Planning for Brexit

Now that Boris Johnson and Michael Gove have thrown their hats out of the EU ring, maybe we should think of how we could make our country and economy great again.

Switzerland is a safe haven for investors. Lorne Baring of B Capital based in Geneva and London in last weekend’s Spectator said ‘Around 35% of clients are UK based non-doms, so they need to put their money to work in a safe place that’s outside, but not far from Britain, and a place that is in Europe, but not part of the EU. Switzerland fits the bill perfectly.

It also has the ability to attract wealthy individuals to live there and bring with them their wealth for the country to manage.

As a result Switzerland has one of the highest wealth per head.

If Johnson and Gove were to win the referendum, ousted Cameron and Osbourne and had the guts and far sight to do so – they could easily shape the UK along the lines of Switzerland; outside of the EU.

What would I do if asked?

1. Extend the exemptions for remitting monies into the UK tax free, to encourage non doms not only to live here but to bring with them their monies to invest in and with the UK. In this way the country would attract monies out of Switzerland to be invested in the UK for the benefit of the UK economy. 

2. Make the remittance basis of taxation fairer. Currently if Francois who is UK resident but non UK domiciled received an inheritance from his uncle, on which he had earned no interest or made any gain – this money could be remitted into the UK totally tax free, if Francois were eligible for the remittance payment of taxation. This is because only income or gains which are remitted to the UK are taxable – pure capital is not.

Huge amounts of time and money go into people like Francois trying to keeping their capital pure, so that when it is remitted into the UK no tax is payable. Similarly, HMRC spends huge amounts of time and money trying to prove that Francois has in some way got it wrong. If it succeeds in proving Francois has remitted taxable monies he will then have to pay interest and penalties on what he did not declare.

All monies whether capital, income or gains should be subject to income tax  when remitted, with broad exemptions for monies invested in the UK; property, equity, debt or alternative investments. This is fair because it taxes what they spend, but not what they invest, in the UK.

This simple change would cut expenses and make the UK much more attractive for non-doms to live and bring with them their monies

3. Remove the levy on the remittance basis of taxation.

4. Change the excluded property settlement rules for inheritance tax. Currently if a trust is set up offshore and is treated as an ‘excluded property settlement’ all assets treated as non UK situs are outside the scope of inheritance tax. Why not therefore treat such trusts with  trustees and management in the UK resident as if they were offshore. In this way excluded property trusts would be much more transparent to everyone, would create jobs for our trained and skilled trustees and bring more monies into the UK to be managed. The UK invented the trust but we do so little trust work now in the UK. All disputes affecting such trusts should also have access to our UK court system.

5. Introduce an amnesty, for all non doms who bring their excluded property settlements onshore. Most excluded property settlements were set up such a long time ago that not only are records impossible to find, but also the distinction between capital and income has become impossibly blurred. For all excluded property settlements which migrate to the UK there could be an amnesty for any tax liability incurred as a result of inaccuracies in accounting and administration. This would be particularly attractive when the Common Reporting Standard becomes fully operational in 2017 when taxpayers would prefer to locate their wealth to a jurisdiction where the administration and compliance rules are well understood and properly applied.

6. Change the Stamp Duty Land Tax on residential properties to a more modest rate. Currently the rate introduced by George Osborne is at 12% (15% for second homes) which has had a negative impact on the collection of tax. It would appear that the tax take for Westminster, and Kensington and Chelsea, which used to account for more than Scotland, Wales, Northern Ireland and Northern England has since 2013/14 fallen by half. This is a great example of the Laffer curve, which shows that if the rate of tax is put up to a level at which the taxpayer will not pay the collection of tax goes down.

Our country needs to find the rate of stamp duty land tax at which the maximum tax is collected and not just what rate is likely to win the most votes.

If you have any comments please please call on 020 3740 7423 or email svetlana@garnhamfos.com 

If you think any or all of the above could increase your ability to win business in the UK and thereby improve our economy please forward this to your MP or to any influential politician, journalist or friend so that we can start to formulate a strategy post Brexit.

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