Extraordinary

When selecting an employee – employers want the right person for the job – they have two or three meetings, ask ‘open’ questions, ask them to complete a psychometric test, and do a background search as to their criminal record and credit worthiness.

However, when selecting an adviser, it seems the importance of rigour goes out of the window.

UHNW families ask a friend for a recommendation! But has the friend had experience of lots of advisers to advice you who is best for you?

Some UHNW families are influenced by awards? But having been given awards and sat on a panel of judges picking top advisers – I can honestly say most are not picked on objective criteria – it is based on who they know and heresay!

In my book ‘When you are Super Rich who can you Trust?’ I give this matter some considerable thought.

When choosing and adviser this is my initial check list

Qualifications;

·      What qualifications does the advisor have and has anyone checked them?

·      Ask for a curriculum vitae and check for oddities in their professional career

·      Take references

Track record

·      Ask for case studies, what have they done for their clients? Do their clients have the same concerns and issues as you?

·      Testimonials: what do their clients say about them?

Do you feel you can trust them?

·      Are they interested in finding out about your goals and assisting you in meeting them?

·      Are they dominating the conversation with their jargon and projections?

·      Are they trying to shoehorn you into what they want to do for you, rather than what you want?

How secure are they?

·      Could a rogue dealer hold the organization and your money to ransom?

·      Have their been any irregularities or warnings? What for?

·      What are the policies and procedures to protect client confidentiality?

How do they pay themselves and reward themselves?

·      In particular you need to know how quickly the client pays for the services. The average lawyer has in excess of 90 lock up days – which is a good indicator of client dissatisfaction

·      Look at their engagement letter, get a second opinion if necessary

Very few advisers are taught how to build trust with clients. Trust can be earned but not by giant bounds – only over many, small steps. Most advisers are not interested in doing the small steps with the client, they just want to get on with what they are good at.

For example; Joshua wants to swap his mansion with his son Martin’s lodge. They are thinking of simply moving homes. If they did so however, they could end up in a tax nightmare.  Capital gains tax relief on future gains could be lost and the extra inheritance tax on Joshua’s death on the mansion could become payable when both taxes could have been easily avoided.

 But, Joshua does not have a trusted relationship with his adviser – Alan. Last time Alan did some work for him, aware that Joshua did not like paying legal fees, he tried to keep the costs down by not keeping Joshua informed as to progress at each step of the way. Naturally enough when the bill arrived at the end of each month Joshua nearly fainted, he had no idea so much work had been done, of which he was totally unaware. This lack of trust also led him to suspect that Alan was ‘padding’ his bill – keeping the clock running as he went to get a coffee or worse, just putting down time, when he was not working on Joshua’s matter.

The last thing Joshua wanted to do was to pick up the phone to Alan to ask him whether he was doing the right thing in swapping homes with Martin. So, Alan did not get further work and Joshua was walking towards a tax nightmare.

Fees are always sensitive with professional advisers. But picking an adviser because they have a low charge out rate does not always mean that the bills end up lower – it depends on the number of hours the job takes.

As I say in my book ‘From my experience it is not always true that you get what you pay for’ In fact in most cases the opposite is true. ‘Certainly, the more reputable the organization the more training the staff are likely to have had’ But training on what? If they are being trained in matters which do not affect you, you are not getting the benefit of their additional knowledge. Many of the large organizations with a good reputation are essentially generalists, so that ‘if you need niche services you may have to go to a specialist boutique to find the relevant expertise’. The larger organization may say it can do the work – but if it has not done this type of work before – it will be very expensive and will not benefit from experience.

Time and again clients place professional knowledge fairly low on the criteria for choosing an adviser. Mistakenly they believe that all advisers have the same level of knowledge. But, it is simply not true – not all advisers are experienced in all areas and even when they do have the knowledge may not have the experience in knowing how at apply the knowledge to the facts of your case.

If you would like to buy ‘When you are Super Rich who can you Trust?’ simply buy from Amazon or from www.garnhamfos.com or if you would like to book a meeting with Caroline simply call on 020 3743 7422.

It isn't fair? Part 3

What message did George Osborne deliver in his 2014 Budget by making changes to Stamp Duty Land Tax?  Screw the rich? Probably not – it was a political measure designed to pull the rug from under the feet of the Labour party which was then proposing a mansion tax on high end properties.

It may have been an astute political move – but it has left a noticeable strain on the high-end residential property market.

In short George Osborne increased stamp duty land tax from a maximum rate of 7% to 15% and in so doing created the worst property market in London for twenty years. Furthermore, the revenue he predicted it would generate, simply has not materialised.

It is not because buyers have found some fancy way to avoid the tax – they have simply stopped buying and selling!   

The rate of tax affects people’s behaviour. This is a fact Laffer understood, but it seems few Chancellors grasp as they make changes to our tax legislation to score political points!

Arthur Laffer was a supply side economist who drew a bell-shaped curve to show the relationship between tax rates and the amount of revenue collected by governments. The higher the tax rate the fewer people engage in the activity from which the tax is generated – in this case buying and selling residential property.

From the increases in revenue these new rates were expected to generate, the actual revenue generated has fallen woefully short, and this is to ignore the wider perspective.

A fall in the buying and selling of expensive residential property impacts on the businesses which feed off a buoyant high-end housing market; estate agents, architects, interior designers and so on. Furthermore, one stated intention was to lower the price of London’s overheated residential market, but this has not materialised to any great extent.

Our government needs to focus on a tax system which fills our capital city with houses and apartments which are full of people who live in them; they will then be spending in our shops, eating in our restaurants, engaging the services of our plumbers, electricians and carpenters.

So, what would I do to achieve this – ignoring any political objective?

Before April 2014, the highest rate of stamp duty land tax was 7% on all the value of a property worth in excess of £2 million. This was called the ‘slab’ system. After, April 2014, the rate of taxation was at 12% but only on the value in excess of £2million and at the lower rates below. So, for a property worth £2 million before April 2014 £100,000 tax was payable, but if it was worth £2 million and one pound, tax was payable at £140,000 (if owned by an individual and not a second home). However, after April 2014 tax was payable at £153,750 whether on a £2 million property or on a property of £2 million and one pound.

George Osborne did well to get rid of the ‘slab’ basis of taxation and lower the rates at the lower end, it removed distortions in the residential property market and has created a buoyant market for the less expensive homes.

However, at the upper end he not only introduced a swingeing high tax rate of 12%, but an increase of 3% on all rates if a residential property was bought through a company or if this was a second home. This puts the top rate of stamp duty land tax to 15%.

The reason for putting up the rate for ownership for a company is because companies do not die – which means no inheritance tax is payable on the death of the owner (in particular if non-UK domiciled).

For second homes, could the reason why George Osborne put up the rate was because he did not want to be seen to be favouring the rich?

Under the current system of stamp duty land tax, however there are many Londoners who now struggle to upgrade for the growing needs of their family or to downsize to provide a first home for their adult kids. This lack of mobility is not fair for those working and living in London. There should be a return to the maximum tax rate of say 7% for UK residents for whom their property is their main or only residence (a term taken from capital gains tax legislation).

Then I would like to see a higher rate for UK residents who want to buy a second home. The rate I would suggest is say 10%.

Finally, I would like to see a third rate of say 12% for all non-UK residents and corporate owners, (other than companies providing buy to let properties which should be charged at the 7% rate).

By lowering the rate at which stamp duty is payable for UK residents, the government would also encourage people who have not been able to sell their high-end properties now to do so. I believe these changes would have a dramatic effect on the demographic in London which could filter through quite quickly.

Ironically, although the stated intention of George Osborne was to lower the prices of London properties for people who work in London and to fill them up with people who wanted to live here, in fact he achieved just the opposite. However, by introducing the above changes, I think we could achieve not only a London full of people who want to live here, a buoyant market both at the high end and low end but also a dramatic increase in revenue!!!

Please let me have your comments.

It isn't fair? Part 2

 Once upon a time the UK was seen as the best place in the world for wealthy families to live. They could come to the UK and not pay any tax, other than what they brought into the UK to live on, and even this could be reduced by some clever tax planning.

However, over the years the special reliefs available to non-dom were seen as unfair and so have been eroded. But has much thought been given to the bigger picture?

Is it not sheer madness to give non-doms tax incentives to come to the UK but, to leave their wealth offshore?

Taxing rich people should be much more than raising revenue or being ‘fair’. It should be about incentivising rich families to live in the UK, invest in the UK, use the UK’s financial centres, create work for people living here and to bring businesses to the UK.

The ‘remittance basis of taxation’ which is at the heart of the exemption of income tax and capital gains tax for non-doms, was not invented by some wizard tax brain, it came about because tax could not be paid on offshore trading income until the monies were received in the UK.

However, in 1914 it was decided that this approach was outdated, and that income should be taxed as it arose, with an exception introduced at committee stage, that this should not apply to people who were UK resident but, non-UK domiciled. The law was further modified to raise taxes in 1940 to pay for the war.

As governments came and went we have seen changes made, but no real thought as to the bigger picture and what we have now is a dog’s breakfast.

A non-dom can come to live in the UK and not pay tax on the income or gains he/she does not bring into the UK such as into a UK bank account. If he or she wants to live for more than seven years of the previous nine and continue not to be taxed on the offshore income and gains, they need to pay a remittance charge for the privilege which is £30,000 per annum. This rises to £60,000 per annum if they continue to live in the UK for twelve out of the previous fourteen years.

Surely this tax arrangement conveys to the world’s wealthiest families ‘come to the UK, leave your money offshore, but do not stay too long!’ Surely, this is back to front? We should be incentivising them to come here, spend in our shops and restaurants, bring their investments and businesses here and to stay as long as possible?

There was some attempt to introduce an investment relief in April 2012 to encourage non-doms to bring their offshore wealth into the UK provided it was invested as loans or shares in a UK trading company.  This was called Business Investment Relief but, was riddled with fiddly reliefs which if you got them wrong would mean paying tax on the income and gain remitted. For example; the money had to be invested within 45 days of coming into the UK and if the investment was sold, the proceeds had to be taken offshore within 45 days or re-invested in this time frame you were taxed. Furthermore, you were not allowed to benefit from the investment!

Since inception this relief has encouraged investment of a mere £1.5 billion, and to my mind has not been a great success; it is too narrow and only applies to those who are still subject to the remittance basis of taxation.

Added to this is the complication introduced by the automatic exchange of information which brings even more madness into the system.

If you are a non-dom, and have left your money offshore, the financial institution in which you have invested your money will disclose to HMRC how much you have offshore and in what it is invested. If, however you had your money onshore the automatic exchange of information or Common Reporting Standard would not apply but, you would then pay tax on all your income and gains. Where is the joined up thinking in this muddle?

I would like to suggest a complete overhaul of the relief and exemptions by introducing the concept of a Ring Fence.

I would like to propose that a non-dom should be able to apply for an exemption from the remittance charge (£30,000/£60,000) if he brings into the UK a ‘ring-fenced’ amount. This would be calculated as being sufficient to compensate HMRC for the loss of the remittance charge. This sum would need to be placed with UK custodians, UK investment managers and UK trustees.  Such sum as the non-dom used for their own benefit would be taxed as income, and to the extent that the amount falls below the required sum, would need to be topped up. This sum could be invested in whatever the non-dom wanted or held in cash and would not be restricted as in the Business Investment Relief provided it was managed and physically present in the UK. Once a non-dom had lived in the UK for more than twelve of the previous fourteen years, the amount to be brought into the UK would need to be increased accordingly.

Furthermore, I suggest that the rules as to residence of a trust are amended so that a UK trust set up with Ring Fenced monies is given the same tax treatment as an offshore trust. The UK invented the trust and yet trusts are largely set up and kept offshore – surely this also is madness. There should be an incentive to encourage UK fiduciary businesses to thrive, not to drive this business offshore.

If you would like to comment please do so, or if you would like to book an appointment or talk to Caroline directly please email  caroline@garnhamfos.com or call 020 3740 7422.

It isn't fair? Part 1

A few weeks ago, I was asked what I would do to change taxation to make it fairer and increase revenue. I have my favourite bug bears which over the next three weeks I will share with you. I will then submit them to Parliament.

My first bug bear is the concept of domicile which is outdated and hard to track.  

Millions of pounds are therefore lost to HMRC which could easily be remedied by making a few tweaks.

‘Domicile’ is nothing to do with ‘residence’ which was overhauled in the Finance Act 2013.

It is now much harder for anyone living in the UK to escape the UK income tax and capital gains tax by moving abroad while keeping a home and children in the UK.

However, if you were to sever all connections with the UK, to become non-UK resident you would then get out of income tax and capital gains tax, you could still be liable for inheritance tax but HMRC may never know!

The population in Britain is around 66 million, the diaspora of British around the world is 140 million. Many of these 140 million will retain a domicile in the UK, and liable to inheritance tax but their estates my slip the UK tax net.

Boris is a British billionaire. He has made a fortune in his petro-chemical business and his shares are now pregnant with capital gain. British politics irritates him and so he has decided to move his business and family to Monacl. However, he wants to continue to hold his British passport in case the politics improves, or he wants to return to the UK for medical treatment. He takes out a Cyprus passport for freedom of movement around Europe.

On leaving the UK, under current rules, he is not obliged to pay capital gains tax on the inherent gain in his petro-chemical business. His plan is to settle in Monaco for a few years sell his shares and pay no capital gains tax.  

Furthermore, on his death, if he has no UK assets over which probate is needed his executors will not need to file in the UK and so he may slip the attention of HMRC and avoid 40% Inheritance Tax.

The concept of domicile is crucial to whether a person, like Boris will be subject to inheritance tax on his death. Boris will be treated as UK domiciled if his father was UK domiciled at the time of his birth and he was born legitimate. Boris’s father will be treated as UK domiciled if at the time of his birth his father treated the UK as his ‘home’ country.

If Boris leaves the UK with the intention of making Monaco his home country, then it could be argued that Monaco has become his new domicile – but if he keeps his UK passport, has he genuinely adopted Monaco as his new domicile?

If the Treasury were to switch the concept of domicile with citizenship, it could then monitor its citizens around the world, and also increase taxation substantially.

If Boris wants to keep his UK passport surely it is fair that he should submit an annual self-assessment tax return to HMRC. HMRC could then easily check on Boris at Customs and Excise when he enters or leaves the UK.

If he was UK resident for a few years after leaving for Monaco and then claims to be non-UK resident is it not fair that at that time, he should be treated as if he had disposed of all his assets, including the shares in his petro-chemical business and pay UK capital gains tax accordingly.

If he wants to keep his UK passport, he should then be obliged to continue to submit a self-assessment tax return. He could renounce his UK passport, but at that time he should pay tax as if he had given away all his assets, at 20%. If he then dies within seven years, the estate will be obliged to pay more.

If on his death if he has not renounced his British citizenship, then his estate should pay tax at the full 40%.

There are currently 28 out of our 93 British Billionaires, one in three, living in tax havens. Not one of them has paid capital gains tax to drop out of the UK tax and none of them who are non-resident but still British is submitting a tax return. Furthermore, none of them is being monitored as to whether they are still alive or dead, and if any of them relinquishes their British passport, they suffer no penalty. Is this fair?

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

Slick Willie

Slick Willie was born on June 30th 1901 in Brooklyn. He had a forty-year criminal career as a bank robber, during which time he stole an estimated $2 million. His name was William Sutton, but was nicknamed Slick Willie, because of his masterful robberies, polite manner and immaculate dressing. He also managed to escape prison three times.

Once interviewed by Mitch Ohnstad he was asked why he robbed banks, his response ‘Because that’s where the money is’.

The same is true of all cash starved governments. They look at the $8.5 trillion sitting in offshore accounts and trusts tantalizingly out of reach of their grasp and long to tax it –their dream is soon to come true – but like Slick Willie the world’s wealthiest are already looking at ways to escape!

The world’s wealthiest became rich because they innovate to make our lives better, create businesses which employ our tax payers and oil the machine of our world economy. Like Slick Willie, some may get caught, but many others will find ways to escape. The OECD has told us how it intends to undermine these offshore structures, so we simply need to be prepared.

However, there are many professionals who delude themselves into thinking, that the OECD simply wants to catch criminals like Slick Willie and confiscate their proceeds of crime.  But, it is clear from what we have seen in the press in the last six months that money is not laundered through offshore financial centres, it is laundered under our very noses, through major banks in high tax paying countries. Criminals look for pockets of lax due diligence and exploit them.

Danske Bank last autumn was embroiled in a money laundering scandal.  The Danish lender’s Estonian branch is suspected of handling up to $230 billions of ‘dodgy’ funds from former Soviet states. This has now led to an investigation of Raiffeisen Bank International after a complaint was filed accusing it of ‘gross negligence or acquiescence’ in connection with suspicious flows of funds from Danske.

Last week, Sweden’s oldest bank Swedbank – the biggest lender in the Baltic got drawn into the mix. It is alleged that about E135 billion flowed from Danske’s Estonian branch through Swedbank’s local operation before entering the Western financial system. The scandal has already claimed the scalp of the Swedbank boss Birgitte Bonnesen. Investigations are now under way in Denmark, Estonia, Britain, France and American banks. It should also be remembered that in 2012 HSBC was fined $1.9 billion for handling Mexican drug money.

So, let’s therefore be very clear, the reason why the OECD and EU put pressure on the offshore financial centres is not because they are laundering money, but because this is where private international wealth goes to avoid tax.   

Until 2018, this money was out of sight and out of mind – but not any-more. The OECD has made it very clear it intends to go for the richest, the most-high profile, and the most prominent, and they are under orders to name and shame. It will argue that structures are nominee arrangements as evidenced, not by the pro-active and careful management of the trust by the professional trustees, but because of the existence of persons of significant influence, indemnity clauses, lack of substance and non-interference clauses.

The OECD has set out its stall and expects tax authorities to exercise zero tolerance, super aggression and total ruthlessness; tax authorities will not compromise, will not negotiate and do not care.

Most trustees GFOS knows and works with know the dangers and are alerting their clients. They know that they cannot rely on legal opinions and indemnities.  In November 2014 the IRS fined Credit Suisse $2.6 billion in a plea bargain, for conspiring to aid and assist taxpayers in filing false returns. Credit Suisse was working well within the law, but the IRS decided otherwise.

As Albert Einstein so cleverly remarked ‘We cannot solve our problems with the same thinking we used when we created them’.

We know that offshore structures evolved over the past 40 years, since exchange controls were lifted, by lawyers, using concepts familiar to trust specialists. The role of Protector for example, was first used in Will drafting. It is the person appointed to give direction to the executors on how to take decisions. Tax authorities are now pouncing on such persons of significant influence as evidence to argue that the settlor did not have the necessary intention to hand over absolute control to the trustees and therefore prima facie the structure is a nominee arrangement.

GFOS is working with its clients to find escape routes and draws on concepts used extensively in international business to provide protection, preservation and control for its clients. At the same time, it is looking to give comfort to the professional trustees that they will not get caught in the cross fire.

Clients of GFOS are looking now to refresh and review their international wealth ownership structures. Like Slick Willie some may get caught, but others would prefer not to wait and see they want to put in place some protection now.

If you know of anyone who may be affected by these new provisions use the email icon to share this article with them.

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