What the government should do post Brexit

This morning, I gave a talk on Making Britain Great – post Brexit for the Wealth Forum at the Caledonian Club in London. The Consultation Paper on the taxation of non doms published on the 19th August 2016 by the Government, as I have described in my previous two notes, sends out the same harsh message as we have seen before – it has no sympathy for anyone who tries to avoid tax.

It is, however, not fair to treat UK resident taxpaying non doms in the same way as non UK residents. The Government should be seen as tough on those seeking to avoid tax who are not contributing to the economy, but not on those for whom the UK is their home and at a time when they do not have the cash to pay the tax.

The gain should be taxed only as and when the gain is realised on a sale or gift, but not on the de-enveloping of the property – transferring it out of an offshore company. If on a subsequent sale or gift the home is the taxpayers’ main or only residence, and has been throughout ownership (whether directly or indirectly) the taxpayer should be entitled 100% relief from capital gains tax. For non UK residents for whom a home in the UK is a luxury to which they make the occasional visit the main and only residence relief for capital gains tax will not be available. Even so capital gains tax should not be payable on a de-envelope.

Similarly, if the home is owned directly at the time of death there should be an uplift in capital gains whether the owner is UK resident or not. This is fair and consistent with introducing inheritance tax on all UK homes. 

Encouraging non doms to de-envelope in the above manner is also in line with the Government’s stance on transparency and enables it to track transfers of residential properties through the land registry. It should not make advisors/directors of companies obligated to report and liable for the tax to track information.

Furthermore, if the UK resident taxpayer wants to sell he should not be penalised by crippling Stamp Duty Land Tax (SDLT) at 12 – 15%. The Government should lower this rate for UK residents to 4%. Since the hike the tax take for SDLT has fallen by one third, this cannot be right for either the Government or the taxpayer. If by doing so a two tier market is created – so be it – why should we not favour our own residents?

With regard to the Government’s proposal to make the UK more attractive to non doms through the Business Investment Relief. Our view is that this relief is complicated, ill targeted and should be scrapped in favour of a more radical, but much more consistent message from the Government.

It has long been a mystery to us, why the Government which is a pioneer on transparency, and tax anti avoidance should wish to preserve a system of taxation which promotes offshore financial centres in preference to its own. What we propose is for the Government to extend the tax benefits for non UK doms given to offshore trusts to trusts with UK resident trustees and UK situs assets. This would give the Government full transparency, save the Government considerable expense in administering the automatic exchange of information for all its non UK doms  and protect its UK resident non doms from the vagaries of the CRS. It would also send the right message to the world that the UK is committed to transparency, supports its own financial centre and welcomes wealthy foreigners who wish to make the UK their home.

The Government should also encourage beneficiaries to spend. Trusts should not lose their tax advantages when a benefit is paid to a beneficiary. It makes no sense!

An extension of the tax reliefs to onshore trusts and UK situs assets, would also lend support to the private client industry with a welcome injection of new business. The trust business in the UK, founder of the trust, has, with increasing hikes in taxation, seen the trust business dwindle to back room administration of Will Trusts for widows, orphans and the disabled. These changes would be a welcome boost to our private client industry and with increased profits would increase revenue for HMRC.

We will be submitting our responses to the Consultation Paper before the deadline of 20th October but would welcome any comments you may have - for or against - before then.

In the meantime, if you would like to arrange to see Caroline or one of her team for any concern you may have as an UHNW individual or family, please contact Svetlana on 020 3740 7423 or on svetlana@garnhamfos.com

What tax planning not to do

Last week I wrote my Note on the consultation paper issued by the Government on the taxation of non doms on the 19th August and said I would write this week on what tax planning not to do.

A few months ago a former advisor to a very wealthy family, who I will call William, came to see me. He had been given an idea as to how to save tax on his client’s numerous residential properties in London owned through a series of trusts in Jersey. The trustees should grant a company owned by his client’s trustees, a lease or sub lease of the property and then give to another trust for his client’s children the residuary interest in the property. This is in essence the ‘double trust scheme’ which I referred to last week in my note, which was stopped in the Finance Act 2014 with the introduction of an annual income tax charge called POAT (pre-owned asset tax). He had been told that this arrangement would work for his client because he was not UK resident and therefore would not be subject to the annual income tax charge.

I told him in no uncertain terms not to give the suggestion another thought.

Under the terms of GAAR (General Anti Abuse Regulation) any such arrangement could be looked through and taxed, together with interest and penalties. I was right. However, rather than rely on GAAR, the Government has inserted a specific anti avoidance clause. ‘it proposes to include a targeted ant-avoidance rule in the new legislation, the effect of which will be to disregard any arrangements where their whole or main purpose is to avoid or mitigate a charge to IHT on residential property’.

I also mentioned last week that the Government is not prepared to grant concessions to taxpayers to de-envelope their property – dispose of the property out of an offshore company and hold it personally. Most advisors hoped that the Government would prefer to be able to see when a property was transferred and by whom through entries in the Land Register. However, it would appear that the Government has ducked this issue in favour, not only of making advisers report – but also to make them personally liable for the tax!

In their consultation paper the Government says ‘HMRC might have difficulties in identifying whether a chargeable event had taken place and hence whether a liability to IHT has arisen. To address this, the Government intends to extend responsibility for reporting to HMRC when chargeable events have taken place and for paying any tax which arises….’ to the directors of offshore companies, and…

‘a new liability will be imposed on any person who has legal ownership of the property, including any directors of the company which holds the property. This will ensure that IHT is paid’.

This is harsh. Let’s take an example of a company in Jersey which owns a £20million residential property in Mayfair in which Jacques and his family visit from time to time. There are three directors of the company one of whom is their London lawyer Nick.

Nick took over looking after Jacques when his partner Tom retired and in the hand over notes he was told by Mark that the company was a nominee for the trust of which Jacques’ son Mark had an interest in possession.

The facts, however, were not as Mark had described. The company was not a nominee and Jacques, not Mark, used it whenever he was in London.

On the death of Jacques, Nick should have reported the property in Jacques probate but he was not aware that Jacques was still living there and that the company was not a nominee. These omissions of fact, could leave Nick facing personally an IHT charge of £8million. Sadly, there is no defence in tax law for not knowing the facts and having no intention to conspire to evade taxes.

The world is a harsh place for the rich to live and for any adviser who is not in full command of the facts of how his clients live and how an offshore structure is, in fact, set up it could be a very costly profession to follow. As I have said before Big Brother is with us, and the ‘security police’ are the people UHNW families are expected to trust.

Next week, I will write about what I think the Government should do to put revenue into its coffers and make the UK a place where the rich want to live, spend their money and pay their taxes, without fear that their banks and advisers will snitch on them.

If you would like to book an appointment with Caroline or one of her team, call Svetlana on 020 3740 7423 or e mail on svetlana@garnhamfos.com

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