Has the treasury misled taxpayers?

In the Finance Act 2014 the Government introduced anti avoidance provisions called Pre Owned Asset Tax which charged an income tax charge on taxpayers who had entered into a ‘double trust scheme’ to avoid an inheritance tax on their own homes. Many of these people had entered these schemes confident that they were within the law, relying on Counsel’s opinions and taking advice from top ranking lawyers.

What shocked me then was not that the Government had closed down an inheritance tax scheme with an income tax charge, but the vindictive tone and attitude of the Government to taxpayers who used the existing law to plan to pay less Inheritance Tax. It took the harsh view that if anyone even tried to minimize their tax, then they deserved what they got if as a result they had to pay more tax to unravel the arrangement than if they had done nothing or taken out life insurance.

It was with this experience in mind that I have been telling everyone who was prepared to listen for many years to own their home directly and not through a company structure. I did not believe the Government, when in the Summer Budget of 2015, it said ‘it would consider the costs associated with de-enveloping of properties’ and would publish a consultation paper setting out its views. It’s in business to collect tax, not to make it easy on those who are trying to avoid it.

What I think however is wrong, is that the Government promised to publish a consultation paper, but then waited a full year before doing so. In its Statement published on the 19th August it starkly states ‘while the Government can see there might be a case for encouraging de-enveloping, it does not think it would be appropriate to provide any incentive to encourage individuals to exit from their enveloped structures’.

The Government recognizes and admits that most owners of residential properties in the UK bought their homes through offshore companies to avoid Inheritance Tax. It also made it very clear in April 2015, that as from April 2017 this advantage would be removed.

The Government to be fair, should have given this statement before April 2016. Home owners could then have decided whether or not to de-envelope. Sadly, having left the decision until gains have increased and ATED has been paid, whatever decision is now taken eye popping taxes have been paid and will be payable, just to stay living in their own home.

Take Bartholomew and his family. He is a wealthy Eastern European who has lived with his wife and family in Belgravia for the last twenty years. Before becoming deemed domiciled he set up a number of trusts in Jersey. One for his operating company and income producing investments and another ‘dry trust’ which owns his home in Belgravia.

In April 2012, his home was worth £8.5m. If he had taken it out of the company and trust structure then, he may have had to pay some capital gains tax under s 87 on the benefit of living in his own home tax free, and some life insurance, but would have saved all other taxes.

He did not. In April 2012 his home was under £10 million so that put it in the under £10 million ATED tax bracket. However, homes need to be revalued every 5 years; in 2017 it will then fall in the bracket above £10million. In April, this year he paid £54,450 in ATED, but next year he will need to pay in excess of £109,050, which was last year’s rate, if he does nothing.

So what can he do and what taxes will he have to pay?

The killer tax in de-enveloping is capital gains tax, which given that there is 100% relief if a home is your main or only residence, which it is for Bartholomew, is galling. The headline tax is ATED related CGT which taxes any gain made since 2012 at 28%. If the property has gone up by £4m and Bartholomew and his trustees liquidate the company which owns his home, the liquidation will crystalize a tax charge of £1,120,000.

As if that was not enough S 87 TCGA is also likely to kick in which charges the settlor on all benefits received from the trust to the extent that a gain has been realized in the trust. S 87 takes the base cost for the gain to the 2008 value and the benefits as the value to Bartholomew and his family of living in their own home rent free.

On top of this is is the prospect of paying inheritance tax on Bartholomew’s death at 40% or at 6% every ten years. The value of this charge is taken as the value of the property. So if the trust was set up in October 2007, and by then the trust is discretionary the trustees will have to pay an additional £750,000.

What is the likelihood of the Government changing its mind? The Government is in business to raise revenue – and it has said it will not grant concessions, so it is unlikely to do so. There are many people who will say that they have enjoyed the privileges of living in the UK as a non dom for many years and therefore do not mind paying a ‘bit’ of tax. However, there are many others for whom these taxes will necessitate a sale at a time when the housing market at the upper end is already soft.

Next week, I will write my note on how the the Treasury has turned the tables on advisors and what tax planning not to do if you own your home through an offshore company. The following week I will share with you my thoughts on what the Treasury should do to extend the Business Investment Relief on which it has asked for comments to be given by 20th October 2016.

If you would like to comment or book an appointment with Caroline with any concern affecting UHNW families please contact svetlana@garnhamfos.com or call 020 3740 7423

Tax the Elite!

Sitting in a hospital bed in the University College London waiting for my turn in the theatre to repair a dislocated metatarsal, I was able to catch up on some reading – (I had nine hours). The article written by Helen Lewis, deputy editor of the New Statesman attracted my attention ‘Who are the elite?’. In short any group of people which can be pointed to as having greater benefits than others unite supporters through envy; they may have more money, more power or better access to the leavers of control.

She made the point that the ‘elite’ are more often the anti-elite cheerleaders – on the right is Boris Johnson (Eton, Oxford, London Mayor, MP), who rages against the ‘unelected elite in Brussels’, and on the left we see Diane Abbott (MP since 1987) who rails against the ‘Westminster elite’. Then there are the supporters of Donald Trump, who are said to be rebelling against ‘the elites’, yet in many states, they’re the voters on above average incomes.

It is a human trait to unite against a common enemy. It is often said that during war, people are united in a way that they are not in times of peace they come together against a common enemy.

I live in a block of apartments, which was owned by a landlord, which without consulting the tenants, made our long serving resident caretaker, redundant, and installed a house manager. The tenants were so cross, they united against our landlord – to enfranchise the block and buy the freehold to get rid of it.

Politicians are well versed with the desire of humans to unite against a common enemy and if there is no obvious enemy, envy is a good substitute; find an ‘elite’; a group of people who in some way have more privileges than others and vilify them as having above average income, access to power or control.

This week we saw Nick Clegg going for the envy jugular once again with his suggestion that a wealth tax should be introduced. This is not a sensible political suggestion, we only have to look at the damage to the French economy under extreme socialist politics, or the stagnation to our property market at the upper end with eye popping ATED, CGT related ATED and IHT at 40% on all UK residential properties regardless of how they are owned to see how a suggestion like this is more to do with politics of envy than raising revenue.

‘If we want to remain cohesive and prosperous as a society, people of very considerable personal wealth have got to make a bit of an extra contribution,’ Nick Clegg declared. I agree, but a wealth tax is not how to go about it. What is needed is to understand what the rich want and are prepared to pay and make changes that will produce more revenue; not less.

Lady T proved, if tax rates get too high people find ways not to pay it. If income tax gets too high people pay themselves in other ways; capital gains or deferred income. Inheritance tax at a rate of 40% on an estate at death is unacceptably too high. Why do I say this, because most people want to find ways to avoid using the reliefs available; business property relief, spouse relief and gifts survived by seven years. If it were say 20%, much more tax would be raised, because they would not have the incentive to avoid it.

What is needed is a proper understanding of how the rich behave and think, and with this knowledge to be creative. The non doms should be encouraged to bring their wealth into the UK through new investment reliefs; rather than to leave it offshore where it is managed and controlled by the Swiss, the Channel Islands or in Liechtenstein to the benefit of their economy not ours.

The UK has an opportunity now that it has voted to leave the EU to be the most successful financial centre in the world. It should welcome the wealthy to our shores and encourage them to bring their money with them. As mild mannered Bernard Jenkin MP said on radio 4 Breakfast Program, we must not ‘kill the goose that lays the golden eggs’. It may be a hackneyed expression, but he is right. Politicians need to dump the temptation to unite the voters through envy and look to new ways to raise revenue which is not through higher rates. If we were a little more understanding, determined and creative I believe it would not be difficult to make Britain ‘Great’ once again.

If you would like to comment on this note or to book an appointment with Caroline with any UHNW concern  please call the office on 0203 740 7420 or email svetlana@garnhamfos.com

The Taxation of Apple - is it right?

Is it right that Apple pay 0.005% corporate tax when it should be paying 12.5%?

Why has Apple paid corporation tax of only 0.005% in 2014 when the rate of tax in Ireland is 12.5%?

It is well established that companies can and do locate their head office to jurisdictions which charge a low rate of taxation. Ireland and Cyprus have the lowest corporate tax rates in the EU at 12.5% and attract a lot of business as a result – but this is not the point.

How did Apple get away with paying only 0.005% tax and not 12.5% while based in Ireland? Is it due to some selective treatment of Apple by Ireland or simply a legal provision in the Irish law of which Apple has taken advantage?

In June 2014 the European Commission wanted to get to the bottom of this and so launched an in depth EU ‘state aid investigation’. Under these EU rules, it is illegal for a country to give selective tax treatment to a company which gives significant tax advantage to that company over other businesses subject to the same national taxation rules.

The Commission after an extensive investigation concluded that selective tax treatment was given to Apple by Ireland and ordered Apple to pay Ireland the unpaid taxes for the previous ten years of EU 13 billion.

Ireland (which is debt ridden) and Apple will appeal the decision. Ireland and Apple argue that special treatment was not given, Apple merely used the laws in Ireland in a proper way to minimize the corporate tax payable. So what is going on?

When you buy an iphone in the Apple Store in Regent Street, you enter into a contract to buy the phone direct from Apple Sales International; an Irish registered and resident company. The Apple Store in Regent Street is merely a representative office of the Irish company.

Apple Sales International and Apple Operations Europe, its sister company are both owned by Apple Inc, which is a US resident company. Between them they own the rights to the Apple Intellectual Property which gives them the right to sell Apple products anywhere outside North and South America. The monies you pay to the Apple Store in Regent Street, attract VAT which is paid to the UK Government at 20%, a small proportion of the monies paid will be kept by the Apple Store as compensation for making the sale and the balance is paid to Ireland.

In Ireland a significant proportion of the purchase price, $2billion in 2011, is paid to Apple Inc. as funding for its research and development and makes about half of its total R&D funding requirements. This payment is tax deductible by Apple Sales International and not taxable in the US.

None of this is contentious.

What bothers the European Commission is that in Ireland the majority of the profits of Apple are then allocated away from Ireland to a ‘head office’ which Apple claims is where its mind and management reside. Although the activities of the head office consist only of occasional board meetings, it is at these meetings that decisions are taken which decide the dividend policy, cash management, and administration arrangements of the non-American business. The mind and management of the company is not based in any country, does not have employees and neither does it own any premises. The profits allocated to this part of the business are therefore not taxed anywhere, leaving only a fraction of the profits in the ‘Irish Branch’ subject to tax in Ireland at 12.5%.

In 1991 Ireland gave a ruling supporting Apple’s proposition, which in 2007 was replaced by a similar second tax ruling to the effect that the allocation was within its tax rules. In 2015, this tax ruling was terminated when Apple Sales International and Apple Operations Europe changed their structures. So the taxes under dispute are historic and not ongoing.

Apple Sales International recorded profits of EU 16 billion, but under the tax ruling only around EU 50 million was taxed in Ireland, leaving EU 15.95 billions of profits allocated to the ‘head office’ and not taxed. This is why the tax rate for the Apple is as low as 0.005% in 2014.

The Commission claims, that the allocation of profits in Ireland has no factual or economic justification and therefore for Ireland to accept it amounted to a selective advantage given by Ireland to Apple.

The EU Commission is not just focused on Apple. In October 2015 it concluded that Luxembourg and Netherlands granted selective tax advantages to Fiat and Starbucks, and investigations are still ongoing with Amazon and McDonald’s.

In June 2015, the European Commission unveiled its ‘Action Plan for fair and effective taxation: a series of initiatives which aims to make the corporate tax environment in the EU fairer and more efficient. It includes the automatic exchange of information on tax rulings.

Given that Apple has since 2015 changed its internal structure, and the EU is cracking down on these arrangements, in future it will be the headline tax rate of the jurisdiction which will determine the tax rate and not complex structures which Apple has until recently enjoyed. It is hardly surprising therefore that Theresa May has already announced a likely drop in corporation tax rates to 15% - to make it more competitive for multinational companies to locate to the UK!

If you would like to comment, or book an appointment with Caroline for estate or privacy planning, offshore trust reviews or any other concern or reason, simply call Svetlana on   020 3740 7423, or a mail svetlana@garnhamfos.co

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