The father with the disappointing daughters

Last week I met a client who I will call Tom, for a coffee, I had given him some tax advice some months ago, so I thought our meeting was a follow up on the work we had done but I was wrong.

‘I wanted to meet because I have been reading your notes and wondered whether you may be able to help on a domestic issue which is getting out of hand.' Intrigued, I asked him to continue, ‘As you know I have built a successful business and have 1,245 people working for me. Each employee reports to a manager and each manager reports to my board. Every month we go through the figures of each department and the board responds accordingly. Everyone knows what they need to do and they do it, if they feel they deserve a better deal, they can ask, we always listen, but they may or may not get what they want’.

‘Over the years, I have taken profits and invested them; a fine country home, farm, beautiful furniture, a number of boutique hotels, other hospitality businesses and an investment management company. I have a really good inner Ring of Confidence – as you describe it – a good team of advisers, which meet on a regular basis and update me on all my investments. I am lucky to be still married to my childhood sweetheart, have one fine boy who works with me, but my three daughters have been a disappointment. I have always been generous with my girls; I have provided them with homes, set up an education fund for their children, and financed their husbands in business ventures, but they are envious of their brother’s success working for me, and are feckless. The more I give them, the more they want and if I tell them they cannot have what they want, they complain, cause trouble and I am worried I have made mistakes in the way I brought them up.’

‘My youngest now wants me to take her husband into the business, when I know he is not qualified, my eldest wants me to set up a gallery for her husband to run, and the middle girl and her husband keep racking up fees buying horses to event telling me each year that the next new horse will make their fortune’

I explained to Tom that all families have their problems but for wealthy ones, the problems are magnified. The UK has centuries of experience in managing family fortunes, largely because, unlike civil law, it promotes primogeniture and the preservation of wealth for future generations. This is the reason why country estates have stayed intact (until such time as they had to be sold to pay tax).

Of course, leaving the bulk of the family fortune to only one child was not always well received by the others, in the same way as Tom’s daughters envy the good fortune of their brother. Maintaining family harmony, in the past, was left to trustees. If the family fortune was held in trust, investment decisions, distribution of wealth and succession was then not the responsibility of the head of the family, in the same way that salary increases is not in the sole discretion of the CEO of any business.

I told Tom about some of the families and the trusts I have had the privilege to work with. Numerous family member requests, I have seen turned down by a board of trustees or accepted with conditions, it is not the decision of the settlor along. If a family member wishes to start a business venture for example; the trustees need to see a business case and will decide whether or not to invest according to the viability of the proposition.

‘On what basis do the trustees make their decision?’ Tom asked. ‘In most cases,’ I told him, ‘the founder makes it clear what he wishes to achieve, which I prefer to set out in a binding – but flexible memorandum. Ideally I like to discuss this with all members of the family. In this way they then know what to expect and can adjust their lives accordingly. Many founders want to incentivise their family members, with matching payments for entrepreneurial endeavour, but I have seen this lead to unfair consequences such as for mothers with young children, or for those who work hard but for non-profit organisations, sporting activities or charities. This sort of approach would merely aggravate Tom’s domestic concerns.

‘Do I need to set up my trust abroad?’ Tom asked. ‘it depends’ was my reply’, ‘on how important tax mitigation and privacy is. Now that privacy is compromised by having structures offshore many founders of family fortunes are moving their structures onshore where possible’.

Tom confessed that he had only thought of trusts as being vehicles to avoid tax, and was somewhat confused as to how a trust could be used to give him and his team of advisers not only control, but family harmony.

I peered at Tom through my ByOcular glasses which I like to wear when I am being serious. ‘Trusts have been used by wealthy families to preserve wealth and family harmony for centuries. Tax was not until recently the main reason for setting up trusts, asset protection, control and family harmony were the main drivers.  Tom was keen to explore further, so we agreed to work together to scope out his concerns to see whether a family trust could be a solution.

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Watch the ingredients

Jamie Oliver celebrity chef and father of five, has admitted to losing £90 million since 2014 by investing in friends’ projects. He is now on record as saying ‘I should not have mixed business and pleasure’.

Jamie Oliver, came up in a conversation I had last week with one of my UK dom clients who I will call Bobby, who is not dissimilar in situation and background to Jamie Oliver. Whereas, Bobby was brought up in Suffolk, not Essex, went to a Comprehensive school not a grammar school, both are UK resident and UK domiciled, both are high profile with high profile families, both have made millions in books and related businesses, both have been caught up in bad press and public disputes, and both have lost tens of millions in loss making projects with ‘friends’.

Bobby was candid about his experience and his expectations of what he thought it would be like doing business with family. I quizzed him on the subject, ‘When I started to make money, it was so exciting, I wanted to share it with everyone, I had made more than my wildest dreams, I wanted everyone to know that I was the same bloke, same standards and values; still like watching football, having a drink with my mates and giving a helping hand where I can, but the people I came across, even my old mates, treated me differently when I had a few bob – I did not want money to change the relationships with those around me but felt almost forced to.’ 

He went on, ‘I was foolish to bring my family into my business profile.’ We were such a happy family when the kids were young, I could not see how publicity could harm them’. 

Bobby has two adult kids, who I will call Jack and Lucy, and two younger ones. ‘Jack and Lucy have had to learn quickly who their real friends are, they had to deal with a lot of negativity and pressure on social media and at school. ‘They now tend to gravitate towards kids of wealthy parents, who understand what it is like to be born into a rich family, but my concern is that a lot of them lack any direction or drive.' He described to me how Lucy made a friend whose parents live in Monaco. Most weekends her father sends a private plane to pick her up to ‘come home’, and whenever Lucy has been with them, the parents are rarely there. They go out with a group of other kids in Monaco where they wear expensive clothes, go to ludicrously expensive nightclubs and get boozed or worse. Bobby says that it took a while for Lucy to find her way out of the group as she has always been an ambitious and driven kid who wants to make a difference.

I explored with Bobby what his goals were. This is a topic I go into in some detail in Chapter 1 of my book ‘When you are Super Rich who can you Trust?’ It soon became clear that Bobby wanted to give his kids a sense of purpose and responsibility.

After a meeting with Jack and Lucy, it became obvious that Jack was drawn to co-investment and project planning – which his father is poor at, and Lucy, was keen to manage a team of advisers and her father’s charitable endeavours.

We; Jack, Lucy and I, with their father’s blessing, set to work on elaborating on the goals set by their father and in selecting a team of advisers which would assist them in delivering his goals, the family’s inner Ring of Confidence. We then needed a structure into which all elements could fit including the family’s objectives, with clear rules as to what was expected of each adviser, and the structure could be adapted to new circumstances over time.  

Jack and Lucy, were excited as they had always wanted to find roles for themselves in their father's business but because he had been badly bruised when working with family and friends previously, he was cautious of bringing his children on board as well. It took him some time to recognise the potential and to recognise that the young generation can be the continuation rather than the destruction of wealth.

The first step was to produce a Report with recommendations which we put to Bobby in early June; he approved. We then agreed an action plan, on how to implement, which we is not nearly complete. Bobby is thrilled. ‘We may not have been able to put back the clock, but we have found a way to engage Jack and Lucy in consolidating and building on my work, filling in the gaps and making my wealth and legacy go further in a way I clearly cannot!’.

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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.

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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.

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