20:20 Vision

One of my clients Khalid, (not his real name) has been supporting a geek wizard who has developed new technology which could revolutionise the storage of energy (business details are fictional) and is now looking for investors to take it to the next stage.



Khalid phoned to ask what he should do given that the projection forecasts and the favourable response from prospective investors meant that the business was likely to have a billion dollar turn over within the next five years.


Where should he start?


Before take-off on a plane, the steward’s safety speech says, in the event of an emergency fit your own oxygen mask, before assisting anyone else. The same is true in becoming a billionaire – which is what I say in my book ‘When you are Super Rich, Who can you Trust?’


Look after your own interests first, before addressing the concerns of others.


Khalid is not primarily concerned about tax mitigation, he does not pay tax where he lives.


However, he is very concerned about keeping control of the decision making in his new business and to protect his shares from opportunistic creditors and greedy family members, such as estranged spouses, step children and current girlfriends. His close advisers he wants on his executive board, eldest son and right-hand man.


Like all billionaires I have worked each has a trusted ‘homme d’affaires’, chancellor, or right-hand man/woman who is usually professionally qualified; banker, lawyer or accountant. This person keeps the billionaire and the business up to date with regulatory requirements, business administration and follow up, once the business takes off. Without such a person, the business will inevitably fail to reach its potential.


Khalid is lucky, he has worked with an experienced banker, Matthew, over many years, who is keen to work with Khalid and is ideally qualified to support him. I suggested he start working with him right away.


Khalid already has a trust, which is administered by a professional trustee, who he has not seen since he set it up eight years ago. I suggested we set up for Khalid a special purpose trustee which could be appointed as trustee of his trust in place of his existing trustee. Matthew could then be appointed onto the executive board with his eldest son, Matthew would then be in pole position to assist Khalid and his family.


Khalid did not want a company to be his special purpose trustee, because he did not want a professional own the shares of his trustee, having a company to act as a trustee was in any event now out of date, he needed a vehicle much more tailored to what he wanted and current circumstances.


With Khalid’s concerns addressed we now needed to turn to our attention to the needs and concerns of the other shareholders and potential investors.


Although, Khalid does not live in a high tax jurisdiction, having shares in a company registered and resident in a high tax jurisdiction may not be in either his best interests or in the best interests of his fellow shareholders such as Mohammed (Mo) or future investors.


Mo has been a UK resident for three years, but is a non-UK domiciled person (he was not born or brought up in the UK). Khalid set up his company as a UK resident PLC, because he thought it would attract investors, but having shares in a UK company has significant tax implications for all shareholders including Khalid.


Khalid, Mo and any future investors in a UK company will be subject to UK income tax and UK inheritance tax. In addition, Mo, who is UK resident will also be subject to UK capital gains tax on any ‘disposal’. These taxes can be avoided, legitimately and openly, if instead of owning shares in a UK registered company they owned shares in a non-UK registered and resident company which owned the UK company.


Ideally, the UK company should be owned by a Guernsey/Jersey holding company in which the existing shareholders and potential investors would have shares in exchange for their shares in the UK company.


Assuming there is a commercial advantage in raising finance for a non-UK holding company owning the UK company, the shareholders could make an application (through a leading firm of UK accountants) to HMRC for a ‘share for share exchange’.


Mo, for example by exchanging his shares in a UK company for shares in a non-UK company could then ‘settle’ these shares in trust and appoint a special purpose trustee on which he could appoint his family and advisers as the executive board to take all the decisions. All future benefits such as income could be free of income tax, capital gains free of capital gains tax and gifts or bequests free of inheritance tax, with full disclosure to the UK HMRC. In addition, he would benefit from all the advantages Khalid wants; protection from creditors, smooth succession and a binding family constitution.


If, you would like to find out more or you would like to book a meeting with Caroline or one of her team to discuss, please phone 020 3740 7422 or write to caroline@garnhamfos.com. You can also buy Caroline’s book ‘When you are Super Rich, Who do you Trust?’ from her website www.garnhamfos.com or buy direct from Amazon.


Get ahead of the game.

My client, Mo came to England fifteen years ago, from the Middle East. He built a successful food importing business from his home country for which he wanted protection from opportunistic creditors and greedy aunts and uncles.


He was advised to set up a trust and holding company in Guernsey to own his operating company and in due course his trustees formed other companies to hold his surplus cash and other complementary operating companies. It is super successful but has also become unwieldy.


Mo came to see me, he wanted to streamline his operation but was also concerned about the substance requirements legislation to be introduced in Guernsey in 2019. Was there anything he could or should do now?


Substance requirements in Guernsey, like most other offshore jurisdictions, have arisen out of research carried out by the OECD in 2015 into profit shifting by companies such as Google, Apple and Microsoft; Base Erosion and Profit Shifting (BEPS). These multinational companies position their IP in a low tax jurisdiction such as Ireland (headline tax rate 12.5% - the number one BEPS hub in the world) to which operations in high tax jurisdictions, such as the US, pay royalties. The royalties reduce the profits in the high tax jurisdiction and increase the profits in the low tax jurisdiction mitigating the overall tax payable.


Clearly, Mo did not set up his trust and holding structure in Guernsey to create a tax deduction in a high tax jurisdiction, he set it up for other reasons. At first blush, his structure is outside the mischief of this legislation.


However, the legislation extends to investment holding companies and so although his operating companies maybe outside the mischief of the law, his investment holding companies could be caught by this legislation.


Mo is lucky, the trust company which administers his trust has anticipated the way the global tax authorities are moving and has created opportunities for him and his advisers to do business in Guernsey, with meeting rooms and working hubs.


However, I told Mo, it is not just a matter of spending more time and doing more work in Guernsey, his structure and the wording of his trusts should also be amended to reflect substance in Guernsey.


The structure he set up fifteen years ago provides for professional trustees to act as both administrators and decision makers, with powers reserved to a Protector to remove the trustees as circumstances require. In addition, he has a detailed Family Constitution which has evolved out of a simple letter of wishes, as his children grew into adults, but is not binding.


His structure is typical of trusts/companies set up fifteen years ago, but times have changed. We now have greater transparency and the automatic exchange of information. His structure is in need of ‘modernisation’.


First, he should de-couple the decision making from the trust administration by setting up a special purpose trustee (SPT), but not a private trustee company. This SPT needs to have incorporated within it, good governance provisions and to make his family constitution binding.


His family and its advisers then need to be appointed as the executive board. This will take the decisions as trustee and as shareholder of the operating companies in Guernsey. Of course, Mo wants his SPT to continue to use the services of his trustees, because they are good, under contract with his SPT.


Second, his Protector needs to remove the non-interference clauses. Once an SPT is appointed as trustee, his professional trustees will no longer have a fiduciary duty which de-risks their business, so these clauses can and should be removed and instead place a positive obligation on his SPT to interfere with the active and passive companies, which is in line with the trustee’s primary duty to act as a ‘prudent man of business’ in making decisions.


To assist Mo GFOS has put together a team of investment performance analysts to carry out independent asset audits on both his active operating and passive investment holding companies. The team produce for the executive board of Mo’s SPT reports on the Return on Investment (ROI) of each company which include whether the fees charged by the managers justify the return and risk taken. With these reports, the executive board will be well equipped to decide how best to consolidate his structure and get a much-improved overall ROI.


I pointed out to Mo, that the costs of operating this structure in Guernsey would be more expensive and would involve more time, but the investment performance recommendations by our team of investment performance analysts would more than compensate for any additional cost. Mo was thrilled.


‘I have always wanted protection of my trust assets, but not at the expense of control. I now have both, and can stop worrying, knowing that I have got the right people doing what I want them to do’


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


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

This will hurt

Every year just before Christmas, 20 or so former Simmons partners meet at Tate Britain for a boozy lunch. Many of my former business colleagues, I do not see from year to year, and it is fascinating to watch what they get up to; some retire, some start their own businesses and others ‘give back’.


Edward Troup, now Sir Edward Troup was appointed Executive Chair and Permanent Secretary to HMRC in April 2016, for which he was knighted in the 2018 new year’s honours list. He was the former head of the firm’s tax department and the most brilliant brain I have ever encountered.


He knows his tax and is highly regarded. In 2000, he advised on the management buyout of part of the hedge fund Man Group commenting that ‘achieving a tax efficient structure in the context of a buyout involving businesses and shareholders round the world posed some interesting challenges’. The new business owners of the company ended up holding their shares through a trust company in Jersey.


Troup knows that without specific legislation tax cannot be raised. He is on record as saying


‘Tax law does not codify some Platonic set of tax raising principles. Taxation is legalised extortion and is valid only to the extent of the law’ – a point of with which I concur.


During Troup’s time at HMRC, revenue increased for seven consecutive years, and in 2015/16 it raised a whopping £574.9 billion up by £38.1 billion on the previous year. In the annual report for 2015/16 it said ‘£28.9 billions came from compliance yield which would have otherwise been lost to the UK through fraud, tax avoidance and evasion. We have tightened our grip on those who deliberately cheat the system and continue to pursue those who refuse to pay what they owe.’


But the question now is, has HMRC gone too far?


The House of Lords Economic Affairs Committee, EAC, published its findings in December 2018, and thinks so!


A ‘careful balance must be struck between clamping down and treating taxpayers’ fairly. Our evidence has convinced us that this balance has tipped too far in favour of HMRC and against the fundamental protections every taxpayer expects.’


In 2000 some employers set up Employee Benefits Trusts for their employees. They paid their employee wages into an offshore trust which then loaned the income on a 5 or 10 year basis to their employees, in the knowledge that this loan would be rolled over and no tax paid.


This arrangement was considered effective in avoiding tax. In fact, I was asked to advise on it many years ago. In my opinion, the arrangement was legally sound, but I could not recommend it because once in, it would be impossible to get out, if the law or the attitude of HMRC subsequently changed, without a huge tax bill. This would now appear to have been good advice. 


In 2010 HMRC warned that such arrangements were unacceptable, and that those who used such an arrangement had to repay the loan, pay the tax or face fines.


A Loan Charge Action Group was formed which represented 50,000 affected contractors. It declared that many employees were in now in danger of losing their homes or made bankrupt through no fault of their own.


These employees were merely complying with what they had been told by their employers was lawful and for their benefit. They now faced huge tax bills, which they were unable to pay. The EAC decided that it was wrong for HMRC to treat these people in the same manner as those who deliberately went out of their way to avoid/evade tax.


The EAC may have sympathy for the ‘man in the street’ who unwittingly gets caught up in tax avoidance, but it would not be sympathetic if the victims were multi-millionaire settlors of their own offshore trust from which they had saved millions of pounds in tax.


It is clear from what has already been published that the information to be received by HMRC this year from offshore financial institutions under the Common Reporting Standard once analysed will be used to attack settlors of offshore trusts. The first such attacks are expected in about six months.


HMRC has said that it will first go for well-known names with significant assets in trust. It has been advised to attack structures which have Persons of Significant Influence on the basis of sham. It will then look very closely for clauses in the Trust Deed once provided absolving the Trustee from any form of liability and duty to interfere. This it will take as further evidence that the Trust was nothing more than a nominee arrangement and tax the settlor as if no trust had been set up together with 200% penalties.


If this line is pursued by HMRC, it is then debatable whether the trustee can rely on its indemnity clauses in the Trust Deed, and could well get sued by its client, with little protection.


For those professional fiduciaries, who are alive to the dangers, there are plenty of things which can be done to minimize their exposure, but they must be pursued in a timely manner.  If not, and HMRC starts an investigation, it will be too late to do anything other than wait, worry and watch the litigators get rich.



If you would like to discuss what can be done to protect and control assets in trust and to reduce the risks posed by HMRC or any other tax authority call Caroline on 020 3740 7422 or email on caroline@garnhamfos.com


You can also buy her books ‘When you are Super Rich who can you Trust?’ and ‘Uncovering Secrets; How to Win Business from Private Clients’

Brexit and Oyster Sauce

It is staggering that David Cameron asked the British people to determine, by ‘simply majority’, whether or not to leave the EU. There was little notice, precious little information made available, and no let-out clause as to what to do should the terms of the exit agreement be disastrous.


I have spent over 30 years working with families to protect their family assets from disputes, whether from within the family or from third parties. The secret to success has little to do with the terms of the family constitution or the quality of its professional trustees; it is simply a matter of good family governance supported by a robust structure.


I coined the term Family Governance in 2001, more than 18 years ago, to mean; ‘the facilitation of effective, entrepreneurial and prudent management of family wealth to deliver its preservation for future generations.’


Family Governance invariably includes

            An executive board,

            A non-executive board, and

            A binding family memorandum or constitution.


Within the documentation, which is bespoke for each client, needs to be terms as to when a decision is effective; how much notice is needed, the information made available and whether the vote is by simple majority (50%) or by special resolution (75%).


Anything as fundamental as leaving a trading club would need plenty of notice, significant information, meaningful discussion and a special resolution. None of this happened within Family Britain and look what a mess we are in now!


The history of the Lee Kum Kee family, is a case in point.


In 1888, Lee Kum Sheung started LKK in Guangdong, China, as an oyster bar, which moved to Macau in 1902 and finally to Hong Kong in 1932. As part of the business it developed its, now famous, oyster sauces which are known worldwide.


But growth was not always straightforward.


In 1972, Man Tat, who now runs the company, proposed the addition of products, such as soy and hoisin sauce to expand the business. His father supported him, but his uncles did not. Unable to resolve the dispute, Man Tat had no option, but to buy out the uncles; an expensive and damaging resolution to their dispute.


In 1986, Man Tat wanted to increase factory production, but his younger brother refused. Again, without good governance in place to determine how to resolve the dispute, Man Tat was obliged to buy out his younger brother, another expensive and damaging resolution to their dispute.


Man Tat, now, had sole ownership of the company and wanted to expand the management to include his five children.


In 1999, his youngest son Sammy Lee went against his father. He wanted to expand the business to include an herbal health care product division, but after years of trying, Man Tat wanted to sell it. Sammy refused.


At the turn of the millennium, Sammy decided to suggest a compromise – a five-year grace period to allow his health care unit to become profitable. His father agreed and within this period his business became successful.


Today, the LKK Group is the largest oyster sauce maker in the world, and on track to become the largest soy sauce maker with £3 billion in annual profits. The health care unit however, generates double this revenue and profits.


How did this come about? In 2002, Sammy and his siblings proposed the creation of a family council and an executive board. The details of which I am not privy, other than what is publicly available.


The family council, is composed of Man Tat and his wife, their four sons and their one daughter. The council handles the family affairs, such as distribution and succession. The board, is composed of Man Tat and his sons, and this handles the business and its direction, growth and expansion.


Good family governance documentation needs to lean heavily on good corporate governance and provide ways to circumvent the mischief which this area of the law has uncovered. For example; I have seen directors of a family business drive down the business until it was virtually worthless, then buy the shares of their siblings who were not in the business, at a knock down price, to then drive up the business to its former profitability.


At the heart of good governance is the supply of adequate information and time before a decision needs to be taken. Then there needs to be enough people at the meeting for there to be a proper discussion at which all the issues of concern need to be raised and discussed.


Good governance provisions need to be able to settle disputes without recourse to lawyer’s opinions, mediation or litigation, although these must not be ruled out if there is a stalemate.


At GFOS we are experienced family governance experts as well as specialists in creating the structures to support it. We use trusts and foundations as necessary to achieve the founder’s or family’s requirements. We aim to protect the family and its assets by providing means to resolve disputes, stamp out indecision, and thwart opportunistic creditors, divorcing spouses and many other dangers and difficulties.


If you would like further information as to what GFOS does for its clients please visit www.garnhamfos.com, or phone for an appointment with Caroline on 020 3740 7422 or on 07979 188 288, or email on caroline@garnhamfos.com.


Please also go to our website if you would like to buy Caroline’s books; ‘When  you are Super Rich who do you Trust?’  or ‘Uncovering secrets; How to win business from Private Clients’ or  you can buy direct from Amazon.

2019 - not happy for some

Happy new year to all readers of my Note – may it be the best year ever.


Sadly, it won’t be happy for Ramses Owens and Dirk Brauer, two senior employees of Panamanian headquartered law firm Mossack Fonseca who have been charged with a string of offences. The Department of Justice (DOJ) alleges that both employees were connected in a decades long criminal scheme’ to conspire to evade US taxes on behalf of their clients.


The DOJ goes on ‘The charges announced today demonstrate our commitment to prosecute professionals who facilitate financial crime across international borders and the cheats who utilize their services’ said Assistant Attorney General Brian A. Benezkowski.


But, before we shrug our shoulders and say ‘tut, tut’ let’s pause a moment and compare this with the claim against Credit Suisse in May 2014 for a similar charge.


Credit Suisse, it was claimed was guilty of criminal conspiracy to evade US taxes. It was fined a staggering $2.6 billions, roughly equivalent to the net profit for 2013. But, it was well publicized, that the deal with Credit Suisse was part of a plea bargain – with the Department of Justice – and was ‘structured in such a way as to allow the bank to ‘continue operating’’.


It has been said that the Zurich based bank was ‘on the regulator’s list of 29 global institutions which was considered to be systemically important and whose failure would be considered a threat to the entire financial system!’


In short, the DOJ had no choice, but to allow the bank to continue operating, and Credit Suisse had no choice, but to put in a plea of guilty.  For many, what it was guilty of, was ‘to recruit US clients to open Swiss accounts to help them conceal monies from the IRS’. This may not have been something which IRS liked, but at the time opening a Swiss bank account was legal and part of the bread and butter business of global international private banks.


The IRS was transparent in its intention behind its harsh treatment of Credit Suisse. It wanted to ‘name and shame’, it wanted the fine and the guilty plea bargain to be a ‘warning to foreign banks believed to be helping US taxpayers conceal assets’ from the IRS. AND IT WORKED.


In charging the two senior employees of Mossack Fonseca are we seeing a re-run of the claims in 2014? But rather than focussing on international private banks, is the IRS now, focussed on vulnerable employees in professional firms, starting with lawyers and accountants?


The Department of Justice alleges that the employees of Mossack Fonseca ‘defrauded the US Government through a large scale, intercontinental money laundering and wire fraud scheme’ it goes on to say ‘For decades, the … employees.. of global law firm Mossack Fonseca allegedly shuffled millions of dollars through offshore accounts and created shell companies to hide fortunes’.


These prosecutions are yet again expressed to be ‘a warning’ to all professionals, that what was considered acceptable yesterday, needs to be carefully reviewed today.


Trusts are not illegal, neither is owning assets through an offshore company, provided all taxes which are due are properly and correctly declared and paid.


The problems start, when the client has been advised that by setting up a trust or company offshore he or she has put in place a structure which is perfectly legal to mitigate taxation. The tax authorities however, may take the opposite view, that what is being done is a conspiracy to defraud taxation. If proved successful this is tax evasion, which carries criminal sanctions – and a possible jail sentence.


Most Swiss private banks now refuse to have clients with any US connections, and refuse to recommend any of their clients to any professional which could advise them how to mitigate their tax bill in the US – or elsewhere. If the allegations against the two senior employees of Mossack Fonseca succeed maybe professional service providers will similarly refuse to act for US citizens for fear of imprisonment!


The US may have been the first to initiate the automatic exchange of information under FATCA, but every time it is proved successful the OECD and the rest of the world follow. Many were of the opinion that the automatic exchange of information under FATCA was a breach of the human right to privacy, but as financial institutions across the globe invested huge sums to provide the IRS with the information it requested, it was seen as a success and the OECD took no time to follow suit.


So, what should we do?


Now is not the time to sit back and watch the hurricane gather speed, we each need to do what we can to put one’s house in order.


But insisting nothing is wrong, is simply not good enough. What is needed is a fundamental change of view; back to basics and embrace the fact that changing times require a change of approach.


There is a silver lining; many have already adopted it, but others simply refuse to believe anything can or need be done to avert the damage. It may blow over, but it is unlikely; so it is better to be safe now, than sorry later.


If you would like to find out more please write to me at caroline@garnhamfos.com or call on 020 3740 7422 for an appointment.


Please also contact the above or go to www.garnhamfos.com or Amazon to buy both or either of my books ‘When you are Super Rich who can you Trust?’ and ‘Uncovering Secrets, how to Win business from Private Clients’