You are paying for fugazi!

A man builds a house, it is a beautiful, on top of a cliff overlooking the sea. He engages the best architect to prepare the drawings, his wife enthuses about the colour scheme, curtains and carpets, he shows his friends, work colleagues and advisers. The building is the pinnacle of his success, the house of his dreams, the place where his children will go and remember what he did for them. Then one day an elderly structural engineer says gently ‘Of course you realize that the cliff is falling into the sea; your house will be gone in twenty years!’

The underpinnings of a family business empire, like the foundations of a house, need to last for many generations, but - most are rotten with the seeds of nightmares. These business empires are destined to fall into the sea of litigation, high taxation, poor investments, family infighting and dissipation, before the founder’s grandchildren reach middle age. Most often the seeds of destruction stem from some form of professional fugazi. Advice which better serves the adviser than the client (see Matthew McConaughey in Wolf of Wall Street).

The founder of a business empire needs to find an adviser which is looking after his best interests; not his own pocket, what we call ‘A Culture of Care’. A family office is on the side of the client and fights fugazi on his behalf.

Samir came to GFOS for a wealth ownership structure for his business empire which would survive the test of time and give him and his team control over his assets when in trust. It was a brilliant structure – and one I use a lot now. We were working day and night to perfect it. But what neither of us had anticipated was that a former business partner was to serve a legal claim against him for fraud. If we had known, we would have transferred all his assets into a trust immediately and perfected the structure later; at least then his assets would have been protected, but they were not.

Samir had to abandon his wealth ownership planning to fight the litigation. It took five years of his life and absorbed him completely. His business suffered, his reputation was questioned in the press and the pressure took its toll on his family. A wealth ownership structure is not therefore a ‘nice to have’; if you value your business, your reputation and family harmony – it is a ‘must have’ and time is of the essence. Perfection can come later.

Moises was another client.  A resident of Brazil, he set up a trust for his worldwide empire with ABC Trustees Limited as the trustee. His lawyer advised him to write a detailed letter of wishes which set out his philosophy; who should receive what and when, and reserved extensive powers to himself, as Protector of the trust.  Moises wondered why he was spending so much money on a letter which was not binding, and why the trustees were being paid so much, when in effect he was making all the decisions, but his lawyer seemed not to be bothered, so he did not ask.

As Moises got older, he fell out with his son Andre, and ABC Trustees at the insistence of Moises, removed him as a beneficiary. Andre was furious, so he took advice and was told that he could have the trust put aside as a sham, Moises had too much control. Moises sought advice from GFOS.

‘I cannot believe that I have spent so much on a structure which is worse than useless!’ he exploded ‘I made it very clear to my lawyer, that the last thing I want is debilitating litigation against a family member, which could damage my business, and get splattered all over the press – my wife wouldnot tolerate it –she would divorce me!’

I explained to Moises, that all was not lost; he could have control, but not through the trust, he could ensure that his son did not benefit for as long or as short as he wanted, but not through a letter of wishes and he could protect the structure from litigation. 

To do so, I told Moises, would take an initial six weeks for GFOS to scope out the problem and a further two weeks to write a report. This would set out the problems, recommendations and detail as to implementation.  We estimated that to implement the basic structure would take a further two months.

Moises was delighted, we saved his business empire from a sea of litigation, replaced his complex and unworkable structure with one which put him and his team of advisers in the driving seat, protected matrimonial harmony and protected the structure from litigation.

At GFOS our ethos is; a Culture of Care, but we are also not afraid to find solutions for our clients. The great monster on the horizon is the erosion of privacy. As from September 2017, financial information is to be exchanged by many countries across the world and in most cases relates to their financial position as of 2016.

As sensitive information reaches more hands, the greater is the likelihood of it being sold to interested parties; former employees, estranged spouses, business colleagues, spendthrift family members, the press - not to mention crooks, blackmailers, kidnappers and thieves. GFOS has solutions; – but time is of the essence. By 2018, the only relevant information you want reported is that the account was closed in 2017.

If you have a business empire or substantial wealth which you do not want to fall into a sea of litigation, you need to act now. Time is of the essence. Dithering could be the most expensive waste of time in your life.

To contact Caroline:

E mail: svetlana@garnhamfos.com

Telephone: Svetlana 020 3740 7423.

Caroline’s book, ‘When you are Super Trust who can you Trust?’ can be bought from Amazon, or direct from Svetlana.

What is the risk?

This Note is dedicated to Simon – my insurance broker for my professional indemnity cover. Last Friday he invited me to lunch in the City which was delicious to introduce me to my Lloyds broker – David. On arriving at the restaurant, I asked Simon who the fourth person was going to be since the table was laid for four, ‘No-one’ he said. ‘I always book a table for four even if I have only one or two guests – I like the extra room and privacy!’.

I usually prepare for meetings – I believe it is courteous and produces a better outcome, but on this occasion I assumed, since both Simon and David knew everything about my business, I did not need to. I was a bit thrown when David said ‘Tell me a bit about what you do?’ I fluffed thinking about claims and premiums.

The truth of the matter is, that working with high net worth clients in a family office is more than being a highly qualified technician. I set up GFOS because I am passionate about my clients. Sometimes they need educating, sometimes they need to be told that they cannot do what they say they would like to do, and sometimes there is a better solution than what they have suggested. The consistent theme is we put put the best interests of our clients first.

Sadly, this is not the attitude throughout the industry. Most clients do not know enough about tax, cross border succession, security, governance, philanthropy, setting up family offices, dispute resolution or whatever other issues which affect them and their money, to know when they are being given a sales pitch and when they are being given good advice.

Our ethos is to operate a ‘Culture of Care’. Much of my work is therefore educational. In my view each client needs to understand the nature of their issue before deciding what they want to do. If what they need is outside our area of expertise we will introduce them to other professionals who we will then instruct, negotiate the best possible price and monitor progress.

On occasions however a situation is serious, I will then nag a client to take action, even if at that time he or she may not see the seriousness of their situation.

One of my clients who I will call Saud wanted to set up a structure while still in his mid-fifties, because he wanted to run it with his family while he was still alive. I persuaded him to start with a simple trust and private trustee company but to set it up swiftly; we could sort out the details over time.

Three years later, his former business partner Ahmed sued both Saud and another business colleague Sacha. Saud’s business interests were in trust and so he was untouched by the claim, however, Sacha faced five years of litigation; his assets were not in trust and therefore not protected.

Another similar case, involved a trust structure which was governed by a lengthy letter of wishes, which I advised was not fit for purpose. My client, AT, prevaricated, but I insisted that he incorporate some simple family governance changes immediately. Eighteen months later he came to see me ‘Thank you so much for pushing me to make the changes’ One of the advisers on the board had taken sides in an unwelcome family dispute. Under the new family governance structure, this adviser could be removed. If we had not made these changes, the family would have had to negotiate a settlement which would have been costly and difficult and could have jeopardised the family harmony.

In another situation, I was approached by a family keen to know what to do with their house in London following the changes in tax legislation for non-UK doms. His situation was convoluted and tricky, but rather than write a five-page report on his options, I simply advised him what the tax position was and to take out life insurance. I then introduced him to the best person I know, and negotiated and monitored the process. It was the right solution for this problem.

So in answer to David’s question the simple answer is ‘GFOS is highly qualified to deal with a whole range of issues faced by high net worth families; we are not always the best people to deal with the concerns of our clients, in which case in accordance with our culture of care, we will introduce the client to the best professional we know and will ensure he gets a very good service at the best possible price’.

If you would like to book a meeting with Caroline contact Svetlana on 020 3740 7423 or e mail her on svetlana@garnhamfos.com.

You can buy Caroline’s book “When you are Super rich who can you Trust?’ from Svetlana or from Amazon.

Trust you

I was speaking last week with a client who I will call Santos. He lives in Brazil, but has business interests around the world and bank accounts in Liechtenstein and Switzerland.

‘I had a great relationship with my private bankers for years’ he said, ‘but now they are afraid to give me advice about my concerns on privacy, succession, asset protection or mitigating taxation. It is as if the whole financial world is conspiring against anyone who is rich.’

I told him that financial institutions the world over are fearful of ‘big brother’; tax authorities in the jurisdictions in which they do business.  However, just because governments have successfully scared financial institutions into silence, they will not stop people like Santos from planning. Santos is free to find professionals such as GFOS, which are picking up the pieces left by the financial institutions. Of course we are bound to report if we are suspicious as to the source of funds, or if anyone who is evading tax, but we are not gagged into giving advice.

The truth of the matter is that the world is made up of jurisdictions which have the sovereign right to make such laws as they chose; there is nothing to stop them creating laws to attract wealthy families to live in their jurisdiction and /or hold their wealth there.

A sophisticated high tax jurisdiction such as the UK would appear to be hell bent on taxing and reporting on wealthy individuals’ resident in its country, but there are numerous other countries eager to step into the shoes so eagerly vacated by the UK. The latest country to introduce benefits for foreigners is Italy and it joins a long list of similar countries such as Malta, Singapore and Portugal.

It is not always necessary to emigrate, by putting money in another country in a specially designed structure vast benefits can be achieved. However, it is unlikely to be good enough to set up a mere investment holding company and hope for the best. For example, if Santos were living in the UK, and had a company in the British Virgin Islands owned by himself and his children they could be taxed on the income and gains arising to that company under our anti avoidance rules which deems the income and gains to be that of the shareholders.

However, if rather than putting the asset into an offshore company, he puts it into a discretionary trust for his children – who owns the asset? – the trustees. But unlike a company with defined shareholders, the beneficiaries have no rights to the capital and income – their interest is in ‘spes’ or hope. Governments are generally agreed that they do not tax a person who may or may not receive a benefit.

To give an example, if Santos were to name Theresa May as a beneficiary as well as his children – would it be right that Theresa May be taxed on income she may never receive – no! So in general, the income is only taxed when it is paid out provided the settlor and his spouse are excluded from benefiting.

Trusts are therefore an amazing invention. Santos, can give his wealth to trustees, say in Guernsey who then own the assets – but not for themselves – for others – the beneficiaries – such as Theresa May, and his children. If he wishes to retain control such that Theresa May never gets a penny, he can do so through good governance principles, which I will not go into here.

The UK is the mother of trusts, and yet it cannot find a way to charge offshore trusts on its non UK source income. Just think how much harder it is then for less sophisticated jurisdictions which have little knowledge of the trust concept to tax beneficiaries living in its jurisdiction to the income earned on a trust offshore. The trust can and is therefore still being used most effectively in planning. But the benefits of a trust go far beyond tax mitigation. Trusts are also used for privacy planning, succession without the need of probate, asset protection and many more.

Of course, governments are eager to fill their coffers with a greater slice of the rich man’s cake, but while jurisdictions are free to make such legislation as they chose, there will always be ways to plan which do not involve evasion or aggressive avoidance techniques.

Governments if they want to make more revenue, to attract the wealthy to their country they need to lower taxes and amend the rules which give rise to concern. Squeezing the rich hard and at rates they will not tolerate only drives them away or into structures which are impenetrable.

Sadly, restricting some of the best institutions from giving advice, means that structures are being set up which are not fit for purpose. I know from experience how much heartache a family can go through in unravelling shoddy structures. I can only weep at the loss of good advisers in this market and the prospect of costly litigation.

Lady Thatcher got it right – lower taxes and the revenue goes up. Will Theresa May be as wise? Given the legislation recently published on the taxation of non doms – I fear not!

If you would like to find out more, or book a meeting or conference call with Caroline please call Svetlana on 020 3740 7423 or write on svetlana@garnhamfos.com

You can also buy Caroline’s book, When you are Super Rich who can you Trust?’ either from Svetlana or Amazon

Bad news or good news first?

In July 2005 if a German resident, Heinrich earned interest on his French bank account, the French bank was obliged to notify the German tax authorities under the Savings Directive that Heinrich had a bank account in France. Why then if the Savings Directive is already in place has it been necessary to implement the automatic exchange of information? Surely this Directive was sufficient for all Governments to get the information they needed to stamp out the tax evasion of their residents?

The Directive however, failed to live up to its ambitious plans, for a number of reasons.  For example; Austria and Luxembourg were granted exemptions. Instead of exchanging information on the identity of account holders both countries were allowed to preserve the anonymity of their clients and apply a withholding tax of 35% on all interest earned on the account of non- EU residents. But, it backfired.

Francois, for example is French, but has a bank account in Austria. Austria deducted 35% against interest earned by Francois and paid three quarters to the French tax authorities. Francois pays the top rate of tax in France which is 45% which is 10% higher than the amount deducted in Austria. Francois is liable to pay an extra 10% tax in France and should declare it. However, if he does not, the French tax authorities do not know that Francois has a bank account in Austria, so they cannot they cannot check that he has paid the right amount of tax.

Exemptions from the general rule are already beginning to creep into the Common Reporting Standard for the automatic exchange of information.

Some countries such as the Bahamas and Switzerland have seized on the legitimate concern recognised by the OECD that some countries in which wealthy individuals live do not have the necessary security and confidentiality measures in place to protect the privacy of the information exchanged. In situations such as this the jurisdiction collating the information need not exchange it.  

Bahamas has refused to sign the multi-lateral convention for this reason and will only sign bi-lateral agreements with countries it considers to be safe. It has not for example signed many agreements with S American countries in which it has a significant number of account holders. Switzerland has adopted a similar approach, and has identified only a handful of jurisdictions which it considers to have adequate security measures in place. As a result, both the Bahamas and Switzerland have a competitive advantage over other financial centres.

The second loophole in the Savings Directive, was the fact that the Directive only applied to accounts owned by individuals, not accounts held by entities such as a company, trust or foundation. If Francois did not wish to pay the 35% on his Austrian bank account, all he had to do is to transfer his account to a British Virgin Island company. Austria would not then look behind this company and declare Francois as the shareholder and disclose these details to the French government. In the UK, if there are five or fewer shareholder which control a company the tax authorities can tax the shareholder on the income of the company and I am sure France has similar anti avoidance rules. Therefore is Francois doesnot declare the income arising in his offshore company which holds the Austrian account, he is evading tax.

In 2004 before the Directive was implemented 50% of accounts in Switzerland were held by offshore companies, whereas by the end of the 2005 60% were owned by offshore companies – an increase of 10%.

The possible reason why this percentage was not higher was the example made by the US of Credit Suisse, UBS and other Swiss banks in response to legislation which proceeded FATCA, known as the qualified intermediary rules. Banks were obliged under these rules to provide data to the US IRS only if their clients held American securities. To avoid this rule, the American Securities were transferred to an offshore company. The Swiss banks keen to assist their clients promoted the ownership of their accounts through offshore companies. The IRS did not like this conspiracy to evade its rules and sued the Swiss banks for defrauding the US IRS. Credit Suisse was fined $2.6billion.

The CRS automatic exchange of information has similar loopholes. Income on investments held in a discretionary trust do not need to be reported until such time as paid out to a beneficiary. Discretionary trusts do not have similar anti avoidance rules as companies an are therefore much more useful. Income can therefore be accumulated without any reporting to the country where the beneficiaries reside, until such time as they receive the income. Furthermore, there are ways in which distributions can be made without the need to report as income.

However, it is now unlikely that a financial institution with reporting obligations will advise their clients on what they can do to plan for fear of being sued.

Wealthy families are beginning to realise this and are now looking for planning from independent advisers; whether on the structuring to preserve privacy, protect their assets from spurious litigious claims, provide for their heirs or legally mitigate their tax obligations.

There are numerous ways in which people can plan, mainly because there is nothing to stop wealthy families taking advantage of companies and trusts in jurisdictions which want to attract business to their shores.

If you would like to find out more, or you would like to book a meeting with Caroline or one of her team, please email svetlana@garnhamfos.com or phone 020 3740 7423.

You can buy Caroline’s book ‘Who can you trust when you are super rich?’ from Amazon or direct from Svetlana.

The good news about Trump

Last week, while away skiing with leading Simmons & Simmons partners, I read Zucman’s book the ‘Hidden Wealth of Nations – the Scourge of Tax Havens’.

Zucman is a young French economist. His thesis is that the world would be a better place if tax havens were abolished.  He supports his propositions with calculations.  

Wealth hidden in tax havens he says is equivalent to eight percent of global financial assets, totalling $7.6 trillion. Eighty per cent of it is not reported and therefore taxes are not paid on this money, he says.  Zucman estimates that $125billion is lost in income tax, $55billion in inheritance taxes and $10 billion in wealth taxes.

Zucman’s mentor Thomas Picketty, is also French. Picketty is a strong advocate of taxing the wealthy more heavily. Anyone with income in excess of $500,000 should be taxed at 80% and those with income above $200,000 should be taxed at rates of between 50 and 60%.

Zucman admits that most of this money may be ‘hidden’ in trust. If he is correct then his assumptions as to ‘lost’ taxes, is a nonsense. Income arising in a discretionary trust is taxable in the country in which the trust is resident. If that country does not impose a tax, then tax is not ‘lost’ it is simply not payable to a high tax jurisdiction!

In France wealthy families emigrated from their beloved France, because of their dislike of the harsh tax imposed under the Hollande regime, and in particular its wealth tax. The payment of these taxes were not lost to the French Government, it is simply that fewer people lived in France on whom the Government could levy their punitive taxes.

Tax havens, Zucman says, are a danger to the world economy and growing. In the five years from 2010 to 2015, wealth in tax havens, he says, grew by twenty-five percent. However, what Zucman fails to understand is that as governments tighten the net around the ultra-high net worth community, the incentive to look for other ways to avoid the pressure increases.

Governments of the world are now united in their endeavour to stamp out tax evasion through the erosion of privacy. However, what they fail to recognise is that the more ferocious they become the greater is the incentive for the rich to create sophisticated trust structures to avoid it - legally.  

Zucman takes the view that the new rules on the automatic exchange of information will not work, because the penalties for the tax payer and financial institutions is not high enough. The fine paid by Credit Suisse for encouraging their American clients to set up structures to avoid paying US tax, may have hurt – but, he says, was not enough to make these financial institutions stop doing what their clients want. Possibly true. Financial institutions – like their clients will learn where the new line is drawn – and not step over it.

The automatic exchange of information has undoubtedly stamped out tax evasion, but this does not stop wealthy families from finding other ways to do what they want, which are legal. Until a country’s sovereignty can be curbed and all governments set the same taxes in the same way and at the same rate, people will always choose one tax system over another for their own benefit.   

Take the Argentinian tax amnesty. It is widely known that Argentines have not been declaring tax on monies held offshore. They have however now been frightened into declaring what they own offshore through the threat of transparency. $120 billion out of an estimated $400billion offshore has been declared and tax paid. But, imposing an amnesty under threat of criminal prosecution, will not make the Argentines change, it will only serve to increase their desire to use more sophisticated structures to achieve what formerly they were doing illegally.

And what is the good news about Trump? The US is the only country which is keen to stamp out tax evasion but only for US tax payers. For non US taxpayers, it is a privacy haven. For our clients we can maintain privacy, maximise Investment flexibility and minimise tax consequences. Billions of dollars are tumbling into the US coffers which makes it the new Switzerland.

As a business man Trump welcomes this gravy train and as a rich man he understands why. He won’t do anything to stop it – if he did his slogan ‘make America great again’ may not come true – much to the annoyance of the likes of Zucman and Picketty.

If you would like to find out more about how to protect your assets and privacy, or other offshore planning issues please contact Svetlana on 020 3740 7423 or svetlana@garnhamfos.com. Caroline has been a thought leader in regards to privacy for UHNW clients for the past year and at GFOS we have the culture of care embedded in our DNA. 

If you would like to purchase Caroline's book 'When you are Super rich who can you trust' please do so from the website our contact Svetlana direct.

Garnham FOS only works with clients who are tax compliant.