HMRC - splitting hairs?

Can you remember what came first, was it the chicken or the egg? Did you seek advice on your domicile first and then on how to use your status to avoid tax or did you go to your adviser to see how you could save tax? This distinction could make the difference between keeping your trust fund or paying the bulk of it over to HMRC!

This is the example given in Case 9 of the HMRC guidelines on how, where and when it will impose the new penalties.

Bernard has been a client of mine for many years, he was told by a friend that if he set up a trust offshore he could provide not only for his heirs in unequal shares, but could also save tax. His friend introduced him to a specialist firm in Switzerland, to which he went to set up his trust ten years ago. His first conversation with them which was recorded on their files, was how could he get the benefits which his friend was currently enjoying with his trust; succession and tax avoidance. The firm also told him how to complete his tax return.

Since the trust was set up Bernard has used the monies in trust to build his business empire, trading between Africa and Europe. The trust has served him well, apart from Bernard’s irritation about the time it takes for his professional trustees to agree to invest or disinvest, and his concern about what the trustee would do if faced with a third-party dispute, which was always of concern to him knowing how expensive such a trust dispute could be.

He wanted to put in place good governance, which was why he came to see me; which would address his irritation with his trustees. I explained to him how this could be done, and we set about putting it in place.

During our work together, Bernard asked whether we could do anything to stop HMRC investigating him and his trust. The simple answer was no, but he could stop a disaster turning into a catastrophe, first, by setting up good governance measures, which we were in the process of doing, but second by engaging an accountant to review his structure.

The Failure to Correct legislation introduced in the Finance Act 2017, is stated to coincide with the first information to be received by HMRC under the ‘Automatic Exchange of Information’ legislation. If as a result of information being disclosed under these new rules, HMRC discovers that an offshore structure is subject to taxation which has not been declared it can charge up to 200% penalty under the Failure to Correct legislation.

This may not seem unfair, until you factor in that a settlor, like Bernard could be liable for this penalty even if, as far as he was concerned, he had taken good advice and followed it to the letter. In short, the penalties can be imposed without the taxpayer having had the intention to evade tax, he was simply acting on advice on how best to plan for succession in the most tax efficient manner.

But, I hear you think, if Bernard has followed the rules, and taken good advice, he is tax compliant and HMRC will go away empty handed? Not necessarily. Let’s assume that HMRC once in possession of all the facts decides to investigate Bernard’s trust.

It will first go knocking on the door of his trustees in Switzerland. If it finds out from the files that Bernard went to the specialist firm in Switzerland for the benefits he was told would be available by a friend, this advice, regardless of how accurate and correct it is, will be ‘disqualified’ in protecting Bernard from 200% penalties, provided HMRC can find something to tax.

How could this happen? Let’s assume that HMRC finds in the setup correspondence and marketing material of the trustees, that ‘a trust is an ideal vehicle for succession and saving tax, but don’t worry about losing control, we are obliged to look after the best interests of our clients – which unless you are acting unreasonably, means we will do what you request’.

In the Pugachev case, it was decided that where a settlor retains too much control and the trustee does what is requested of him, the trust can be treated as a nominee arrangement which means that the assets can be taxed as if the assets remained owned by Bernard. This could be a serious outcome, but when added to this are the penalties of Failure to Correct, at 200% it could wipe out Bernard’s entire trust fund. Given that the trust fund consists of Bernard’s business this would probably mean that Bernard would be made bankrupt.

In Case 10A of the Guidance Notes, HMRC makes it clear that if Bernard, provides full details of the set up and trust structure to an accountant after setup and asks the accountant to advise how to fill in his tax return, he will be protected from the Failure to Correct penalties, provided Bernard engages the accountant before the investigation begins.

My advice therefore to anyone who has a trust structure offshore, regardless of how tax compliant you may think you are, if you have not already done so, take advantage of the ‘get out of jail free card’ and get an independent review by a UK based accountant as well the best possible governance you can afford for your trust structure. The stakes are simply too high not to!

If you would like to find out more simply call me on 020 3740 7422 or e mail me at caroline@garnhamfos.com

HMRC takes its gloves off

Tom came to see me last week, in a state of high anxiety. He is a beneficiary of a trust based in the Cayman Islands and ABC Trustee Limited is the professional trustee administering it.

Tom is resident and domiciled in the UK, and has been receiving regular and substantial distributions from the trust, which he has always declared and on which tax has been paid.

The trust had been set up by his uncle, Brian fifteen years ago. Brian had been born and raised in the UK, but had left the UK to live in Spain, where he had developed a substantial property development business, he lived with Martyn in a villa which they owned jointly.

Fifteen years ago, after a health scare, Brian called Tom, to say that he had transferred £20million to a nominee account for him. Tom suggested they seek advice from a professional in Spain to see how best to  structure the gift to mitigate tax.  As a result, Bran set up the trust, and the monies were transferred to ABC Trustee Limited.  

Although Brian lived full time in Spain, he had however, kept his membership at the Lansdowne Club, where he liked to stay when visiting London, which he did every year to attend the tennis tournament at Queen’s and watch the racing at Ascot, where he had entry into the Royal Enclosure.

ABC Trustees had contacted Tom about the setup of the trust, because from their due diligence into the source of funds, the monies appeared to come from Tom’s account before being transferred to ABC Trustees Limited. Under the CRS rules, ABC Trustees Limited were obliged to report on who was the settlor, and they were unsure.

It  had spent £250,000 of the trust fund in seeking legal advice, but were non-the less certain as to who the settlor was. The legal opinion had been obtained in Cayman from a member of CIOT, but it was not helpful in that it set out a list of options; what would the  tax treatment be, if Brian was the settlor and was at the time a non-UK domiciled person, what the tax treatment be if he were a UK domiciled person and what the tax treatment be if Tom were the settlor. ABC Trustees Limited made it clear to Tom that if he were the settlor he had a duty to notify HMRC before 30th September 2018, and failure to do so would result in up to 200% fine on the tax he failed to report, plus interest.

The first thing I told Tom, was that HMRC was not mucking about – the minimum tax penalty was 100% of the tax he failed to report, and the percentage would be dependent on the extent to which he co-operated with HMRC, the quality of the disclosure and the seriousness of the failure.

Given that the monies transferred was £20million the tax charge would be c £4,000,000 and the penalty could be as high as £8,000,000 plus interest and a possible additional charge at 6% for the ten-year charge. The total tax charge could therefore be as much as £13,200,000 excluding interest charges and professional costs in dealing with the investigation.

In short, Tom would be left with very little in the trust fund after the tax investigation.

The second thing I told Tom was the necessity to put in place a ‘reasonable excuse’. Again, strict attention, would need to be taken as to who he appointed to do a review. HMRC has laid down strict rules as to what comprises a ‘reasonable excuse’ and what it will treat as disqualified.

The advice taken by Tom and Brian in Spain, is clearly disqualified, because the advisers they went to see were not a ‘member of a UK recognized legal, accountancy or tax advisory body’.

The advice sought by ABC Trustees Limited was from a member of CIOT a UK tax advisory body, but will be disqualified, because it was sought by an ‘interested party’; it ‘participated in the relevant avoidance arrangements.

Avoidance arrangements are ‘any arrangements where in all the tax circumstances it would be reasonable to conclude that the main purpose of the arrangements is the obtaining of a tax advantage’. Clearly this was the intention behind Tom and Brian seeking advice in Spain so Tom must act independently from ABC Trustees Limited.

I told Tom that he needed to act swiftly and seek out a first-rate tax accountant to do an audit and report. The accountant must be given all the facts relevant to the matter. Seeking out such independent advice I told Tom was critical if Tom was to avoid these excessive penalties for a failure to correct.

If you or your trustees are concerned as to the correct interpretation of the set-up of your trust and as a result you could be liable personally, you need to take independent advice from a person suitably qualified, because if you fail to do so, you could be significantly worse off.

HMRC has taken its gloves off and is not pulling its punches.

If you would like to find out more, simply contact caroline@garnhamfos.com

Headless chickens

‘Intermittent reinforcement’ is the term used by psychologists for unpredictable rewards for certain behaviours. The example often cited is slot machine gamblers. The slot machines are programmed to provide ‘variable ratio reinforcement’. The jackpot is hit frequently enough to keep the gambler playing, but unpredictably so he or she never tires, gets bored, or stops to remember that the casino never loses.

When a pigeon or rat is fed with a pellet, on a ‘variable ratio reinforcement schedule’ for every peck of a button or pull of a lever, such is the strength of the conditioning, that it does not stop to eat the pellet, it continues to peck or pull with food uneaten.

On a recent business trip to the Bahamas, we visited the new Baha Mar hotel with its enormous gambling hall, full of casino tables and slot machines. I watched as people worked six or seven machines at a time, filling in the slots, pulling the handle not waiting to see the drums roll, just fill the slot, pull the handle and move on to the next one.

But it is not just in the gambling hall that we can observe this sticky behaviour, it can be observed in sports; football, tennis, golf and in making money.

It is the thrill of the ‘variable ratio reinforcement schedule’, which become the fun, the end goal is almost irrelevant. Ask anyone who loves football which is more important the win – regardless of the opposition, or the game against a tough opponent?

Business and investing is also unpredictable and the rewards are never consistent. Making money is not a science, it does not follow set rules, it is an art, picking the winners from the losers, watching their successes or failures, observing, learning, and trying again. It is all part of the fun – but it is also addictive.

Most successful business founders I know need to be reminded that running a business is not just a game. They have responsibilities for managing their wealth for their family and future generations. It is not enough to set up a ‘Family Office’ and let it ‘do its own thing’, it needs direction, goals and management – which for many business founders – is not much fun.  However, without it, as I say in my book ‘When you are Super Rich who can you Trust?’ entropy sets in.

The solution to entropy is ‘mindful management’ which I call Family Governance.

Imagine three people come together to build a hotel; one is an expert on food and beverage, the other hospitality and the third in hotel management and design. They all three invest together with two outside investors, and stick at it until the hotel is successful with near 100% occupancy rate all year round.  Then one day, the expert in food and beverage becomes ill and wants his wife to take over from him, which the other two do not want. What do they do? According to the company’s memorandum and articles they need to call an extraordinary meeting of the shareholders, and put it to the vote. Notice must be given of this meeting it cannot be held surreptitiously, the meeting must be quorate and the matter needs to be formally discussed and aired and a decision made. This is good corporate governance in operation.

Now imagine a similar situation in a family. The family business is owned by a trust, and one of the family members who works in the business wants his wife to take over from him. The trustees do not know much about the running of the business to know what decision to make in the best interests of the business. They know they need to act in the best interests of all the beneficiaries – but in this case the beneficiaries are divided. The Family Office can provide no help and the Family Constitution simply says that the business is to be operated by such family members as are fit and able, but says nothing about the spouses of such family members.

How do the trustees make a decision, without getting a legal or third-party opinion? Many ownership structures when faced with such a difficult decision run around like a headless chicken –  turning a simply decision, into a family crisis.

What most family ownership structures need is a Family Headquarters Structure. A structure which provides a process to resolve such difficult issues, against a binding constitution which sets out high level goals and parameters. In this way, difficult decisions can be taken with the minimum of fuss, cost or emotion – good family governance.

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

To buy Caroline's books please press here:

SFOs - working with the family

In my book ‘When you are Super Rich who can you Trust?’ I encourage families to create an inner circle of confidence – a team of independent professionals who will report to the family on the good management or otherwise of their assets. This is the role of a non-executive board of a company and the same principles need to be followed at trust level and single-family office level as well.

One of my first clients when I was in my twenties was a family which owned a large chunk of London. I would meet up with the eldest son and heir after work, when the clock was not ticking. He wanted to share his views and concerns with someone who was knowledgeable and who would listen. ‘I see buildings with scaffolding up for weeks on end, with no builders in sight – surely this cannot be good for our business?’ and ‘With the new Leasehold Reform Acts coming through, why are we not diversifying out of London residential property – like other London estate owners?’

With some trepidation, I approached the Trustee Council Chairman with the young man’s concerns. His retort ‘Don’t listen to him, he knows nothing about managing property. We will make sure he is given a handsome distribution to keep him quiet and buy another car!’. I still have a picture of the new car. But the Chairman’s words rankled.

Everyone at Trustee level of this trust had a vested interest. The Trustee Council Chairman was the head of a well-known property management company, our senior partners were their property lawyers and a leading accountant did the books and advised on property taxes. They were all keen for nothing to change, but was this strategy in the best interests of the beneficiaries? No-one was watching over them, no-one was holding them to account, no-one was keeping the property empire in check – apart from this young man – who they dismissed as ‘stupid’ and was told ‘not to interfere’.

As you can imagine, I was very soon told I had no future at the firm and asked to leave.

Only years after, did I discover that, irregularities were discovered at both trustee and management level and litigation threatened. Some very important city business folk were lucky not to lose their reputation; the dispute was settled out of court.

You may think this is an extreme example, and could not happen today, but I am not so sure.

Three conversations last week reminded me of this first brush with self-interest at trustee and single-family office level. In all three independent situations, I heard the same thing ‘I do not know what our trustees/investment managers/single family office/ property managers are doing for us, but we seem to pay them a lot in fees for little return!’

Many single-family offices whether owned in-house or independently, have no-one who is professionally qualified and independent holding them to account –  they invest as best they can, in some cases well, but in other cases not so well; but the family find it hard to know which and where they are getting value for money.

The answer is not to give it a quick fix; hiring professionals to prepare reports as a one off. This will simply highlight where some improvements should be made, but if they are not permanently engaged they will not spot weaknesses as they arise.

What is needed is good governance – such that ongoing performance is held to account. This works two ways, if management is poor sack them, but if exceptional give them bonuses.

But, surely, a trustee has a ‘fiduciary’ duty of care to look after the best interests of his client’.  Yes, they do – they have the beneficiaries’ best interests uppermost. But, sometimes there is temptation such as losing your best client, when it becomes tricky to know what influenced a decision – the beneficiaries best interest or that of your own business. In these situations, it is better to have an independent view rather than to litigate the matter with disgruntled members of the family.

 If a trustee is faced with losing his best client, his decision needs not only to be independent, but to be seen to be independent. This is what good governance is about – and is needed at trust and single-family office level as well as in the company boardroom.

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

To buy Caroline's books please press here:

A Club for Groucho

In the recent May 2018 FT Wealth magazine distributed with the FT in early May, Matthew Vincent wrote a piece under the heading ‘At last, a Club for Groucho’.

Groucho was well known for resigning from Clubs with the words ‘Please accept my resignation. I do not want to belong to any club that will have me as a member’. Most Clubs he thought were a waste of time and money.

What he did not think was a waste of time, however, was visiting his broker. In fact, he saw him almost every day, and his holdings were worth in excess of $2.6m in later life through his active interest and management.

Vincent in his article mentions the launch of BConnect Club, which is the Club I set up for UHNWIs and Single-Family Offices.  

BConnect Club, Vincent says, ‘has openly declared an aim of bringing individuals together to do deals, rather than to invest conventionally’.

Other clubs, he says charge an annual membership fee of $30,000, presumably to weed out those who cannot pay, and to make a profit. BConnect Club, however, does not charge its UHNW members anything.

The begging question in his piece which Vincent does not address, is how do we weed out the rich from the poor if we do not charge a high fee?

The answer is simple. 

As a practising family governance lawyer, I am fully aware of the onerous obligations put upon financial institutions and the professions to ‘know their client’ and with the increasing obsession of Governments to stamp the laundering of ill-gotten gains, they are also obliged to ensure that the source of wealth is not from criminal activity.

Each of our members, to qualify, must be verified as an UHNWI, by a practising professional; lawyer, banker or accountant, who must also confirm that he/she is a client.

The second, and possibly more interesting question, is why would UHNWIs and/or their single-family offices want to invest direct – surely it is too risky to invest in private equity?

This answer is less simple.

In my book ‘When you are Super-Rich who can you trust?’ I point out that the ‘professional’ management of wealth flourished when interest rates and inflation were high. In such a climate, the investment manager invariably made money for his/her client. This was then cleverly weighted against an industry standard, so that irrespective of the fact that the investment may have made a loss – if it was above the industry standard it was a success and a high fee could be levied by the investment manager.

However, as interest rates and inflation fell, poor performance became more obvious. This coincided with a world-wide drive, for transparency in the investment management industry to stamp out hidden fees and disreputable practices.  Clients could now see how much it was costing them to invest with professionals.

This transparency will not ruin the investment management industry, there will always be wealthy people who want to outsource the management of their wealth to a professional. But to understand why investing direct for some is so desirable, it is necessary to understand what it is like to be rich.

Some rich people give to good causes – they are philanthropic, but others prefer to invest in good causes. The fact that some of these good causes or projects may fail is not a priority, they would  not be any better off if they they gave it away, but the added fun is that some investments will make a profit.

BConnect Club simply brings these like-minded people together and introduces them to investment opportunities, which they would struggle to find on their own or with a few friends.

Matthew Vincent in his article quotes me ‘There are a significant number of high-end investment clubs around the world’, but he does not ask why our Club is different?

Small investment clubs invariably struggle. If they get too large they attract ‘wannabe’s’ but without economy of scale they cannot attract quality deals. This is a drawback we have resolved.

Digital technology solves other drawbacks as well. No-one can enter our ‘deal room’ unless it wants the BConnect Club to find it deals. Furthermore, our deals are only teasers –if a member is interested he needs to contact one of our Account Managers for further details. In this way, we combine a people business with digital technology.

The other advantage of having a Club of verified UHNWIs is that we can open it up to luxury products and professional advisers for whom UHNWIs are their target audience. They can feature their products and services for as little as £100 a month, or meet our UHNW members by sponsoring our events.

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

To buy Caroline's books please press here: