Beggars belief

A few weeks ago, I attended a panel session on how to pick a trustee. There were a range of leading experts on the podium supporting a variety of opinions. Luckily, I was not among them, because one comment from a leading lawyer in a well-known offshore financial centre made my blood boil!

‘Let’s face it,’ he said, ‘we make a lot more money out of our clients if they use professional trustees’.

How true, but how wrong.

To explain I will tell you the story of Frank (name and details have been changed to protect the family).

Frank set up a trust and transferred to his trustees his pharmaceutical business. In due course, he died and two of his three sons, became directors and turned it from a successful business to a well-known brand. The trust was administered in Hong Kong, by professional trustees.

The third of Frank’s sons, Martin, was not involved with the business. He married a beautiful and immensely rich woman, Margy. Martin and Margy lived a glamorous lifestyle in Monaco – that is, until Margy took up tennis.

With the children grown up, while Martin ran their family office, Margy played tennis and, fell in love with her tennis partner, a handsome widower. When, this came to light Martin was furious. In due course, Margy and Martin separated, and Margy sacked Martin from running her family office and chucked him out of their sumptuous apartment.

Angry and bitter, Martin turned to his brothers. They were each living comfortable lifestyles in houses with swimming pools and fancy cars, whereas he saw himself as having been badly treated and impoverished.

Martin angrily approached the trustee, to insist that as shareholder, it had a duty to all three siblings and should therefore dispute the directors’ remuneration and insist the company pay a better dividend to the trust.

On receipt of Martin’s demands the professional trustee panicked. Martin could sue it, for dereliction of its fiduciary duty of care to look after the interests of all three beneficiaries. It sought a legal opinion. However, the lawyers were unable to opine, without sight of the company accounts going back five years, a thorough research of the pharmaceutical sector and a review of comparable businesses.

This initial work took two months and the legal bill for the trust was $150,000. However, the report failed to make any recommendations as to how the dispute could be resolved, it was a statement of the facts and a list of what other directors in similar businesses were earning – some higher some lower.  

Martin’s reaction was that the report was evidence of fraud with the collusion of the Trustee. His brothers, he was convinced, were using their powers as Directors, to ‘milk’ the company, depriving the shareholder and him of a dividend.

On the other hand, his brothers saw the report as justification for their hard work and success, to which Martin had not contributed.

In month three, both Martin and his brothers had engaged their own lawyers, which delivered to the Trustee their legal bills, of $100,000 each!

Over the next three years, the dispute cost the Trust a fortune. But it was also a distraction. Martin’s brothers were unable to concentrate on running the business and the profits fell by 30%.

Martin saw the fall in profits, as further proof that his brothers were deliberately running down the business to reduce its value, to pay him less!

With falling profits however, Martin’s brothers were reluctant to saddle the company with debt. However, they also realized that until the dispute was resolved they could not focus on the business to bring its profits back up. Each side became more and more bitter and the arguments became increasingly personal.

After three years, and much distress and anger, the brothers finally decided to mediate. By this stage Martin and his brothers could not bear to be in the same room. Each arrived at the hotel where the mediation was to be held, by separate entrances and occupied separate rooms on separate floors.

The mediation lasted three days, but eventually both sides were sufficiently worn down to agree a settlement – which neither side was happy with. The final figure paid to Martin could have been more if they had mediated from the start and not incurred three years of professional fees.

Sadly, Martin’s situation is not unusual. As I say in my book, ‘When you are Super Rich who can you Trust?’ no-one can avoid concerns and miss-understandings from arising, but how they are resolved can make the difference between an irritating concern, or the creation of a catastrophe.

If you would like to find out how to structure your trust to deal with disputes, should they ever rise, please contact me on 020 3740 7422, or e mail me on caroline@garnhamfos.com Furthermore, if you would like to buy my books ‘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 buy them direct from Amazon.

The Vultures are Circling

In the Labour manifesto, two years ago, McDonnell together with Corbyn, proposed to introduce a 50% top rate of income tax; up 5%, on net income above £123,000 and 40% on net income above £80,000, to howls of protest.

Only a few years later, now, Hammond and Gove have come around to the Labour way of thinking. Michael Gove talks of British capitalism being ‘rigged’ in favour of elites, and Philip Hammond, is on record as saying that the economy needs ‘higher taxes to provide services to a greying, weakening population’.

So, it looks we are set for higher tax rates whatever the colour in Government next – what does it matter?

From 1932 to 1980- the average top rate of tax was 81%. Under Ted Heath’s government in the 1970’s, it was 75% with a 15% surcharge. Even under Margaret Thatcher it was a 60% top rate, until the last two years of her reign. So why is there such alarm now?

Because we are not used to anything other than low tax rates!

But do you really think, before Lady Thatcher slashed the top rate of tax, high tax payers, simply sat back quietly and paid it?  Remember this was not a time at which you could squirrel your money outside the UK. Until 1979, exchange controls were in place – so what you made in the UK, stayed in the UK.

Many wealthy families during this time, left the UK, to live in Switzerland or Monaco. With the prospect of higher rates of taxation, we are seeing the same thing again. An unprecedented number of families are looking for a bolt hole abroad in case tax rates rise again too high. Monaco and Switzerland are again the favourites, but with the exponential explosion of communication and travel since the 1970s, many are looking further afield; Dubai, Singapore, Bahamas or wherever convenient for family and business reasons

Those who could not move looked for other ways.

Post 1979, non- doms set up trusts offshore (not least as a result of my articles in the weekend FT on the benefits of offshore tax planning for non-doms). These trusts, however, are now vulnerable to attack since the introduction of the automatic exchange of information and the requirement to correct.

Of the 92,000 non doms currently living in this country most have set up offshore structures decades ago with little supervision or monitoring, since. They were out of sight and mind, but with pressure now mounting on offshore financial institutions– these structures are under scrutiny and should be reviewed by an independent professional before HMRC gets a look in.

All trusts now need to be independently reviewed to ensure they are as robust and tax efficient as they could be.

But if you are UK dom and do not wish to leave the country, what can you do?  Ask whether you are employed or could be self-employed? The self-employed can make arrangements to pay less tax.

You are employed if you work for one person or company, and that person calls the shots as to what you do, the days you work and the hours. However, if you call the shots and are or could work for several companies or businesses, it may be possible that you could be self-employed.

If so, you should consider setting up a limited company in the UK, to which you subcontract your services – why? Because, companies pay 19% tax, whereas, if you were employed or self-employed in your own name, you would pay a maximum of 45%.

Kate is a business consultant. She used to work for a large agency, until her major client asked her to leave and work for it. Rather than work in-house, she negotiated a free-lance contract which meant she was free to work for other clients as well, which she did.

To begin with Kate earned £320,000 a year. However, she now no-longer receives this income, her company TTC Limited is the recipient, and it pays taxes at only 19% rather than Kate’s top rate of tax at 45%.

In setting up the company, Kate loaned it £600,000, so for the first two years, the company was repaying her loan so she paid no extra personal tax.

Kate’s business requires her to travel abroad on business marketing trips. The travel and accommodation is paid for her by TGC Limited which is deducted against its profits so the expenses are tax free. However, expenses on client entertaining, dinners and drinks, are not deductible, but nevertheless Kate has a company credit card and the company pays the bills.

However, although the expenses are not tax deductible for the company, they are still business expenses, and are not treated as a benefit in kind from the company to Kate. This means that she is not taxed at her tax rate of 45% on the client entertaining expenses incurred by her company TCC Limited.

Because TCC Limited does not get a deduction for entertaining clients, Kate prefers to get to know her clients through client workshops and educational presentations, with drinks and canapes thereafter. The cost of running these workshops and training programs are wholly tax deductible by her company, including the food and drink.

Given the huge discrepancy in tax rates between the corporation tax rate and the higher personal tax rate it is hardly surprising that this form of tax planning has started to attract a lot more interest in recent months.

If you would like to know more about getting a review of your trust offshore or how to plan, using traditional tax planning methods, contact me at caroline@garnhamfos.com or phone on 020 3740 7422 or 07979 188 288. Also, if you would like to buy my book, ‘When you are Super Rich Who can you Trust?’ please buy from Amazon or contact me direct.

Scary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HMRC tools up

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

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

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

So, what’s the problem?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Karen Millen - tough

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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