Choosing the right ring

Time and time again I hear the same concerns being voiced even by those with family offices: ‘I am not sure my adviser is up to speed with all the dangers and risks – he lacks direction’ and ‘I need to protect my assets and privacy, but my adviser seems lost as to what to do’ or ‘My CIO does not seem to be plugged into direct investment opportunities, I do not want to pay fund managers more than I am making out of my own money’. 

It is impossible for any one given adviser to know it all. Here are my suggestions.

I have been spending the last two weeks re-reading the copy of my sold out book When you are Super Rich who can you Trust, first published in 2014. I am updating it, as well as its sister book – Uncovering Secrets on How to Win Business from Private Clients in preparation for our re-launch on 11th October. I was surprised at how much has changed in only three years.

We all know that wealthy families are always fingered for money but over the last three years it has gotten much worse. Their offshore financial data is due now to be exchanged automatically and their private bankers have been gagged in giving advice; banks have been fined $320 billion since 2008!

It is not rocket science to learn that UHNW families want to be in control of their wealth, if they are to enjoy it. But gone are the days when one suitable homme d’affaire was all that was needed to guide the family to opportunities and steer them away from the pitfalls.

Gone also are the days when advisers would ‘own’ their client. Keeping their clients sweet with a wall of obfuscation, impenetrable jargon, intimidation and flattery. Families are now actively looking for a new dawn and the family office, despite its meteoric rise, is not by itself the solution.  

Many have come to realise that in this complex world, and even more now than three years ago, that it is impossible for any one adviser to be able to guide their family to the best opportunities and away from the pitfalls and traps. There is now no substitute for each family having their own team or cabinet – or what I call the Ring of Confidence.

The advice I give in my book, and the one I work on with my client families (if not the founder then the second generation), is first know what you are hoping to achieve, and what you fear. Unless the family is clearly aware of their goals and traps, it will never be able to pick the best team of advisers.

You may think setting goals is obvious – make more; lose less – but, when you drill down into the detail, it is usually much more complex. Some families like to collect art, support their charity, avoid litigation, groom the next generation to take meaningful positions in the business, smooth succession and so on. Unless these goals are understood, the inner circle may not be suitably well balanced.

It is only when the goals are fully understood that tan the Ring of Confidence can be selected, reviewed and built.

Second, the structure in which they work needs to make the team work together, not in silos.

A business run by a company has a board of directors who meet. They know what the business goals are, which should be clearly set out in the business plan. They meet together, knowing that each Director has something to contribute to the proper running of the business and they need to hear what the other advisers are saying, since it may impact on their area of expertise.

When I first wrote my book When you are Super Rich Who can you Trust?  in 2014 having a Ring of Confidence run on a commercial basis, was a nice to have. In most cases their financial assets were offshore; out of sight and out of mind. This is now no longer possible. Running your Ring of Confidence on a commercial basis is no longer a nice to have, but a must have.

The time to act is NOW.

Get in touch with us for a preliminary consultation or if you'd like to pre-order any of our books.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

Jack from last week

Last week, we looked at Jack, the M&A specialist who works with ABC bank in London. As I outlined already, his sister living in Dubai, paid him commission on successful deals he put in LPT Bank in Dubai. It was his ‘rainy day’ money which he had not declared to HMRC and on which he had not paid tax. This was clear tax evasion and I told him to declare it immediately.

Before I go into the detail, I would like to stress that these issues are very complex and most people approach tax as a straightforward, a black and white matter, but in actual fact it all depends on the detail; playing with ‘what ifs’ is always a dangerous game.

Jack had asked ‘what if’ his non UK domiciled status would make any difference to his tax liability –  I told him to be effective, this would need to have been claimed, and if not then it should be considered very carefully.

Jack came back to me with more questions – ‘What if his sister had put his commission in trust for the kids?

Although Jack needed no warning he was a professional, I made it clear that any thought he may have to backdate ‘legal papers’ was not worth any tax savings. Without detailed correspondence to support his case it would be unlikely to pass even the most superficial of investigations by HMRC.

He still pressed for answers.  

The first thing to consider was from whom did the monies come from when the trust was funded. Was there an agreement between Jack and his sister such that Jack expected his sister to use the commission earned to set up a trust for his children?

If this was not the case, Jack needed clear evidence in writing and clear proof that she treated his children as her own.

Without such written and clear evidence there was the presumption that Jack’s commission was in fact an indirect gift to his children.

Under the law of the presumption of advancement, only a transfer from a husband to a wife, or a gift from a father to a child is a presumption of a gift. In all other cases, without contrary evidence it is to treated as a loan, which needs to be repaid.

Note that the presumption is gender specific. Therefore, even if Jack’s sister treated his children as her own, there would still not be a presumption of advancement, just as a transfer of monies from a woman to her husband will be presumed to be a loan, even if the woman is an heiress or the main or only breadwinner. However, these factors may be taken into account to rebut the presumption.

Then, of course, HMRC would need to look into the domicile of Jack’s sister, if tax was not to be paid and which adviser set it up for her.

We looked into the case of Jack’s domicile last week and that of his sister may be assumed to be similar. However, it is likely that HMRC will also make enquiries as to who set up the trust. If it was a UK based adviser, that person would have had report the trust at the time if Jack’s sister was or could have been UK domiciled.  

Jack threw up his hands in disgust. ‘How can anyone know the relevance of this sort of detail when making a tax return. My sister has no children of her own, she often takes mine on holiday to exotic places in the Middle East, and has more than enough money of her own. If she had settled the trusts for my kids, I would never think of declaring these trusts as set up by me, and she would not have given a second thought as to the possibility of tax being paid in the UK. This is crazy’.

‘This is why,’ I said ‘you need something which I like to call “a Ring of Confidence”. It is not enough to have an ad hoc team of advisers; they need to be consulted not just when you think you need them, but regularly, in case your common sense approach is not reflected in law’.

Jack was silent – ‘I suppose this is appropriate not just for tax matters, but in all areas of concern such as direct investments. I can see how beneficial it would be to have an independent expert look over my investments once a year, to make sure I took profits at a good time and reinvest them appropriately. Maybe this would also be true of succession plans as well as tax?’

‘The world in which we live is so complex’, I said to Jack ‘Having and using good advisers is no longer a ‘nice to have’ but a must have, and not just when you think you need their advice’.

Our Protection Packages we liken to insurance – you need protection all the time – not just when you think you may need it – and in actual fact it is more competitive than insuring against the risks!

In my book ‘When you are Super Rich who do you Trust?’ I guide my wealthy readers to analyse, first their goals for their wealth, and then to do a SWOT analysis. This information can then be fed into a bespoke Protection Package to ensure they get their own bespoke ‘Ring of Confidence’.

Both books ‘When you are Super Rich Who do Trust’ and ‘Uncovering Secrets of Winning Business from Private Clients’ are being relaunched on 11th October. If you would like to get a copy please visit our Education tab or get in touch with us either by phone on 020 3740 7420 or email  svetlana@garnhamfos.com

Let the tsunami begin

Jack is a M&A specialist who works for ABC bank in London. He is paid a salary on which tax is deducted monthly under PAYE. His sister is a facilitator in Dubai, matching investors with investments and as and when Jack introduces a client who invests with her, she pays him commission. His first ‘deal’ was in 2002 on which he received a six figure sum.

In 2002, the world was very different. Jack saw this commission as his ‘rainy day’ money and put it in LPT Bank in Dubai. He did not disclose it in his tax return. His sister paid him further commission in 2010 and again in 2015. He had ‘got away’ with not paying tax in 2002, so did not see why he needed to declare it in 2010 or 2015

Jack is evading tax.

There is an amnesty in the UK called the Worldwide Disclosure Facility which runs until 30 September 2018, but it is hardly attractive. If Jack were to disclose voluntarily the commission earned in 2002, 2010 and 2015, he can expect to pay the full tax due for those years, plus a minimum penalty of 30%, but this could go as high as 200% plus interest. Furthermore, there is no guarantee that HMRC will not press for a criminal prosecution which would no doubt lose Jack his job with ABC Bank.

Although the amnesty is hardly attractive, it will be better than if HMRC were to find out that Jack had been receiving commission from Dubai on which he has paid no tax.

As from September 2018, Dubai, as part of the United Arab Emirates will collate all financial information including all the details of bank accounts held by LPT Bank and will send the details of Jack’s account to HMRC. Armed with this information HMRC will investigate Jack’s Dubai account. This is what CRS is designed to do.

Let’s now suppose that Jack was born in Hong Kong to parents who lived most of their lives in Asia. Although Jack went to school in the UK, he only came to live in the UK when he got married in 2001, 16 years ago. Before then he was living and working in Hong Kong. Jack has always considered himself non UK domiciled and was under the misapprehension that provided he did not bring the commission into the UK he was not liable to tax.

The truth is that non doms, who wish to benefit from the ‘remittance basis of tax’ must claim it, it is not automatic. Furthermore, the benefit is now only available to those who pay for it annually, which is £30,000 if you have lived in the UK for 7 of the previous 9 years, £60,000 if you have lived in the UK for 12 out of the previous 14 years and £90,000 if you have lived in the UK for 17 out of the previous 20 years. Furthermore, if Jack wants to benefit from the remittance basis of tax he would lose his annual personal allowance which is deducted from his tax payable by his employer ABC Bank

Before voluntarily disclosing his commission to the tax authorities Jack should first work out whether he would be better off as a UK or non UK domiciled person.

HMRC may not accept that his parents, at the time of Jack’s birth were non UK domiciled, since they were both born in the UK and in 2015 returned to the UK. Therefore, if, on doing his calculations he believes he will pay less tax as a non UK domiciled person, but the tax saving is only marginal, he should factor in the added time and cost it will take to argue his non domicile position with HMRC – which could take as long as 4-5 years.

Jack is tempted to take the monies out of Dubai and put them into his UK bank account, to avoid Dubai disclosing it to HMRC. But Jack should not assume that his bank in the UK will accept a sizeable sum of money without asking questions.  – If Jack does not give his bank a sensible answer as to the source of funds, it will file a suspicious transaction report – at which time all hell will let lose.

Jack like so many people around the world need to face up to the reality that authorities now have the information they need to tackle tax evaders and to say that you thought you were tax compliant –is no defence. If you have monies in the following countries your financial details will be exchanged as soon as September 2017

Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, 23 Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, United Kingdom.

And in the following countries from September 2018

Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay, Vanuatu.

The time to act is NOW.

Get in touch with us for a Free preliminary consultation.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

The case of Pablo from Argentina

Pablo is a resident in Argentina, he is rich and successful through his enterprises in renewable energy and industry. He has always lived in Argentina and is married to a second wife who is also in love with the country. They have two children Mateo and Valeria in school in Buenos Aires.

In the mid noughties Pablo sold part of his energy enterprise and transferred the proceeds into trust in the Bahamas. He appointed a professional trustee recommended to him by a friend and sought comfort that the professional trustee would do as he wanted by appointing a friend in S America as his Protector, by reserving powers to himself to remove the Protector and replace with another in the trust, and in writing a detailed Letter of Wishes in which he told his trustee how he wanted the Trustees to invest the monies, and how and when to distribute to his five children, three from a previous relationship.

In 2016 the Argentine Government introduced an amnesty. His advisor Manuel strongly advised him to disclose all his assets offshore including the BVI shares he had sold to give him immunity from prosecution for tax evasion by paying the tax and a 10% fine.

Manuel came to me three months ago ‘What is Pablo to do? He has declared everything under the amnesty, but despite this the trustees of his trust in the Bahamas are collating the details of his financial assets held in trust, together with the names and addresses of Pablo as settlor, his friend as Protector, and his children as beneficiaries. Pablo has already disclosed all his offshore assets and is fully tax compliant, why can’t they leave him alone?’

Pablo had been drawn to the Bahamas, because of its expressed eagerness to serve the needs of the UHNW international community, and he was delighted when it took a stand against the OECD with a bilateral approach to the automatic exchange of information. Under this agreement the Bahamas would only exchange financial information with those countries with which it had an agreement and not with all the countries which had signed up under a multi-lateral agreement.

The OECD, in May 2017, paid a visit to the Bahamas where they made it clear that they don't want the Bahamas picking a different route from everyone else. Did the Bahamas want to be black listed by the OECD or would it like to reconsider signing a multi-lateral agreement?

Of course, the Bahamas has the sovereign right to make whatever legislative decisions it thinks are in the best interests of its country but if in doing so it jeopardises the well-being of other businesses which trade with OECD countries, it needed to think again. The OECD is fully aware of its power and is not afraid to use it whether against a jurisdiction like the Bahamas, financial institutions or wealthy families; even though in doing so it may be in breach of fundamental human rights.

The UN Declaration of Human Rights, the International Covenant on Civil and Political Rights and in many other international and regional treaties, the right to privacy is a human right which Governments are expected to respect. Privacy, it is believed, underpins human dignity and other key values such as freedom of association and freedom of speech. It has become one of the most important human rights issues of the modern age.

The drive to stamp out tax evasion has clearly become an obsession with tax authorities across the globe. 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 in the pursuit of more taxes. 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.

This blindly ignores the fact that tax authorities in their obsession to raise more taxes resort to declaring black is white and white is black – which is exactly what human rights to privacy are designed to protect.

Pablo is justifiably angry, he has done everything he can to be compliant; but does not want to wait in the hope that he will not be found out. He wants to do something now to ensure that his trust is bottom of the pile on the tax authorities’ hit list.

For the past thirty years I have been working with some of the wealthiest families in S America, Africa, Europe, Russia, Australia and Asia. They want robust structures which they can understand and which give them control, transparency and protection.  Protectors, reserved powers and Letters of Wishes do not withstand the slightest puff of dispute so our structures do not include them.

Now, with the introduction of CRS our structures are a must have for every wealthy settlor who fears for his privacy, security and the well-being of himself and his family

Get an independent trust review by contacting us.

Plan for Privacy

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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