New trend for single family offices

Twenty-three single family offices with a combined net wealth of $20 billion came together for a BConnectClub dinner at L’Oscar on February 6th to listen to three investment presentations.

Amongst the investors was my client, Jacob (not his real name).

Jacob sold his company in 2015, and the first thing he did, as I say in my book ‘When you are Super Rich who can you Trust?’ was to set out for himself goals for what he wanted to do with his new found wealth.

He wanted to invest half his liquid wealth in growing tech companies and the remaining half he wanted managed by professional investment managers. With regard to his family, he wanted his children and grandchildren to have a decent education, a home and a fulfilling career, but he did not want to spoil them financially - and he wanted a boat.

In 2018 I set up for him a Special Purpose Trustee (SPT) and embodied his goals and strategy into a binding family constitution. We also set up for him a family office to administer his tech investments and to keep his investment managers on their toes. They were expected to prepare investment reports on a six-monthly basis which would be reviewed by the executive board of his SPT.

‘I am not sure the board of my SPT are being critical of my single family office executives or the investment managers. None of us are investment specialists. They all seem too cosy; they get paid a lot for pitiful returns. Is this the best they can do, or should I expect more?’

I asked Jacob how he had picked his tech investments, single family office executives and the investment managers and why had he kept them.

‘I suppose I hand picked my single family executives on shared interests; tennis, rugby and the opera, and a good cv, and they picked the investment managers. I know what to look for in tech companies so I tend to pick which projects to invest in. I like to keep an eye on the tech projects, but I am not sure that my single family office executives or investment managers are any good, and I don’t understand their reports’

‘Why not explore with the executive board of your SPT at your next meeting appointing an independent investment performance analyst to review the performance of your single family office, each investment manager and your non-liquid projects – an independent asset audit?’

‘For example; investment manager A may be producing a better return than investment manager B, but he may be taking a higher risk or paying dividends out of long term borrowings. The performance of investment manager B, may be taking less risk, but is invested in sustainable companies.’

Jacob looked puzzled ‘So we appoint an investment performance analyst to teach us what to look for in our single family office executives and investment managers?’

I agreed. By carrying out an independent investment performance review, he and the board would learn more about the ‘art’ of investment management and what to look for. The board would then be much better informed as to what it wanted and could then analyse the reports prepared for it more critically.

With regard to finding a new investment manager or single family office executive, I told Jacob they could find private client professionals through the BConnectClub.

Each private client professional has a network of professionals who have clients to whom they refer business – however, referring a client to someone in your network can be a bit ‘hit and miss’ and a reliable network takes years to develop.

With digital technology pioneered by BConnectClub, this process can be sped up and made much easier and more efficient.

Every adviser wanting to win new business, whether from Club members or through its network, is asked to fill out a questionnaire; what services do you provide, what type of clients do you have and what are your interests. These answers are then matched to the questionnaires of other professionals. Each professional is then ranked by his or her peers according to ‘likes’.

This process of ranking professional advisers, in a particular sector, gives a fairly accurate assessment of how the industry views each professional. From this a short list can be identified and the executive board of the SPT can interview each of them against an objective investment strategy.

To further speed up the process BConnectClub not only provides deal dinners for Club members like Jacob, but it also hosts B2B networking events for private client professionals. At each event they learn what others do for their clients in a series of case studies, and are given a short list of five other professionals who are at the event and with whom they may like to refer business.

This strategy is not new, it is set out in my book, ‘Uncovering secrets; How to win business from Private Clients’

If you would like to find out more about GFOS or to buy my books, ‘When you are Super Rich, who can you Trust?’ or ‘Uncovering Secrets; How to win business from Private Clients’ call Caroline on 020 3740 7422 or email caroline@garnhamfos.com or you can buy her books on Amazon.

If you would like to be a part of BConnectClub, call Barbara on 07970 000020 or email on her on barbara@bconnectclub.com.

Omissions can be expensive

Our property expert recommended me to a client recently who had inadvertently got caught up in a wasteful and unnecessary dispute.

A professional trustee ABC Fiduciary Limited, (ABC) held a property portfolio for a trust it was administering, worth in excess of £20 millions. The trust had been set up by lawyers in the UK, for the settlor Amin, his wife Sally and their three sons of whom Rauolf was the eldest. Amin lived in the Middle East and worked on an export business with his brother, Saoud.

The first property the trust acquired was a mews house in Mayfair, which the family wanted to use, from time to time, when they visited London, which was once or twice a year.

When Raoulf, turned twelve Amin and Sally decided to send him to school in the UK, and given that the family would be spending more time here, decided the mews house would be too small.

The Trustees of Amin’s trust bought a more substantial property in Mayfair for the family as well as Raoulf’s friends, some of whom would be staying in the UK over the school vacations.

About this time, Saoud’s son, Maan, Raoulf’s cousin, finished his education and was looking for a job in London. He did not have anywhere to live so Amin agreed with Saoud, that Maan could live in their mews house, since Amin and his family now had somewhere else to stay. The Trustees kept a minute of their decision.

Time went on, and Saoud and Amin fell out, Amin took over the Western side of their business and Saoud the East. In due course, their grievances grew into a serious dispute and the families stopped speaking with each other, but Maan and his occupation of the mews house was overlooked.

In due course, Raoulf finished his education and went to university in Durham, where he did very well. After university, he was offered a training contract with a US law firm in London. But by now his younger brothers were at university and school in the UK, and Raoulf found their home too crowded and noisy to live in and asked his parents for a place of his own.

It was at this time, that Amin remembered that Maan was living in their mews house and asked the trustees to obtain vacant possession so that Raoulf could move in.

Maan had by now been living in the mews house for fifteen years completely free of charge, apart from paying the bills and outgoings which he had in his name. He had no intention of moving out. He spent most of his time in Mayfair, ‘doing deals’ which rarely came to anything, but that did not stop him living a lavish lifestyle with expensive holidays and habits.

Amin took legal advice, and was told that in the absence of any License Agreement or correspondence stating that his occupation was unwelcome he had obtained squatters rights of ownership and could apply to have the mews property registered in his name. ABC Fiduciary was informed of the application, as the registered owner.

It instructed solicitors, who advised ABC Fiduciary to object to the application which it did, it then started legal action to get Raoulf removed from the property which was not easy.

Raoulf was adamant that the mews property was his, and would not give up without a court order. Years of expensive legal wrangling ensued and finally both parties had to appear before the Land Tribunal, each represented by a qualified and expensive barrister.

The Judge in his summing up was critical of ABC  for not taking its responsibilities as a property owner and trustee with due care and attention. He specifically pointed out that Raoulf, at no time was asked to sign a License Agreement and not once had ABC inspected the property to see who was living there or how well it was being maintained.

However, despite being critical of ABC, Raoulf was ordered to vacate the property.

By the time he moved, out the total cost in legal fees payable out of the trust fund was in excess of £500,000.

ABC was anxious to avoid Amin suing it, given the harsh criticism of the Judge, but Amin was keen to give it a bloody nose. Our property expert suggested Amin see me.

My advice was that given the wide non-interference and indemnity clauses it was probably futile for Amin to sue ABC, but that he should replace ABC with a Special Purpose Trustee. We could then remove the non-interference clauses and replace them with positive obligations on the Trustee to interfere in the inspection and legal audit of the trust properties (and other trust assets) to avoid this unnecessary and costly omission occurring again.

GFOS was able to introduce Amin to our team of investment performance analysts including our property expert, bankers, dispute resolution specialists, investment managers and fiduciaries who are skilled and able to carry out an independent report as to whether Amin’s trust assets or trustees were doing what they should to maintain and preserve the value of his trust fund.

If you would like to find out more about our team and what they can do to ensure you and your trustees avoid expensive disputes and diminution of value, call GFOS on 020 3740 7422 or drop us an email at caroline@garnhamfos.com.

You can also buy Caroline’s book ‘When you are super rich who can you trust?’ or ‘Uncovering Secrets; How to win business from Private Clients’ direct from ww.garnhamfos.com or direct from Amazon.

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’