Are we going to be queuing for an EU passport?

Last week I was invited to Cyprus to visit some clients and catch up with some professionals on the island.

One of my clients, who I will call Ivan, owns a substantial Russian company which specialises in precious stones. He has long taken advantage of the beneficial tax treaty between Russia and Cyprus to extract profits from Russia and then to send them on to the BVI.

Sadly for him both Russia and the BVI were closing in on him and he was concerned. As from January this year, Russia expects every company owned by a Cyprus company to have an office in Cyprus. Ivan has therefore taken space in Limassol, an attractive city on the sea and has mapped out a schedule of visits to coincide with board meeting and annual reports. His company had an apartment in Larnaca, but it was too small for his family.

He was also concerned about the sudden change of direction in the BVI. As a British dependent territory the BVI has to keep a register of wealth owners, their interests and details under the common reporting standard (CRS) which it is under pressure from Britain to make available to the public. It would be bad enough to know that his interests in the BVI would be known to Russia, but for it to be made public was a real worry for him.

Ivan invited me to his office to discuss his options. He confided in me that he had recently remarried and had two daughters under five, but was not seeing them as much as he would like. He was also fearful for their safety. A friend of his who I will call Sasha, had his bank account in Liechtenstein hacked and as a result he and his family were blackmailed; the blackmailer knew all his account details, the names of his family and where his daughters went to school. It was unacceptable to him that his daughters could be at risk from crooks for whom the CRS is a license to print money.

We explored a number of options some of which were very attractive. He was eager to pursue the transfer immediately so that he could sleep at night. 

We then turned to his desire of wanting to spend more time in Cyprus. I suggested that he buy a really nice holiday home in the luxury resort of Paphos which was only 40 minutes from Limassol by car. He could then bring his family with him when he needed to work for the holding company, and spend with them some quality time together.

Cyprus is a destination of choice for 2.5 million tourists every year, who come to enjoy its clear blue waters, ideal climate and sandy beaches. Ivan and I visited some fabulous new residential homes on the seafront which were designed for luxury family life. Ivan was clearly excited.

I pointed out that with a quality home came the added advantage of an EU passport.

This was clearly of interest. As a frequent flyer to European destinations, Ivan was fed up with queuing for immigration and had frequently been caught short by an out of date visa. Cyprus is not only a member of the EU where there is freedom of movement, but has an extensive list of countries which entitle the passport holders visa free travel. Passports would also be available for his wife and two daughters.

The other advantage was that if ever he felt it necessary to leave Russia in a hurry, he had a safe place to which he could retreat where his daughters could enjoy quality education and health care.

As a Citizen of Europe he and his family would also be entitled to a European Health Insurance Card which provides insurance for emergency medical treatment insurance when visiting other participating countries. The look on Ivan’s face said it all, it was just too good to be true.

I said that I could make all the necessary arrangements for him; relocate his wealth and trust from the BVI, introduce him to people for priority property purchases and obtain for him and his family Cyprus passports.

Last week was the first time I had been to Cyprus, but what struck me, in particular, were the people. They were keen to innovate for the benefit of their clients, eager to work with a sense of urgency and exuded a pride in their ability to provide a quality service.

Cyprus was the perfect location for Ivan and his family, and I suspect it could be the perfect location for many others as the world becomes an ever more hostile place for the UHNW families to live.

If you would like to book a meeting with Caroline or one of her colleagues, for estate planning, privacy planning, dispute resolution, matrimonial concerns, offshore trust review or investment strategy, please contact svetlana@garnhamfos.com or call 020 3740 7423.

Defending the indefensible!

Many of you will have heard my defence of the offshore financial centres on the Today programme on Radio 4 on Tuesday. Robert Barrington of Transparency International said, live on air, that my proposition was ‘a good defence of the indefensible’!

Since the abolition of exchange controls in 1979, money can move anywhere in the world. It is hardly surprising therefore that it finds its way to places where it is taxed the least – offshore financial centres – which attract funds to their country by reducing taxation to zero.

Companies with surplus cash and an exposure to risk; health and safety, litigation or natural disaster set up companies in Bermuda for emergencies known as captive insurance, and for the payment of their employees on retirement in Jersey known as pension funds. The UK Government could charge these funds to UK taxation, but does not.

When it comes to private wealth however, the UK government has a different attitude. UK resident and dom UHNW families are charged to tax on all income, gains and capital held in offshore companies and trusts through sophisticated anti avoidance legislation.

This attitude has recently been extended to tax private homes in the UK held by offshore companies.

The Common Reporting Standard is an OECD initiative pioneered by the UK and due to become fully operational in 2017. Through the automatic exchange of information between countries it aims to flush out those people who are evading tax by not declaring income and gains in offshore structures.

This does not mean that all offshore structures to which UK residents can benefit are taxable. The UK offers specific exemptions from tax for offshore trust structures set up by non doms before becoming long term residents in the UK. These are called ‘Excluded Property Settlements’.  Residents of Switzerland who have a forfeit arrangement are not subject to tax on their offshore structures either and residents of Dubai are similarly not taxed on their offshore financial structures.

UHNW people are therefore attracted to live in such places, because their wealth is not being depleted by tax, either during their lifetime or on death.

Other countries in which wealthy individuals live may not have specific exemptions from tax for wealth held in offshore financial structures, but their legislation is not sufficiently sophisticated to charge the income and gains made by these structures to tax. To set up offshore structures by residents of these countries is not evasion of tax – because there is no charging legislation which makes it subject to tax – this was traditionally known as the avoidance of tax – the lack of legislation to tax it.

Lord Clyde summed up the principle behind tax avoidance in the Ayrshire Pullman case when he opined: “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into 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 purpose 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.”

In recent years however, the UK Government has overridden this opinion by introducing the General Anti Abuse Regulations with the glorious sentence ‘Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability’.

The automatic exchange of information under the Common Reporting Standard will catch many wealthy families with offshore structures who are intentionally or otherwise evading tax. If these families have acted on advice and their evasion is unwitting then the professional is likely to be fined or even prosecuted as assisting in the evasion of tax. This will inevitably lead to an explosion of professional negligence cases by families who find they face the harsh and uncompromising steel of HMRC when dealing with suspected evasion.

If you would like to comment or book an appointment with Caroline please contact Svetlana on 020 3740 7423 or email svetlana@garnhamfos.com

Next week I will address non tax reasons and why families set up structures in one offshore jurisdiction rather than another.

What does the Budget mean for the rich?

For all the swipes at the non doms and high end property owners, George Osborne seems to have taken a break and made a few thin concessions.

As from 6th April 2016 capital gains tax will go down from 28% to 20% for higher rate tax payers and from 18% to 10% for basic rate taxpayers.

This is of course welcome – but the extraordinary thing is that from our studies capital gains tax at 28% was the tax that most UHNW individuals did not mind paying. The taxes they really resent are the tax on the remittance basis for the non doms, Stamp Duty Land Tax on the purchase or their homes in the UK and most disliked of all is 40% inheritance tax.

If the government showed just a glimmer of understanding of the Laffer curve, it would understand that to cut capital gains tax – a tax which is of least concern to the wealthy and therefore less likely to try to avoid it will just result in less tax in the Government’s coffers. If, however, they were to reduce the tax rate of what the UHNW individuals most dislike and are at pains to avoid, such as inheritance tax at 40% or stamp duty at 15% they would be more likely to increase the tax take for the Government.

As I have said in previous notes the tax taken on stamp duty for Westminster and Kensington and Chelsea has fallen since 2013 by about one half since the stamp duty went up. How do people avoid this tax? Simple – the market has dried up for residential properties above £4 million. In 2013 the tax take from stamp duty from these boroughs alone accounted for more than the total tax taken from Northern England, Scotland, Northern Ireland and Wales put together. If the Government was really serious about raising money for the Treasury it would do some serious research into what taxes are disliked to the point at which people will change their behaviour to avoid them and which taxes are tolerated. It would then reduce the rates of those which taxpayers want to avoid and up the taxes taxpayers were happy to pay. The Government needs to find the rate at which the maximum return can be made for the Government. Sadly the Government would appear to be keener on clinging on to power than raising revenue.

The other measure we tend to gloss over – but at our peril is the continued drive to crack down on ‘all forms of tax evasion and avoidance, and aggressive tax planning and non-compliance’. The Government press policy statement goes on ‘There should be a level playing field for the majority who pay their tax, and everyone should make their contribution.’

These are sentiments with which everyone can agree. However for those running businesses or who have more money than they need to maintain their lifestyle paying the right amount of tax is not always so straightforward.

The UK has more tax legislation than any other country in the world other than India and every tax payer is expected to know and understand every word. Most professionals do not know every nook and cranny and even if they did may have misinterpreted the legal nature of the facts and come up with the wrong assumptions with the result that the taxpayer does not declare what he should or puts in the wrong amount in his tax return.

To give an example, Roger owns his house in the UK through an offshore company and trust structure. He took advice from Blink and Co in 2014 which said that based on the facts before them the company owned the property as a nominee for the children and therefore the Annual Tax on Enveloped Dwellings did not apply (furthermore Blink and Co advised, the ATED payment in 2013 was incorrect and should be recovered). Furthermore they advised, the property was not a trust asset and therefore not subject to the 10 yearly inheritance tax charges.

Blink and Co relied on the facts provided by Roger, but Roger does not fully understand the legal difference between whether a property is held on trust for the children or for them as a nominee. Blink and Co did not verify the facts with the trustee ABC Trust Co; they simply relied on what Roger told them.

If they had asked ABC and Co to verify the facts, they would have discovered not only that the property was owned by the company beneficially but also that the company was owned as an asset of the trust which was used as security to a bank for borrowings. They would also have discovered that ABC Trust Co was very concerned as to the lack of payment of ATED on the property and were refusing to continue as Trustees unless and until ATED was paid.

It is therefore only a matter of time before HMRC finds out that ATED was not paid for a few years and at that time it is likely that the advice given by Blink and Co based on the facts provided by Roger will become known. With the funding from the Government and a clear endorsement to pursue non tax payers, it is more than likely that Roger will then face a full tax investigation together with fines for assisting to evade tax which will then extend to Blink and Co.

In 2014 when Roger took advice neither he nor Blink and Co thought that their actions were evasion of tax – it would have then been considered tax avoidance – not now.

If you would like to comment on this or book an appointment with Caroline please contact svetlana@garnhamfos.com or phone 020 3740 7423.

Tomorrow's budget

In 1985 I was ill in bed when the Budget was being read in the House of Commons. At the strike of a pen Development Land Tax was abolished – that was my area of expertise. I wondered whether it was worth going into work when better.

There must be many advisers – accountants, private bankers, lawyers, financial planners, estate agents and trustees keen to see what George Osborne will say tomorrow about the taxation of non doms – their clients. He seems hell bent on killing the golden goose; cutting down the tax reliefs which have made the UK such an attractive place to live for non doms.

Given the pace of change, most non doms living in the country, or who have homes in this country are not rushing to unravel their offshore structures. Many are sitting on their hands, even if it means paying more tax. They have not decided how they want to structure their investments or whether to stay or leave. Living in the UK has been so good for so long they are not convinced that they can no longer do whatever they want and not pay tax.  They talk to their friends, neighbours and colleagues – who are also bewildered and waiting.

Their advisers are also waiting; waiting for the small print in the legislation. Will there be an exemption or planning opportunity?

If not then this rich community is still likely still to do nothing until after the referendum on Brexit.

David Cameron and George Osborne may be keen to stamp out the tax advantages for rich non doms – but will this policy be adopted by Boris Johnson and Michael Gove. If Boris and Michael are concerned about the country and serious about reducing our horrific debts, they should consider how best to use our new independence to attract more monies into the country; which must include making the country attractive to wealth creators.

As I wrote in last week’s blog, if following the referendum we see Britain leave the EU, there will be an opportunity to alter our policies to be more in line with Switzerland. If the new Government does so, in such a manner to give the UHNW community confidence and the electorate see the changes as fair we could see monies flooding into the UK; away from Switzerland and offshore tax havens. This will make everyone happy including accountants, lawyers, trustees, estate agents, architects, bankers, wealth managers and all manner or tradesmen shopkeepers and other service providers.

There are good reasons to introduce the changes. As a result of George Osborne’s hike in stamp duty land tax we have seen a dramatic fall in property sales above the £4 million mark and a consequential drop in the tax take in Westminster, Kensington and Chelsea by about one half since 2012/13.

Whatever George says tomorrow in his Budget statement, I doubt whether we will see a return of confidence or a boost to our economy. The next date for optimism will be the referendum. If we are out of the EU, then we will again need to wait to see what policies will be adopted by Boris and Michael.  I for one will be lobbying hard for them to take a leaf out of the Swiss book to attract foreigners to not only come to the UK, but to bring their wealth with them.

Having been an ardent follower and commentator on budgets over many years – I would like to see politicians axe taxes and lower rates. The irony is that the fewer taxes and lower rates we have– the more tax is collected and the more work there is for everyone – apart from a small handful of nerds.

If you have any comments or would like to book an appointment with us, please call 0203 740 7423 or email svetlana@garnhamfos.com

Planning for Brexit

Now that Boris Johnson and Michael Gove have thrown their hats out of the EU ring, maybe we should think of how we could make our country and economy great again.

Switzerland is a safe haven for investors. Lorne Baring of B Capital based in Geneva and London in last weekend’s Spectator said ‘Around 35% of clients are UK based non-doms, so they need to put their money to work in a safe place that’s outside, but not far from Britain, and a place that is in Europe, but not part of the EU. Switzerland fits the bill perfectly.

It also has the ability to attract wealthy individuals to live there and bring with them their wealth for the country to manage.

As a result Switzerland has one of the highest wealth per head.

If Johnson and Gove were to win the referendum, ousted Cameron and Osbourne and had the guts and far sight to do so – they could easily shape the UK along the lines of Switzerland; outside of the EU.

What would I do if asked?

1. Extend the exemptions for remitting monies into the UK tax free, to encourage non doms not only to live here but to bring with them their monies to invest in and with the UK. In this way the country would attract monies out of Switzerland to be invested in the UK for the benefit of the UK economy. 

2. Make the remittance basis of taxation fairer. Currently if Francois who is UK resident but non UK domiciled received an inheritance from his uncle, on which he had earned no interest or made any gain – this money could be remitted into the UK totally tax free, if Francois were eligible for the remittance payment of taxation. This is because only income or gains which are remitted to the UK are taxable – pure capital is not.

Huge amounts of time and money go into people like Francois trying to keeping their capital pure, so that when it is remitted into the UK no tax is payable. Similarly, HMRC spends huge amounts of time and money trying to prove that Francois has in some way got it wrong. If it succeeds in proving Francois has remitted taxable monies he will then have to pay interest and penalties on what he did not declare.

All monies whether capital, income or gains should be subject to income tax  when remitted, with broad exemptions for monies invested in the UK; property, equity, debt or alternative investments. This is fair because it taxes what they spend, but not what they invest, in the UK.

This simple change would cut expenses and make the UK much more attractive for non-doms to live and bring with them their monies

3. Remove the levy on the remittance basis of taxation.

4. Change the excluded property settlement rules for inheritance tax. Currently if a trust is set up offshore and is treated as an ‘excluded property settlement’ all assets treated as non UK situs are outside the scope of inheritance tax. Why not therefore treat such trusts with  trustees and management in the UK resident as if they were offshore. In this way excluded property trusts would be much more transparent to everyone, would create jobs for our trained and skilled trustees and bring more monies into the UK to be managed. The UK invented the trust but we do so little trust work now in the UK. All disputes affecting such trusts should also have access to our UK court system.

5. Introduce an amnesty, for all non doms who bring their excluded property settlements onshore. Most excluded property settlements were set up such a long time ago that not only are records impossible to find, but also the distinction between capital and income has become impossibly blurred. For all excluded property settlements which migrate to the UK there could be an amnesty for any tax liability incurred as a result of inaccuracies in accounting and administration. This would be particularly attractive when the Common Reporting Standard becomes fully operational in 2017 when taxpayers would prefer to locate their wealth to a jurisdiction where the administration and compliance rules are well understood and properly applied.

6. Change the Stamp Duty Land Tax on residential properties to a more modest rate. Currently the rate introduced by George Osborne is at 12% (15% for second homes) which has had a negative impact on the collection of tax. It would appear that the tax take for Westminster, and Kensington and Chelsea, which used to account for more than Scotland, Wales, Northern Ireland and Northern England has since 2013/14 fallen by half. This is a great example of the Laffer curve, which shows that if the rate of tax is put up to a level at which the taxpayer will not pay the collection of tax goes down.

Our country needs to find the rate of stamp duty land tax at which the maximum tax is collected and not just what rate is likely to win the most votes.

If you have any comments please please call on 020 3740 7423 or email svetlana@garnhamfos.com 

If you think any or all of the above could increase your ability to win business in the UK and thereby improve our economy please forward this to your MP or to any influential politician, journalist or friend so that we can start to formulate a strategy post Brexit.