We need to rethink Privacy Planning

Twenty years ago I was approached by a professional trustee who I will call Jack, who had taken on the office of Protector of a Trust which owned a very substantial trading company. ‘I am nervous,’ he said. ‘If there is a claim against the company or the trust I could get dragged in personally. I have no funds at my disposal with which to defend any claim other than my own personal finances and have only limited information or right to information. A claim could wipe me out!’

I looked into the situation for him and wrote a report. He was in deed in a precarious position. He had a fiduciary duty towards the beneficiaries of the trust, which meant he had to act in their best interests even if it meant being proactive without being paid for his services. At the same time his hands were tied; he had no funds to take a legal opinion and no legal right to access information even if he did have the funds.

My report for Jack was put to the settlor who will I will call Joseph, who was luckily alive and well disposed towards Jack. He had not realised that Jack was, as the ‘Protector’ of his trust in such a vulnerable position to carry out his obligations in protecting his trust.

Joseph instructed me to see what solution we could find. He wanted Jack to remain in a decision making role, wanted him to have access to resources of information and funds, but did not want him to be exposed personally.

Between us we came up with the solution of setting up a private trustee company which was at that time, to my knowledge, the first. Jack was appointed a director, and as such had limited liability, had access to funds should he need to use them to fulfil his fiduciary duties, and access to information so that he could do his job properly. The professional trustees were then appointed under a contract of services to continue doing their job in administering the trust, but were relieved of their obligation to take fiduciary decisions which were now assigned to Jack and his fellow directors.

There are many trusts still being administered successfully by professional trustees to which powers, such as the removal and replacement of trustees have been reserved to a Protector. In some cases, the powers reserved are limited and in others they are extensive. Some trusts such as those governed by the International Trust Law of Cyprus, can reserve a power to a Protector which can determine when and to whom distributions are to be made without invalidating the trust. Whether the powers are limited or extensive, these powers give the Protector ‘significant control’.

Under the common reporting standard due to come into force next year tax relevant information will automatically be exchanged between jurisdictions and it will include the identity of the Protector and trust of which he holds office.

The definition of ‘beneficial owner has been extended in the CRS to include PSC’s; ‘persons exercising significant control’ as follows: 'Beneficial owner refers to the natural person who ultimately owns or controls a customer or the natural person on whose behalf a transaction is being conducted. It also so includes those persons who exercise ultimate effective control over a legal person or arrangement.’

The concern for every Protector is what will the tax authorities do, as and when they get hold of their name and the trust of which they are a Protector? Will they start an investigation under the Tax Information Exchange Agreement between the two countries?

The Protector, as I have said before, is in an invidious position; he or she does not have the resources to comply with a full investigation and neither will he or she have the necessary information, even if they were funded to comply.

The role of the Protector is to give the settlor some control over his assets, should the trustees begin to act in a manner which was not in line with his wishes. In most cases however the role of the Protector in practice is removed from the activities of the trust and so it may come as a real shock when the tax authorities start to investigate.

My advice to anyone who is concerned about their involvement with an offshore trust, whether as a Protector, settlor, beneficiary, trustee or director of a Private Trustee company is to get an independent review of the structure not only to protect the Protector, but also to ensure that the family knows who is reporting what and if necessary make changes.

Privacy Planning has nothing to do with the evasion of tax or any other illegal activity. For example, I will not take on any client if I have reason to believe they want privacy to evade tax. However, many wish to protect their family from an unwanted and expensive investigation and to do so they want to know what changes they need to make this year.

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

Is privacy dead?

This morning I asked my daughter, aged 20, whether she would like the details of her bank account made public. She was indignant – it was her private bank account! What she earns and how she spends it are not the business of anyone else in her opinion.

However, the global commitment to transparency and stamping out tax evasion would appear to justify having one rule for the rich and another for the less well off. And before you say, but is only the rich who have money offshore take a little time to consider where and how your pension is invested and yet the automatic exchange of information does not apply to pensions which are administered and managed offshore so as to enable them to accumulate tax free.

For many UHNW families privacy is very important, and I can already see more and more of them making arrangements to protect it.

In the US ,FATCA, the Foreign Account Tax Compliance Act contained in Sections 1471 to 1474 of the US Internal Revenue Code, was adopted on 17 January 2013 and effective as of 28 January 2013.

The purpose of this legislation was to prevent US persons from using foreign accounts and foreign entities to evade US tax on their assets deposited abroad. US taxpayers; banks, brokers, and investment management companies are obliged to withhold 30% of payments to foreign entities unless those foreign entities are either exempt or they have an agreement with the IRS to disclose all account details of US persons to the IRS. The withholding requirement became operative on 1st July 2014.

The OECD studied FATCA and then took it one step further generally known as the Common Reporting Standard (CRS). This is heavily based on the Intergovernmental Agreements introduced by the US under FATCA but is two way; not one way. The details of these proposals were first published in February 2014, with more details in July 2014.

To date all 34 OECD countries support it and more than 90 countries are committed to it, including all members of the EU, the BRIC countries and most major global economies such as Japan, Australia Canada and Switzerland. (Although the UK has voted to leave the EU, given the prominent role it played in shaping the CRS, I doubt whether it will not remain committed to it).

The way CRS works is that each country signs a bi-lateral agreement with every other country to agree to the automatic exchange of information dealing with tax matters. The only fig leaf offered to protect the privacy and confidentiality of the residents of any one country is that if it is concerned as to the confidentiality of data exchange with another country, it can decline to enter into an agreement with that other country.

But like so many proposals the ‘devil (or opportunity) is in the detail’. The countries which are committed to CRS all have different laws and rules. In some countries a company is resident in the country from which it is controlled, in others it is where it is registered and in others it is from where it is effectively managed. This means that if a company is owned by Mr Jones who is a resident in country X, is registered in country A, controlled from country B, and has its effective management in country C, information about the profits to which Mr Jones is entitled could be automatically exchanged with country X from three different countries; A,B and C depending on their bi-lateral agreements. This could mean triplication of information about the same profits to which Mr Jones is entitled.

Then of course what happens if you put a US entity in the mix. If a US resident Mr Wilson, has an account held by a bank in Switzerland, under FATCA the bank has to disclose Mr Wilson’s account details to the IRS but what about the other way around? A Swiss resident has a company in Delaware from which he receives dividends, which he does not declare to the Swiss tax authorities. There is no obligation on the company administrators in Delaware to disclose this information to the Swiss tax authorities. The Intergovernmental Agreement Switzerland has with the US is for a one-way traffic of data exchange.

For many UHNW families, who value their privacy whether they fear for the safety of family members, theft or adverse publicity, the fact that the US engages in only one-way exchange is attracting interest and ‘Privacy Planning’ is already on the minds of many UHNW families. However, exploiting the difference between the US and the rest of the world is not the only area attracting interest.

If country A and country B agree to exchange information with regard only to companies registered in their jurisdiction, but country B and C agree to exchange information only with companies controlled from their jurisdiction it may be possible to register a company in jurisdiction C, but control it from country B for a resident of country A. In this case neither country will be required to exchange information about this company to country A. This may be a facile example, but already fears and opportunities are being discussed across the globe as UHNW families become aware of the dangers of automatic exchange of information.

What are your views on ‘Privacy Planning’?

If you would like to book an appointment with Caroline or with anyone of her colleagues for succession, estate planning, privacy planning, offshore trust structuring, dispute resolution, matrimonial, or any other issue, please contact svetlana@garnhamfos.com or call 020 3740 7423.

Brexit - what the rich could expect?

What does Brexit mean for UHNWIs in Britain? Who knows – it very much depends on who will be our next leader and what his or her vision of Britain outside the EU will be. There is a global need for what we can offer, but we need someone with the guts to grasp it.

Our strengths on the world stage are that the UK is the world’s leading financial centre and undisputed centre for UHNWIs. The country needs now unashamedly to position itself as the world’s leading financial centre - offshore.

Our weakness is that the UK now has a politically unacceptable gap between the country’s very rich and our working middle class; doctors, teachers, accountants and architects. George Osborne has been set upon addressing this divide by pulling the rich down with swingeing taxes and eye popping fees. He has hiked stamp duty land tax up to 15%. Three years ago the boroughs of Westminster, and Kensington and Chelsea accounted for more revenue from stamp duty land tax than Scotland, Northern Ireland, Wales and northern England put together, this has now fallen by half.

In addition, he has introduced an annual tax on enveloped dwellings and extended inheritance tax on all UK homes. The result is stagnation of the high end property market to the detriment of all businesses which cater for this market; architects, builders, interior designers, plumbers and estate agents. 

Rather than making the rich pay their fair share of tax, the UHNWIs are confused and bewildered. Are they still welcome in this country?  The new taxes introduced over the last few years have sent out the wrong message. What we need is for the rich to live and invest in the UK, not to drive them away and to penalize them when they bring their wealth into the country.

However, we do not have the luxury of time.

The world needs to know that we are serious about wanting to attract business into the UK. If we don’t we will be negotiating from a position of weakness; trading agreements, treaty concessions or the terms on which we exit the EU.

As a Fellow of the Chartered Institute of Taxation and leading private client lawyer, a new leader could do this very simply with a few tweaks to our tax legislation

·      lower the rate of stamp duty land tax to 4% (the same as for commercial properties) for all residential properties other than properties owned by non UK residents. This will send a clear message that we want to encourage the wealthy to buy in our country provided they live here and pay taxes as UK residents

·      provide an exemption for every non dom who lives in this country and brings wealth into the country to be managed in the UK, or invested in the UK. I cannot see any logic in attracting the rich into our country, and then to stop them bringing in their wealth for us to manage and invest

·      tax all remittances to the UK to income tax regardless of the source of funds, which will make the remittance basis of taxation much fairer and simpler to operate

·      remove the fee for the remittance basis of taxation

·      encourage all non doms with trusts offshore to bring them onshore with full income tax and capital gains tax exemptions and to extend the inheritance tax exemption to UK situs investments. The UK is the founder of the trust, but has taxed trusts so savagely in recent years that they are no longer created in this country. This would provide a much needed boost to our tax and trust industry; lawyers, barristers and dispute resolution experts

·      lower the rate of VAT for non-luxury goods and services.

Taxing the rich at unacceptably high rates is not good for the country.  With the vote to leave the EU and resignation of Cameron, we now have the opportunity to play to our strengths. In so doing we can once again become Great Britain; rather than Little England.

If you are in agreement with my views, please share this with your MP and in particular to all candidates who have put themselves forward to succeed Cameron.

Caroline has written two books ‘When you are Super Rich who can you Trust’ and ‘How to win business from Private Clients’.

If you would like to book an appointment to see Caroline for estate planning, offshore trust review or succession, or any one of her colleagues for dispute resolution, family issues or investment strategy, or buy a book please contact svetlana@garnhamfos.com or call 020 37407423.

We don’t talk about these things!

I had lunch with a client last week who I will call Jennifer. Her sister Tracey lives in a property owned by an offshore company which is owned by a trust set up by their father Yusef. Yusef is happily married to Sara and they both live in Singapore. Both parents are in their mid-sixties and in good health.

In April Yusef paid £109,050 in ATED which is set to rise again next year. Yusef knows that as from April 2017 if the property in which Tracey lives is still owned by an offshore company he will have to pay another ATED charge and in addition if the company is still owned by the trust will have to pay inheritance tax on the ten yearly charge.

ATED (Annual Tax on Enveloped Dwellings) is the annual charge introduced by the Government to compensate it for the lack of Stamp Duty Land Tax on a sale of the offshore company to someone who wants to own the property. The Treasury has also announced that the rate of tax is due to go up by 50% of the RPI year on year. This a clear indication from the Government that it wants everyone who has a property in the UK to pay tax.

Inheritance tax is payable on death, every ten years by a discretionary trust and on gifts made within seven years of death. As from April 2017 on death it is charged at 40%. If Yusef were to die owning the property or a company which owns a property worth £12 million the tax payable will be £4.8 million. Given that Jennifer and Tracey are his only two children, they would each be deprived of £2.8million if he left the property to them in equal shares.

If he left the property in trust for his children, then he would have to pay tax at 6% on every tenth anniversary of when the trust was set up. Given that Yusef set up the trust in May 2007, the ten yearly charge would £720,000, payable in May 2017 which when added to the April ATED charge of £109,050 adds up to tax in excess of £829,050 next year.

Jennifer accepted her father Yusef needed to enter into an estate plan to save the tax. There is nothing wrong with making a plan to save tax provided it uses reliefs for the purpose for which they were granted.

I sat down with Jennifer last month and we went through the options arriving at a solution which she thought would be attractive to her parents.  

A few days later however she phoned me and by the tone of her voice she was not pleased.

She had met with Tracey her sister who was also delighted with what was proposed, but when they called their parents, their mother Sara refused to discuss any sort of plan. ‘This is an issue for your father and I to discuss and we have not made up our minds as to whom or how we wish to leave this property in London. There are just too many things to consider. We are both in good health and do not want to think about what should happen on our death’.

I suggested that I have a meeting with Sara, I pointed out that Sara need to understand the difference between putting in place an estate plan and a succession plan. 

Jennifer did manage to arrange a meeting. It soon became clear that Sara was not clear as to the distinction between the two. She was worrying as to whetherJennifer or Tracey would have children, what would be their financial circumstance and how much should they provide for each of them and how much should go to charity. She was trying to imagine what her family would look like on the death of herself and her husband, rather than to look at the consequences if either were to die unexpectedly tomorrow.

Once Sara understood the distinction between the two and realised that she could at any time make changes as and when circumstances changed, she quickly grasped the value of the plan and she and her husband asked us to proceed.

If you would like to know more about how to put in place an estate plan, or would like to meet either Caroline or one of her colleagues for succession, offshore trust structuring, dispute resolution or matrimonial issues please contact Svetlana for an appointment on svetlana@garnhamfos.com or call on 0203 740 7423.

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.