The Panama Papers made my blood boil

The publication of the Panama Papers last week made my blood boil. Why? Because it perpetuates the myth that offshore financial centres are the piggy banks for crooks and tax dodgers.

In April 2009 the G20 heads of state resolved to ‘take action’ against non-co-operative jurisdictions which did not comply with anti-money laundering initiatives. These initiatives were introduced 9 years prior to that.

Since 2009, the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force on Money Laundering (FATF) have been tightening up regulation and implementation. The primary focus has been on the Offshore Financial Centres – why – because they are small and weak against such powerful organisations? As a result these offshore financial centres have had no option, but to comply. Jersey is now rated the most compliant of jurisdictions internationally, complying with 44 of the ’40 + 9’ recommendations.

In 2010 the US passed The Foreign Account Compliance Act (FATCA) which requires financial institutions abroad to report details of their American clients’ accounts or face punishing withholding taxes on American-sourced payments.

FATCA then spawned the Common Reporting Standard a transparency initiative overseen by the OECD club of 34 countries. This is to be the standard reporting for the exchange of data for tax purposes. So far 96 countries, including Switzerland, have signed up and will soon start swapping information.

All British offshore financial centres, including Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey, Jersey and the Isle of Man were early adopters of the new standard.

Now that the offshore financial centres are fully compliant – where do the tax dodgers go to hide their money from tax authorities? The US!

America has steadfastly refused to sign the CRS saying that it has a large network of bi lateral agreements under FATCA and therefore does not need any additional obligations. However, FATCA does not look beyond the account to the beneficial owner if held by a company or nominee.

It is therefore easy to avoid detection of wealth ownership; simply set up a company in Delaware or Nevada. The incorporation of companies in the US is a State not federal matter and in many states the incorporation agents do not have to collect ownership information and therefore are unable to exchange such details even if asked to.

Already money is flowing into the US from the Bahamas and Bermuda because they have signed up to CRS and the US has not. America is therefore the best place to hide legally earned wealth from tax authorities. It does not treat the banking of undeclared money as money-laundering. However, the US is not a good place to put the monies of ill-gotten gains for fear of facing the full force of the US legal system.

But why were there so many high profile people using one firm in Panama?

Part of the anti-money laundering initiatives requires the private client industry to conduct more rigorous checks on politically exposed persons – (PEPs) and report them if they suspect their wealth has been illegally – such as bribes. Most banks, law firms and other professionals as a matter of policy therefore do not act for such people for fear that their power has been used to secure a financial advantage.

I once acted for a PEP – a man who I had known for many years (with the explicit consent of the senior partner). Although he had done nothing wrong he could not open a bank account in London – he was therefore forced to open an account offshore.

These rules drive such people to obscure places and to firms known to accept them – presumably without asking too many questions. However, not all offshore structures are dodgy. It is well known that business people in countries such as Russia and Ukraine put their assets offshore to defend them from ‘raids’ by criminals.

Mossack Fonseca has grown big on the back of acting for PEPs. It is (or was) the fourth largest offshore law firm in the world with a global network of 600, operating in 42 countries. However, I have never had dealings with it or with Panama and have been in the offshore structuring business for over 25 years.

The Panama Papers is good journalism in that it sells papers and attracts viewers, but distorts the true picture. There are lots of good reasons why UHNW families including PEPs put their wealth in offshore financial centres, but it is simply not true that offshore financial centres are sunny places for shady people. This myth hides the real truth that rich and powerful countries like the US demonise offshore financial centres while attracting huge wealth into their own country for the evasion of tax.

If you would like to comment on this piece or make an appointment with Caroline or any one on her team please contact svetlana@garnhamfos.com or call 020 3740 7423.

Disputes need not destroy value

Marsha came to see me last year. Her father Mohammed had died unexpectedly leaving a very large family home in Knightsbridge worth in excess of £15million. At the time of his death Mohammed was married to Sally; a daughter of a very wealthy family, so he had decided to leave the property to his four children; Marsha and her three brothers. Neither child was resident in the UK, so the apartment remained largely empty.

A year before his death he had de-enveloped the property to avoid ATED and at the time of his death he owned the apartment personally. His estate was now facing a £6,000,000 inheritance tax charge.

Two of the four children Abdullah and Salah worked closely with their father in his clothes importing business based in the Middle East and the third was working as a fashion designer, but not with the family business. Mohammed had fallen out with Abdullah before he died. Abdullah had been pressing for greater transparency with their creditors and wanted to restructure the company’s debt – but his father had resisted. As a result Mohammed had removed Abdullah from the board.

Salah remained on the board and he and Abdullah were now not speaking to each other. All four children were executors of their father’s estate and Marsha was using her best efforts to administer it. However, it was not proving easy given the animosity between the two brothers. At their last family meeting the two brothers had to be restrained from fighting each other.

Marsha had come to me to see what could be done about saving the inheritance tax on the property in London. I suggested that the executors enter into a Deed of Variation to pass the benefit of the property to Mohammed’s wife, and thereafter to the four children which would save the estate £6million pounds.

All four children were agreed that this was a good idea and the variation was accepted by HMRC without a hitch. As Marsha and I celebrated our success over a cup of coffee, she confided in me that the dispute between her brothers was damaging the business and the company’s bank was putting pressure on the board to sell it. However the business was now worth less than half what it was on the death of her father, and she wanted to know what could be done to restore its value.

I asked what Abdullah and Salah would do once they received funds from their inheritance. She said they were already having preliminary talks with lawyers to litigate against each other. I suggested that they try to avoid this form of dispute resolution. It would destroy the value of the company, drive the family apart and ensure that the brothers never work together again.

Marsha was keen to explore this further. I contacted my dear friend Philip. He had recently retired from practicing as a leading dispute resolution lawyer and he agreed that litigation was not the best way to resolve this type of dispute – ‘mediation would be quicker, cheaper and private’.

I put this to the executors. To begin with Salah refused to co-operate. He was in control of the board and did not want to share this power with his brother. However it was obvious that the board wanted Abdullah back. He was more experienced with the financial aspects of the business, whereas Salah was better at sales.

Philip then spoke with each one of the four executors. Salah finally conceded to mediate in the knowledge that if a deal could not be found he could still revert to litigation. The cost of the mediation it was agreed should be met out of the funds in the estate.

Philip and I collated the facts, interviewed all four children as well as each and every member of the company board and then hired two meeting rooms in a hotel for two days to hammer out a deal.

The irony of the exercise was that once we started to drill down into what everyone thought was best to restore the company back to its former value it was surprising how similar everyone’s views were, even Abdullah and Salah were not far apart in what they saw was best for the business. Neither the executors nor the board wanted to sell.  Furthermore, when the views of the board were put to Salah, in an objective and unemotional manner he came to see that the business would be better with Abdullah than without him.  At this point it was easy to come to a deal which they could accept.

The resolution of this dispute, like so many family issues, can be met, when emotions and irrelevant history are not included in the negotiations. Mediation makes angry parties see the dispute objectively at which point it is usually easier to resolve.

Abdullah and Salah were now faced with a new problem - how to restructure the groups finances so that they could buy time to restore the company to its former value. I suggested they meet Richard, a former leading corporate lawyer, who like Philip had recently retired, but keen to get involved in projects which could benefit from his expertise and knowledge.

With Richard and Philip and a few other leading experts a strategy recovery was quickly arrived at and implemented for the benefit of all – a very satisfying conclusion.

Working with families of considerable wealth and in particular when the wealth is tied up in a family business GFOS recognizes that families require a multi-faceted approach to get to the right solution. We do not work on a project and then leave the family to its own devises to resolve the next issue – we go on solving problems as they arise. With Marsha’s family, a tax plan led to a dispute resolution which led to a debt restructuring – it could have resulted in sale in which case we would have worked with them to devise the most appropriate investment strategy, and what type of investment management they needed, how to structure the investments and how to preserve it for future generations or if preferred how to give it away. As a family office we focus on the family and their issues – whatever they may be from cradle to grave.

If you would like to find out more contact svetlana@garnhamfos.com or phone 0203 740 7423 to book an appointment with Caroline and her team.

What does the Budget mean for the rich?

For all the swipes at the non doms and high end property owners, George Osborne seems to have taken a break and made a few thin concessions.

As from 6th April 2016 capital gains tax will go down from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate taxpayers.

This is of course welcome – but the extraordinary thing is that from our studies capital gains tax at 28% was the tax that most UHNW individuals did not mind paying. The taxes they really resent are the tax on the remittance basis for the non doms, Stamp Duty Land Tax on the purchase or their homes in the UK and most disliked of all is 40% inheritance tax.

If the government showed just a glimmer of understanding of the Laffer curve, it would understand that to cut capital gains tax – a tax which is of least concern to the wealthy and therefore less likely to try to avoid it will just result in less tax in the Government’s coffers. If, however, they were to reduce the tax rate of what the UHNW individuals most dislike and are at pains to avoid, such as inheritance tax at 40% or stamp duty at 15% they would be more likely to increase the tax take for the Government.

As I have said in previous notes the tax taken on stamp duty for Westminster and Kensington and Chelsea has fallen since 2013 by about one half since the stamp duty went up. How do people avoid this tax? Simple – the market has dried up for residential properties above £4 million. In 2013 the tax take from stamp duty from these boroughs alone accounted for more than the total tax taken from Northern England, Scotland, Northern Ireland and Wales put together. If the Government was really serious about raising money for the Treasury it would do some serious research into what taxes are disliked to the point at which people will change their behaviour to avoid them and which taxes are tolerated. It would then reduce the rates of those which taxpayers want to avoid and up the taxes taxpayers were happy to pay. The Government needs to find the rate at which the maximum return can be made for the Government. Sadly the Government would appear to be keener on clinging on to power than raising revenue.

The other measure we tend to gloss over – but at our peril is the continued drive to crack down on ‘all forms of tax evasion and avoidance, and aggressive tax planning and non-compliance’. The Government press policy statement goes on ‘There should be a level playing field for the majority who pay their tax, and everyone should make their contribution.’

These are sentiments with which everyone can agree. However for those running businesses or who have more money than they need to maintain their lifestyle paying the right amount of tax is not always so straightforward.

The UK has more tax legislation than any other country in the world other than India and every tax payer is expected to know and understand every word. Most professionals do not know every nook and cranny and even if they did may have misinterpreted the legal nature of the facts and come up with the wrong assumptions with the result that the taxpayer does not declare what he should or puts in the wrong amount in his tax return.

To give an example, Roger owns his house in the UK through an offshore company and trust structure. He took advice from Blink and Co in 2014 which said that based on the facts before them the company owned the property as a nominee for the children and therefore the Annual Tax on Enveloped Dwellings did not apply (furthermore Blink and Co advised, the ATED payment in 2013 was incorrect and should be recovered). Furthermore they advised, the property was not a trust asset and therefore not subject to the 10 yearly inheritance tax charges.

Blink and Co relied on the facts provided by Roger, but Roger does not fully understand the legal difference between whether a property is held on trust for the children or for them as a nominee. Blink and Co did not verify the facts with the trustee ABC Trust Co; they simply relied on what Roger told them.

If they had asked ABC and Co to verify the facts, they would have discovered not only that the property was owned by the company beneficially but also that the company was owned as an asset of the trust which was used as security to a bank for borrowings. They would also have discovered that ABC Trust Co was very concerned as to the lack of payment of ATED on the property and were refusing to continue as Trustees unless and until ATED was paid.

It is therefore only a matter of time before HMRC finds out that ATED was not paid for a few years and at that time it is likely that the advice given by Blink and Co based on the facts provided by Roger will become known. With the funding from the Government and a clear endorsement to pursue non tax payers, it is more than likely that Roger will then face a full tax investigation together with fines for assisting to evade tax which will then extend to Blink and Co.

In 2014 when Roger took advice neither he nor Blink and Co thought that their actions were evasion of tax – it would have then been considered tax avoidance – not now.

If you would like to comment on this or book an appointment with Caroline please contact svetlana@garnhamfos.com or phone 020 3740 7423.

Tomorrow's budget

In 1985 I was ill in bed when the Budget was being read in the House of Commons. At the strike of a pen Development Land Tax was abolished – that was my area of expertise. I wondered whether it was worth going into work when better.

There must be many advisers – accountants, private bankers, lawyers, financial planners, estate agents and trustees keen to see what George Osborne will say tomorrow about the taxation of non doms – their clients. He seems hell bent on killing the golden goose; cutting down the tax reliefs which have made the UK such an attractive place to live for non doms.

Given the pace of change, most non doms living in the country, or who have homes in this country are not rushing to unravel their offshore structures. Many are sitting on their hands, even if it means paying more tax. They have not decided how they want to structure their investments or whether to stay or leave. Living in the UK has been so good for so long they are not convinced that they can no longer do whatever they want and not pay tax.  They talk to their friends, neighbours and colleagues – who are also bewildered and waiting.

Their advisers are also waiting; waiting for the small print in the legislation. Will there be an exemption or planning opportunity?

If not then this rich community is still likely still to do nothing until after the referendum on Brexit.

David Cameron and George Osborne may be keen to stamp out the tax advantages for rich non doms – but will this policy be adopted by Boris Johnson and Michael Gove. If Boris and Michael are concerned about the country and serious about reducing our horrific debts, they should consider how best to use our new independence to attract more monies into the country; which must include making the country attractive to wealth creators.

As I wrote in last week’s blog, if following the referendum we see Britain leave the EU, there will be an opportunity to alter our policies to be more in line with Switzerland. If the new Government does so, in such a manner to give the UHNW community confidence and the electorate see the changes as fair we could see monies flooding into the UK; away from Switzerland and offshore tax havens. This will make everyone happy including accountants, lawyers, trustees, estate agents, architects, bankers, wealth managers and all manner or tradesmen shopkeepers and other service providers.

There are good reasons to introduce the changes. As a result of George Osborne’s hike in stamp duty land tax we have seen a dramatic fall in property sales above the £4 million mark and a consequential drop in the tax take in Westminster, Kensington and Chelsea by about one half since 2012/13.

Whatever George says tomorrow in his Budget statement, I doubt whether we will see a return of confidence or a boost to our economy. The next date for optimism will be the referendum. If we are out of the EU, then we will again need to wait to see what policies will be adopted by Boris and Michael.  I for one will be lobbying hard for them to take a leaf out of the Swiss book to attract foreigners to not only come to the UK, but to bring their wealth with them.

Having been an ardent follower and commentator on budgets over many years – I would like to see politicians axe taxes and lower rates. The irony is that the fewer taxes and lower rates we have– the more tax is collected and the more work there is for everyone – apart from a small handful of nerds.

If you have any comments or would like to book an appointment with us, please call 0203 740 7423 or email svetlana@garnhamfos.com

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.