciled in the UK. Although he is liable for ATED since 2013, he rarely comes to London and was not aware of this tax.

Does Bhavik have a claim against ABC and partners for putting him into a structure to avoid tax and failing to notify him that the law had changed? Does he have a right against Chester Bank Ltd which manages XYZ Limited which failed to tell him that the law had changed even though they categorically state that they do not give tax advice? Has HMRC got a right against ABC and partners and or Chester Bank Ltd for failing to report the structure and possible evasion of tax?

UK Deadlines: Evasion, Avoidance or Planning

‘Taxation’ the Government has said ‘is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability’.

But where is the line between avoidance and planning?

In 2013 the Government introduced the General Anti Abusive Regime (GAAR). In its press release it made it very clear that planning is permitted, but if the planning goes ‘beyond anything which could reasonably be regarded as a reasonable course of action’ then the GAAR could be invoked. In practice it never has been.

A taxpayer carrying on a trade can do so either as a sole trader or through a limited company, and can accumulate the income in the company rather than paying it out as a salary. The Government has said this is planning and not abusive avoidance. Making gifts of capital to a son or daughter with a view to reducing inheritance tax is also considered planning and not abusive avoidance.

Similarly making the best use of Business Property Relief for owners of private company shares is not abusive avoidance – provided the use is not a contrived arrangement to obtain a relief without incurring an equivalent economic risk.

However, with inheritance tax rates now the fifth highest in the world and the Government’s attitude to the rich as seen in the harsh treatment of the non doms, the temptation to look to other reliefs to mitigate tax, becomes ever more tempting – but be careful!

The first rule of planning is, do not get into something which cannot be unravelled without making a transaction. If you set up a trust, you may be taxed on distributions if you want to unravel it. A better plan is to write a good Will, which can at any time be rewritten without making a transaction.

The second rule of planning is to try to avoid anything offshore, and if you already have a structure offshore review  it, now.

Atif is not resident or domiciled in the UK - he is an importer of fruit to the UK and owns a property in Surrey through an offshore company in Jersey. No one told him that he should be paying an annual tax on his home in Surrey since 2013, so he has not paid it. According to HMRC Atif has ‘evaded tax’ but did not know he was doing anything wrong.

We all know that evading tax is a criminal offence and should be stopped, but what happens to the taxpayer who does not know that tax is due? Lack of knowledge according to HMRC is no defence. Furthermore the Government has signed the Common Standard of Reporting with 94 countries which will automatically exchange information starting with the Crown Dependencies and Offshore Territories – so the Government may have information about Atif from Jersey which he knows nothing about and the information may even be wrong.

The taxpayer has no right of compensation or appeal if no tax is found to be due. Although the TaxPayers Charter promises to treat taxpayers with respect, and treat them as honest, it is also committed to stamp out evasion and the bending of rules. If Atif is suspected of evading tax, he could be in for a very unpleasant and lengthy investigation. Our advice therefore to Atif is to review all offshore structures and obtain an independent review of any arrangement and confirmation to say that no further tax is due.

The third rule of tax planning is to make sure you get the best advice (at the best possible rate): failing to do so could be the most expensive decision you have ever make.

Family Office Services are what our clients like

I have recently completed a plan for a very dear and long standing client Yuri and his wife Rosie.

Yuri has for many years owned an estate in a beautiful valley in the Cotswolds where he keeps his horses and herd of prize cattle. He also runs a shoot, but has over the last few years been thinking of winding it down since he does not get as much pleasure out of it as he used to.

He and Rosie have four children, one of whom is keen on dressage. Katie spends most weekends in the country and his son Mani likes shooting. I remember when Katie, who is the youngest was just a baby - she is now 22 - so I must have known them now for over 20 years.

Having spoken to Yuri last year I knew he was angry about paying the annual tax on enveloped dwellings, but nevertheless paid it since he saw it as protection against an inheritance tax charge which has now been removed by George Osborne in the summer statement. Both Yuri and Rosie are in good health and are in their early sixties, so they are not worried about the imminent payment of inheritance tax. However, having got used to the idea of their country home being tax free because it was owned in an offshore company, they intensely dislike the idea of now having to pay 40% tax on it, which they would prefer to go to their children.

The estate is currently worth about £10 million which means they would be looking to pay £4 million to HMRC rather than an extra £1 million to each of their children.

Yuri has recently been very busy working in his technology company which he formed in the late 1990s. It is owned by a trust which I set up for him before he became resident in the UK for seventeen years. 

I had some solutions which we discussed when  we met in late summer at his country home.

In the opinion of Yuri, which was shared by Rosie, although they travelled extensively they both loved their home in the country and would not want to become non-resident, and certainly not for tax reasons.

I first wanted to find out their priorities. Once established we then went through the options, costs and savings. Top of their list was not to have to worry about ever more hostile taxes such as ATED and they did not want anything which was in any way risky. Both Yuri and Rosie have a healthy respect for authorities such as HMRC and their potential for creating a very uncomfortable few years. I set out for them in some detail to make their decision simpler.

Once they had come to a decision, I then set out a schedule of work to implement the solution. They had formerly engaged me as a private client lawyer and knew my working standards and my reputation.

I said that to make the process as seamless and straightforward as possible, I would discuss the schedule with Yuri and Rosie’s lawyers and approve a timetable with them. Yuri and Rosie authorised their lawyer to disclose information and progress with me so that I could appraise them on progress and on any sticking points they came up with. Having dealt with them for many years, I knew their preferences on reporting so I put enough detail in the reporting.

The lawyers were delighted because they could get on with doing what they were good at, Yuri and Rosie were happy because they were used to dealing with me and were confident I was acting in their best interests. The transaction was completed ahead of schedule and I made sure the lawyers were paid in full and on time. Each party involved was happy with the outcome and the fact that we saved both on time and costs.

My relationship with Yuri and Rosie is far from unusual and there are many UHNW families which trust their adviser implicitly, because they have not let them down and provided a good service. However, there are other families which do not have such a strong relationship with their adviser or they have an adviser who is not skilled in this area, or worse they are not confident that their adviser is acting in their best interest.

For families who want an independent, neutral and strong team to support them in finding solutions and the right advisers to implement those, Garnham Family Office Services is ideal.

Yuri and Rosie said on the feedback form that our services provided them with a ‘stress free seamless service which ideally suits our circumstances’. Of course circumstances and laws change so any plan must always be kept under review, but for now it suits them very nicely.

If you or your contacts or clients have similar concerns to Yuri and Rosie, please contact svetlana@garnhamfos.com or phone on 020 3740 7423 to arrange a meeting.

Take action!

Sultan is flying from Qatar next week to meet with us. He has a home in Knightsbridge worth roughly £10 million where his daughter Farah lives.

She is a student at the London Business School. Sultan travels extensively but dislikes living out of suitcases so whenever possible he arranges to have business meetings in London so he can see his daughter and travel light.

Last year he paid the Annual Tax on Enveloped Dwellings (ATED) which is a tax to compensate the Government for being outside the scope of Stamp Duty Land Tax (SDLT). A sale of the shares in his Jersey Company would not attract SDLT so instead owners of residential properties owned by companies pay ATED.  He decided to pay the tax this year rather than liquidate the company, because the Jersey Company was still effective at protecting him and his family from Inheritance Tax on his death. On a £10 million home owning the apartment through a Jersey Company would save his estate £4 million.

However, in the summer George Osborne announced that residential properties owned by offshore companies would soon be subject to inheritance tax. In August Sultan visited his lawyer to ask what he should do and was told to wait until more was known. Since then he has heard nothing which is why he came to me. He was concerned. Christmas was fast approaching and then everything would stop until the middle of January. It would then be only ten weeks before the deadline of 1 April and another year’s charge in excess of £100,000. None of his friends and contacts wanted to pay this charge again and Sultan did not want to get caught in the rush in the run up to de-envelope ahead of 1 April.

Sultan’s friend, Osama, who he worked closely with in Qatar, also owns a property in London of a similar size and quality to the apartment owned by Sultan. He also has children the same age as Sultan’s daughter Farah. His advisor had suggested he transfer the apartment into the names of his children and then stay in hotels when he visits London so as not to fall within the ‘Gift with reservation of Benefit’ inheritance tax anti avoidance rules. Osama and Sultan were both irritated by this suggestion. Neither Osama nor Sultan want to transfer valuable properties in London to their children and then not be permitted to stay there.

I explained to Sultan that he needed to liquidate the company to eliminate the ATED charge. He could do this immediately; there were plenty of ways we could then mitigate the inheritance tax exposure.  

In my meeting with him we could then run through his options. I was confident that we could reduce his exposure to Inheritance Tax significantly, certainly by 50% and if the circumstances were favourable up to 100% without compromising his enjoyment of his apartment. He was delighted.

I told Sultan that Garnham Family Office Services specialises in succession and estate planning, but we do not implement any solution. Once a solution has been identified we instruct a suitable professional to work with us. There are many professionals who are highly skilled at delivering the final results, but prefer acting for a family through their family office rather than with the family direct. Garnham FOS offers a culture of care identifying the priorities of our families before suggesting a solution. We then instruct, monitor progress and report to our family giving as much detail as they want.  In this way both the family and the professionals save time and money and the family has then top quality advice at the best possible price.

If you or your contacts or clients have similar concerns to Sultan and Osama, please contact svetlana@garnhamfos.com or phone on 020 3740 7423 to arrange a meeting