This will backfire!

Article 8 of the European Convention on Human Rights says ‘Everyone has the right to respect, for his private and family life, his home and his correspondence’. The Article then goes on to qualify this right with the safeguard inter alia that this right is subject to ‘the economic well-being of the country’.

The OECD initiative on the automatic exchange of information, known as the Common Reporting Standard (CRS) under which all financial institutions must disclose automatically the financial information owned by non-residents to the local tax authority in which the owner lives, is possibly in breach of this Article. Increasing numbers of people including many in the EU are concerned by the disproportionate nature of CRS, which will adversely affect many innocent people. They argue that information should not be automatically exchanged; there needs to be an evaluation to determine whether there is a reasonable risk that tax is being evaded, before information is exchanged.

The EU Data Protection Supervisor on the 8th July 2015 issued the following strongly worded opinion

‘The exchange of information … on an annual basis, confirms our view that the information exchange is independent of the detection of any actual risk of tax evasion thus questioning the proportionality of the measure itself’.

If this notion was upheld in the European Court of Justice, there would be a good chance that the Directive would be overruled as unlawful; in breach of Article 8.

On 21st October 2016 the French Constitutional Court made a start. It struck down the French Public Register of trusts as being in breach of the fundamental respect for private and family life.

In the UK, however, HMRC has given only lip service to the risk. On 23rd January 2017, HMRC conceded that ‘in some cases, the activities or background of the individual [whose privacy is being compromised] may mean that supplying data to the other jurisdictions will place them at risk’ and that information would need to be redacted.

Exactly how HMRC hope to be able to assess the danger and know what information should be redacted and what not, remains a mystery. Given the enormity of the task, I cannot see this statement providing any sort of comfort to those affected and concerned and does not address the fundamental principle as to proportionality.

The drive to stamp out tax evasion has clearly become an obsession with tax authorities. They hate offshore structures; they see them only as devises to evade tax and therefore the loss of privacy is a small price to pay for the well-being of the country. They do not see CRS as disproportionate to the mischief. It is merely putting other jurisdictions in a position of knowledge so that they can then independently evaluate the risk of tax evasion. But is this obsession fair and reasonable given that privacy and freedom is a human right?

Public opinion has moved on since tax evasion first came on the radar. People were shocked and staggered at the sheer quantity of personal information held by the National Security Agency uncovered and made public by Snowden in 2013 on normal people; their correspondence, purchasing habits and acquaintances. This for most is of academic interest only, but when personal, private information starts to be used by tax authorities keen to distort the facts to collect more taxes, there could be an outcry.

We already know that, tax authorities on receipt of information under CRS, have been told to

A         look at how much money is in an offshore trust structure, and then

B         look at whether there is in place a Protector.

The existence of a Protector in a sizeable trust is, tax authorities are told, ‘prima facie’ evidence of a sham – and therefore tax evasion. Is this correct? Does the existence of a Protector provide sufficient evidence to warrant a tax investigation into the existence or otherwise of a trust and tax evasion or is this an unacceptable breach of privacy?  

If it is prima facie evidence of a sham, then tax authorities are justified in approaching trustees for more information, to enable them to concoct a case for sham and issue a tax demand on the Settlor as if the trust had not existed. Whether or not this premise is justified needs to be determined by the European Court of Justice, but until this is decided Settlors of offshore trusts with Protectors can look forward to eight or more years of investigation and then litigation if they refuse to capitulate to the demands of their tax authorities.

In my opinion it is only a matter of time before the UHNW community take a class action to the European Court of Justice to have the OECD Directive set aside. However, this is a long way off and in the meantime – if you or your clients wish to be protected from the erosion of privacy and costly investigations and litigation, please contact Svetlana to find out more about our Protection Solutions.

If you would like to comment or reach out to us, please write to us at contact@garnhamfos.com or call 020 3740 7420

It drives me mad!

Before I set off on a business trip last week, I had some meetings with a client and his trustees which made my blood run cold. The obligations imposed on trustees by the OECD in their eagerness to raise more taxes are unreasonable and the consequent erosion of privacy unjustified.

Trevor left the UK in the mid-eighties and has not returned to live in the UK since. In the early nineties a close business colleague Atif, settled a large sum of money on him and a slightly lesser sum on his three children. The trustees have now to account to their governing body in Jersey as to who is the settlor which it will then exchange with the tax authorities in Trevor’s country of residence – which is Hong Kong.

In order to satisfy these reporting obligations, the Trustees have to dig deep into the facts leading to the creation and funding of the trusts, they need to analyse the original trust deeds, which were declarations by the trustees with no mention of the identity of the settlor and the sequence of transactions and entities through which the funds were transferred from Atif to the trustees.

Luckily the trustees had not changed since inception, but since I drafted the documents I had moved firms and the trustees needed to recover my files from my former firm. It also became necessary for the trustees to travel to London to talk to me, and to meet with Trevor on his visit from Hong Kong to London, to work out exactly what had happened twenty years ago. This involved weeks and weeks of work, which was all billed to Trevor’s children’s trust fund.

At the end of this exercise and at vast cost, it appeared most likely that Atif was the settlor of Trevor’s trust, but that Trevor was the settlor of the trust for his children, even if at first glance Atif was the settlor of both trusts.

If, however, Trevor was UK domiciled at the time he set up the trust for his children the trustees would need to make a report to HMRC and declare his liability to Inheritance Tax and the subsequent ten yearly charges. 

On a quick calculation the cost of the tax, the work done to date, fines penalties and the cost of an investigation with the UK HMRC would wipe out Trevor’s children’s trust and it may also be necessary to claw back some distributions made so that the children could buy homes to live in.

At the time Trevor allegedly funded the trust for his children, he had severed all ties with the UK and was living in Singapore. However, two years later his job took him to Hong Kong where he subsequently settled. The question then arose as to whether he had formed the necessary intention to settle in Singapore which would give rise to a domicile of choice there or whether, his later move to Hong Kong was evidence to disprove this.

Trevor came to see me and we went out to lunch. ‘What can I do to stop this legal gravy train?’.

I told him the only way the trustees could get comfortable with their obligations to the Jersey authorities was to get an opinion from a leading QC.  ‘What if the opinion goes the wrong way’ asked Trevor. I told him bluntly that ‘We cannot determine the outcome of leading Counsel’s opinion, but we can give the best interpretation of the facts as set out in the instructions’.

Luckily, I told Trevor, there has been a recent case on domicile which it could be very useful. It was re Gulliver. The case, heard this year, decided that each year must be looked at separately; subsequent events should not determine the settlor’s domicile at the time of funding the trust.

I said to Trevor that the costs of engaging a lawyer to draw up the instructions was a glimmer of hope to save his children’s trust fund – there was no other way. Trevor finally agreed.

‘Trevor is lucky’ said the lawyer engaged to draw up the instructions to leading Counsel ‘He has experienced and pragmatic trustees able to see what can be done to act in the best interests of Trevor’s children. Most trustees, however, live in fear of their governing body taking away their license and will declare everything regardless of the consequences.’

We live in difficult times – but we shouldn’t lose our sense of responsibility – do you agree?

Contact us to get an independent trust review.

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Warnings!

Last week, I had the pleasure of talking to ‘Jack’ who has the inside track as to what is going to be the approach of HMRC (and probably every other Government signed up to CRS) to the receipt of information about trusts which is about to start going into their hands. It is Armageddon for the offshore trust industry.

Pablo is a prime target. Eight years ago he sold his beef production business in Argentina, for a nine figure sum and transferred it into a trust in the Cayman Islands. He appointed a professional trustee, ABC Limited and his brother Horacio as a Protector.

During the set up procedure which he worked on with lawyers in Argentina and fiduciaries in Switzerland ‘Cresta’, the topic of most discussion was what powers should be reserved in the Trust Deed to his brother, Horacio.

A letter was written to Pablo by Cresta copied into Horacio and the trustees, ABC Limited which said

‘There are a number of reasons why you may wish to appoint a Protector

·      It is comforting to you to know that Horacio is specifically appointed to ensure that the trustee is administering the trust in an appropriate manner,

·      Horacio has detailed personal knowledge of you and your family as you are very close and is a resident of Argentina, so he is fully aware of the politics and culture of the country, which may not be fully understood by your professional trustee in Cayman;

·      Horacio will be the main channel of communication between the trustee and beneficiaries and between the trustee and beneficiaries, and between the trustee and settlor, and can mediate in potential disputes

·      Horacio can also keep the trustees in check to ensure that they are mindful of the Pablo’s wishes and act accordingly’

Pablo responded, in writing to say

‘ABC Limited was recommended to me by my lawyer in Argentina. I have met the CEO, Juan, on a business trip to Buenos Aires. He is a good man, but I am not ready to entrust my life’s work to him to do with as he pleases, without being able to get my money back if I need to. I will not give anyone carte blanche over my money!’

After much correspondence about the role and powers of the Protector, Pablo writes

‘I can see the benefits of a trust, for tax mitigation, succession, asset protection and privacy, but I am not prepared to have these benefits at the cost of losing control over my money. I will only consider setting up a trust if either I or Horacio are given power to instruct the trustees to invest and distribute the funds’

Cresta replied the ‘benefits of the trust are only available if the trustee has full discretionary power over your assets’.

There then follows three months’ silence, after which Cresta reminds Pablo that he has  not come to a decision. During this time Argentina take a turn for the worse for wealthy families living in Argentina and so the correspondence recommences.

Pablo finally agrees to set up a trust; under which Horacio is given a power of veto over the decisions of ABC Limited and a positive power to remove the trustee and appoint a new one.

As soon as the trust is set up, Pablo stays in regular touch with his trustees telling them what he wants done. To begin with, he copies in Horacio, but after a few years stops. ABC Limited does not always do what Pablo requests, however, on the whole, Pablo makes sensible decisions so they conform to most of it; but from the correspondence Horacio is clearly not the driving force Pablo is.

In the not too distant future, ABC Limited will need to disclose to the Cayman tax authorities all persons of ‘significant influence’ over the trust; Pablo, as the settlor, Horacio the Protector, and all the names of his family – his wife and three children. Although in practice and in law, no-one other than the ABC Limited has ‘significant influence’, the tax authorities want to know the identity of everyone involved.

The Cayman tax authorities will then, again – eventually, report all these details to the tax authorities in Argentina.

Armed with this extensive and detailed personal information, Argentina will not immediately approach Pablo or Horacio, they will first take away any defence which Pablo may have by going straight to ABC Limited.  ‘We have reason to believe [because of the existence of a Protector – Horacio] that Pablo’s trust is a sham, and would like to investigate the set up and ongoing correspondence to see whether this is an avenue to pursue’.

ABC Limited will then be obliged to disclose its correspondence with Cresta and Pablo which will include the above. Armed with this information it will insist that Pablo’s trust is a sham and put in a tax demand accordingly. Pablo will then need to dispute the tax demand, but is now at a substantial disadvantage given that the Argentine tax authorities have all the sensitive information it needs to make such demands.

If Pablo capitulates, he will have to pay the tax as if the trust had never existed, but he can demand the return of all the fees paid by the trust fund to ABC Limited. Given that Pablo’s trust is its most significant ABC Limited will, as a result, be put out of business.

If you, as a settlor or a trustee want to avoid this, there are solutions, but you must act now to make sure our trust is not on top of your local tax authority’s pile.

Contact us to get an independent trust review.

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be pre-ordered from Svetlana  and her book ‘Winning Business from Private Clients’ can be bought direct from the website.

Information is Power and Power is King

Many clients don’t know what it is like to be investigated or have authorities breathing down their necks – and they shouldn’t! The uncertainty and confusion which the Common Reporting Standard is bringing to the industry is grave but there are solutions which, if executed properly, can mitigate most of the concerns a typical UHNWI faces today.

The issue is that CRS has disrupted not only the client but also the professional. I was talking last week to Tom, a professional trustee from the Channel Islands. ‘What is the biggest challenge you and your company facing at the moment?’ I asked him.

‘The margins’ he said. ‘Having provided professional trustee services for more than two decades I now feel squeezed and am looking for solutions’.

‘Each year we see more legislation with which to comply. First was the anti-money laundering rules then there came FATCA and now CRS. On top of this I need to act as professional trustee, reviewing and considering all requests for distributions and investments, or risk being set aside as a sham’. I talked about shams in one of my previous notes where I mentioned that if a trust is set aside as sham the consequences are disastrous! Not only will the trustee have to claw back all distributions made since the inception of the trust (which may not be easy if the settlor is dead), they will also have to refund the settlor of all the fees they’ve accumulated over the years (imagine the sums these could reach for large, complex trusts that have been managed for decades and decades) and to top it off the settlor will be treated as the real owner all along (the trust never existed) so he will have to pay back tax on all the funds and make these available to any creditors he may have.

I asked Tom how trust businesses like his were responding to these challenges.

‘In all major offshore trust jurisdictions, the number of professional trustee companies is shrinking. Until recently businesses like mine, were bought by equity houses, but now these houses are looking at the risk side of the equation. If a big trust is investigated by a tax authority and is found to be a sham the repayment of the fees could be ruinous’.

Tom, as the CEO of the trust company, has been tasked with reducing the risk in his business and to make it more profitable.

We looked at the main types of clients Tom had in his business, 75% were UK resident, non doms, who were paying the remittance charge, many of them at £90,000 a year. Of these trusts, 12% owned houses on which ATED was being paid.

I explored with Tom the options. He agreed that the trusts on which the margins were too low and set up by non doms, should be invited to come onshore to the UK. All the others should be restructured on which we could work together.

With regard to the compliance costs generally, Tom would look into using a computerised digital solution which would take a huge burden off his shoulders.

Before we ended our call Tom voiced his concerns; he said ‘any professional trustee which does not anticipate what is around the corner deserves all it gets, but I pity their clients who will of course sue them for not looking after their best interests’.

I encourage professionals in the industry to come together and collectively work towards what should be our common goal to protect clients rather than throw them under the bus when times get tough. We have to educate our clients of the difficulties we are faced so we can work together on the solutions.

Yes, we are faced with challenges but those trust businesses which can find a way to de-risk their trusts will be the winners.

Contact us to get an independent trust review.

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be pre-ordered from Svetlana  and her book ‘Winning Business from Private Clients’ can be bought direct from the website.

The Basics

I have been privileged to work for many decades with some of the wealthiest families in the world. Over these years I have observed what they do and how, which has allowed me to distil this knowledge and experience into two Protection Plans – one for UK resident non doms, and another for those who want to keep their trusts offshore. Both target the complexities surrounding privacy and asset protection.

In this Note I will focus on the Plan for UK resident non doms.

We have all gotten so used to setting up offshore trusts for UK resident non doms, that we sometimes overlook the huge advantages of bringing the trusts onshore. GFOS offers UK Professional Trustee services to individuals who can no longer benefit from having their assets in offshore jurisdictions. 

As I have said in my previous Notes, there is a real concern that as and when HMRC receives information about trusts offshore, it will pick out the trusts which are weak and whose integrity can be questioned. HMRC knows that nobody who has worked incredibly hard their entire life to build an empire will just hand it over happily to a trustee offshore to own and control it. Investigators will want to set these trusts aside as formal or administrative shams - the more trusts that are considered sham, the more assets they will tax. 

If you or anyone you know has been investigated, you will know that HMRC is ruthless and has deep pockets. It cares little that you have to incur huge professional fees to fight off allegations, not to mention the reputational damage you suffer along the way. It is concerned only with raising taxes; and if it is successful in setting aside your trust, they can charge you to tax on all the income and gains, and on the assets in the trust, as if there never was trust. This will be a catastrophe! Imagine you have had a trust for the last 12 years thinking it is all fine and dandy until 2017 when it is declared sham -  it never existed, you've been the owner all along. The trust property can be used to pay off creditors, you will now not only be taxed on these assets going forward but you will have to backtrack 12 years and pay the tax for that period too.

The grass isn't greener on the other side as the trustees could be put out of business by having to pay back all the fees it earned as a trustee - if the trust never existed then the trustee has no right to keep those fees.

With the GFOS Protection Plan, the settlor can choose the people he wants to take the decisions in his trust. This is what I mean by getting back to basics. Trusts were always designed to be in the same place in which the family lived so that trustees that are known to the family can be chosen.

The family can choose its investment manager, lawyer and/or banker here in the UK. It also does away with the need for a Protector as this person can now be a Trustee - our plan makes sure that all trustees are protected from liability.

The third advantage, is that the income and gains are taxed in the trust on an arising basis, so there is no need to pay the Remittance Basis Fee. This has not been cheap. For non doms who have lived in the UK for more than 7 years out of the previous 9, it is £30,000 annually, for those who have lived in the UK for more than 12 years out of the previous 15, it is £60,000 annually and for those who have lived between 17 out of the previous 20 years it is £90,000.

Of course the income and capital gains will be taxed as these arise, but the beneficiary will then receive a full income tax and capital gains tax annual allowance, which is the fourth advantage.

The fifth advantage is that having the trust in the same country in which you live, means you can stay on top of your trustees and wealth, and as the saying goes – ‘You gain respect, for what you inspect.’

Get an independent Trust Review

UK Trustee Service we provide

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Caroline’s Book ‘Who can you trust when you are Super Rich?’ can be pre-ordered from Svetlana  and her book ‘Winning Business from Private Clients’ can be bought direct from the website.