When a kick is needed

One of the great things about engaging the services of a family office is to cut the crap. Some professionals paid by the hour are tempted to prevaricate, because they are then paid more. The family office sits alongside the family with the aim of saving them time and money.

Last week Robert phoned me he was really cross. Robert is the beneficiary of a trust in Jersey from which his former wife Jennifer had been the settlor and she and her two children had been beneficiaries.  As part of their divorce settlement Robert had paid Jennifer and their children a sum of money and they had been removed as beneficiaries in 2001. The purpose of the trust had therefore been satisfied and so understandably Robert wanted the assets in the trust paid to him.

The trustees had done nothing in fifteen years other than collect their yearly fee which was based on the value of the assets in the trusts – which was substantial. So a few weeks ago Robert came to see me to explore what could be done.

I phoned the trustees and explained to them that Robert wanted the assets ‘appointed’ to him, in other words transferred to him. They confirmed that they would engage lawyers and get a Deed drawn up. That was fine – the document needed could fit on one page, so would not take long to draft. I chased up a week later and was told that instructions had been given to the lawyers to proceed.

Two weeks later, nothing had happened. I telephoned again and was told that instructions had not been given to the lawyers, because their in-house team had said that under the terms of Jennifer’s removal she had been given an indemnity from the trustees, which was not restricted in time and so remained in place. The trustees therefore needed to hold onto the trust assets to protect them against this ongoing exposure!

I informed Robert of this and he hit the roof. I pointed out to him that this problem could easily be resolved if Jennifer gave the trustees a waiver of her rights, and if not he could cover the risk with insurance.

When Robert calmed down he explained that he was on good terms with Jennifer and could see no reason why she would not sign a waiver.

I wrote to Jennifer explaining to her the situation,  taking care to point out that she should take legal advice if she was uncertain as to what was being asked of her and telling her what she needed to say to the trustees. She responded by saying that she understood what was being asked of her and e mailed the trustees accordingly. I then hounded the trustees until a Deed was prepared and signed and the assets were transferred to Robert.

Last week we had a meeting of our team of experts; leaders in the fields of matrimonial, dispute resolution, family company issues, investment strategy, estate planning, succession and offshore trust structuring. Each of them gave shocking examples of professional prevarication to preserve fees.

Rhiannon our matrimonial expert said she had heard of couples, who had no jurisdictional issues, spending years in unnecessary litigation when both parties would have been able and willing to mediate. Not only had their joint assets been depleted but the pain been prolonged and their children had suffered, simply because neither party had been made aware of an alternative to court litigation.

Richard had had the same experience; families made to go through years of expensive litigation when the dispute could have easily have been resolved through inexpensive mediation.

It is hardly surprising therefore that family office services do not charge by the hour. We charge on a fixed fee basis with a success fee at the end; we want to encourage short letters, simple solutions and speedy outcomes. There are of course times when a solution is not immediately obvious, but then we proceed in stages – until a solution is in sight – and charge accordingly. 

Of course, there are many professionals who do not engage in prevarication crap, and if their clients come to us for a second opinion we tell them that they receiving a first class service, that they are not being overcharged and we can little to assist, however this is sadly not always the case.

If you would like to book an appointment with me please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com

How the PM dodged Inheritance Tax!

How the PM dodged Inheritance Tax was a headline in the newspapers last week. No wonder the 5% who have sufficient wealth to be subject to inheritance tax are confused.

Firstly I am not at all sure that David’s father’s estate saved much tax despite the press coverage. In 2006 David’s father did a house swop with his eldest son Alexander and gave £1million to each of his daughters to buy a property in Kensington.  The paper went on to say ‘None of these gifts are believed to have incurred IHT’. Huh?

For a gift to be free of IHT, the donor must survive seven years. Ian Cameron died in 2010, which is only 3-4 years after the gift. Assuming my facts are correct the estate would have paid 32% IHT on these gifts. If he had died a year earlier – he would not have saved a penny in tax and could well have incurred capital gains tax which he could have avoided if he had left his estate to his wife on death. The IHT rate only starts coming down if the deceased survives more than three years.

As matters have turned out the Cameron family would have been better off if Ian had left everything to his wife Mary or in trust for Mary and she had made gifts to her children following her husband’s death. Given that she is still alive today six years following her husband’s death, the gifts would have attracted only 8% tax rather than 32%.

The newspaper blagged that Ian Cameron must have ‘known a thing or two about tax planning’ – obviously not!

The second error in the newspaper heading was that the PM ‘dodged inheritance tax’. The PM did nothing other than to receive a gift from his father on death and from his mother during her lifetime. This does not amount to ‘dodging’.

The newspapers went on to print more drivel. Inheritance tax the newspapers said raises ‘only’ £3.7 billion, or 0.25% of GDP ‘owing to the rich finding IHT relatively easy to avoid’. A survey conducted by Octopus revealed that 90% of people do not know what the inheritance tax threshold is and only one in three home owners have thought about tax planning to avoid this much disliked tax. On the contrary to what the newspapers have printed, I am surprised at how much tax is raised.

Polly Toynbee in The Guardian came out with the most risible statement ‘The time has come ’she writes ‘to abolish the tax’.  I am certainly in favour of reducing the rate to a level where the few who want to avoid giving the bulk of their estate to the Government cannot be bothered to avoid it. At 40% we have the fifth highest inheritance tax rate in the world. A family like the Cameron’s would have paid more money to the Government in tax than any one family member would have inherited.

Toynbee goes on to suggest that the Government should ‘introduce a new system in which all income is taxed in the same way, regardless of its source’ eh?

Inheritance tax is a tax on capital. A tax on the accumulation of hard earned income on which income tax has already been paid. What therefore is the link between abolishing inheritance tax and a new system of income tax?

And what does she mean by ‘taxed in the same way, regardless of source’? Income is divided and taxed according to its source; Schedule A land, B woodland, D business activity and E employment. We have a vast amount of legislation – the second largest in the world to prevent abuse of exemptions and reliefs. However, Toynbee in one dramatic sweep suggests we put a red line through years of intense work on income tax for the sake of abolishing a tax which affects only 5% of the population.

From my experience Inheritance Tax, which was first introduced in 1984 in place of Estate Duty, is a well thought out and carefully drafted tax as proved by the fact that it has not been tinkered with that much over the decades since. However what is needed is more education for our journalists which write this rubbish and to their editors who print it.

If you would like to arrange to meet with Caroline or any one of our team at GFOS for estate planning, dispute resolution, matrimonial (including family), family governance or investment strategy call Svetlana on 020 3740 7423 or e mail svetlana@garnhamfos.com

Defending the indefensible!

Many of you will have heard my defence of the offshore financial centres on the Today programme on Radio 4 on Tuesday. Robert Barrington of Transparency International said, live on air, that my proposition was ‘a good defence of the indefensible’!

Since the abolition of exchange controls in 1979, money can move anywhere in the world. It is hardly surprising therefore that it finds its way to places where it is taxed the least – offshore financial centres – which attract funds to their country by reducing taxation to zero.

Companies with surplus cash and an exposure to risk; health and safety, litigation or natural disaster set up companies in Bermuda for emergencies known as captive insurance, and for the payment of their employees on retirement in Jersey known as pension funds. The UK Government could charge these funds to UK taxation, but does not.

When it comes to private wealth however, the UK government has a different attitude. UK resident and dom UHNW families are charged to tax on all income, gains and capital held in offshore companies and trusts through sophisticated anti avoidance legislation.

This attitude has recently been extended to tax private homes in the UK held by offshore companies.

The Common Reporting Standard is an OECD initiative pioneered by the UK and due to become fully operational in 2017. Through the automatic exchange of information between countries it aims to flush out those people who are evading tax by not declaring income and gains in offshore structures.

This does not mean that all offshore structures to which UK residents can benefit are taxable. The UK offers specific exemptions from tax for offshore trust structures set up by non doms before becoming long term residents in the UK. These are called ‘Excluded Property Settlements’.  Residents of Switzerland who have a forfeit arrangement are not subject to tax on their offshore structures either and residents of Dubai are similarly not taxed on their offshore financial structures.

UHNW people are therefore attracted to live in such places, because their wealth is not being depleted by tax, either during their lifetime or on death.

Other countries in which wealthy individuals live may not have specific exemptions from tax for wealth held in offshore financial structures, but their legislation is not sufficiently sophisticated to charge the income and gains made by these structures to tax. To set up offshore structures by residents of these countries is not evasion of tax – because there is no charging legislation which makes it subject to tax – this was traditionally known as the avoidance of tax – the lack of legislation to tax it.

Lord Clyde summed up the principle behind tax avoidance in the Ayrshire Pullman case when he opined: “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”

In recent years however, the UK Government has overridden this opinion by introducing the General Anti Abuse Regulations with the glorious sentence ‘Taxation 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’.

The automatic exchange of information under the Common Reporting Standard will catch many wealthy families with offshore structures who are intentionally or otherwise evading tax. If these families have acted on advice and their evasion is unwitting then the professional is likely to be fined or even prosecuted as assisting in the evasion of tax. This will inevitably lead to an explosion of professional negligence cases by families who find they face the harsh and uncompromising steel of HMRC when dealing with suspected evasion.

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

Next week I will address non tax reasons and why families set up structures in one offshore jurisdiction rather than another.

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.