Next year could be the beginning of the end

First things first, I wish you all have a Happy Christmas and an enjoyable New Year.

Here in London it has been unseasonably mild; we are seeing the first bulb shoots peeking above ground, snowbells in full bloom and yet some of the leaves on the London Planes have not yet fallen; a very odd autumn indeed.

This last year, 2015 in retrospect, I fear, will also be seen as very odd. From the outside nothing has changed. The private client industry remains extremely busy flying around the world going to meetings, money still flows into its coffers and the UHNW families continue to hold their monies in complex and convoluted structures.

However, we are beginning to see new shoots of change and unlike the bulbs and snowdrops I do not like what I see.

At the IBC conference where I was speaking a few weeks ago, I was talking to a professional trustee who was expressing concerns as to how to maintain the privacy and anonymity of her clients given the forthcoming automatic exchange of information across the globe with the introduction of the Common Reporting Standard.

This was the concern of a client of mine as well who has arranged to see me early in January. He was weighing up the advantage of maintaining privacy and anonymity by keeping his homes in the UK in an offshore structure and paying the tax or transferring them into his own name. The truth of the matter is that Governments across the globe are determined to stamp out what they see as tax evasion through the use of offshore structures and care very little about the concerns of UHNW families to preserve anonymity and privacy. These Governments demand transparency and are determined to get it. They want to see for themselves whether tax is payable!

As from 2017 highly sensitive information, which financial institutions across the globe have been at pains to protect, will now have to be freely and automatically exchanged. The identity and address of the settlor and beneficiaries, the value held on their behalf and all transfers made will be obliged to be reported. The private client industry will, in short, no longer be private. There is no hiding and any professional who assists a UHNW family in preserving their anonymity may find themselves being fined along with their clients.

A totally different approach is required and some change of habits. Each UHNW family from whatever part of the world will need to analyse their fears and address them in a different way; do they fear for their physical safety, theft or a mismatch of information as to what is being exchanged and what is disclosed to the local taxing authorities?

I live around the corner from Tony Blair, a public figure who cannot be anonymous. There are four policemen which permanently guard his home twenty four hours a day, whether he and his family are in or not. He cannot remain anonymous so he increases his personal protection.

I also live a stone’s throw from a Saudi princess, not to say I have ever seen her or even know her name, but it is obvious when she is in town. There are at least four cars parked outside her house, most of them bodyguards and chauffeurs in armour plated cars with dark windows. It is also obvious when she is about to leave or arrive, two large white vans are parked outside which are then filled with enormous suitcases. How she ever finds what she wants to wear with so much choice is a mystery.

The issue of theft is also of concern to many. I suspect that many families under the new regime will wish to reduce the number of financial institutions with which they deal, while retaining diversification and will need to review their contracts. They may also want to put in place systems to capture all financial information to ensure that there is little or no slippage. If theft is occurring it needs to be spotted immediately and the financial institution which permits it made liable for it. Similarly every family needs to know precisely what information is being exchanged so that they can declare the same amount in their tax returns.   

Financial institutions looking after the wealth of UHNW families will also need to gear up for the new regime, not only to comply with their reporting obligations but also to avoid being sued by their clients. We have long seen the intention of Governments to make financial institutions to UHNW families their unpaid whistle blowing policemen; reporting on suspicious transactions, carrying out anti-money laundering checks and checking on the identity of their clients. At the same time we have seen little or no increase of terrorists caught or criminals detained. Some may suspect that the real motive behind the anti-money laundering was to obtain information which could lead to an increase of revenue from tax evasion. Whether the case or not, information gathering has now been taken to a new level.

There is no doubt in my mind that the private client industry is set to change and like all changes there are winners and losers. For those ready to embrace the change, I believe there are rich rewards - UHNW families will be looking to renew their contracts with financial institutions that understand their concerns and to restructure their offshore structures to put themselves in the best possible position to combat automatic exchange of information. However, for those insisting on rearranging the deckchairs as the ship goes down, they could face a cruel fate from both the Government as well as clients - which could be very expensive indeed.

What a nightmare

Everyone who has a trust offshore should seriously consider carrying out a full audit, not only for any breaches of tax reporting but also for who will be disclosing information in 2017 to the tax authorities. The person orchestrating or doing the audit should be independent so that an unbiased opinion is provided on which the family can decide what it should do.

Without a full audit and changes made, financial information could be flying across the globe with little or no protection from investigative journalists – or criminals who must be delighted to see that financial institutions must now disclose information about their clients without having to pay for it or steal it.

What started out as a sub section of obscure US legislation may turn into a nightmare for many international wealthy families. Within the US Hiring Incentive to Restore Employment Act was the US Foreign Account Tax Compliant Act, more commonly known as FATCA, which obliges reporting of financial information and the automatic exchange to all interested countries. This has been picked up and developed by the Organisation Economic Co-operation and Development with the G20 countries and shaped into the Standard Automatic Exchange of Financial Information in Tax Matters known as the Common Reporting Standard (CRS).

What does it all mean? Let’s take Alexander as an example. He is the settlor of a substantial trust in Jersey which holds his investments, properties and his ongoing exporting and importing business for himself, his wife and children. The trustee of the trust is the professional arm of a significant international trust company ‘XYP Trust Company’ and his solicitor James, resident in the UK, is the protector. Because XYP Trust Company is treated as a ‘Reporting Financial Institution’ (FI) under the new CRS rules it has an obligation to report to Jersey all people who have an interest in the trust and are resident of a Common Reporting Standard country. So XYP Trust Company will be obliged to disclose the interests of Alexander, his wife and any child who receives a benefit as well as details about James. These people are said to have a ‘Reporting Account’.

Mr Chang also has a trust in Jersey, but his trust is a company which he formed ‘MTC Trust Company’ to be the trustee of his investments and properties for his wife and children. The shares are owned by a Bahamas Executive Entity ‘MTC EE’ on which there is a board of three Martha, Alan and Geoff. Martha is resident in the UK, but Alan and Geoff are resident in Jersey.

MTC Trust Company is not treated as a Financial Institution so it does not have a reporting requirement other than to give the details of Mr Chang, his wife and any child which receives a benefit as well as the board members.

Mr Chang’s trust is better protected than that of Alexander because he has more control over it and the financial institutions with which it is contracted.

What needs to be reported to the local authority by the financial institutions are the name, address, tax identity, date and place of birth, amount of interest and any change in the interest over the previous year. Reports for the previous year will start in 2017, but some may date back to interests in 2015. This information is given no guarantee that it will not get into the wrong hands.

Then there is the added difficulty as to the value of the interest, taxing authorities will be keen to investigate any mismatch of information between what is reported under the reporting and what is in the tax returns.

The impact of this legislation on the lives of wealthy families has yet to be seen, but given the powers of HMRC and its determination to stamp out tax evasion and to bring monies in shady places into the light, I can only begin to imagine the nightmares of many families post 2017. If settlors and beneficiaries want to prepare for what I can see as dangerous waters ahead, they need to review their trust structure, with the following questions in mind:

• Which financial institutions will have to report and where is this information likely to go?
• Is there an up to date record of all the assets owned by the trusts?
• Is there an up to date record of mortgages and debts of the trust?
• Do contracts with financial institutions need to be changed so as to ensure they disclose to all interested parties what thy disclose to their local authority?
• If the Protector is resident in a country such as the UK, will their controlling power make the trust resident in the UK?
• Should the Protector have some form of limited liability protection?
• What are the benefits being received by one or more parties?

Alexander may decide to replace James his Protector and WYP Trust Company with a Private Trustee Company owned by a Bahamas Executive Entity with a board of three or four. This will give the Protectors much greater protection and reduce the risk of the trust being treated as resident in the UK.

Never before has the record keeping of trusts been so important. From my experience some trusts are woefully lacking in their record keeping. I was acting for one family with substantial assets held in trust which they wanted to move to a different jurisdiction. It took two years to document properly all its assets, before the transfer could be made. Given that reporting is expected to be made in 2017 trustees should start the process now, because by 2017 it could be too late – financial institutions could then be facing penalties for breach of their obligation to report.

The impact of this life changing legislation is only now beginning to be understood and families need to be proactive, because being reactive is no longer the sensible option.

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.