Litigation is looming

To be a good tax adviser you need not only to have the right qualifications, and the best is to be a member of the Chartered Institute of Taxation, but you also need a good dollop of common sense and legal knowledge.

One succession plan I was asked to review involved a married couple John and Jane. Both had been married before. John had two boys, Jason and Kenneth and Jane two girls Mary and Susan with previous relationships. The succession plan drawn up for them was that the estate of the first to die was to be set aside to pay the income to the survivor.  If John was to die first his estate – which is considerable, would be set aside for Jane and as trustee she could at any time, decide to cut out Jason and Kenneth.  John’s wealth accumulated over his lifetime would then go to Jane’s children on her death. John was horrified. However the situation was easy to remedy. John and Jane simply needed to revoke their Wills and rewrite them specifying to whom their estate should be left on the death of the surviving spouse.

Rewriting Wills is easy; however restructuring offshore structures for non UK doms is not always so straight forward.

Last week I was asked to look at a letter of advice written for Aditya who has an offshore trust which owns his extensive businesses across the world through a network of companies. Within the structure he also owned his home in St John’s Wood worth in excess of £15 million. The advice given to Aditya assumed that the company which owned his home held it as a nominee and therefore despite having paid ATED in 2013, he had not paid ATED in 2014 and 2015.

I asked the trustee to provide the evidence that the property was held as a nominee – there was none. I then asked who, on the sale of the property, would receive the proceeds the company or the trustee. If it was the trustee would the property be available for creditors if there was a claim against one of the businesses owned by the trustee?

Furthermore the trust was set up in December 2006, if the property was held direct by the trustees would they be paying the ten year charge in December 2016? Aditya had not been told about the ten year charge.

My advice to Aditya was to accept that the company owned his home beneficially and to pay the tax for 2014 and 2015. He should then plan to mitigate Inheritance tax and transfer the property out of the company before 1st April. HMRC would no doubt want to raise interest for late payment, but may not raise penalties given the fact that Aditya was following advice. HMRC could also decide to go against his adviser for fines for assisting Aditya in evading tax.

Aditya is able to rectify the position without too much trouble and before HMRC investigates. What worries me however is the exposure of tax advisers who may not have been properly trained to analyse the legal nature of a structure and have given advice based on wrong assumptions. Not only could they be pursued by HMRC for assisting in the evasion of tax, but could also be sued by their clients for misadvising.

HMRC is not kind, it cares little whether a taxpayer was misadvised, or that the adviser was negligent in finding out the true nature of the structure. It needs to collect tax and is determined to stamp out evasion regardless of how innocent it may have been.

If you would like to book a meeting with us please contact Svetlana on 020 3740 7423 or at svetlana@garnhamfos.com

Who can advise on tax?

From whom should you seek tax advice? Should you go to an accountant, a solicitor, a banker or a financial advisor? 

I was asked this question three times this week – and would like to share with you my reply.

If the tax in question is not well understood and documented, the planning opportunities are not tried and tested and time is short, the tax payer does not have the luxury of shopping around.

Probably the highest level of UK tax education comes from the Chartered Institute of Taxation. This is the Institute which is focused exclusively on tax legislation. It has 17,000 members some of whom are Fellows and others Associates. Its members set out clearly the areas in which they specialise and these people are the undisputed experts in their field.  

I am a Fellow and am required to have indemnity insurance, comply with anti-money laundering regulations and complete the necessary set hours of training on my area of tax every year. My expert area of knowledge is on estate and succession and it is in this area that the law has been changing at an exponential rate with extremely tight deadlines.

Take the new higher rates of stamp duty land tax (SDLT) which are due to come into force in April 2016 on additional homes in the UK. The consultation paper was published on the 28th December 2015 and was closed on 1st February 2016 with results due to be announced in the Spring Budget Statement on 16th March.

For those with residential homes in offshore companies on which there is a mortgage, decisions need to be made now if the home is to avoid the higher rates of tax if the home is not their main home. However the details of this higher rate of SDLT will not be known until next month and it becomes law only weeks after. Any planning therefore needs to be started now. Of course some people say they would prefer to pay the extra tax and have certainty, but not everyone is so sanguine.

The increase in the rate of SDLT by 3% on any home in the UK which is not the main residence is expected to be as follows:

Band                        Existing        New

£0*-£125k               0%                3%

£125k-£250k           2%                5%

£250k-£925k           5%                8%

£925k-£1.5m           10%              13%

£15m+                      12%              15% 

Transactions under £40,000 do not require a ta x return to be filed with HMRC and are not subject to the higher rates.  

However, unlike capital gains tax where a home owner can elect within two years of acquiring the second home which is to be the main home, for SDLT purposes the main home is question of fact dependent upon a number of objective factors such as where the children go to school and the place of work.

Furthermore as the rules currently stand the acquisition of a second home to enable a couple to separate is not exempt from the higher rates of SDLT which is clearly not fair. Hopefully this will be picked up in the consultation.

There is also concern amongst the professionals who have to certify that the home is or is not the main residence. The professional will not know other than what he is told by the purchaser. Why the professional should be made to certify something which he cannot be expected to know independently from the purchaser.

The higher rates of SDLT are not limited to homes in which the purchaser wants to live – it extends to homes they let out – which is likely to increase the cost of renting accommodation. This may also be an area in which we may see some amendments. If not, the only way in which the higher rates can be avoided is to have more than fifteen properties available for let.

When planning, it is always the reliefs which are of most interest and SDLT is no exception. Where a property has mixed use such as an apartment which includes an office – or a doctor’s surgery, the rate of SDLT drops to a maximum of 4%. This needs careful thought not only as to whether the relief could be used, but how to ensure it is accepted.

There are a lot of advisors and many are experienced and knowledgeable about tax, but when it comes to something new, the deadline is short and the tax high – it is wise to got to the expert whose governing body is focused exclusively on tax because they are the undisputed experts.

If you would like to make a comment, find out more or arrange an appointment with Caroline please write to us on contact@garnhamfos.com or phone 020 3740 7423.

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.