Court Experience

Some say that Court experiences are like your first day of school. At school I always worked hard, handed my homework in on time, was never late, was known as the teacher's pet and got top marks. So I was convinced that if I ever have to go to Court, I'd be alright because I knew the rules of the system. 

I have been in the privileged position of not having had many Court experiences with any of my clients nor being involved in any disputes so when I had to participate in a hearing for an Asian client of mine, I was shocked at how unsettled I felt after. The tactics of the other lawyers were those of unattended bullies and there was little fairness involved; it was like whoever capitulates first is the loser, even if he is on the right side of the law. 

When planning, I always advise my clients to think ahead and remember that you might have to defend yourself one day - my words when drafting or writing documents are always very carefully chosen so that they cannot be misinterpreted or to put my client in a vulnerable position. 

The direction in which the world is headed now, especially with the obsession of transparency, means that undoubtedly, we are going to see a lot of litigation, a lot uncertainty and a lot of wealth structures under attack. Most disputes I've had can be sorted out with a good night's sleep, a nice glass of wine and a heart to heart conversation but that doesn't fly in Court - what was meant to be a few hours hearing turned into a 3 day deliberation over a four word email I had sent to one of the client's advisors!

A friend of mine who is a seasoned litigator called the other side of lawyers ‘lying toe rags’ and the fact that they were manipulating the truth annoyed me even more. Nobody likes being lied to, cheated or insulted but sticking to principles can be expensive.

Imagine what it must be like to receive a letter from HMRC claiming that you owe them a huge sum of money in tax, penalties and interest. The tax advice you were given five years ago, which cost you north of at least £10,000, which you followed to the letter, HMRC now claims is flawed and what you thought you had done, you had not done so now you are to be taxed regardless of the fact you had no idea you are doing anything wrong.

It is not for me to say that HMRC is abusing its powers but what I do think is unfair is that it treats legitimate avoidance taken on good advice in the same way as the deliberate evasion of tax.

The most vulnerable in the UK, I think, are the non-doms who took advice on coming to this country - costing them hefty fees! They were told to set up a trust which would take them outside the scope of income tax, capital gains tax and inheritance tax on all monies offshore - costing them another set of fees. These individuals had no intention of evading tax, they merely followed good advice for legitimate tax mitigation.

It may be in the fullness of time – that these non-doms can prove the attack against them was groundless. However, by the time they have engaged a lawyer to investigate the matter, put forward a good case, and argued it for years, possibly in front of a Judge – they may just find that what they have saved in tax they have spent in legal and court fees – that is if they win. If they lose, HMRC could wipe them out!

But, it is not as if you need to sit there like a sitting duck waiting for HMRC to catch up with you. There are some simple measures you can put in place to ensure that your trusts, whether you are a settlor or in the fiduciary business, are less likely to be investigated. 

To get an independent opinion on your tax position or trust review, or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Digging into Foundations

Foundations for the last century have been used by many UHNW individuals across the globe for much the same reason as settlors of trusts; privacy, asset protection, freedom of distribution, smooth succession and tax avoidance.

Although they serve much the same purpose, they are very different in history and nature.

Private foundations developed from entities set up by residents in continental Europe in the middle ages to fund religious houses.

In 1926, Liechtenstein broadened the appeal of foundations when it enactedthe Personen-und Gesellschaftrecht (Persons and Companies Act, hereafter referred to as the PGR) and made the foundation suitable for use as a vehicle to manage family assets.

Liechtenstein remained unique in establishing private foundations until Panama introduced the Foundation Law No.25 of 1995. Since that date foundation legislation that provides for the establishment of private asset- holding foundations has been enacted by the other jurisdictions, including Aruba, Anguilla, Antigua, Bahamas, Cyprus, Guernsey, Isle of Man, Jersey, Malta, Netherlands Antilles, Nevis, St Kitts, Seychelles and Vanuatu.

Joshua came to see me last week, he was looking to set up a structure for his wealth and was looking into trusts, when his friend Michael told him not to bother with trusts, but to set up a foundation, since they were ‘outside the scope of CRS’.

NO, they are not!

Fiduciary businesses which administer foundations must report to the home country of the founder in the same way as they would if they were administering a trust. The only difference will be the way in which the Governments treat this information once in their possession.

I explained to Joshua that Governments want to tax their residents on the assets they hold offshore and in particular if they are held in a trust or foundation.

However, whereas a trust is an obligation, and is only created if the three certainties are present; certainty of objects, certainty of subject, and certainty of intention, a foundation is a legal entity. Trusts are most likely to be attacked if there is no certainty of intention, under the sham doctrine. The evidence Governments will be looking for is whether the settlor passed total control to the trustees or was power reserved either to the settlor or a third party such as a Protector

Foundations, do not need certainties to exist, they are formed, like a company. Forms are filled in, the foundation is endowed and registered, and hey presto, it exists. The intention of the founder is irrelevant!

The bad news is that not only can it be formed like a company it can also be taxed as if it were a company under CFC rules.

CFC (Controlled Foreign Company) rules enable a Government to tax the founder on income arising to the foundation as if it were income of the founder, if he retains control for himself. Therefore, if Joshua were to set up a Foundation and reserve rights to himself, then he will be obliged to report the income arising to his foundation on his tax return in his home country as if it were his own income, and if he does not do so, he will be treated as evading (not avoiding) tax.

Joshua asked whether there was any way he could continue to exercise control of the assets in the foundation without infringing the CFC rules.

The problem here is that there is little case law as to what would or would not be considered ‘control’. Does it extend to having a seat on the Council, does it apply if control is exercised through a Guardian or Protector – it is simply not known – but the problem with not being known is that it leaves it open for hungry Governments to claim that any form of control exercisable by the founder triggers the CFC rules which would make Joshua liable to tax on all the income as it arises.

Joshua looked crestfallen. I told him not to worry. Like all clouds there are silver lining and we were able to put to him a tried and tested solution, which suited him perfectly and he liked very much.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

STARs in your eyes

Jacob came to see me last week. He lives with his wife and family in South America where he runs a successful import and export business.

In 2005 he was persuaded to transfer his then growing business into a Cayman STAR trust. He came to see me concerned as to how robust the STAR would be against creditors, tax authorities or family disputes in the light of CRS.

In 1997 the Cayman set up the Special Trusts (Alternative Regime) Law. Given the industry climate in mid 1990’s it was very clever legislation which ticked all desired boxes of a settlor running a business.

Jacob is passionate about his business and he wants it to continue long after his death. He has three children; Ben, Deborah and Adam. Ben his eldest is a budding entrepreneur, he has set him up an agri business which is doing well. Samantha is married, but is feckless and Adam, his youngest would like to follow his father’s footsteps into the business.

Jacob trusts Adam with his business but does not want either Deborah or Ben to make decisions about it.

Jacob was drawn to the STAR trust because during his lifetime he could be the obligatory enforcer and on his death his son Adam could step into his shoes. Unlike a normal trust, a document expressed to be under the STAR regime gives the beneficiaries Ben, Deborah and Adam no rights, these are all reserved to a person called an enforcer.

Jacob also liked the STAR because he was not restricted in setting out what he wanted which was for the continuation of his import and export business for the benefit of his children.

If he had put this as a term in a normal trust, there could be a debate as to whether the trust was set up primarily for the benefit of his children, in which case it would be a valid trust, or was it primarily for the continuation of his business in which case the trust would be invalid. By setting up a STAR trust this debate was unnecessary since regardless of what was the dominant purpose it would remain valid.

Another feature Jacob liked was that if at any time the business was taken over or became obsolete or went bust, the purposes could be rewritten giving him flexibility which he liked.

The only feature Jacob did not like about the STAR was that he had to appoint a professional trustee resident and licensed in the Cayman Islands. He was not convinced that a professional trustee had any idea of how to run an import and export business or would make the best decisions about the family investment or the family. He had heard gloomy tales of professional trustees unable to make a decision without seeking endless legal opinions which sucked out the cash resources of the trust and slowed down the speed of decision until making a profit was an impossibility. But the benefits outweighed his concerns until now.

I made it very clear to Jacob that I did not know how his government in South America would treat the knowledge that he had set up a STAR trust and that he continued to be the obligatory enforcer. All I could do was to go back to basics and apply them to the CRS regime.

Under CRS the trustee in the Cayman would need to report the existence of the STAR and that Jacob was the settlor and obligatory enforcer. What would it do with this information?

There would probably be little point in trying to argue sham because the STAR is a creation of specific legislation which obliges the settlor to appoint an enforcer so the existence of an enforcer will not render the trust void and even if they could get such an order in the country where Jacob lived, it would not be enforceable in Cayman.

So where would it be most vulnerable? The weakest link has to be the enforcer and his extensive powers. Why? Because he is living in the country which wants his trust assets taxed.

The case of Anderson in the US shows just how much of a danger this can be. Mr and Mrs Anderson lost their case against the IRS. They claimed that the money in trust was no longer theirs and therefore they could not compel the trustees to make distributions to them to meet the tax due. The IRS simply locked them up until the trustees saw that to make distributions was in the best interests of the beneficiaries!

In the case of Jacob’s trust, his tax authorities if they did not have suitable anti-avoidance legislation on transferring assets offshore, could run the argument that Jacob, given his extensive powers as an obligatory enforcer, was a quasi- trustee and therefore taxable in his home country on all income and gains.

If he refused to pay the tax, they could simply lock him up until such time as he did!

The STAR, when created in the 1990s, was the belle of the ball but I am not sure now twenty years on in the cold light of CRS, she is just as lovely. I welcome your comments.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

Criminal Offences for Wealth Structuring

In June 2008 Igor Olenicoff was offered a plea bargain by the US Internal Revenue Service. His sentence for fraudulent tax evasion would be slashed if he disclosed the identity of those who had helped him evade taxes.

Olenicoff, named Bradley Birkenfeld a senior banker with UBS who had assisted him in evading $200 millions of tax in offshore assets worth $7.26 billion.

In a seven-page deposition, Birkenfeld said that he assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts. Misleading and false documentation, Birkenfeld said, was routinely prepared to facilitate this. The advantage for UBS was that it could then continue to manage $20billion of assets owned by wealthy US individuals, which generated the bank $200 million in fees each year.

The statement read ‘By concealing US clients’ ownership and control in the assets held offshore, [UBS] managers and bankers…defrauded the IRS and evaded US income tax’.

At the time, this story broke, there was a lot of concern about how financial institutions would react to this bullying behaviour of the IRS. One commentator said ‘The US, of all countries, needs foreign investment. It won’t shoot itself in the foot.’

At the other end of the spectrum, there was concern that UBS could lose its banking license if Birkenfeld’s claims were found to be true.

In the fullness of time, neither concerns proved accurate, the IRS fined Swiss private banks a whopping $320 billion, not enough to put them out of business, but enough to hurt.

The IRS then went one step further. It introduced in 2010 the Financial Accounting Tax and Compliance Act which demanded all financial institutions with assets in the US to research and report on all its clients which were US citizens with monies outside the US. They had to report on all financial dealings of all its US clients, or face a massive 30% withholding on US assets.

In 2010, it was thought that there would be a massive disinvestment out of US assets, but instead these financial institutions complied at huge expense. Forbes estimates that the cost to the financial institutions of implementing FATCA has cost them ten times the amount of taxes raised by the IRS; a whopping $200million per annum and a total of $800 billion to set up.

On the back of the success of the IRS, the OECD introduced an automatic exchange of information known as the Common Reporting Standard, whereby financial institutions need to collate and report all financial information of individuals which hold assets outside the country in which they live to the country in which they are tax resident. As part of this information, where a trust is set up, the identity of the settlor, trustee, beneficiary and protector will need to be disclosed.

And now the UK Government has gone one stage further.

On the 1st September 2017, it published its guidance notes on ‘Tackling Tax Evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion’. In its guidance notes, the offence is aimed at corporations like UBS, in the case above, where one of its bankers, Birkenfeld facilitated tax evasion, in this case US taxes, by introducing their clients – in this case Olenicoff to third parties, with the intention of facilitating the evasion of tax.

What is interesting in the example given, was that Birkenfeld in his deposition said that he ‘assisted wealthy Americans to conceal their assets by creating ‘sham’ offshore trusts’.

There is nothing illegal or morally wrong in holding assets in a foreign jurisdiction and there is nothing criminal in the creation of trusts. Trusts are a legal concept recognised across the globe which have been in existence and used since the eleventh century.

What is wrong and what is now criminally wrong is setting up, or the introduction to any professional with the intention to setting up, a structure with the intention of evading tax i.e. setting up a ‘sham’ trust.

The law of sham is clearly set out in the Rahman case. The Settlor in that case Mr. Rahman, signed the documentation necessary to set up a trust. However, both parties understood that the words in the documentation would not govern their relationship. The trustees would do precisely what the ‘Settlor’ asked, regardless of the fact that they did not have to under the documentation signed by both parties.

The Judge held that the Rahman ‘Trust’ was not a ‘trust’ it was nothing more than a nominee arrangement – it could therefore be ignored for ALL purposes; claims of creditors, rights of forced heirs (as in the case of Rahman), or tax authorities - which can now impose criminal sanctions.

The unknown is how far tax authorities will push the law of sham, once they have all the information they need to pursue it. Are trusts with Protectors vulnerable as tax authorities would have us believe?

Write to us direct if you would like to discuss this Note or have questions relating to de-risking your trust against criminal liability.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here:

The UK's bringing out the big guns

You live in the UK, and have been given to understand that you are non-UK domiciled, but UK resident. You set up a trust in Jersey in 1998 to which your mother, who was living in Canada on her death, left half her substantial estate for you and your two daughters. Your brother Joseph, who also lives in the UK, is your Protector and business partner. You inherited the cosmetics business built up by your father in Canada on the death of your mother and now run it out of an office in Surrey with Joseph.

A local firm of accountants in Guildford do your tax returns and as far as you are concerned you are, and intend to be, totally tax compliant. Your trustees in Jersey, in accordance with their compliance obligations, have collated the information about your business and liquid investments held in trust, including some funds and insurance products and have sent them to the Jersey authorities which has forwarded them to the UK tax authorities who will in due course investigate you.

When you set up your trust your banker in Switzerland advised you with regard to your domicile and asked all the right questions about your father’s domicile at the time of your birth. However, he failed to ask whether at the time of your birth your father and mother were married. If he had asked he would have asked the same questions, but not about your father, but about your mother.

Unlike your father, your mother was born to English parents in England and always kept close ties with her family in the UK. She always intended to return, but soon after her husband died, she became seriously ill and died before she could return. It is more than likely that she retained her UK domicile of origin.

When your mother left her estate to your trust, you did not think to seek UK tax advice, since it did not seem relevant. Given that you do not know you are not tax compliant – you will not think to ask independent tax specialists to review your offshore trust arrangements.

However, if you do not make a full disclosure to HMRC before 30 September 2018, you will not escape the onerous penalties introduced in the Finance Bill 2017.

These penalties are called ‘Fail to Correct’ penalties and are significantly more onerous than the tax penalties which used to be levied on deliberate tax evasion. The ‘FTC’ penalties are

·      100% to 200% financial penalty of the tax undeclared

·      50% uplift in the event of any attempt to move assets to a more opaque jurisdiction, moving the penalty to 150% to 300%

·      An additional 10% for every year that the tax which was non-declared exceeds £25,000, and

·      Potential ‘naming and shaming’ if you have more than 5 FTC penalties

The problem is that you do not know that the advice you were given in 1998 was wrong – you did not know that it was important to tell your adviser that you mother and father were not married at the time of your birth.

This simple oversight is likely to result in a claim by HMRC that you were UK domiciled at the time of your birth and that the trust you set up in 1998 was in fact set up by a UK domiciled person. You are therefore subject to income tax on all the income which arose to the trust since 1998 under section 720 of the Income and Taxes Act 2007, and to all the gains made by the trust under section 86 of the Taxation of Capital Gains Act 1992. Your mother’s estate may also be liable to tax at 40% on her estate on death, payable by the trustees, subject to any double tax treaty there may be in Canada.

If your trust is worth £72million and the income tax and capital gains tax over the last 19 years has been £19million, you could face in addition to the tax, £39,900,000 of penalties with additional late payment interest at the official HMRC rates, a total tax bill in excess of £60,000,000, which excludes the cost of the legal and accountants bills and excluding a claim against the trustees for 40% inheritance tax on your mother’s inheritance.

The only way you can mitigate this penalty to 100% post 30th September, is to have a ‘reasonable excuse’.

Case law makes it clear that a reasonable excuse is available only if you sought suitably competent independent professional advice to review all of the non-UK assets and activities for any potential UK tax oversights and that you provided such advisers with all relevant information. In your case, you sought advice from a Swiss banker who would not be treated as ‘suitably competent’ and you did not give him all relevant advice. Furthermore, you failed to seek UK tax advice on the death of your mother, but you did not know that you should have done.

Given that the trust holds half of the chocolate business owned by you and your brother, this will need to be sold to pay the tax, which will then put both you and your brother out of a job and business.

The only sensible course of action is for you to engage an independent tax specialist, to tell you what taxes are due and to make a full disclosure before 30th September next year. Although it may be expensive – it will be nothing like £40million which will become due if competent advice is not taken.

You can write to us direct if you would like to discuss this Note with Caroline or have questions relating to HMRC's position.

To get an independent trust review or discuss all matters relating to trusts, privacy, control and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here: