Not in my backyard

Thanks to all of you who took the time to reply to last week’s note – Pugachev to Assist Tax Authorities.

The most common feedback, which I would like to address in this note, was ‘the Pugachev case will not affect trusts governed by my jurisdiction’. This comment came from readers in Cayman, Jersey, and Guernsey.

These jurisdictions, as well as many more: Bermuda, BVI, Isle of Man and Bahamas, have enacted local legislation which states that any action against the validity of any trust due, for example, to the settlor’s reservation of powers or powers reserved to a Protector in the Trust Deed, will not invalidate the trust. Furthermore, any foreign judgement presented to a court within that jurisdiction will not be recognised.

This has been upheld. In fact, local courts have gone one step further, such as in the Cayman case of RBS Coutts Cayman Ltd v W [2010] which directed the trustees not to comply with such an order.

So the question is, for example, what will a tax authority do, armed with evidence from CRS that a  trust which was set up by a Settlor resident in its jurisdiction do when it has information that the trust

·      has a Protector,

·      owns family businesses and or private shares in one or more joint venture businesses, and

·      is governed by a jurisdiction which has ‘firewall legislation’

We know from the tax manuals written to tax inspectors that the first step for them is to approach the trustee for a copy of the trust deed on suspicion of tax evasion.

On receipt of the trust deed it will look to see if, in accordance with the Pugachev case, the trustee has any autonomous power. If consent is needed for the exercise of most of its powers it needs the tax authority could that the Protector’s powers are personal and not fiduciary.

On this basis, it could issue a claim against the Settlor direct, for tax on all the trust’s assets as if the trust were a bare trust.  This approach does not need to take the case to the jurisdiction in which the trust is resident or governed, thereby neatly by-passing any firewall legislation.

This is what is commonly done by a disgruntled spouse faced with a family trust in a jurisdiction which has ‘firewall legislation’.

In order to succeed the court in the jurisdiction in which the claim is brought will look at the terms of the Trust Deed, what powers were reserved and to whom. It will then look at the Letter of Wishes to see whether this sets out the purpose of the trust, and most critically it will look at the correspondence between the Settlor and the Trustee, in particular immediately before the trustees make a distribution or invest or dispose of trust assets.  – Is the Settlor using the trust fund as his/her own piggy bank?

Given that the many professional trustees owning, in whole or in part, family businesses or other private shareholdings, frequently rely on the experience and knowledge of the Settlor in making its decision as to which investments to keep and which to sell, this guidance could give the tax authority the evidence it needs to tax the underlying assets. The  order sought would be to tax the Settlor as if the trust assets were held by him/her personally on the basis that the trust was a bare trust and the trust assets were held to the order of the Settlor.

This has been a well-worn path trodden by many spouses seeking to claim against trust assets. If a spouse is then unable to pay without access to the trust fund, he or she is left to ask the trustee for a distribution. If the trustee refuses, then the Settlor could face bankruptcy or a custodial sentence for contempt of court.

It is what many call rough justice.

In my personal experience, most Settlors who find themselves in such a situation demand that the trustees make a distribution. If they do so, then that is proof that the trustees simply do what they are told, if however, they do not – could they be accused for not acting in the best interests of the beneficiaries by allowing him/her to go to prison for want of a distribution.

The fact that the trust may have a clause in the deed such that such an action will make the Settlor an excluded person may have some influence on the court but depending on the wording, that it is likely to be at the discretion of the trustees, will be unlikely to affect the decision of the court.

We live in an age where tax authorities now have the information they need to attack and they will use any and all the existing case law to – make the best possible case to secure their goal; to tax the underlying trust assets.

Trustees may wish to ignore how and when tax authorities will use the information they are about to or already have in their possession, but to do so when there are robust and safe alternatives is do so at the risk of alienating their best clients and business.

If you would like to hear about what we do for our clients or have comments about this article please get in touch below.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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Tax authorities are assisted by Pugachev

On the 11th October 2017, the Privy Council handed down a judgement in the case of Mezhprom v Pugachev which should send shivers down the spines of every fiduciary business as well as all families whose wealth is held in offshore trusts.

Sergei Pugachev was the founder of Mezhprom which was once Russia’s leading private bank. In due course, however, it got into financial difficulties and had to be bailed out by the Russian Central Bank.

Creditors of the bank included The Deposit Insurance Agency an arm of the Russian State. It claimed that Mr Pugachev had misappropriated the funds and settled them in five trusts in New Zealand with private trustee companies, of which his adviser and his wife, in New Zealand were directors. Mr Pugachev was the Settlor and Protector and he, and his partner and children were the Beneficiaries.

As Protector Mr Pugachev had extensive powers to block any decision of the Trustee, and if it did not do what he wanted, he could remove and replace it.

The decision of the Judge focused on the intention of Mr Pugachev at the time he created the trust. Did he intend to divest himself of control of the assets when he set up the trust and transferred the assets to his trustee? If not, then his role as Protector was ‘personal’ and not ‘fiduciary’.

The importance of this distinction in the Judgement is fundamental. If ‘personal’, then in exercising his extensive blocking powers over the decisions of the trustee, he need only consider his own needs and requirements. If however, his intention at the outset was that the role of the Protector was ‘fiduciary’ then the Protector must, in exercising his powers, consider what was in the best interests of all the beneficiaries.

If the proper construction of the trust documentation was that Mr Pugachev intended that the role of the Protector was ‘personal’, then the trust was not a sham, it was a trust – but only a bare trust. As a bare trust, the assets were in the name of the trustees, but held to the order of Mr Pugachev. The beneficial interests in the trust assets remained with Mr Pugachev – and were, therefore, available to be seized by the bank Mezhprom to meet the claims of its creditors such as the DIA.

The Judge went on, if on a proper construction of the intention of Mr Pugachev at the time he set up the trust, was to divest himself of control of the assets, then following the Esteem case, he needed to find a common intention by both the trustees and the settlor to mislead, for it to be a sham.

The Judge looked to the divorce case of A v A for a precedent.  A common intention can be construed where the trustee, although not obviously or deliberately out to mislead, had a ‘reckless indifference’ as to what was the intention of the settlor and went along with it to secure the business.  

If this was the proper construction of the facts, then the test set by Esteem was satisfied and the trust as set out in the documentation was a sham and could be set aside as being void ab initio.

The Judge continued; if on a proper construction of all the circumstances leading up to the formation of the trust, Mr Purgachev had the intention to form the trust, the Protector’s powers were fiduciary and the trustee was not reckless as to the intention of Mr Pugachev in setting up the trusts, he would still set aside the transfer of the assets into the trust because they were transferred with the intention of defeating his creditors, so would be available to meet the claims of the creditors of the bank.

Mr Pugachev was defeated on all claims.

Some advisers say that the importance of this case is limited to its facts; Mr Pugachev, was Settlor, Beneficiary and a Protector with extensive reactive reserved powers. I do not agree.

This case, is dynamite for any third party, such as a tax authority. Tax authorities across the globe now know who is the Settlor, whether the Settlor is also a beneficiary and which trusts have a Protector under CRS.

All they now need to do, following the decision in the Pugachev case is to ask the Trustee for a copy of the Trust Deed. With this, they can identify the powers of the Protector and attack the trust on the basis that the Protector’s powers were personal to the Settlor, either directly or through his nominee which they can now glean from an objective interpretation of the trust deed. Before this case the tax authority would need to prove a common intention on behalf of the trustee and the settlor, to deceive.

I have for many years been wary of the office of Protector, and this case justifies my contention that the role of Protector puts the trust at risk of an investigation.

If you would like to hear about what we do for our clients or have comments about this article please get in touch below.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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Facebook Under Fire

In this digital age, we disclose our likes and dislikes every day, all the time; loyalty cards, browsing on the internet, and going about our daily activities, monitored 24/7 by CCTV cameras. So, what is the big fuss with Facebook and Cambridge Analytica? The issue is not even current; it relates back to an event which happened in 2014.

Facebook makes revenue out of allowing third party developers, such as Cambridge Analytica, access to the data of millions of its users.  In 2014, the data of their members and their friends required less filtering than today. But what is relevant today is that we now know Cambridge Analytica used this data to help Trump into the White House.

For many who think Trump should not be President, the use of this information in this way is an outrage. Whether Facebook will be made to pay, however, will depend on the law at that time. Facebook was subject to an order made in 2011 not to share data with any third party without the express permission of the user. However, it neatly sidestepped this requirement with the use of irritating pop-ups.

One of the issues addressed in the EU initiative on General Data Protection Regulations is to stop these annoying pop-ups which won’t disappear until you have ticked the box which says ‘I have read and agree to the terms and conditions’. Under the new initiative, due to become law on 25th May, consent can only be meaningfully if ‘freely given’ which means that consent is asked for in ‘clear and plain’ language.

Under these new data protection regulations there are 6 principles

·      The data must be collected lawfully, fairly and transparently

·      It must be collected only for a specific legal purpose

·      It must be adequate, relevant and limited to what is necessary

·      It must be accurate and kept up to date

·      It must be stored only as long as is necessary, and

·      It must ensure appropriate security, integrity and confidentiality.

These regulations apply to all digital technology businesses, but do they apply to the information collected by Governments? Under the existing rules, if the primary purpose of collecting data is for the best interests of the security and well-being of the country’s residents as a whole, or for the purposes of collecting and administering tax then the data protection rules may not apply subject to proportionality.

Let’s put this in context: Ferdinand set up a trust in Jersey fifteen years ago, with the proceeds of the sale of his first business. He appointed a professional, reputable trustee and his brother in law as a Protector. He and his family are UK resident, non-UK domiciled, but Ferdinand spends a lot of his time in Central America where many of his businesses are based. His businesses have done well and now his trusts are worth many hundreds of £’s millions.

His Jersey trustees tell him that under CRS he is obliged to self-certify his tax residence. From records kept by his professional trustees, it is known that he lives with his family in the UK, but spends a lot of his time in Central America.

In order to fill out this form correctly, Ferdinand, asks a reputable firm of accountants in both the UK and Central America for a tax report as to whether he is tax resident, and if yes, is he fully up to date on all taxes.

The UK report made it clear that Ferdinand was UK resident but not liable for any taxes. However, the report from Central America, was uncertain as to his tax residence, but that if he were tax resident, no taxes were due. Ferdinand has given both reports to his Jersey trustees and they have reported accordingly.

Ferdinand is keen to restructure his trust to give him greater control and to put beyond doubt that he is not tax resident in Central America. However, he is concerned about the information which has already been collected and exchanged? Has he got a right to demand that the information ‘be forgotten’ and when? If he were to make such a request, would not serve to draw attention to himself?

In Article 17 there is a ‘right to erase’. But does this to apply to data collected under the CRS?

Common sense would argue that if it was reasonable to collect information, even when there was a ‘reasonable excuse’ to say that this information would not give rise to any further tax due, Ferdinand would have the right to demand that this information be erased within a reasonable period of time, if by then inaccurate or out of date or maybe not?

The answer will only emerge as a result of long and painful litigation. If you do not wish to be a test case – please contact …. to find out how you can maximise control and minimise exposure.

If you have comments or would like to discuss matters relating to restructuring, control, trusts and protection of your assets please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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The Partner for Private Clients

Last Tuesday we officially launched the BConnect Club, the partner for Private Clients. It was a fabulous event held on the roof terrace of the Trafalgar where we were joined by sponsors, Julius Baer, SPS Security, luxury chocolatiers  Godiva and Cult Wines. The room was packed with single family offices and carefully chosen UHNW friends of ours.

The BConnect Club is focused on serving the best interests of the UHNW community and the independent platform is able to provide them with fresh, exclusive deals which are pre-vetted, the opportunity to find co-investors for existing projects, meet each other at our Club events and get the opportunity to see the best luxury brands. 

As many of you will know, I am passionate about the unique concerns of the wealthy, which I wrote about in my book ‘When you are Super Rich who can you Trust?’.

It is a fact of life that whereas flames attract moths, money attracts all manner of greed in the form of sophisticated salesmen keen to get rich themselves. Therefore, the community which is in most need of advice and advisors tends to be very private and hard to reach. However, they have money and money needs to be invested, spent and taxed. For all these activities, they need advisers - ones they can trust to help them spend wisely, invest well, pay the right amount of tax and keep a low and safe profile.

And herein lies the conundrum – how do you chose your inner cabinet of advisers, to look after your best interests amongst a sea of sharks?

I set up Family Bhive ten years ago as aggregation resource of information for wealthy individuals. This hard to reach private community asked me and my team to provide a platform, where they could follow their interests and learn more about their concerns without revealing who they were and what they wanted.

Our UHNW members would contact our team to ask us, for example, to source five accountants who specialise in tax investigations, so they could compare one with another before asking for a meeting.

In conjunction with setting up Family Bhive I founded GFOS as a leader for wealth planning and structuring for UHNW individuals and Family Offices.  With the introduction of FATCA and the OECD Common Reporting Standard, all financial accounts held offshore are now being automatically disclosed to the tax authority in which the wealthy individual is living – whether there is any suspicion of tax evasion or not.

Through GFOS, we are able to offer Protection solutions to families who are concerned with the erosion of privacy, loss of control over their assets in trust and smooth succession. 

Through BConnect Club, we can now extend our partnership to find good quality deals. Already our private client members have put forward numerous ‘buy side’ deals, which are on line, families which are cash rich looking to invest – at the right price in property, bio tech and energy companies.

We will also be going out to our members to ask them what else they are looking for, across our range of portals; deals, luxury products and service providers. Once they tell us what they want, we source it, and promote it, and we tell our clients when we have what they are looking for.

If you would like to find out how you can join the Club please get in touch on the number below.

For any other Family Office needs please also write to us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

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Interview with Financial Times

Matthew Vincent of the Financial Times contacted me last week to ask my views on UHNW deal clubs and to find out about the launch of our BConnect Club. The article can be found in the next edition of FT Wealth delivered FREE with the FT newspaper on 4th May.

As I told Matthew, the vision for BConnect Club is quite simple - we want to offer our UHNW members a place where they can find co-ivestors, find exclusive deals, find the best professional advisors and do it efficiently. They are part of an exclusive Club which has their interests at heart and provides them with an independent investment platform.

Investment is a people's business so all of our members are interested in meeting one another and finding partners for their projects. Our launch tonight will be one of the many events we will be hosting this year as a way to connect our members on and off line.

Matthew’s first question was ‘Why is there was so much interest from UHNW investors in doing deals direct?’.

In my book ‘When you are Super Rich who can you Trust?’ I remind my readers that the price of any stock or share quoted on a market, is dependent on how many people want to invest in it. Investment Managers may know all the facts and figures of stocks, shares, sectors and economies, but cannot predict whether any one will interpret these facts and figures in the same way and invest. It is only when a lot of people are chasing the same investment that the price goes up. 

At the same time Governments oblige financial institutions to be transparent in what they charge for their services.  Gone are the times when charges could be hidden in the small print.

So not only does the Financial Institution have to comply with the Governments hunger for information, but they must also openly declare how much they are making in fees. The point at which the investment manager is making as much, if not more, than the investor, is the point at which the investor starts to look for new ways to invest. And for many that point has been reached.

I personally know of deal clubs in London, Singapore, Canada, Dubai and Switzerland and they are growing almost daily. But each club faces the same challenges - good quality members, good quality deals and good quality events.

Some clubs get ‘good quality members’ by charging a high up-front fee, to weed out those who are not serious. We don’t. We screen our members and each and every one of them must be 'verified' before they join the platform as an UHNW or SFO member.

Another challenge is to make UHNW individuals and their single-family offices want to come back. From our experience, like minded wealthy people want to find others like them, to do deals – of course -  but also to ask for their opinion, ideas and recommendations. Like this evening’s event we bring our members together regularly, not only to promote deals, but as you can see from our broad range of sponsors, such as Bank Julius Baer, Cult Wines, and SPS security services we promote exclusive luxury products, as well as specialist advice.

BConnect Club enables anyone who wants to promote their luxury product and or specialist service providers to connect with our UHNW members, how best to do so is explained in my book ‘How to win Business from Private Clients’.

If you would like to find out how you can join the Club please contact us direct.

Contact :          svetlana@garnhamfos.com

                        020 3740 7423

To buy Caroline's books please press here: