Nonsense!

In 1987 I was invited to be a contributor to the weekend Financial Times because their journalists were not sufficiently knowledgeable about tax to write about it. Reading the nonsense written in the papers about the non-payment of inheritance tax by the Duke of Westminster on his £9.9billion estate, makes me think that nothing much has changed.

 To give some quotes; the Observer ‘For the Grosvenors the 40% death duties incurred by normal estates do not apply’ - based on what?

The Guardian ‘’Money can stay in the trust and cascade down from generation to generation and nobody pays inheritance tax on it’ – huh?

Money Week  ‘we have long argued that inheritance tax should be fundamentally reformed so that the tax is not levied on a deceased person’s estate but on the income gifted to the beneficiaries.’ What sort of revenue would this produce?

The Observer talks about a campaign to call for beneficiaries to be named on a public register of family trusts and to publish annual accounts, and says ‘the argument for transparency has surely been won’ -  Does the Observer genuinely believe that family trusts in the UK are engaging in some skullduggery that needs to come to light?

The articles talk about discretionary trusts as not being ‘owned by anyone’ so that wealth can pass from one generation to another tax free. This is simply not the case. Inheritance Tax is payable at 20% when the trust is set up and at 6% every 10 years, which means that after 40 years the trust would have paid 44%. Furthermore, trusts in this country cannot last forever, the average time is about 100 years. However, in other jurisdictions trusts can go on forever and can skip the 20% charge on set up.

If I were advising the Grosvenors – which I am not, I would not use discretionary trusts other than for assets which are 100% exempt from tax; agricultural land and relevant business property.

However, the land in Mayfair and Belgravia do not qualify for business property relief or agricultural property relief, so I would suggest that these assets are held in an ‘interest in possession’ trust for his eldest son Hugh.  

The term ‘interest in possession’ means that Hugh is entitled to all the income which arises from the land. However, this does not mean that Hugh gets paid all the rent from Mayfair and Belgravia.  If the land is owned by an investment holding company the Directors can decide whether or not to pay dividends, if no dividends are paid Hugh would receive nothing. The company would of course pay tax on all the rental income it receives but the rate of this is about half what Hugh would pay if he received this money direct.

The problem with an interest in possession trust is that Hugh will be treated for inheritance tax purposes as if he were the owner. Therefore, if he were to die unexpectedly, then Inheritance Tax at 40% will be payable on all the land in the trust.  Given that Hugh is only 25 this can easily and cheaply be covered by insurance.

As soon as Hugh marries and has a child, then this trust will be moved by the trustees on to the next generation, and provided Hugh survives seven years it will pass free of tax.

The calling for a public register of all trusts and beneficiaries, raises concern that in some way these elite aristocrats are above the law and that journalists need to be able to expose this mischief. The fact is that these families are bound by the same laws as everyone else. Where they differ is that they see themselves as custodians of their wealth; not owners. Most wealthy families, even with significant wealth see themselves as owners and are simply not happy to pass their wealth on to the next generation. They have a tendency to hang on to it until death is looming at which time it is too late to survive the gift by seven years.  

The main advantage of having assets in trust, is that the trustees take the decisions as to when to pass the assets on to the next generation and often do so as soon as the next generation is born. Where the journalists go wrong is in thinking that the deceased Duke was worth £9.9 billion on his death. In reality he was probably worth little more than the £325,000 nil rate band, the rest was probably passed on to his son 25 years ago!

If you would like comment or to book an appointment to see Caroline or one of her team to discuss, estate planning, review your trust, privacy planning or any other concern please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com 

2017 – the new 1984

Last week I went to see the production of George Orwell’s book 1984 currently showing at the Playhouse Theatre in London.

Winston Smith is the main character in the book and play. He lives in Airstrip One, formerly known as London, within Oceania one of the three Superstates which divided the world after the global war. The UK having fell into civil war after the war has been absorbed into Oceania, whereas continental Europe has been conquered by the USSR and the third Superstate is Eastasia, made of Eastern and South Eastern Asia. The three Superstates are continuously at war fighting over the remaining free land.

Oceania is run by 2% of the population, the Inner Party and is led by ‘Big Brother’.  Individuality and independent thought are forbidden and everyone is encouraged to report suspicious behavior to the ‘Thought Police’ who then bring such miscreants back in line through torture or kill them.

Winston is a member of the middle class called the Outer Party which makes up 13% of the population. He works for the Ministry of Truth or ‘Minitrue’ as an editor, responsible for historical revisionism; he rewrites records and alters photographs to conform to the state’s ever-changing version of history, rendering the deleted people ‘unpersons’.

In every building there are television screens, accompanied by secret microphones and cameras. Most people with whom Winston interacts are like robots repeating the same phrases and actions, apart from Julia, who he discovers hates the lack of privacy and diminished individuality imposed by Big Brother, as does he.

1984 is a powerful play, because it touches on our perceived right to privacy – which most of us expect from a democratic society. But are or we deluding ourselves? Are we already living in an Orwell society, the only difference being that our ‘Big Brother’ is benign, at least until 2017.

Most of us have got used to being watched in every shop and office. We accept this intrusion, because it greatly assists police in catching criminals. Retailers give us loyalty cards to track our personal preferences to tempt us to buy more. The Internet uses cookies to follow our activity online, our mobile phones track our whereabouts and our cars have memories as to when we last used them.

We cannot go to a doctor without them recording our medical history, to keeping us healthy, and we happily disclose personal information to our professional advisors forgetting most of the time that if they suspect us of suspicious transactions they are obliged to report us to the financial crime enforcement unit in that country.

Our ‘Big Brother’ is benign – but is it due to turn beastly in 2017? This is the date when the Fourth Anti Money Laundering Directive for OECD countries comes into effect, when every financial institution must record every payment of EU10,000 and the beneficial owner of every company and account to the local authority. This is designed to flush out suspicious activities and clamp down on the proceeds of crime finding their way into everyday life as well as tax evasion. Reports considered significant will be followed by an investigation, fines and criminal sanctions.

In 2017 we will also see the implementation of the Common Reporting Standard where financial institutions are obliged to collate and report on all accounts of foreign owned individuals to their government which will then be exchanged automatically with that individual’s home country.

Of course it is right and proper that evaders of tax are brought to account, but not all wealthy people with businesses and accounts offshore are tax evaders; and most will not welcome an increased chance of an investigation due to some misleading or inaccurate information or worse – an increased threat to their personal safety and the safety of their family.

Julien E Cohen says ‘Conditions of diminished privacy impair the capacity to innovate’. I am not sure I agree with this. Winston in 1984 did not stop wanting to write his diary or to be intimate with Julia he simply used his powers of innovation to preserve his privacy, (or so he was trapped into believing). In the same way innovative entrepreneurs who value privacy will find ways to preserve and protect their financial information – hence the growing interest in ‘privacy planning’.

If you want to know more about estate or privacy planning, or you wish to review your offshore structure call Svetlana on 020 3740 7423, or write to svetlana@garnhamfos.com 

The Duke of Westminster dies aged 64

Gerald Cavendish Grosvenor, the 6th Duke of Westminster has died of a heart attack aged 64, at the Royal Preston Hospital in Lancashire last week. He was the third richest Briton – worth an estimated £9 billion. 

His estate included 100 acres of Mayfair and 200 acres of Belgravia. 

His son, Hugh Grosvenor, who is Prince George’s godfather will inherit the entire estate at the age of 25, as the only son despite not being the eldest. The Grosvenor Family Trusts still favour primogeniture. However, unlike the Royal Family which changed the succession to the throne under an Act of Parliament, the Succession to the Crown Act 2013, there may be little the Grosvenor’s can do about it.

I do not know the Grosvenor family, but I have worked with another family which owned large swathes of London. I have therefore witnessed first-hand some of the pressures these families are under due entirely to the fact that they are the beneficiaries of a substantial estate trust fund and they cannot live their lives as they chose.

Whether Hugh Richard Louis likes it or not he is now the 7th Duke of Westminster with all the responsibilities, pleasures and burdens that this brings with it. He is now heir to a vast fortune, but is unlikely to have any control over it, and will have little say over the investment strategy or distribution policy. The responsibility for taking these decisions will be on the shoulders of the family’s trusts trustees. Yet despite having little control or say over the vast fortune, he is still treated by the press and everyone else as if it is his.

Vanity Fair described Hugh as ‘baby-faced’ and ‘absurdly rich’ – but the estate is not technically his it is owned by the family’s trustees.

Most heirs surround themselves by those who have similar pressures and concerns, which is why it is not surprising that Gerald was so close to the Queen and Prince Charles. However, unlike the Queen or Prince Charles Gerald never thought he would inherit the title or the vast family fortune. His uncle was the Duke, but he died without heirs and so his father Robert inherited the title and the estate, which then put Gerald first in line.  

Gerald was brought up in a remote part of Northern Ireland and lived a simple rural, unaffected, unspoilt life with aspirations of being a beef farmer in Northern Ireland. Not for him the life of chauffeured limousines, even after he became the Duke he would prefer to drive himself when in the country in a battered old land rover wearing baggy corduroys.

Like his father, Hugh has inherited the title and the estate in his twenties. Hugh is currently working as an account manager at a coffee recycling firm, which collects waste coffee, grounds and converts them into bio fuels and biomass pellets. On his father inheriting the title and becoming a trustee of the estate, Gerald was forced to abandon his dream of a career in the Armed Forces. Quite probably, the trustees of the family’s trusts will have similar plans for Hugh.

The pressure of being a Duke and head of a vast fortune, accompanied by the vast number of charitable functions he is expected to attend nearly led Gerald to a nervous breakdown for some years ago. He had so much handed to him on a plate and so much was expected of him he nearly cracked under the pressure, despite having experienced trustees doing most of the work for him. As I learned from my experience dealing with London land owners, it is hard for them to find something of which they are proud. I remember driving my client, the heir to the title and a vast London estate to our next meeting in my battered old car for which I apologised. His response was ‘Don’t be ashamed, you should be proud, I have never earned money to buy a car, they are all given to me’.

This is why Gerald’s success in becoming a commanding officer in the Territory Army was so important to him. His promotion was entirely due to his own efforts.

How will Hugh rise to the burdens and challenges of being a Duke?

In 1992 his father told the Independent ‘My main object will be to teach himself self-discipline and a sense of duty. He’s been born with the longest silver spoon anyone can have, but he can’t go through life sucking on it. He has to put back what he has been given.

If you would like to discuss your succession, estate, or privacy planning with Caroline or wish to talk to any of her colleagues on dispute resolution, matrimonial or other issues facing UHNW families please contact Svetlana on svetlana@garnhamfos.com or call 020 3740 7422.

Sinister!

Last week, I met with Jane Gilbert, a friend of mine for breakfast. She is an expert in kidnap and extortion insurance and we met to discuss the kidnap of Bernie Ecclestone’s mother.

Whilst kidnapping for ransom continues to be an everyday occurrence in many parts of the world, the crime continues to develop.  Today, for example, a virtual kidnap.  Virtual kidnapping is going global; it is now endemic through Latin America and Mexico and has spread to the Middle East.

The significance of 2017, is that this is when the Common Reporting Standard will be implemented world-wide. The advantage of Virtual Kidnap is that it is a perceived kidnap; it is not real. A Virtual Kidnap avoids the need for more than one person, weapons, a safe house and the risk that the victim will be able to identify them.  Some criminals try their luck (with success) just with a mobile phone and a telephone directory.

Mandy is the daughter of a wealthy entrepreneur Peter who is in the food importing business set up by Peter’s Polish father Nicolas. As Mandy is having coffee in Dubai where she lives, she is jostled and her mobile phone which is in her hand is stolen. She is annoyed, but not alarmed, all her details are backed up.

An hour later, Peter receives an anonymous call, ‘Hello, we are holding Mandy your daughter, she is wearing a blue shirt, white trousers and a Rolex watch. Transfer £1million to us and she will not be harmed’

Immediately, Peter calls Mandy on her phone, but he gets no reply he tries again and again, no reply. He panics, so he pays the money.

A few days later Mandy contacts her father Peter to say that she now has a new contact number and he finds out she has not been kidnapped, but merely had her phone snatched.

Now let’s fast forward to 2017. Peter is a beneficiary of a trust, the Sunshine Trust set up, by his late father, Nicolas in Jersey twenty years ago. He is the Protector of the trust, but has never received any payments from it. The trust has £30million in a bank account in ABC Private Bank in Jersey. Jersey like most other countries now demands every financial entity in the jurisdiction to report all accounts of foreigners with the amount, the distributions and to whom and the identity of everyone who has significant influence over the account under the Common Reporting Standard.  ABC Private Bank therefore has to disclose to the Jersey authorities the deposit of £30 million it holds on behalf of the Sunshine Trust, of which Nicolas is the Settlor and Peter is the Protector.

Peter receives a call in 2017, ‘Hello, we are holding Mandy your daughter. Transfer the sum of £30million which you hold at ABC Private Bank on behalf of the Sunshine Trust and she will not be harmed’.

How did the criminals get this information – both Jersey and the UK have in place rigorous processes to ensure the privacy of this information? There are however, numerous examples where rogue employees whether in government or in a bank simply steal the information and sell it. We have also seen seemingly impenetrable systems hacked and information made public.

As Protector of the Sunshine Trust Peter can indeed call the trustees and ask them to transfer to him the £30million to pay the ransom, but that is not all. The payment to Peter is a distribution from the Sunshine Trust, on which he is liable to pay tax. The Jersey authorities are obliged to report to the Jersey authorities which will automatically exchange this information to HMRC and Peter will need to pay tax on this money - but Peter does not now have the money to pay HMRC!

There are plenty of things Peter could have done, had he known the risks.  He can insure against such a risk, but he can also minimise the risk through ‘Privacy Planning’. He can change trustees in favour of those resident in a more suitable jurisdiction, move the administration of the trust from Jersey and the account from ABC Private Bank.

Tax evasion and aggressive avoidance are not to be tolerated anywhere in the world, and any professional which is complicit with a taxpayer in concealing funds from the taxman, will find themselves paying fines or worse. However, there are people, like Peter who have no intention of evading or aggressively avoiding paying their taxes, but will not compromise the safety of their family and will do what is necessary to protect them.

If you wish to book an appointment with Caroline or one of her team for privacy planning, the review of an offshore structure, estate planning, family governance, dispute resolution matrimonial concerns or any of the subjects discussed in this paper contact Svetlana on svetlana@garnhamfos.com or call 0203 740 7423.  

The kidnapping of Ecclestone’s mother-in-law

The mother-in-law of Formula 1 billionaire Bernie Ecclestone has reportedly been taken hostage for £28 million; believed to be Brazil’s biggest ransom demand.

Aparecida Schunck was allegedly abducted from her home in Interlagos, Sao Paulo, according to Brazilian Veja magazine. The 67-year-old mother of Ms Fabiana Flosi the 38-year-old wife of Mr Ecclestone presumably does not have this sort of money to pay her abductors, but her son in law does!

Ms Fabiana married Mr Ecclestone, 85, in 2012, after he divorced his wife Slavica Radic. He is reputedly worth an estimated US $ 3.1 billion.

Sao Paulo is not new to kidnap. It reached its peak in 2001/2 with more than 300 reported kidnaps a year. However, Brazil is still in the top five countries for kidnap with more than 1,000 reported a year in 2012. The actual number is likely to be many, many times more than this.

Abduction, however, is less common than ‘express kidnap’ which is commonly done by police, demanding the victim go to an ATM at gunpoint to pay to them a ‘bribe’.

Is it hardly surprising therefore with this going by the police, that some countries are refusing to sign a bi-lateral agreement with Brazil for the automatic exchange of information on financial data.

Governments across the globe are committed to the eradication of tax evasion which is good, tax evasion is not to be tolerated. The OECD Council approved The Common Reporting Standard (CRS) on the 15th July 2014. Each jurisdiction which signs up is committed to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

Guidance on what information is to be collected, which financial institutions are required to report, the different types of accounts and the information of the taxpayers as well as the due diligence procedures to be followed were first published in July 2014. However, concerns were soon expressed as to whether the information collected and exchanged would be secure in the hands of some of the ‘home’ countries of the beneficial owners such as Brazil.

While it is expected that most countries will sign up to CRS via a multilateral convention, some jurisdictions such as Hong Kong have adopted a ‘bi lateral’ approach, which means it will sign up only one country at a time and will not sign up to some of the less developed and secure jurisdictions.

The OECD is keen to stress that each country must meet certain standards to safeguard the information and if these standards are not met, other countries need not exchange the information collected with them. This let out clause is naturally not welcomed by many of the poorer developing countries which see themselves as being denied access to the information collected but then not exchanged. The OECD acknowledge this concern and has tasked the Global Forum to work with the OECD Task Force on Tax and Development in finding a solution.

It is public knowledge that Bernie Ecclestone is a billionaire and he would have been well advised to insure against the risk of his mother in law’s kidnap. However, as from 2017, the risk of kidnap of anyone who has an offshore bank account is likely to increase dramatically. The only way for these people to sleep soundly at night is to either move their account onshore, or to a country which has not signed a bilateral agreement with their home country or to countries which will not exchange the information collected until their systems are secure from hacking by criminals. Even if secure from hacking anyone with monies offshore should be concerned that their information could be sold by corrupt employees of these government institutions. It happened in Liechtenstein and could happen anywhere.

Privacy planning is, for UHNW families with investments world-wide, not a nice to have, but a must have. As from 2017, the confidentiality of financial information wherever it is, can no longer be guaranteed, unless it is in a country which does not collect or exchange information.

I welcome your comments and if you would like to know about privacy planning, estate planning, family governance, dispute resolution or matrimonial concerns contact svetlana@garnhamfos.com or call 020 3740 7423.