Family Offices: come of age?

At the Marcus Evans’ Real Estate Investors Summit at the Chelsea Harbour Hotel recently I spent some time talking to Mark (not his real name). He is the son of a wealthy family tasked with investing in real estate for his family office. Mark expressed frustration ‘I struggle to find Family Offices to be co-owners for big investment deals; they are just so chaotic and disorganized’.

I asked why he thought this was, ‘Most family offices are owned by passive trustees offshore which do not give the family office any direction! They talk a lot about co-investing, but would prefer not to take any risk – so they do nothing!’

This does not come as a surprise.

As I mentioned last week in my blog ‘When the music stops’ most offshore structures were set up years ago and unless they are reviewed, are unlikely to survive an investigation from the world’s tax authorities. The Trust and Corporate Service providers which are currently holding the assets in trust, will get caught in the cross fire. Most however have recognised the danger and are reviewing the structures of clients most at risk to mitigate this threat.

High on their to do list, is to review the ‘non-interference’ and ‘total indemnity’ clauses.

Tax authorities are looking to undermine trust structures using information under the Automatic Exchange of Information introduced this year, so that they can tax the underlying assets as if they were still owned by the settlor. Last week, I referred to the case of Bartlett v Barclays Bank. Professional trustees have a high duty of care to monitor the investments they own – so they prefer to avoid this with extensive ‘non-interference’ and ‘indemnity’ clauses.

However, these trusts are now facing a risk of a different kind.

Tax authorities will use the presence of these clauses –  to argue that the ‘trust’ arrangement was nothing more than a sham, or nominee arrangement. Clearly, with negligible risk adopted by the trustee, was there the necessary intention to form a trust.

In a structure, I put in place some months ago, I set up a ‘Special Purpose Trustee’ (SPT) managed and controlled (from a zero-tax jurisdiction) by the family and its advisers, to which we transferred the family trusts. The existing Trust and Company Service provider continued to administer the trustees, but under contract.  In the documentation, I inserted a positive obligation on the Trustee, which was by now the SPT, to carry out regular asset audits and in particular in relation to the family office which managed the family trusts’ investments.

I was made a non-executive officer of the SPT, and appointed an experienced corporate finance professional, James, to review the performance of the family office and report back to the executive board of the SPT. The report made interesting reading. The return on investment of running the Family Office was negative.

The family were shocked. After a meeting held in Guernsey, I asked James, to devise an investment strategy in line with the family’s binding Family Constitution, and to put in place some goals and targets. James came back with a clear strategy, a list of investments which needed to be sold, and where further investment was required.

The CIO of their family office was then given a year to make the changes and to achieve the modest targets set by James, which if achieved, would more than compensate for the cost of James, the revised structure, and the report.

Excited by this success, the board then looked at the other asset classes held by the trust, including the art collection held in store, the property portfolio and the wine cellar. I was again tasked with appointing a professional to carry out an asset audit and to report back on what strategy to follow, where to take profits and where to reinvest. We are awaiting the outcomes of these reports.

In today’s digital age, with costs of compliance rising exponentially and the threat of litigation around the corner, many private banks and wealth managers are looking at ways to cut corners, rather than innovative ways to cut costs – which I will address next week.

In my opinion, we need to go back to basics to find solutions.

The Trust and Corporate Service providers (‘T&CSps’) with whom I am working are carrying out a thorough review of all structures most vulnerable to attack, and to impose a positive obligation to carry out an asset audit to make sure that suitable benefits are being derived from the costs incurred. This covers the two main areas in which the T&CSps are at most risk.

Offshore trusts and their assets are in the firing line, but now is not the time to throw in the towel. It is an opportunity to give the world’s wealthiest a world class service to make their assets work for them, rather than leaving them in danger of an investigation or worse.

If you would like to find out more, you can buy my book ‘When you are Super Rich who can you Trust?’ or ‘Uncovering Secrets; How to win Business from Private Clients’ from Amazon on www.garnhamfos.com or call me on 020 3740 7422 or on my mobile 0799 188 288.

When the music stops

There is little doubt that all the major Trust and Company Service providers are now aware that they are the next to be squeezed by tax authorities keen to raise more revenue. The question is will their indemnity clauses hold up, or will they get caught in the cross fire and what can they do to protect themselves?

The case of Bartlett vs Barclays Bank [1980] makes it clear that a professional trustee has a high duty of care. Sir Herbert Bartlett set up a trust in which the main asset was 99.8% of the issued shares in the family company. On the board were two surveyors, an accountant and a solicitor. Barclays did not appoint a director on the board even though it had the power to do so.

The board decided to expand its business beyond managing property to developing property and embarked on speculative developments including the Old Bailey project which failed to get planning permission. As a consequence, the trust suffered a significant loss.

Judge Brightman J held that the bank as trustee had not discharged its duty as trustee, in failing to supervise the new ventures of the company. He held that, given the size of the shareholding, the bank should have obtained the fullest information and not rely on the supply of information it received in the ordinary course as a shareholder.

Its defence was that it honestly and reasonably believed the board of directors to be competent and capable of running the business. This was rejected.

The Judge upheld former decisions that the duty of trustees is ‘to conduct the business of the trust with the same care as an ordinary prudent man of business would extend to his own affairs’. With this then in mind is it right for a professional trustee to take on business and then indemnify itself from all liability, other than gross negligence or fraud, and for non-interference.

In Waterman’s Will Trusts [1952] the Judge said ‘A trust corporation holds itself out in its advertising literature as being above ordinary mortals. With a specialist staff of trained trust officers and managers, with ready access to financial information and professional advice, dealing with and solving trust problems day after day, the trust corporation holds itself out, and rightly as capable of providing an expertise which it would be unrealistic to expect and unjust to demand from the ordinary prudent man or woman who accepts, probably unpaid and sometimes reluctantly from a sense of family duty, the burdens of a trusteeship.’

It is inevitable that tax authorities keen to undermine a trust relationship, so that they can tax the underlying assets on the settlor, will jump on these tightly worded indemnity and non-interference clauses to argue that this is not a trust relationship, but a mere nominee arrangement.

The conundrum is that to do the job of a professional trustee properly takes time and money, which needs to be paid for through a proper fee. In many cases, however, the family can find a professional trustee who will charge up to ten times less, than it would cost a professional trustee to do a thorough job. To take an analogy, is it better to take out insurance which pays out on a claim or one which is ten times less expensive which does not?

Should the professional trustee, aware of this higher duty of care take on business for which it is being remunerated to do nothing other than collect fees and keep records. It will not be the first time that judges have looked at the level of fees to evaluate the level of advice and service being given!

But it cuts both ways. Like the case of Barclays v Bartlett, the family does not want to lose money either, and neither does the professional trustee want to get sued. The easiest way to solve this conundrum is to carry out asset audits.

Increasingly, when asked, I insist that trustees should only be given full indemnity protection if they carry out asset audits on a regular basis, and in particular where the main asset is the family holding company.

Once I started to suggest this as a solution it became so much in demand by beneficiaries eager to see; their single family offices, property portfolios, wine cellars, store of antiques, gallery of paintings, horde of jewellery, produce better returns that GFOS decided to offer asset audits across all asset classes including passion investments; yachts, wine, aircraft, jewellery, and alternative asset classes such as real estate, antiques and art.

If you would like to find out more please contact me on caroline@garnhamfos.com or call 020 3740 7422.

Name and Shame

Tim Cochrane of Bain & Company, Financial Consultants has said that ‘Panama Papers’ created a ‘cloud’ over the Trust and Corporate service providers industry.

If Cochrane thinks the Panama Papers is a cloud, the Automatic Exchange of Information (AEoI) is a hurricane!

On April 3rd, 2016, 11.5 million documents of the personal identities and financial transactions of 214,488 offshore entities managed by Mossack Fonesca were leaked to the press. The disclosure blew the whistle on politicians, such as David Cameron and the Icelandic Prime Minister, as well as many sports stars and celebrities who had accounts with the Panamanian firm.

According to French economist Pickerty there are $9.6 trillion (4 times the GDP of UK) in trusts offshore and the OECD governments are united in wanting to bring this private wealth into the charge to tax.

It is now well understood that tax authorities around the world are looking to use the information received under the AEoI specifically to investigate trusts of a significant size, in which the settlor is still alive, and of which there is person of significant influence.

With this information tax authorities can raise a tax claim using the extended doctrine of sham and the powers provided under the exchange to track down tax evaders – even though the tax payer had good and robust professional opinions to say that they have nothing to fear – or hide.

Let’s take an example in the public domain. Bernie Ecclestone is known to have a network of trusts and offshore companies which were set up by his non-domiciled former wife Slavika. It is also well documented that his Swiss adviser, Luc Argand who worked for his ‘Bambino’ trusts worked closely with Bernie for many years and even on occasions worked in his office in the UK. It later came out that to ‘forestall an investigation by the Inland Revenue he had transferred $44 million into the German’s bank account in Austria.

Clearly HMRC could raise a tax claim on the basis that the trusts had their mind and management in the UK. But it could not do so because, it needs more detailed information.

But, with the introduction of AEoI, HMRC and all many other countries around the globe, will have sufficient financial information to raise a claim. With Bernie Ecclestone, it has all the other information it needs to raise a claim, but for others all that is needed is the identity and address of a person of significant influence. This is enough. Tax authorities will have enough to say that they have prima facie evidence of a lack of intention to create a trust using the extended doctrine of sham, or bare trust arguments to put in a tax claim which must then be countered by disclosing files and confidential papers to prove this not to be the case. This could take years of investigation at great cost.

But it will not be mean just paying the tax, governments want to stamp out the use of offshore trusts and intend inflicting massive penalties. The UK for example has introduced a whopping 200% penalty on top of the tax. If this were to be used against someone such as Bernie Ecclestone – despite his billions, he would be wiped out!

But the bad news does not stop with Bernie Ecclestone – tax inspectors have been told to ‘name and shame’ this means they have been ordered to caste around to bring into account everyone involved; advisers, bankers, Trust & Corporate Service providers, lawyers and anyone else.

So, what are the Trust & Corporate Service providers doing about? They do not want to get caught in the cross fire of litigation and damaged reputation.

Professional trustees are resigning in favour of family managed trustees; they want to de-risk their business. They would prefer to be the trust administrator operating under contract without the fiduciary duties of being a trustee rather than get caught in the cross fire.

It is an easy sell. The family gets control over the trust, its assets and the family dynamics, a win/win situation.

For now the restructuring is happening at the top end, but it will only be a matter of time before the change will gain in momentum to all trusts holding significant assets as the practical impact of the Automatic Exchange of Information starts to bite. In five years, I predict trusts with a person of significant influence will not exist.

Next week, we will look at what UHNW families are doing once in control of their own special purpose trustee.

If you would like to find out more on how to restructure your offshore trust, contact Caroline Garnham on caroline@garnhamfos.com or call on 020 3740 7422.

Or if want to read more order Caroline’s book ‘When you are Super Rich who can you Trust?’ and “Uncovering secrets; How to win Business from Private Clients’

Nuns' sense

International families with wealth offshore in trust should take a leaf out of the nuns’ book in Co Galway, in Ireland.

In 2014, the nuns took over the running of the Kylemore Abbey and Gardens and since then have continued to enjoy growth, according to the accounts of its operating company Kylemore Abbey and Gardens Limited, last year.

This is more than can be said of many professionally run trusts, in which the beneficiaries and their advisers take no part. Currently private wealth of $9.6trillion, more than 4 times the UK GDP is owned by offshore entities over which the majority of beneficiaries or their advisers have little or no involvement.

On 7th November 2018, the Government published its paper on ‘Exploring the uses of trusts’ compiled by Ipsos Mori in 2016. Its research involved interviewing 40 ‘agents’ which set up trusts for clients and 20 settlors, of which only 2 had set up trusts offshore. Given my experience of setting up trusts offshore I thought I would add my comments to the Government’s findings.  

The motivations for setting up a trust it concludes are

·      Protection from people, this is a conclusion with which I would concur. Parents are almost unanimous in wanting protection from in-laws, excessive spending from their children before they are old enough to be responsible and unwelcome influences; drugs, religious sects or ‘gold diggers’ (you can read more in my book ‘When you are Super Rich who Can you Trust?) Trusts are also very effective in limiting exposure from creditors. This is of particularly important to citizens of the US, who are bombarded by speculative claims from opportunistic creditors eager to win some benefits from spurious litigation

·      Taxes and costs, this is also a conclusion with which I concur – up to a point. Setting up a trust in the UK by a non-dom barely saves any taxes, although there are still tax advantages for a non-dom in setting up a trust offshore. Saving of costs, however – is debatable! I am a great believer that where value is added – it needs to be paid for, but if value is being diminished, I am not so keen. (Another topic I cover in my book). In so many cases I have seen, professional trustees insulate themselves with layers of indemnities and non-interference clauses that as and when troubles brew, resolution is neither swift, nor cost efficient. Furthermore, the fund gets weighed down with legal opinions and professional expenditure with little or no benefit for the beneficiaries.

·      Control! This is where I applaud the Benedictine nuns of Co Galway. So many settlors abrogate responsibility for the decisions and running of their trust to professional trustees with only a fig leaf of control in the hands of a Protector, who has neither the information or funds to do the job of protecting the interests of the beneficiaries properly. As a matter of practice, the Settlor usually has a good working relationship with his trustees, but in the absence of good governance processes and mechanisms in place, this good relationship rapidly turns sour in the face of a dispute or tax investigation.

·      Flexibility. Again, I concur here with the Government paper, but only if the family and its advisers are in control, like the nuns in Co Galway. In the absence of family control, the beneficiaries can find their trust and trustees remarkably inflexible which as and when this happens can make the trust inflexible.

The other finding of the Government paper, was that very few Settlors knew much about what a trust was before approaching an agent to set one up. They were therefore very much at the mercy of their adviser in deciding whether and what sort of trust is good for them and their family – which is another topic I cover in my book.

In the late 70’s when offshore trusts first started to be set up, on the lifting of exchange controls, the chance of anyone finding out who had done what was so remote that trustees had no problem in saying – in print- that in practice, they would do whatever the settlor asked of them. Now such a statement could invalidate the trust as a sham.

With the threat that all governments will now have all the information they need to start an investigation into all trusts offshore they now need, as a matter of urgency, an independent audit – what was good advice in the early 80’s may not be so water tight now.

But for the Benedictine nuns in Ireland who would appear to be fully aware of their responsibilities, they have no such fears. Let’s only hope that other beneficiaries of trusts offshore do likewise.

If you would like to book an appointment with Caroline, please phone 020 3740 7422 or email caroline@garnhamfos.com and if would like to buy any one or more of her books, ‘When you are Super Rich who can you Trust?’ or ‘uncovering secrets, Winning business from Private Clients’ please go to www.garnhamfos.com or buy from Amazon.

Get a Grip

Hammond’s ‘Giveaway’ Budget was lamentable.

Where was the rhetoric that you would expect this close to Brexit? What about some new ideas as to what is best for Britain? All we saw was Hammond parroting May’s ending of austerity and then beating on the same, boring, old, political drum. Is it hardly surprising that the BBC was not more joyful?

The Government is so anxious not to let Labour jeer at them for being the party for the rich, that they fail to see what is best for us all. Alex Brummer in the Daily Mail said Hammond needs to stand up to these ‘left wing bullies’; not fear them.

In 2014, George Osborne hiked up stamp duty to an ‘eye-watering’ 10% on sales of homes of more than £937,000. It was introduced to steal a march on Labour, who were gaining ground on their mansion tax. It has now proved an expensive and damaging error, and is causing misery. Instead of raising revenue it has now clearly failed.

Stamp duty raises £12.8 billion a year. It has this year fallen a billion short of what was forecast and is set to further decline over the next five years.

When Mrs Thatcher was in office she was not frightened of lowering taxes, or standing up to left-wing bullies. She proved that, ‘when marginal tax rates are too high, revenues will subside’.

Already young ambitious, hopefuls worry about getting a home. They struggle with student loans and have to rely on the bank of Ma and Pa to get started. Homes need to be more affordable, I agree, but high prices are not going to come down as a result of high taxes; their owners simply won’t sell.

And as if this opportunity was lost on Hammond, he then uses the Budget to make matters worse. Last week he fiddled with the capital gains tax exemption on home ownership. Does he not live in the real world? People buy homes to live in, and on occasions they need to sell. If taxes are too high, buyers disappear. So why make the time to sell shorter?

Under the existing rules, if you move out of your home and live somewhere else, you will still qualify for the capital gains tax exemption on all the gain, provided you sell your home within two years of moving out. Under the rules, proposed in Hammond’s Budget, which come into force in April 2020, this exemption period will be reduced to nine months.

Helen and Martin have a young family. They have been trying to sell their expensive apartment in Chelsea into which they moved when they were DINKies, because they need more space for their growing family. Their apartment has already been on the market for over six months and they need to think about their children and schools.

Under the old rules they could move into rented accommodation and would have two years to find a buyer without losing their capital gains tax exemption. Under the new rules they have only nine months to find a buyer, before part of their gain becomes taxable. And the greater the tax to pay, the less Helen and Martin will have to buy a bigger home for their family.

Julie and Matt are at the other side of the spectrum. They own jointly their £3million home in Putney. Their children have grown up and they want to go their separate ways. Julie wants to live with Toby, and Matt and Julie are struggling to be amicable.

Under the old rules, Julie could decide to move out, and they would have two years to find a buyer. But under the new rules, if Julie and Matt cannot sell the house in nine months, Julie will have to pay capital gains tax on part of her gain on her former matrimonial home.

Hammond’s lack of understanding of how tax affects the lives of ordinary people is staggering. If a tax is not working slash it – don’t make it worse by adding unnecessary time constraints.

Brexit is around the corner. We are an island with an extremely good financial services industry and were once the home of choice of the world’s wealthy. We need to use our freedom to raise revenue, not drive it out. 

I would have liked a Budget where non-doms are encouraged to bring their billions into Britain, where trusts can come onshore and the top rate of tax for corporates is slashed to 10%. Rather than be embarrassed about being ‘Singapore on Thames’ – let’s be proud of it!

The Government must think how post Brexit we need to make the best of what we have got. A buoyant economy, does not just benefit the rich. All homes need plumbers, architects, electricians, estate agents, and curtain manufacturers. Slashing stamp duty will get the housing market moving again which will benefit many more than just the rich. Hammond needs to stop pandering to the left-wing bullies and get a grip.

If you would like to find out more contact Caroline on 020 3740 7422 or on caroline@garnhamfos.com and buy her books, ‘When you are Super Rich Who Can you Trust?’ and ‘How to win business from Private Clients’ from her website www.garnhamfos.com or on Amazon.