Google Gobbledegook

In 1987 the Editor of the Week End Financial Times was looking for a contributor to write on tax and trust issues, ‘Our journalists like most MPs do not have sufficient background knowledge to know what not to say’. I was reminded of his comments last week reading the commentaries about the ‘sweetheart’ deal HMRC has reached with Google.

The EU, it would appear, has waded in asking whether this ‘sweetheart’ deal is legal. The Independent has retorted to say we should be thankful that an international body supports the taxpayer’s cause in finding that the UK authorities ‘colluded with a vast company’. The Observer joins in to say the Government ‘chastises  companies for not paying enough tax’ while, in Brussel ‘robustly defending the status’ of British-ruled tax havens. What a lot of piffle.

The fundamental basis of taxing profits of a business in the UK is whether the business is trading in the UK, as distinct to trading with the UK. This may seem to be splitting semantic hairs, until you realize that this small point makes the difference between paying no tax in the UK or many thousands of millions.

In the case of ‘Smidth v Greenwood’ it was decided that for profits to be chargeable to tax the ‘operations … from which the profits in substance arise’ need to be in the UK and if not are not chargeable to UK tax. This was a decision in the House of Lords in 1921, long before the Lordships could ever have envisaged operations being generated electronically outside the UK.

For journalists to encourage their readers to think that a country as desperate as the UK to gather tax in some way ‘colluded’ with Google is madness. The tax system operating in the UK is one of the most sophisticated in the world and is not open to negotiation, or power plays.

The ‘sweetheart’ deal between Google and HMRC is not to pay less than is required by law – but more. Even this is not without its legal implications. Under law a company director is under a duty to maximise the profits of the company for its shareholders. It is under a duty therefore to pay as little tax as is legally possible, because to pay more voluntarily than is required is contrary to its duty. The only exception to this is if in the opinion of the directors it is considered to be in the best interests for the reputation of the company to pay more. Presumably Google took the decision that to pay some tax would be seen to improve its reputation rather than paying no tax at all.

Then there is this notion that in some way the Government is sitting on its hands in letting its Crown Dependencies or Offshore Territories continue as tax havens. The fact of the matter is that the UK Government has no right to intervene in the laws passed by these offshore islands which rests with their own legislative assemblies. It is not robustly protecting these islands – it is powerless to do much about them.

I find it astonishing that not more is said to stop this misinformation being published without any word to counterbalance the perception that Google is above the law. The man in the street is led to believe that there is one tax law for people and another for financial institutions. This is simply not true.

The only person who seems to be making any sense in this sea of nonsense is Nigel Lawson. He not only understands the principles which underpin our tax system but also the psychology of acceptable and unacceptable tax policy. He is on record as saying that what is needed is to replace today’s corporation tax on profits with a ‘levy on sales’. Unlike profits, he says sales can’t easily be shifted.

It must also be remembered that under Lawson the top rate of tax was lowered from 60% to 40% and the tax take went up. Under Osborne however, stamp duty has gone up from single figures to 12% and the tax take has gone down 12%. Nigel Lawson was right; bashing the rich does not fill the tax coffers. So why doesn’t Osborne unite the electorate behind a common enemy – making global giants accountable.

If you have any comments, insights or further thoughts, please contact svetlana@garnhamfos.com

One door closes another opens

Joshua came to see me last week, it is always a pleasure to meet him. 

He is quietly spoken, but always has some interesting insights into what is going on and cares deeply for his clients.

He told me that several well-known banks were reviewing their clients and for those, who may have been with a bank for many years, but for whom the bank has insufficient information about their source of funds these clients were being asked to take their business elsewhere. Many of these people in his opinion were not laundering suspicious monies; they merely did not have the necessary paperwork about transactions and deals, which may have happened many years ago, to substantiate their claims as to the source of funds.

What were they doing about securing new banking relationships I asked. From his knowledge these people were seeking out smaller foreign banks which did not have a full banking license in the UK, with which to open an account. Without a full banking license these banks were subject to the banking laws of their home country and in some cases could take a more pragmatic approach to the evidence as to the source of funds of their clients.

There was another reason why these smaller foreign banks were growing so rapidly. The amount of detail which financial institutions need to disclose to their local authority under the Common Reporting Standard varies from country to country. Whereas some countries need to disclose the beneficial owner of the funds others also need to disclose the value of the funds with that financial institution. For those families for whom kidnap and financial theft are of real concern, the less information disclosed the better. These families are now also taking active steps to seek out banks in jurisdictions which disclose as little information as is possible. As a result these banks have seen a substantial influx of funds.

It may seem harsh that clients who have been looked after by their bank for many years are now being told to take their business elsewhere. The anti-money laundering rules are not new. However, given the extent of the fines many banks have had to pay for flouting these rules to keep their business, it is hardly surprising that they are prepared to shed some business to keep their reputation intact and the risk of being fined down.

Of course some innocent people will be caught up in this activity and that is a pity. However for those who have obtained monies through dubious sources, they will find more secretive places to put their monies. This will merely increase the possibility that these funds and the criminals behind them will remain undetected.

But I do not think these good housekeeping measures are going to keep financial institutions out of trouble. Once there is full and automatic exchange of information, I fear that financial institutions will come under heavy fire. Without doubt tax authorities around the world will have the information they need to start investigations into all manner of structures and transactions. However, given that there is no right of compensation or appeal against an investigation by HMRC and in particular if it suspects evasion – even if none had occurred, the only place these hapless people can turn for redress is the financial institutions with whom they had their money.

Everyone who comes up against HMRC knows how disruptive, painful and expensive an experience this can be. These people will be particularly angry if the financial institution to which they have over the years paid extensive fees is now responsible for a prolonged and in some cases unnecessary investigation. They will want to sue for wrongful disclosure and compensation for costs and loss of earnings. Litigation lawyers I know are already sharpening their pencils to take advantage of what they see as a very lucrative wave of business.

If you have any insights you would like to share or wish to engage Caroline or her team on behalf of yourself or your clients please contact svetlana@garnhamfos.com

What is going on?

Last week I met with an elderly residential property expert, James. He has spent a lifetime watching property buying trends and the current market conditions were not a surprise to him.

Just before Christmas James had paid a visit to Asia, and a colleague of his is currently in the Middle East. From their meetings they remained convinced that the appetite for residential property in the UK remained strong. The UK is safe, it remained buzzing and is still the place UHNW families wanted to be.

He pointed out that this contention was supported by the unusually strong market for lettings and for commercial property. The only area where the market is weak is the residential agency sector, and this he said was skewing the other sectors. Whereas clients who usually come to London at this time of year would be looking for good residential property for their portfolio, they were now hunting down good commercial property because the stamp duty was 4% not 12%.

Buying a home however is very different from buying a commercial property, he went on. It is more akin to an investment of passion; it can be personalised to the tastes of the family, it can create status and deepen relationships. Inviting a business prospect in to your home is much more personal than meeting in a hotel lobby or restaurant.

The current increase in buyers for residential homes in January he said was due to the announcement of an increase in SDLT for second homes as from 1st April from 12% to 15%. However this blip would soon evaporate after 1st April as the market adjusts to the new rate of tax.

What, I asked, was the cause, not so much for the weakness in the market, but which is due to the hike in stamp duty, but the length of time it is taking before it is absorbed into the price? In his opinion the continued lack of confidence was due to confusion as to how structure the acquisition – if an offshore company provided little or no benefit how should the investment now be structured.

James was clearly plugged in to the mood of the market so I asked him about the market response to ATED. Why were so many homes of non UK residents still owned through offshore companies despite the exponential rise of ATED? The tax costs on homes above £2million are now considerable, even for those rich enough to pay them as I set out below.

Property Value     ATED         Inheritance Tax (exc nil rate)

£2m-£5m            £23,350       £800k-£2m

£5-£10m             £54,450       £2m-£4m

£10-£20m           £109,050     £4m-£8m

£20m+                £218,200     £8m+

James explained that the reason why the higher residential market is depressed could be in part the same reason why people were slow to de-envelope - a lack of confidence as to how to structure the investment.  Confidence would return as soon as buyers and home owners knew what the options were under the new regime.

In my opinion, what is needed is old fashioned tax planning, knowing how the taxes work, what reliefs are available and putting them together well.

Six top planning tips

1. Be clear as to the long term intentions with regard to the property you own or are planning to buy
2. If you are concerned as to your privacy own the property through a company as a nominee
3. Be sure that the right person owns the property - multiple ownerships are not usually a good ide
4. Make sure you know who is to inherit the property and plan accordingly
5. If the investment is for life – think about CGT
6. Plan to avoid inheritance tax – it need not be paid in full if at all, multiple ownership is often NOT the best solution.

James was excited; he wanted me to come to his office and explain my planning tips to his sales team. Once they were clear as to what could be done he was sure confidence would return and buying and restructuring would pick up.

If you would like to know more about my six top planning tips, please contact svetlana@garnhamfos.com for a further discussion.

Team players

I had a meeting last week with an old friend who works primarily in the Middle East, Lama. She has a client Farah who is the widow of a very wealthy businessman that died six months ago. Farah’s husband left a substantial family trust based in Jersey and five properties in London which he held in his own name. The Trustee was a professional who had been given a Letter of Wishes as to what it should do with the trust fund. It had been drafted by a reputable firm of lawyers and in it the trustees were expected to make ‘reasonable provision for the siblings’. Already the siblings were beginning to mutter between themselves and with the trustee as to what this could mean for them.

In addition to this trust he had left five substantial properties which he owned personally, having been encouraged to de-envelop last year to avoid ATED by his lawyer.

Farah was at a loss to know where to start. She had lost confidence in the trustees who seemed incapable of getting to grips with her siblings in law and were delaying in responding without an opinion from a QC.  With regard to the lawyers, which her husband had been using, she was also furious that they had encouraged him to de-envelope the five London properties to avoid paying the annual tax on enveloped dwellings without any consideration as to the Inheritance Tax consequences. She was now facing an inheritance tax bill of £3 million.

Farah asked Lama to fix a meeting with our Family Office, because she wanted to know what to do. She wanted to sue her lawyers and remove the trustee, but did not know how she should replace them.

After spending the first few hours getting to know her concerns, the family culture and background, I started by telling her that there was no easy solution. She needed to understand the law, her options and the consequences before choosing what and who she needed by way of professional guidance.

The most pressing need was to get a Grant of Probate for the five homes in London. Farah’s husband had not left a Will and as already mentioned he owned them personally. Under the Intestacy rules Farah was left with an outright gift of £250,000 and half of the remaining value (of around £8m) subject to inheritance tax.

I told her that she and her children could enter into a Deed of Variation and explained what was needed, including a probate lawyers to prepare the necessary forms and the Deed; I explained the process.

She then needed to put a halt to the dispute between the trustees and her siblings in law before it got out of control. I suggested she meet a member of our team who could advise her on what was needed to put a swift end to the dispute without incurring substantial professional fees and it made her feel delighted.

Next on our agenda was to address her right as Protector to remove the Trustee. I pointed out to her that her duty was fiduciary which meant that she could be made liable for any loss to the trust personally. Given that her siblings in law were beginning to show their appetite for a fight, she needed to address this exposure seriously.

I explained that she had the option of setting up a private trustee company which could be owned by a Bahamas Executive Entity and then put in place some good governance principles which a member of our team could guide her on the detail of this. She could continue to use her existing trustees to administer the trust, but they would not then make the decisions which could then be left to the board. She could possibly use the office as a director or member of the board to encourage one or more of her siblings in law to take a less aggressive stance and work with the trust not against it.

As we came to the end of a very interesting and fruitful discussion, she commented on how weary travel had become without a European passport. This of course is an area I advise on frequently and we are in the process of choosing a suitable EU country of which she can become citizen.

They say it is not what you know but who you know – which is true. However for many the difficulty is finding a Family Office at the hub of the wheel, that not only has the right connections but can  ensure that the correct contract is put in place to get the most out of them.

Jerry Hall and Rupert Murdoch

Jerry Hall 59, and Rupert Murdoch 84, have announced their engagement after a four month whirlwind romance.

The couple got engaged in Los Angeles where they were attending the Golden Globe awards. If their history of long marriages continues, Ms Hall is likely to be the last Mrs Murdoch. The empire and his colourful life have all the ‘hall’ marks of a drama waiting to happen.

Ms Hall the former supermodel has four children with her former partner Sir Mick Jaggar and Mr Murdoch has six.

For Mr Murdoch this is his fourth marriage. His first marriage was to Australian Patricia Booker with whom he had one daughter Prudence who is now 57. Their marriage lasted for eleven years and ended in divorce in 1967. She walked away with a settlement of $1.2 billion.

He then married Glasgow-born journalist Anna Tory with whom he had three children, Elisabeth 47, Lachlan 44 and James 43. Lachlan was reinstated into the business empire after ten years and is now co-executive chairman of 21st Century Fox.  His brother is CEO of 21st Century Fox. He was Chairman of the group’s holding company News Group Newspapers when the news of the phone hacking scandal broke. All three children have the business acumen of their father, but only James and Lachlan work in his empire, News Corporation which owns The Sun, the Wall Street Journal and Fox Entertainment Group. He was married to Ms Tory for 32 years who walked away with a settlement worth $1.7 billion when the couple divorced in 1999. Elisabeth and James are not close following her public criticism of her brother about the phone hacking scandal.

His third wife Wendi Deng, a Chinese business woman, was divorced by Mr Murdoch after a fourteen year relationship amid rumours of her infatuation with the former Prime Minister Tony Blair. They have two children Grace 14 and Chloe 12. They were included with the other children as beneficiaries to the stock pool to which his other children are entitled.

Ms Deng was given a settlement to include a $44million apartment in New York a $20 million apartment in Beijing in addition to the assets under their pre-nuptial agreement.

Each of the six children of Mr Murdoch share in a stock pool which was valued in 2006 at $2billion – so are likely to inherit at least $300 million.

For Ms Hall this will be her first proper wedding. Her marriage to Jagger was declared invalid when the pair split after their 23 year relationship ended in 1999.

Mr Murdoch is rumoured to have a net worth of $18 billion so there is plenty left for Ms Hall. If the couple follow the example of his third marriage they will most likely have a pre-nuptial which will no doubt be reflected in any settlement the couple decide on his death.

Although all six children benefit from the stock pool, only two work in the business so their influence will be the greatest. Although we know of the disagreement between Elisabeth and her brother James, other family disharmony will only come to light on the death of their father and then for the sake of his empire I hope he has given more than a cursory thought on how to avoid family disputes turning to full scale litigation through effective Family Governance checks and balances.

With an empire the size of Mr Murdoch’s and with each child being independently wealthy there is plenty of scope for conflict and litigation – and now a further complication has been added in the form of a new and beautiful wife Ms Hall.