Not Fair!

One of my longstanding friends who I will call John, is the founder and director of a global business, which I will call MPP Ltd. Over a few decades MPP Ltd grew to become spectacularly successful and both John and his fellow founder and director Jack became very wealthy.  

However, Jack was able to afford a boat moored in Monaco, a house in Cap Ferat and a private jet, John only had a farm in the UK. John may have wanted a lifestyle equivalent to that of Jack; he deserved to, but he simply could not afford it.

John was UK domiciled and paid taxes on his world-wide wealth, whereas Jack was non-UK domiciled and paid taxes only on what he remitted to the UK.

John was often tempted to look at ways to accumulate his wealth tax free using other reliefs – but I always advised him against it. He did not always follow my advice, he had top accountants managing his financial affairs – but each time he tried, in due course he regretted it.

The UK has wide and extensive reliefs for non-UK domiciled persons, which although have been whittled away in recent years, can still provide extensive tax planning opportunities for those who are not domiciled in the UK.

For UK domiciliaries however, there are only a handful of tax reliefs and exemptions; capital gains tax exemption on your main or only residence, spouse exemption for transfers of value for inheritance tax, but they are, by comparison few and far between.

In the good old days, the skill of a tax adviser was to look at the reliefs and exemptions to see how they could be utilised to save tax, often in artificial and complex ways. It was a skill I enjoyed, and put to good use in the ‘double trust scheme’ as well as others. Schemes were a game, and they had legal backing.

Lord Clyde in the case of Ayrshire Pullman Motor Services v Inland Revenue [1929] 14 Tax Case 754, at 763,764 opined

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

However, in the past ten years, governments have not only used tax legislation to make it an ‘unfair game,’ but have also become super aggressive towards anyone who tries to play.

For example, in 1935 legislation was introduced which brought income to charge to UK taxation if a transfer (usually of a capital investment) was make to a person, company or trust abroad as a result of which the income arising from it, could still be enjoyed by the UK taxpayer. There was, however, a let-out clause for ‘genuine commercial reasons’ which were not undertaken for ‘the avoidance of tax’.

In recent years, some tax practitioners have turned their attention to life policies (a personal portfolio bond) or say, a Qualifying Non-UK Pension Scheme (QNUPS). The argument being that these structures are fully subject to UK tax, albeit deferred, and therefore could be used as a holding structure offshore for a commercial transaction, since tax was not in fact being avoided.

This argument came before the Tribunal in September this year in the case of: (1) Andrew Davies (2) Paul McAteer (3) Brian Evans-Jones V R & C Commrs [2018] TC06733 and was dismissed.

The Appellants had taken out life policies with a Bermudian provider, which held shares in a company which was engaged in property transactions. The arrangement was designed to defer UK income tax on the income generated by the property development until such time as the life policy was cashed in. The company was based in Mauritius, to take advantage of the beneficial UK/Mauritius double taxation agreement under which income would be solely taxable in Mauritius, at an effective rate of 3%.

The Tribunal agreed that there were commercial elements to the transactions, but decided that the structure was put in place primarily so that UK tax was deferred on the profits of the property development. It decided that the arrangement could therefore be looked through and taxed as if the income arose to the Appellants in the UK with no double tax treaty relief and no life policy. This is particularly harsh for anyone who has entered into such an arrangement, because from September to October 2018 the deadline to report a tax liability passed.

Any taxpayer, who until this decision believed his planning was tax effective will not only be looking at paying UK tax on the underlying income – but in addition, a maximum penalty of 200% for the Failure to Correct (FTC). The deadline was 30th September 2018, just after the Tribunal decision. Under the FTC rules if no disclosure was made before the deadline – whether the taxpayer was aware of a liability to tax or not – s/he will be subject to a minimum penalty of 100% on top of the tax due.

And if a taxpayer thinks that what ‘happens offshore, stays offshore’ s/he should think again. With the Automatic Exchange of Information now in place, all governments will know about all transactions and structures offshore and if what you declare does not match up with the information HMRC is given, it will get you!!!

If you would like to find out more or to book a meeting please contact caroline@garnhamfos.com or phone on 020 3740 7422

You can buy Caroline’s books ‘When you are Super Rich who can you Trust?’ and/or ‘How to win business from Private Clients’ from www.garnhamfos.com or from Amazon.

Petty pilfering - good or bad?

Wealthy families have very different attitudes towards petty pilfering by their household staff, in the same way that offices have varying attitudes towards theft of stationary and office equipment by their employees. It may seem ‘small beer’ and nothing to worry about, but small acorns can sometimes turn into giant oaks.

The prosecution of Paul Burrell, Princess Diana’s butler in 2002, and the subsequent outpouring of royal secrets by the aggrieved former employee, wrecked Prince Charles’s reputation and ruined his attempts to rehabilitate himself with Camilla in the eyes of the public. This would never have happened if he and subsequently Diana, had had a more rigorous rule in their households about petty pilfering.

According to Tom Bower, author of Rebel Prince, Prince Charles was allegedly ‘unbothered about pilfering by staff’. The royals receive so many things, many of which are neither liked nor cherished that Charles ‘randomly allowed his staff to sell unwanted gifts and keep the money. Rewarding his butlers and valets, he believed, kept good staff loyal…’ considering their low pay.

The matter of household theft came to the attention of the police, when a director of Spink ‘boasted while intoxicated at a party’ that he was ‘selling a two-foot gold and silver model of a dhow originally worth an estimated £500,000. The piece, he said had been a wedding gift from the Emir of Bahrain to Charles and Diana’.

On investigating further, the police found thousands of pieces including numerous family photos and letters to Prince William in Paul’s home in Cheshire which he had taken from Diana’s apartment in Kensington Palace soon after Diana’s death in 1997.

This is not uncommon.

In my book, ‘When you are Super Rich Who Can you Trust?’ I talk about a client who was elderly and receiving 24 hours care from a nurse. One evening, I saw the nurse dressed to go out to a function wearing one of my client’s brooches, which I asked her about. She said, it had been loaned to her for the evening.

On the death of my client, I was interested to note that the brooch was not part of my client’s estate, but there was no evidence to prove that the brooch had or had not been gifted to the nurse.

In contrast to the household of Prince Charles, the queen’s household, ‘itemised and stored away every gift at Windsor Castle as part of the Royal Collection, forbidding any sales’. There is nothing wrong with making a gift to a member of staff for them to sell, but if the donor genuinely wants the member of staff to get the best possible price for it, it should be accompanied by a simple Deed of Gift and recorded as such.

Some wealthy people may say that they cannot be expected to keep track of their personal valuable possessions. My answer to that, would be to transfer them into trust and make it a problem of the trustees!

If a member of staff pilfers a trust asset, the trustees will be liable to make up the loss if they were negligent in protecting their trust assets from such theft.

Similarly, trustees also have an obligation to make sure that all valuable trust assets are properly maintained – but there again, there are pitfalls.

A common situation, which I also refer to in my book, is where the captain of a yacht is in charge of maintaining the boat. Every year he may take it to his ‘favourite’ boatyard, which pays him a percentage of the work done - and for keeping quiet on the extent of the work.

When I take my car into the garage once a year, for a service and MOT, I trust the mechanic when he says I need new brake pads and windscreen wipers because, I do not know any better. So how is a boat owner going to know if the work listed as necessary really needs to be done, if the Captain and the boatyard are in cahoots?

Trustees in possession of valuable assets, have an obligation to maintain their assets, but not to pay over the top for doing so. They need to conduct a trust audit to ensure that all the trust assets are still there and in proper repair at a proper price. Every year or every other year they need therefore to carry out an independent asset audit, - and if they do not they could be liable to make good any loss or depreciation of value.

If you would like to buy Caroline’s book, ‘When you are Super Rich who can you Trust?’ or ‘How to Win business from Private Clients’ please go to www.garnhamfos.com or on Amazon, and if you would like to book a meeting with Caroline, call 020 3740 7422 or email on caroline@garnhamfos.com

Naive, foolish, irresponsible, nincompoop!

One of Tony Blair’s greatest regrets was his Freedom of Information Act. Introduced as a Labour Party manifesto commitment in the general election of 1997, it was designed to make Government more accountable.

Tony Blair is on record as saying, ‘for political leaders it’s like saying to someone who is hitting you over the head with a stick ‘Hey try this instead’ and handing them a mallet!’

He went on to write ‘Three harmless words. I look at those words as I write them and feel like shaking my head till it drops off my shoulders. You idiot. You naïve, foolish, irresponsible nincompoop. There is really no description of stupidity, no matter how vivid, that is adequate. I quake at the imbecility of it…information is neither sought, because the journalist is curious to know nor given to bestow knowledge on ‘the people’. It’s used as a weapon.’

Why was Tony so incensed? Because, the master of spin, wanted to use his soundbite skills and celebrity connections to make money and continue the lavish lifestyle to which he and Cherie had become accustomed. But he did not want this accompanied by a ‘wall of noise’ from the press. It would undermine his ‘legacy’.

Labour peer and university mate of Tony’s, Lord Falconer criticized the Freedom of Information Act, when used ‘by journalists for ‘fishing expeditions’’ he goes on to say, ‘information needs to be handled responsibly and I strongly believe that there is a duty on behalf of the media as well!’

What tosh! Who is to judge when information is handled responsibly or not – surely the matter is subjective, not objective?

The automatic exchange of information under the OECD global initiative, implemented last month, is a case in point. The UK HMRC, I am sure, will do what it can to avoid this sensitive information about its rich UK residents, being leaked into the hands of journalists and thieves. But, it cannot stop its systems being hacked as we saw in the Panama papers or a rogue employee selling the information as we saw with the Bank of Liechtenstein!

But, there is another, far more immediate threat, which is that HMRC will use the information itself to go on a ‘fishing expedition?’

In the manual for the tax inspectors who are to deal with the information exchanged, they are told to look out for a UK resident settlor, who is alive, with a substantial trust offshore, and a person of ‘significant influence’, such as a Protector.

They are then told to approach the trustee offshore, with the claim that the trust was set up to ‘evade’ tax. The existence of a Protector, they are told to argue, is prima facie evidence of a ‘lack of intention’ to transfer unfettered ownership to the trustees and that the trust is a sham. With this prima facie evidence HMRC can then demand to see all the documents, the set-up correspondence and the marketing literature of the trustee company at the time the trust was set up.

HMRC is also told to look, in particular, for high profile settlors to name and shame, and will bring into the spotlight all other parties involved; lawyers, accountants, trustees, banks as well as the Protectors personally.

What can be done? What did Tony do - to protect himself from unwanted attention? He used structuring to protect his income from detection.

Tom Bower in his book, Broken Vows, claims that on leaving office, Tony commissioned accountants and lawyers –  to erect ‘unusual barriers to prevent an accurate assessment of his wealth. All his income would be channelled through a complicated legal structure. At the top was BDBCo No.819 Ltd, a company that owned a clutch of other companies called either Windrush or Firerush. Windrush Ventures No.3 LP was part owned by Windrush Ventures No.2 LP which in turn controlled Windrush Ventures Ltd. The scheme’s advantage was that the LPs, or limited partnerships were not obliged to publish their accounts’.

Non-dom, UK resident settlors, of which there are just under 80,000, should review their structures. If they own assets offshore they need to minimize their risk of an investigation, by doing one of two things; pay a bit of tax and move the trust to the UK, or restructure to introduce more robust governance, without a Protector.

And my advice to any fiduciary, who may be reading this –  find out how to de-risk your business as soon as possible. If you have any client who HMRC may like to ‘name and shame’ you may also find your name in lights – let alone exposed to litigation for negligence.

If you would like to find out more contact Caroline on 020 3740 7422 or email on caroline@garnhamfos.com

Caroline’s book When you are Super Rich who can you Trust? and ‘How to win business from Private Clients’ can be bought on Amazon or go to www.garnhamfos.com

Best news of the decade

Last week at a fringe meeting at the Tory conference, Brexit Secretary Dominic Raab told Brussels that the UK will slash Corporation Tax in the event of a ‘No Deal’ on the exit from the EU.

The Labour retort ‘it will turn Britain into a tax haven for the super-rich’ omitted to say, that it would also give the UK a competitive advantage for businesses like Amazon, entrepreneurs and the work force in Britain.

Raab’s comments were independently endorsed by Sajid Javid, the Home Secretary, who said, that if the UK could save on its divorce bill from the EU, he would choose to use the money to cut taxes – alleluia!

Javid went on to say ‘We are taxed enough as it is. Give it back to the people’. He went on to say, that post Brexit, it would be possible for the UK to look at some of its rules and regulations ‘currently in place to make the UK a more attractive jurisdiction’ in which businesses will want to invest.

Jeremy Corbyn’s stock answer is ‘the Conservative’s Brexit plans would turn the UK into a low tax, low regulation ‘Singapore-on-Thames’ in a bid to undercut the EU! – Brilliantly put – yes, precisely. What is wrong with a bit of healthy competition? The EU has always been envious of the position of London on the global financial stage – well with lower taxes it will become even more attractive.

The idea, put forward by Javid to slash corporation tax rate to 10% is very attractive. Both Ireland and Cyprus, which are within the EU are at 9% and both jurisdictions have seen a boost to their economy. Setting the rate at 10% would be just above the lowest acceptable rate in the EU, but would nevertheless make the UK most attractive.

As Thatcher proved, slashing taxes makes more money – not less – why, because if the tax rates are too high, people change their behaviour to avoid it, but when the tax rate is ‘acceptable’ – businesses and people simply pay it rather than avoid it.

Numerous islands; the Channel Islands, the Caribbean Islands, and Singapore as well as land locked countries like Switzerland have proved that changing laws to make their jurisdiction attractive to people and business is good for the economy and everyone living there.

Set out below are my top four suggestions of what a Government should do – post Brexit.

First; make sure that non doms are encouraged to bring their wealth into the UK rather than benefit from leaving it offshore, this could easily be done, with relatively few tweaks. It is a nonsense that we encourage rich people to live here, but to leave their wealth offshore.

Second, I would want to see the UK become a financial centre for trusts. The UK was the founder of trusts, but because they are now so heavily taxed there are very few in the UK, they are managed and resident in offshore financial centres – not the UK. This is business which belongs in the UK, but we would need to upgrade our trust laws to make the UK attractive. The UK, has fallen woefully behind the nippy offshore financial centres in trust laws. All that Britain would need to do would be to decide which were the best laws and simply follow them. Of course, my own legislation in the Bahamas – the Executive Entity Act would be the at the top of my wish list for new trust laws in the UK!

Third, I would want to see Stamp Duty on homes slashed. Of course, I have sympathy with the fact that people working in London, cannot afford to live here, but piling on the taxes; ATED, stamp duty, capital gains tax and inheritance tax, simply dries up of the market at the upper end, signalling that the UK does not want to attract rich foreigners to live here. With a buoyant upper end to the property market, which is now totally stagnant, the country would see a resurgence of all businesses which depend on market movement; estate agents, architects, interior designers, plumbers, electricians, decorators, and numerous other industries. What people want who work in London is not a price fall on mansions they could not afford to maintain but new affordable homes, where they can work as well as live.

Fourth, I would slash inheritance tax. Forty percent tax on your estate on death is a penalty for saving which cannot be good when the population is aging and everyone should be encouraged to save for their old age, not squander it – probably abroad so as to avoid having too much to pay to HMRC. Tax on death is a penalty on saving, this message needs to be made, loud and clear.

This is my top four – but I have plenty more suggestions if anyone is listening! If you agree or disagree – I would be delighted to hear from you.

Garnham has written two books ‘When you are Super Rich who can you Trust?’ and ‘How to win business from Private Clients’ which can be bought on Amazon or direct from www.garnhamfos.com, and if you want to contact her for an appointment call 020 3740 7422 or e mail on caroline@garnhamfos.com

Break down of trust

In my Book ‘When you are Super Rich who can you Trust?’ I make the point that if wealthy families fail to keep a check on their wealth it will sooner or later be eroded. From my experience, this tends to happen once the Settlor or wealth creator is incapacitated or dies and the erosion can come from a variety of sources.

Jeffrey (not his real name) is the brother in law of an oil baron Robert. He was close to his sister Margaret and their three children. Jeffrey was much younger than Margaret and she was Roberts second and much younger wife who he adored. Unexpectedly, Margaret contracted a rare form of cancer and after a short illness died. Jeffrey was distraught. He lost the will to live and he also died quite soon thereafter.

Robert had appointed Jeffrey, as the Protector of his trust, which held his many millions. As a Protector, he was given wide powers to appoint and remove beneficiaries. On the death of both Robert and Margaret, Jeffrey asked to see all the trust papers. He duly noted that he had unlimited power to remove the settlor’s children and grandchildren and appoint whoever he liked in their place. In the absence of a clause which said he could not appoint himself, he appointed himself as the sole beneficiary and removed all his nephews and neices. I was brought in my Robert’s eldest daughter, who was surprised that her maintenance payments had ceased.

For the trust buffs among you, it was likely that Jeffrey’s appointment was ‘personal’l. He therefore did not have to exercise his powers for the benefit of his nieces and nephews! If his appointment had been ‘professional’, his appointment would have been ‘fiduciary’ which means he could only exercise his powers in the best interests of his nephews and nieces.  

We called a meeting with Jeffrey and the beneficiaries he had removed and Jeffrey was persuaded to reinstate them as beneficiaries and the trustees were told to continue to pay the maintenance payments – they were lucky! They are still arguing about their entitlement to capital.

In another case, the Settlor, Rufus (not his real name), became incapacitated and was unable to keep in touch with the trustees of his trust, who were aware of his incapacity. His wife Josie approached me, to say that she had been in touch with the trustees, who were refusing to answer her calls or speak to her. Josie showed me a copy of the trust deed. It was clear that on her husband’s death, she and her children would be the beneficiaries, but not until then.  There was no clause stipulating what should happen if the Settlor became incapacitated.

On behalf of Josie we were able to obtain a copy of the trust accounts and documents. Since the incapacity of her husband Rufus, the Trustees had exercised their powers to increase their remuneration. By the time we got involved their fee had gone up from £50,000, to well over £200,000 in just four years. We agreed to indemnify them in exchange for their immediate resignation and we set up a structure for Josie which avoided this from happening again.

The third case, involved a Trustee who had complete control over the financial activities of the trust. Following the death of the Settlor, Serge, his widow Sally, came to see me, she was very concerned. Although her monthly allowance had continued to be paid since the death of Serge, the Trustees were not responding to her request for trust accounts.

Once again, we got involved and were able to obtain trust accounts. When we sat down with Sally and the accounts, it soon became clear that the Trustees had sold several properties at what would appear to be at an undervalue. We made some enquiries. The sales had been made to a company owned by the trustee company which had then sold on the properties at a 50% mark up.

In this case, we told the trustees that we would report them to their local ombudsman to have their license removed – which would put them out of business, if they did not account to the trust for the monies they made on the onward sale, which they did.

In my book, I offer some advice as to what wealthy families should do to avoid being ripped off. The first and most obvious tip is do not put too much trust in just one person – at all levels there must be checks and balances, which I call good governance.

If you would like to buy my book ‘When you are Super Rich who can you Trust?’ or ‘How to win business from Private Clients,’ go to my website www.garnhamfos.com or Amazon, or if you would like a meeting to discuss your concerns please contact me on caroline@garnhamfos.com or call 020 3740 7422