Scary

The week before last, I went to Austria to detox in the Alps. When I arrived at the airport, I was greeted by a young man with a sign, ‘Garnham’. I shook his hand, gave him my suitcase and followed him to his waiting car. ‘Welcome to Austria’ he said, putting my suitcase in the boot. He looked pleasant enough, we drove out of Salzburg, I scarcely noticed in which direction.

I like to think I am not wealthy enough to be of interest to kidnappers, but if I were, would I have got into his car, without proof of his bona fides and letter of engagement with the hotel? Given the number of people kidnapped in this fashion, maybe we should all be a little more vigilant?

Another crude ‘trick’ of criminals is to track diners as they leave an exclusive club or restaurant and then attack them, when they get home. Bernie Ecclestone, was tracked leaving Harry’s bar with Slavica, his wife. On arriving at his home in Chelsea, he was attacked by two trained boxers, who beat him into a pulp before making off with Slavica’s £300,000 ring. No doubt Bernie had CCTV surveillance cameras, but were they sufficiently up to date to track the attackers’ mobile phones?

Another common approach, of which we all need to be wary and is favoured by some police in certain S American countries is to watch an ATM machine, and when someone is leaving demand they take out more money for their attackers at gun point.

These extortion methods are crude, because the criminals rarely have enough information to make their demands specific and to accurately pinpoint their target. However, technology is so sophisticated that with the right input, a criminal can spot his target in a crowded room, in a stadium or underground wearing special glasses. A wealthy target can now be kidnapped literally anywhere, tracked from a distance and threatened remotely.

As from this month, information collated by financial institutions on accounts of non-residents is to be exchanged with the country in which that person is living. All criminals, now need to do, is to intercept the exchange of this information, identify the most vulnerable beneficiary and if they fail to pay, their threats become real; exposure in the press, attack, kidnap or worse. We have seen from the leaks of financial data from Liechtenstein Bank and Mossack Fonseca that the press will pay handsomely for such information, even if the victim will not.

All wealthy families should now, not only ensure they have the most up to date surveillance equipment, but if they have monies offshore they have the most up to date and sophisticated structure to own their wealth with only the best possible people, in control. In my book, ‘When you are Super Rich who can you Trust?’ I estimate that in excess of 90% of structures are vulnerable to attack in some way or another and will crumble if threatened!

And attacks should be anticipated, not only from criminals. Tax authorities have been given to believe there is $9,600 billion in offshore trusts which is untaxed. Although a country may not be able to tax the underlying trust assets in trust, as a matter of law, this will not stop many tax authorities looking for holes and weaknesses in these structures once they have all the information to hand to investigate and challenge.

Many structures were set up, before transparency was thought possible, or by advisers who have not moved with the times. It is these trust structures which are vulnerable. Even if no tax is found to be due, any taxpayer who has been investigated will get a black mark.

You may think you care little whether you get a black mark, but for many who have been investigated it is an experience which they never want to go through again. Furthermore, it may not be long before ‘black marks’ start to become more than a bad experience. China for example has adopted a ‘social credit system’ for black marks.

This was first put forward in an official document in 2014, but is now being piloted in various forms in several cities. The principle is that people build up a score based on past behaviour, which will operate in a similar fashion to a loyalty programme. Misdemeanours can include court cases, and traffic offences, but in the Western hemisphere will most certainly include tax evasion, and avoidance whether successful or not.

A good social credit score in China, can confer benefits, such as preferential loan rates, whereas a poor social score can jeopardise a university place, rule out certain jobs and even limit travel. More than 10.5 million Chinese have been barred from buying airline or high-speed train tickets under this system.

Of course, China is not hindered by data protection, privacy and individual rights, but neither are many Western countries when it comes to tax evasion or attempted tax avoidance. Exemptions are carved out from most of our data protection laws for tax offences.

For anyone who is wealthy enough to worry about being attacked or having their financial information fall into unwelcome hands, they are wealthy enough to take a long hard look at their personal security and wealth ownership structures. Peace of mind may soon be a thing of the past, but there is still time to mitigate your exposure and risk for those who you care for, which is small to price to pay for peace of mind.

If you would like to find out more about how GFOS can review your structure or otherways in which it can facilitate solutions for you and your family, please contact me at caroline@garnhamfos.com phone, 07979 188 288, or 020 3740 7422. You can also buy my book direct from me, from Amazon or from our website www.garnhamfos.com.  

HMRC tools up

HMRC has, along with other agencies such as the National Crime Agency (NCA), now got some serious new toys to play with ‘Unexplained Wealth Orders’ and limited freezing orders.

If ever we needed to be reminded how seriously the Government is taking tax evasion and the proceeds of crime, we only need to look at these new powers.

As from 31st January 2018, if organisations such as HMRC and the NCA have reasonable grounds to suspect any person as being involved in, or connected to a person involved in serious crime, it can obtain, from the High Court an order demanding they explain the nature and extent of their interest in specific property.

So, what’s the problem?

All professionals dealing with UHNW families are reminded continuously that if they see anything suspicious it needs to be reported to the person nominated in the firm to make a ‘Suspicious Transaction Report to the NCA. These nominees are trained in determining, whether a transaction adds up commercially or looks unusual for that type of business.

We are familiar with this legislation; it has been with us since 2004. We accept that, as professionals acting for UHNW families we are expected to look after the best interests of our clients but only if they are tax paying, law-abiding citizens, and if not, we are expected to ‘shop them’! Our duty is to our fellow citizens first.

Why then, given that all professionals dealing with UHNW families, are on the look-out for fishy transactions, does the Government need to take this extra step and give HMRC and the NCA the right to go to the High Court for a highly aggressive ‘Unexplained Wealth Order”?

Don’t get me wrong, I am very much in favour of catching traffickers of drugs, humans, arms, and prostitution, but I fear a number of innocent people will suffer as a result of these new provisions. Remember, that as from September 2018, HMRC will have all the information about the offshore assets held by its tax payers under the automatic exchange of information or CRS. And if they unexpectedly see substantial sums of money offshore they can enquire where it came from; the ‘Unexplained Wealth Order’. However, they are unlikely to do so, unless there is UK taxation in question – but this will not stop it passing the information on to the NCA which will then take action.

For anyone who is a member of the European Economic Area, they have some protection in that HMRC can only apply to the High Court, if it has reason to suspect serious criminality. However, this suspicion is not required for a person who is not from the European Economic Area and is a politically exposed person.

One of my clients who I will call Tom, has a family who is resident in the UK; his children are in school here and his wife Ali lives in the UK, with them, during term time. Tom is not a UK resident, he needs to be in Africa, where his business is based and he has close connections to the Government in his native country. He is therefore a politically exposed person. However, before we took him on as a client we did extensive due diligence and were satisfied that his trust fund did not come from criminal activity. If we did so suspect, we would have made a Suspicious Transaction Report, or refused to take on Tom as a client.

Tom’s trust is in Cayman, and is administered in Switzerland, set up about fifteen years ago.

Under CRS, the Trustees of his trust offshore will report under the automatic exchange of information the details of the trust, to the UK HMRC, because Ali and his children are residents of the UK. Ali owns a big house in North London, which houses her art collection and she has several bank accounts in both London and Switzerland which are funded by the trust. She has a leading accountant looking after the tax affairs of her and the family and is satisfied that she is fully tax compliant in meeting the financial needs of herself and her children in the UK. It is unlikely that HMRC will come up with serious tax revenue by pursuing Ali, but if the amount in trust is substantial it will not stop HMRC from giving the information to the NCA to apply for an Unexplained Wealth Order to ask Ali where the monies came from?

Under the new powers, it could freeze for up to five years, Ali’s house, her art and bank accounts, and continue for five years until it has answers.  

I have seen authorities freeze personal assets, purely, because they think the amount is too much for someone to amass without some form of criminal activity. In cases in Australia and the middle east, as part of this exercise, I have seen authorities restrict freedom of movement, to increase the inconvenience to the individual under investigation, by removing passports.

I have no problem with HMRC using its extensive powers and even draconian powers to catch criminals and others seeking to evade tax. My concern is when these powers are used capriciously or without reasonable grounds, Citizens of non- European Economic Area, should be allowed to live here in peace if they are not suspected of any criminal activity?

This may be a moot point so I would welcome your comments.

Contact me on 020 3740 7422 or email me on caroline@garnhamfos.com.

I will be on holiday for a few weeks, so my next note will be on 11th September – on Orwell and all that!

Wishing you all a very happy Summer and a relaxing and refreshing break.

Karen Millen - tough

On occasions, I get some feedback about my book, ‘When you are Super Rich, who can you Trust?’ Last week, a reader wrote ‘I have really enjoyed reading your book. It’s not as easy as you think to be super rich!’

The feedback reminded me of the tragic story of Karen Millen, who this year was forced to sell her home to pay tax owed as part of bankruptcy proceedings brought against her by HMRC.

The sorry story of Karen Millen’s financial collapse, is a typical tale of someone who trusted the wrong people, and paid a heavy price.

Karen was the daughter of a carpet fitter Anthony Millen, and lived her early life in a council house in Maidstone, Kent. Her father suffered from rheumatoid arthritis, and died too young to see his daughter’s success.

After leaving school, she took a fashion course in Kent’s City and Guilds in Medway College of Design. When aged 19, she went on holiday to Morocco and met Kevin Stanford; it was love at first sight and a great partnership.

Between them they took £100 loan in 1981, bought some white fabric, and Karen started making shirts for their friends. This was the start of a business empire which encompassed 400 shops in 65 countries. In the 90s, she and Kevin were riding high – and then everything started to go wrong, starting with the end of her twenty years relationship with Kevin.

In 2001, with a sale in mind, Karen was advised by her accountants to transfer her shares in Karen Millen to Mauritius trustees in a carefully orchestrated and complex arrangement being promoted by a number of leading accountants, known as ‘Round the World’. It would avoid capital gains tax.

Icelandic tycoon, Jon Asgeir Johannesson’s company Bauger then came sniffing, and offered to buy her company for £95 million. Jon was already powerful on the UK high street, and in due course owned stakes in All Saints, House of Fraser, Hamleys, the Icelandic frozen food chain and Woolworths. In 2007, at the height of his success, he was named the third most powerful retailer in Britain, by Retail Week.

The sale went ahead in 2004. Baugur the buyer financed the purchase through, Kaupthing, the Icelandic bank. On October 2008, Kaupthing was taken over by the Icelandic Financial Supervisory Authority, it was bust. But 40% of the purchase price for Karen Millen was not settled. In due course, Karen and Kevin were given 8% in Baugur and 4% in Kaupthing, which then collapsed along with other Icelandic financial firms. So, they received only a fraction of the sales price.

Karen wanted to start work again now that her business was sold. She wanted to start a homeware firm selling to the US and China, but the administrators of Kaupthing bank would not allow her to use her name ‘Karen’ for the new business. She took the case to the High Court and lost, with an order to pay £2-3 million of costs for both sides.

Then in 2010 HMRC came knocking. It claimed that the gain made on the sale of her shares in Karen Millen was not made by a trust based in Mauritius, but in the UK. The scheme was ‘carefully orchestrated from the UK’ and therefore taxable in the UK! This decision was upheld on appeal and in September 2016, Karen was served with a tax notice to pay £6million of capital gains tax.

She had been advised every step of the way, but failed to receive full consideration for the sale of her company, had been ordered to pay legal costs of both sides on her failed attempt to start a new business with the name of Karen, and the tax scheme she had entered into on advice from her accountants had collapsed –  she was left with nothing.

When Karen was ordered to pay £6million in tax – which she did not have – HMRC proceeded to make her bankrupt and ordered the sale of her beloved Grade II Georgian home in Wateringbury, Kent to pay the tax.

Of course, in hindsight it is easy to say she should have steered clear of Baugur, but Johannesson was a powerful British retail tycoon. She should not have trusted her accountants with a risky tax avoidance scheme, but lots of accountants were promoting this arrangement. And, she should not have fought a case against the administrators for the use of her name which she had already sold, but she was advised to do so.

It is arguable that Karen had not been brought up with finance and money, and therefore was more gullible than most – I think she simply trusted the wrong people and got it – very wrong.

The advice I give in my book to anyone hoping to have the success of Karen and not the failures, is choose your advisers carefully and always remember

·      If it looks too good to be true – don’t touch it

·      If you don’t understand it – avoid it, and

·      Never fight, unless the odds of winning are good.

If you would like to buy my book, ‘When you are Super Rich Who can you Trust?’ or would like to find out more as to how I could be of assistance to you, simply call 020 3740 7422, or e mail caroline@garnhamfos.com.

Damned Statistics

The BBC invited me on two occasions, to join Nicky Campbell on his Sunday morning show to contribute to the debate on how valuable rich people are to the UK.

The first time, as we went live – Nicky turned on me, aggressively. Is it right for some people to live in this country and not pay their fair share of tax? I cannot remember what I said, I was so surprised, but remember being quite robust. If the government tax this valuable community too much they will simply leave!

One woman, a strongly opinionated journalist, claimed they would not – we now have the statistics, who is right?

The simple answer is that one quarter have either left or given up their privileged status, but the total tax taken has gone up. Sadly, records only began in 2008, when a fee was introduced for the privilege of the beneficial tax regime for non-UK doms living in the UK.

In 1986, I was asked by the Weekend FT to write a column on tax and trusts, which I did for twelve years writing about ten articles a year. At that time, very little was written about the taxation of non-UK domiciled persons, so I had no option but to read the legislation and interpret it as best I could.

I was shocked to discover, as I wrote my articles, that non-domiciled persons could save vast swathes of tax simply by leaving most of their assets offshore, preferably in trust, and to bring into this country only monies on which they needed to live. And even this tax could, with careful planning, be avoided.

Although, I cannot claim to be responsible for the surge in the offshore fiduciary industry and an influx of wealthy people into the UK, in the 80s and 90s, I certainly think I contributed to it.

As the years rolled by, it became increasingly clear to me that the Treasury would clamp down on this ‘gravy train’ of tax breaks for the non-doms, which is precisely what it did, although for many, it was great while it lasted.

In 2008, the Government introduced a charge of £30,000 for any non-domiciled person who had been resident in the UK for 7 of the previous 9 years and did not want to pay tax on their unremitted offshore income and gains. In 2012, a new band was introduced £50,000 for any such a person who had been resident in the UK for 12 of the previous 14 years (which went up to £60,000 from April 2015). Then, in 2015, a new band was introduced of £90,000 for such a person who had lived in the UK for 17 of the previous 20 years.

Finally, from 6 April 2017, the £90,000 band was dropped and all non-UK domiciles who have lived in the UK for 15 of the previous 20 years will now have to pay UK income tax and capital gains tax on their offshore as well as their onshore wealth.

We do not know what the outcome of this deemed domiciled rule will be, because the published statistics only go up to 15-16, but we can see, from the statistics published this month the effect of the increase in the remittance charge on the behaviour of the non dom community living in the UK.

First, the total number of non-doms who do not want to pay the fee for the privilege of having their unremitted offshore wealth left untaxed, fell by one quarter, down from 120,000 to 91,000. This could either be because they did not want to continue to pay the fee for the privilege, or they have simply left the UK. The split would appear to be 50:50.

Second the tax take went up. Non doms last year paid more income tax, capital gains tax and national insurance tax than at any time since records began - 2008.

Of the non dom taxpayers only two thirds bring monies into the UK which is taxable, the others may simply leave their monies offshore, because they do not need it in the UK. The amount of tax paid on the remittances was £2,100 million, which is roughly the same as previous years, but the fee for the privilege was up to £285 million which is the highest amount ever paid, largely due to the £90,000 band.

The number of people who pay this fee is only 4,300. This means that of the 91,000 who claim non-dom tax privileges, less than 5% stay beyond seven years, or then drop their non-dom status.

As from April 2017 of these 4,300 who have been here for fifteen of the previous twenty years, they will be taxed on their worldwide income and capital gains. Ironically, provided they do not need the money to spend personally, it can usually be, legally, mitigated or avoided.

Changes were also made as from April 2017 to the rules of non-doms for inheritance tax.  If they have lived in the UK for fifteen, rather than seventeen out of the previous twenty years, they will be subject to inheritance tax on their world-wide wealth at 40%. However, this can also be avoided, provided action is taken before the fifteen-year cut-off date.  Simply set up a trust and transfer all your non UK assets into it. And if you want to know how to do this without losing control of your world-wide wealth, simply contact me.

If you would like to find out more or buy Caroline’s book ‘When you are Super Rich Who can you Trust?’, please contact Caroline on 020 3740 7422, or email on caroline@garnhamfos.com

Don't tempt fate

I have acted for Joshua for many years. He is a beneficiary of a trust, which I will call Larchwood Trust, with his sister Marcelle which was set up for him in 1998 by their father. Joshua is resident in the UK, but Marcelle is resident in Argentina.

The trust owns a number of active businesses, one of which is an import business to the UK of products from Argentina, based in the UK, which I will call Larchwood Enterprises Limited.

The Trustee of his trust ABC Limited, has an excellent track record, and has over the last few years been very acquisitive; buying large and small fiduciary businesses mostly in offshore financial centres and introducing them to their way of doing business and looking after clients.

Joshua recently received a letter from ABC Limited to say that it was proud to announce the acquisition of a fiduciary business STU Limited, with offices in Singapore, BVI, Lugano and London. Joshua wrote to me to say how excited he was that he could now have meetings with his Trustees in London and would no longer have to travel to the Channel Islands!

I wrote back to him, which I copied to ABC Limited, who I had got to know quite well over the years, to say that it was unlikely that his visits to the Channel Islands would come to an end despite ABC Limited having acquired an office in London.

Under Section 69(2D) of the Taxation of Capital Gains Act 1992, and Section 475(6) Income Taxes Act a trustee, ABC Limited will be treated as UK resident and taxable in the UK, in relation to a trust, if it acts in the course of a business which it carries on through a ‘permanent establishment in the UK’.

I told Joshua that ABC Limited would no doubt have taken legal advice before acquiring STU Limited and would have put in place rigorous processes, but Joshua was inquisitive, he wanted to know the rules and the dangers.

I told Joshua that HMRC and the OECD Tax Model Convention provide helpful guidance on the meaning of permanent establishment which is at the heart of where a trust is resident, if it has a corporate trustee acting as a sole trustee.

If ABC Limited employees were to use the offices of STU Limited when they came to London, this would not necessarily mean that Larchwood Trust would become subject to UK capital gains tax or income tax. But it depends what these employees are doing while in the UK which matters, and this is governed by three tests.

The first is if ABC Limited employees are doing trust business in the UK. If they are merely coming to the UK to pitch for new business, that is ok, but they should not be doing trust business, while in the UK.

The second test is, are the employees of ABC Limited doing trust business in the offices of STU Limited in London?

Third test is, are the employees of ABC Limited carrying out the trust business of Larchwood Trust, in the offices of STU Limited in London?

The Guidelines make it very clear what trust business is, namely

·      The general administration of the trust

·      The over-arching investment strategy

·      Monitoring the performance of those investments, and

·      Decisions on how trust income will be dealt with and whether distributions should be made.

One off meetings are ok. To give an example, if ABC Limited met with Joshua at the offices of STU Limited to discuss the potential release of capital from the Larchwood Trust, this clearly falls within a core activity of the Larchwood Trust.  Prima facie ABC Limited is acting as a trustee of the Larchwood Trust through a permanent establishment, the offices of STU Limited. However, HMRC will not make a decision based on a one-off meeting, it wants to know the whole history.  

The trap to avoid, which crops up when a trust has appointed a professional trustee, is where meetings are held by employees of ABC Limited with Joshua in London, which ABC Limited then ratifies in the Channel Islands at a formal meeting of the Directors of ABC Limited.

In my opinion, as I told Joshua, he needs a structure, where it is clear who is taking the decisions and where they are taken. Although, in most cases, on balance, it is clear that the real decisions are being taken abroad, no-one wants to tempt fate with HMRC. Fighting HMRC is not like fighting anything or anyone else. It has been told it must go after every penny of potential tax, regardless of the time and expense it takes to go through all the files and papers of Larchwood Trust, since inception.

The inconvenience and cost of flying out to the Channel Islands to have real meetings where real decisions are taken is a small price to pay to avoid years of wrangling with HMRC.

If you would like to find out more, or buy my book, ‘When you are Super Rich who Can You Trust?’ please contact me on 020 3740 7422, or e mail me on caroline@garnhamfos.com