Sir Philip Green

It is quite right and proper for the MPs Business and Pensions committee to have powers (House of Commons Standing Order No 152) to ‘examine expenditure, administration and policy of the Department for Work and Pensions and its associated bodies and to call such people as it thinks appropriate to give evidence’.

BHS, the 88-year-old high street chain, has gone into administration with a £571million pension fund deficit which the Government backed pensions lifeboat may need to fund. However, in this case, talks are ongoing with investors and Sir Philip has not concluded his negotiations for funding the pension fund shortfall – so there may yet be no threat to the public purse.

But is it right for the select committee to use its House of Commons privilege to dig into the personal lives of Sir Philip and his wife, defaming them in their style of life and choice of residence because that is more salacious than finding out who was really to blame for ‘sleeping at the wheel’? Surely this is nothing short of a kangaroo court?

Richard Fuller MP said of Sir Philip Green that he was the ‘unacceptable face of capitalism’ – uh!

Arcadia Group Limited is a British multinational retailing company. It owns the high street clothing retailers Burton, Dorothy Perkins, Evans, Miss Selfridge, Topman, Topshop, Wallis and the out of town chain Outfit. I would like to know how many people in the select committee meeting had items of clothing from these stores in their wardrobes. Is this the unacceptable face of capitalism?

The three main areas of concern, to my mind, are

• why was BHS sold to Dominic Chappell who had no retail experience?
• why did Sir Philip Green take out such high dividends when the pension fund was so depleted, and
• should he have known that the pension fund was so depleted?

Sir Philip Green is a busy entrepreneur; he has to rely on his advisors. His responsibility is to choose his advisors well. He picked Goldman Sachs to do due diligence on Dominic Chappell who investigative journalists have now revealed has been three times bankrupt and has no experience in retail. In less than one year he extracted over £25million from the ailing company. Sir Philip is on record as saying that if he knew about Chappell’s lack of experience he would ‘one million per cent’ not have sold BHS to his company. Is this the unacceptable face of capitalism when his advisor has failed to do its job properly?

How did Sir Philip get away with paying his wife £400 million in dividends? In 2002, Arcadia Group plc was bought by Taveta Investments, owned by Taveta Ltd based in Jersey. Taveta Ltd is owned by Philip Green's family, and the only director is Lady Christina Green Sir Philip Green’s wife. Arcadia Limited is therefore a private company which means that it is not subject to the stringent rules of the London Stock Exchange and what it pays out in dividends is not so carefully monitored. The alleged payment of £400 million was not however paid out of BHS alone but from all his brands. Like so many entrepreneurs he has some rising stars and some duff investments. He is a very successful retailer and has every right to benefit from his hard work and expertise.

With regard to Sir Philip’s duties to the pension fund, monies were paid from the retailer to the pension for the benefit of the 20,000 employees and former employees. It is held on trust to separate the fund from the business. As soon as the payments have been made they are the responsibility of the trustees who have a ‘fiduciary duty’ to act in the best interests of the beneficiaries – the employees. It is therefore the trustees, not Sir Philip, who have the duty to make sure the fund is properly funded. Why is the blame not more properly targeted at them? Maybe because evidence from the trustees would not make such a good story as the personal lives of Sir Philip and his wife?

Sir Philip Green may not be everyone’s favourite entrepreneur, but being successful and living in Monaco should not be a good enough reason for MPs to publicly mock and ridicule him and his wife in the House of Commons for the enjoyment of the man in the street.

If you would like to comment or book an appointment with Caroline or any one of her team, for succession, estate planning, offshore trust review, dispute resolution or matrimonial concerns please contact svetlana@garnhamfos.com or call 020 3740 7423.

Not surprising

We are living in uncertain times; will the US be a safer place under Trump or will the world be better under Hilary Clinton? Should we leave the EU and go it alone, or will we be better off with the protection of being part of a larger group pulling together? Each one of us who votes will put their cross against what they see as best for them and uppermost on the agenda is personal safety and well-being,

In July last year, the Prime Minister spoke of the need to address corruption and to combat illicit financial flows. This is also tapping into everyone’s concern for their safety and well-being. As from this month, June 2016, the UK is to be the first G20 country to establish a publicly accessible central registry showing who really owns and controls UK companies. The reason is to ‘open a new era of corporate transparency in Britain’ which will help us tackle corruption, money laundering and terrorist financing.

But before we sweep away privacy and confidentiality I would like to know what research has been done into whether such a public register will genuinely flush out crooks or will it in fact create more.

The private client industry is already beset with compliance and regulation which seeks to flush out those who have made their wealth from ill-gotten gains. Every business which is involved with financial transactions needs to obtain from their clients a copy of their passport and utility bill and to investigate how their clients made their money. Since 5th July 2005, if any private client practitioner has reasonable grounds to suspect that monies have been made by suspicious transactions, they then need to make a suspicious transaction report to the Financial Conduct Authority.

The reporting of suspicious transactions has been with us now for over 10 years. We should by now know whether this cost of compliance and the inconvenience to the majority of innocent people has resulted in a significant increase in apprehending criminals. 

Although not all countries want to make the information they glean from other countries under the automatic exchange of information (Common Reporting Standard) public, I am seeing a fear amongst wealthy individuals that this information whether public or not, will lead increase the risk of criminal activity against them rather decrease the number of people gaining from criminal activity and want to know what they can do about it. 

Currently the focus in offshore structuring is to include entities in countries which either have not signed up to the Common Reporting Standard or do not collect the beneficial ownership details when companies or entities are formed.  The country at the top of the list is the US and in particular Delaware companies and trusts based in the US Virgin Islands.

As we all know most wealthy people have not made their money from illegal activity. Behind every successful business, whether it supplies us with BBQ’s, fuel, wine or curtain fabric is one or more wealthy individuals; people who have made their riches through sheer hard work, client focus and determination. It is simply not true that a billionaire could have only have made ‘that sort of money’ through exploitation, corruption, greed, cheating or organized crime. However, despite this obvious fact many of our journalists and politicians would have us believe otherwise, and that this is a small price to pay for the benefit of being rich.

Is it? Just pause to think how you would feel if there was a public register of everything you owned (including the numbers of shoes and watches) how much you had in your bank account and what you spent your money on. Why should there be one rule for the rich and another for the poor?

If you would like to comment or would like to book an appointment with Caroline for estate or succession planning, or with any one of her team for dispute resolution, matrimonial or investment strategy write to svetlana@garnhamfos.com or call her on 020 3740 7423.

Where do we go from here?

Buying homes in the UK and in particular London, has been part of the diversification investment strategy for wealthy Asians for the last three decades. Having a home in the UK,  is their offshore ‘store of value’. Until recently not only was it a good investment which enriched their lives, but was also tax free.

Families could simply invest through an offshore company and then forget about stamp duty, capital gains tax and inheritance tax. This has now all changed thanks to George Osborne.

Many foreign home owners are confused. They need to know that just as it was possible to avoid taxes through foreign company ownership there are other ways in which tax can be mitigated.

Lee is a typical Asian living in Singapore, he has a daughter in Wycomb Abbey and a son at Cambridge University. He owns a home in Knightsbridge where he and his children stay when in the country and not at school or uni. Their home is owned through a Jersey trust and company structure, on which Lee has been paying the annual tax on enveloped dwellings which for last year was £54,450. Their children are resident in the UK and are beneficiaries of a trust which is also based in Jersey. The cost of running two trusts offshore is in excess of £16,000.

Lee’s first priority are the taxes on his home; the annual payment of ATED, capital gains tax on a sale at 20% and ultimately inheritance tax at 40% on death, the second priority is that he and his wife do not want to give large sums of money to their children at such a young age.

Oddly enough tax planning should be first and foremost about life decisions – not tax. Living in the Bahamas may be a great way to save taxes, but if you do not want to live there – don’t do it! This means that planning around personal priorities should not be embarked upon by an enthusiastic amateur.

To take Lee’s Knightsbridge home out of the company structure would, I pointed out, trigger a capital gains tax charge. However, it would be levied only on any gain made since 2015 and at a rate of 20%. So this would not too onerous a cost.

Lee and his wife would then need to put in place some precautionary measures to mitigate inheritance tax. They are both in their fifties and in good health, so what they needed was precautionary measures should Lee die unexpectedly – not a full blown succession plan.

For Lee it made sense for him to draw up a Will leaving his Knightsbridge home in a Will Trust for his wife for life and thereafter for their children. Given that both she and Lee are non UK domiciled, this transfer would be tax exempt. Lee’s wife could then decide whether to keep or sell the home. If she decided to sell it, she could then take the proceeds out of the UK and the value would then immediately be outside the scope of Inheritance Tax on her subsequent death or gift to the children. 

With regard to the trust for the children, I asked whether the children were paying UK tax on the income and capital gains tax on the distributions which they were receiving from their Jersey trust. They were, but at their lower rates of tax, so the annual tax cost was not very high. The main benefit of the trust was therefore to provide a hedge against the ten yearly inheritance tax charge at 6%.

I pointed out that if mitigation was the main benefit of the trust then there was no reason to keep it offshore. The same benefits could be achieved if the trust was repatriated to the UK by appointing UK trustees.

Lee was delighted putting in place a few simple precautionary measures which did not take him long to understood, he felt much more in control, he could retain his UK investments and continue to enjoy them.

Tax should never be the tail which wags the dog. People like Lee can always find ways to mitigate tax, and because the timing of death is not predictable estate planning is not considered by the government as aggressive tax avoidance.

If you would like to book an appointment with Caroline who is a Fellow of the Chartered Institute of Taxation or meet with any of her team for dispute resolution, matrimonial or family business concerns contact svetlana@garnhamfos.com or call 020 3740 742.

Proud to be British

Last week George Osborne, Chancellor of the Exchequer predicted that Brexit could cost the UK £200 billion in lost trade and a further £200 billion in foreign investment within 15 years. Does anyone believe him?

The outlandish announcements started with the Prime Minister stating that he had secured ‘fundamental reforms’ in the EU which meant he could now confidently put his weight behind the decision to remain in the EU. But the British people know that the EU is not set to change despite the claims of our Prime Minister to the contrary.

The polls regardless of the barrage of lies and half-truths have not budged. The British people are not stupid; recent attempts by the Prime Minister and his Chancellor to pull the wool over our eyes are not working.

There are many people in this country proud to be British. Our little rain swept island has created more jobs than all the other European countries put together and we are now the fifth largest economy in the world. Why do we need to believe politicians who say we cannot go it alone – we can, but do we have the politicians we need with the innovation and guts to make a success of it?

We need to look at how countries outside the EU have fared and take a leaf out of their book. Switzerland, for example is outside the EU and yet it has twice the GDP per capita than we have in this country. Can we take some of its policies and adapt them to our country.

First we could change our attitude towards the wealthy who are keen to live and buy homes in the UK. Rather than encouraging them to leave their wealth offshore we should legislate to incentivize them to bring wealth into the UK. This could be achieved very simply by introducing an exemption from UK tax for all monies brought into the UK which are invested or managed in the UK.

This exemption could then be extended such that any monies, which were brought into the UK but not managed or invested should be charged to income tax – regardless of source. This would wipe out a lot of wasted time and effort in trying to work out the source of funds and the correct amount of tax payable. It would also be much fairer; taxing monies which are spent in the UK.

In line with this thinking, I would extend the exemption of the excluded property settlements to trusts with UK trustees which are managed or invested in the UK. The UK is the founder of the trust, and we should do what we can to make sure we capitalise on our creation rather than provide opportunities for offshore financial centres such as the Bahamas, Jersey and Cayman Islands to thrive. In this way excluded property trusts would be much more transparent to everyone, would create jobs for our trained and skilled professional members and bring more monies into the UK to be managed. All disputes affecting such trusts would also have access to our UK court system and skilled lawyers.

The government could further encourage wealthy foreigners as well as those who are already living in the UK to bring monies into the UK by introducing an amnesty for all non doms who are concerned that inadvertently they have not declared all monies which are offshore but the source of the funds is uncertain (but not illegal). This would be particularly attractive in the buildup to the Common Reporting Standard 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.

George Osborne talks about the house price crash if we were to leave the EU, and yet ironically he has done everything possible to freeze the housing market and drive down prices. He has ratcheted Stamp Duty Land Tax to 12% (15% for second homes), which has not only sent the tax take spiraling downwards, stalled the upper end of the market, but has also had a profound impact on the industries which serve these homes; architects, builders, interior decorators, estate agents, surveyors and many more.

What the country will decide on the 23rd June, I have no idea, but I am concerned on two counts. First, if the country votes marginally to stay in, the uncertainty about the future of the European Union will remain, second if we vote to go out, do we have the political innovation in government to make going it alone the success, I think the British people are capable of. I am proud to be British, and I think we could once again be Great, but do we have the politicians in government who believe in us, and have the experience and guts to take us there?

Caroline Garnham is CEO of Garnham Family Office Services, if you would like to receive her weekly Note or book an appointment with Caroline or any of her team to discuss any concerns as to estate planning, succession, offshore trusts, dispute resolution, matrimonial or other non-investment issues write to svetlana@garnhamfos.com or call 020 3740 7423.

Not always good

Last weekend I was sitting having a cup of tea with Paul, in the weak Spring sun at the Lido café overlooking the Serpentine in Hyde Park. There is something chilling, but not unpleasant about being warm drinking a hot cup of tea, watching swimmers pound out their lengths in the freezing cold water.

Paul, before he retired was a top City capital markets lawyer and is therefore familiar with the law of trusts. More recently he has turned his skills to reviewing trusts for private clients and other related matters.

I asked, from his recent experience of private client trusts, whether they were as well drafted as trusts for commercial purposes. He said that standard forms of trust written by banks, on the whole, were well crafted, but this was not always the case for the more ‘tailored’ trusts.

This is not as surprising as it may seem. Banks do not allow Settlors to add or remove clauses. Their standard trust deeds are drafted by experts and approved by leading counsel.

However not all Settlors are prepared to accept a standard form when it comes to dealing with their world-wide wealth. Many Settlors want to set up trusts for their successors, but they do not want to lose control of their wealth, by giving their trustees too much power. They are used to getting their own way. They push their advisers into putting clauses into trusts which all but the very experienced trust professionals would find hard to resist.

The latest example, was for a family which I will call Gonzalez. They are based in South America, but have their liquid assets managed out of Switzerland. The structure was overly complex, but at the heart was a trust which reserved three powers to a ‘Protector’ which was Gonzalez, during his lifetime and thereafter his eldest child.

The first power was to decide on the investment strategy of the trust, the second was to remove and replace the trustee and the third was to determine when and to whom distributions were to be made.

I discussed these three powers with Paul. He agreed with me that to reserve powers of investment and choice of trustee is fine, but to reserve the right to decide on distributions was probably not.

Gonzalez has two sons and two daughters. His first child is a son and is the apple of his eye. He has followed his father into the family business, married well and has three beautiful children. However, his other son who is the youngest was not so well regarded by Gonzalez. He left school early to become a singer songwriter, but after a promising start had produced only a modicum of success and had slipped into a louche lifestyle of soft drugs, late night revelling and poor company. He had two children by two different mothers and Gonzalez feared he may be bisexual. His two daughters were fine, but feckless. They were both married, but to men who Gonzalez thought lazy.

On his death he wants his eldest son to step into his shoes, run the business, be the Protector of his trust and prevent his other children from inheriting any capital outright. However, it soon became clear that the three younger children would resist any arrangement whereby their older brother could decide how much or how little they were to inherit.

Under the trust document as drafted, it could be argued by the youngest three children that Gonzalez had not succeeded in creating a trust, but a nominee arrangement. If successful in this argument, his estate would pass under the laws of the country of his residence; one quarter to each child. However, it is not as simple as deciding which members of the family are right and which members are wrong. Family disputes only get resolved after months, if not years of arguing, and the longer the argument continues the more the family assets are eroded with legal fees.

Some advisers suggest to their clients that they leave the trust as drafted and set out how to resolve their concerns in a Letter of Wishes. In theory this is excellent. However, in practise, a Letter of Wishes or Family Constitution is for guidance only. Trustees keen on a quiet life are more likely to follow the path of least resistance than to ensure the Settlor’s wishes are followed.

Of course where neither party is ready or willing to compromise then the Trustee has no option but to get professionals involved. If the trust is well drafted differences can be resolved through skilled mediation, which is what we would recommend and do for a client wherever possible. Although more fees can be earned through litigation, we do not believe that litigation is the best way to resolve a family dispute. However, it is not always easy to get a family around a table and sometimes family members will only mediate if they are not made to sit in the same room as each other.

My preferred option to resolving disputes using third parties is to put in place a dynamic structure; trusts, private trustee companies and an Executive Entity where good governance principles resolve disputes rather than outside professionals. Structures which incorporate good governance principles can also meet most concerns of the Settlor without jeopardising the integrity of the structure or ignoring human nature.

If you have any comments on the above, would like Garnham FOS to review your trust structure or your family is in dispute over a trust, contact svetlana@garnhamfos.com or call 020 3740 7423 to arrange an appointment to see Caroline or any one of her team.