Another one bites the dust

One of the last Inheritance Tax planning opportunities in the UK is headed for the bin, under the slender disguise of simplification.

The Office of Tax Simplification; an independent adviser to government, issued in July this year it’s second report on simplifying the Inheritance Tax system. In Chapter 4 it recommends the removal, in part, of a capital gains tax relief. Hmmm!!!

How does simplification of Inheritance Tax justify the removal in part of a Capital Gains Tax exemption?

In 2015/16 there were 590,000 deaths in the UK, of which only 270,000 estates were required to file an IHT tax form. This means that most estates are too small to warrant completing an IHT form.

Of the 270,000 estates which did file an IHT form, only 14% paid any tax. This is less than 5% of all deaths in any one year.

The reduction from potential tax payers to 14%; 86%, is due to the broad scope of the exemptions. 64% rely on the nil rate band of £325,000, 2% rely on Business Property Relief (BPR), 1% rely on Agricultural Property Relief (APR), 14% on spouse relief and the remaining 8% on other hotchpot reliefs.

But, of the 14% of estates which do pay tax the annual tax take is £4.38 billion.

In the beginning of the Report the Office of Tax Simplification is at pains to say that it does not address matters of ‘policy’ such as whether, Inheritance Tax should be replaced by Capital Gains Tax. Hmmm!

Could it be that inheritance tax affects only 24,500 people and raises £4.38 billion, whereas if it were replaced by capital gains tax 55,000 people would be brought into charge to tax with an estimated £1.3 billion in tax, a shortfall of £3 billion.  

This strategy straight-jacket does not however restrict it from exploring ways in which more tax could be raised through the interaction of IHT and CGT.

Bequests on death benefit from an ‘uplift whereas gifts during life benefit from only a ‘hold over’.  

If for example, Tom acquired shares at £102,000 and waits until his death to bequeath them to his son Rory, when they are worth £202,000 – Rory will receive them at a base cost of £202,000. He can sell them the next day, for £202,000 and pay not a penny of capital gains tax. The gain in Tom’s shares of £100,000 has been ‘uplifted’.

However, if before Tom dies, he gives his shares, to his son Rory, when the shares are worth £202,000, Rory receives the shares at Tom’s base cost of £102,000. The gain has been ‘held over’. This means that Tom does not pay Capital Gains Tax when he receives them or on Tom’s death. Tom’s gain has been held over until Rory sells them. At this point Rory will pay Capital Gains Tax as if he had acquired them at Tom’s base cost of £102,000 and will pay Capital Gains Tax on the gain made while Tom owned them of £100,000.

Furthermore, if Tom’s shares were in his family business it is likely that they will qualify for BPR; 100% exemption from Inheritance Tax.  If Tom hangs onto the family business until death, neither Capital Gains Tax nor Inheritance Tax is payable – an attractive proposition.

The OTS claims that the difference between lifetime ‘hold over’ and the death ‘uplift’ distorts the decision making of wealth owners. True.

 The report goes on ‘A similar issue arises where the spouse exemption from Inheritance Tax applies. The capital gains uplift can apply when assets are transferred on death and are covered by the spouse exemption so that capital gains are wiped out and no Inheritance Tax is paid. However, lifetime transfers between spouses do not benefit from the uplift. This can also distort the decisions couples make about the timing of asset sales.’

The report having highlighted the ‘distortion’ then goes on to make a recommendation ‘Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died’.

The report points out that the reason why the Inheritance Tax exemptions are available for spouses, farms and businesses is because the payment of tax could affect the lifestyle of a surviving spouse, or the viability of a farm or ongoing business if tax had to be paid at that time. A hold-over of gain would delay the payment of tax until such time as the asset is liquidated but would not eliminate it.

All of this makes sense.

But what puzzles me is how the Office of Tax Simplification tasked with looking into Inheritance Tax and restricted in strategic scope, can recommend the removal of a Capital Gains Tax exemption?

If you would like to find out more or explore how you can plan now, before this recommendation becomes law contact caroline@garnhamfos.com com or phone 020 3740 7422

Be warned!

In 2016/17 the tax take levied by HMRC on offshore assets was £325 million. However, in 2018/19 this tax rose to £560 million, an increase of 72%. What happened between then and now to cause this dramatic rise?

In 2015 HMRC set up an Offshore, Corporate and Wealth Unit to look into the information revealed by the 11.5 million documents related to offshore entities revealed from a leak orchestrated by the German newspaper Suddeutsche Zeitung – now known as the Panama Papers. This information was then shared with the International Consortium of Investigative Journalists.

The Unit is part of HMRC’s Fraud Investigative Service, which targets rich individuals and businesses with undeclared offshore interests and is staffed by lawyers and accountants. When a rogue employee stole 4.4 GB of sensitive private details of the clients of the Liechtenstein Bank which he then sold to governments around the world, it took between 2-3 years before tax authorities processed this information and the victims started to receive tax claims.

This is about the same time it has taken tax authorities to process the information received from the Panama Papers to raise tax claims on the clients of Mossack Fonseca the law firm in Panama from which the information was leaked. The quantum of information, from the Panama Papers leak is, however  50 times more extensive than the information received from the Liechtenstein Bank. The tax take from the information sold from the Liechtenstein Bank is quoted as being in excess of £100 million (in the UK) while the tax take from the Panama Papers leak is expected to raise $1.2 billion across the world.

Since the Panama Papers leak the two founders of the Panama based law firm have been arrested in Panama, and four former employees arrested in the US; the forty-year old firm has now closed down.

Without doubt, Mossack Fonseca had some dodgy clients; convicted prime minister of Pakistan Nawaz Sharif and his daughter, Ayad Allawi ex-prime minister and former vice president of Iraq, Petro Poroshenko president of Ukraine and Aloa Mubarek, son of Egypt’s prime minister.

But not all its business was dodgy. Mossack Fonseca acted for the father of David Cameron the British Prime Minister. He set up a fund which was fully disclosed to HMRC on which he managed to avoid paying UK tax, due to a ‘small army of Bahamas residents who signed all its paperwork in the Bahamas’.

These headlines paint a picture of a gaggle of unscrupulous politicians and greedy business men eager to use an offshore financial centre to hide ill-gotten gains and avoid tax. But this is not the whole picture. Many innocent entrepreneurs and wealthy international families have also got caught up in the scandal and taxed as if their structuring had not taken place.

I have seen first-hand what tax authorities do with information gleaned from rogue activities. The prima facie assumption of any tax authority is that the main reason to set up a structure, such as a trust and company, offshore is to avoid tax. Many professionals are concerned about the ongoing involvement of the settlor. However, this is not of particular concern to me since the Trustees need to be guided as to when and to whom to make distributions and in what to invest.

A professional trustee has a duty to ‘act in the best interests of the beneficiaries’ and as ‘a prudent man of business’. How can trustees fulfil these duties if they do not stay in regular contact with the settlor who is the best placed person to advise them as to what decisions to take as being in the best interests of the beneficiaries and in what to invest as a prudent man of business?

The real concern to my mind is not the continuing ‘guidance’ given by the Settlor, but what would happen if the Settlor and the Professional Trustees fell out. Tax authorities assume that if the structure has reserved a power to someone other than a trustee to remove and replace the trustees then the ultimate power over the Trustees rests with that person who tax authorities will assume to be the agent of the Settlor.

Many professionals are more optimistic, but the threat of a client faced with a tax claim with interest and penalties which could wipe the majority of this wealth is of sufficient seriousness to warrant a review and stress test. We know that tax authorities have been told to undermine the structures wherever possible and to name and shame – and we have seen them do it before.

Many professionals are of the view for tax authorities to behave in such a manner is an abuse of power and they may eventually be proved right, but there could be a lot of blood on the walls before the line between lawful planning and unlawful evasion has been properly drawn.

In the meantime, if you want to know what you can do to reduce the risk of being investigated call me on 020 3740 37422 or email on caroline@garnhamfos.com

How to make a small fortune?

How to make a small fortune - as the joke goes - start off with a large one!

There are three ways to dissipate wealth quickly; tax, family disputes and third party claims. But you do not have to just sit back and wait for it to happen - you can plan to avoid it. Let’s look at each in turn.  

Tax

Tax authorities, until 2018, did not have the information they needed to investigate and undermine offshore structures to tax wealth held offshore.  This has now changed! The Automatic Exchange of Information introduced in 2018 by all OECD countries gives them everything they need and want to investigate and claim tax.

GFOS works with a family to explore what it would you do if it received a letter from a tax authority which claimed it owed tax on all the income of its wealth held offshore since inception, together with a penalty of 200%?

GFOS asks how would your trustee, if you have one, respond? It explores with the family whether the trustee is the best person to conduct an investigation? If not, from whom would it seek advice; a solicitor, an accountant, a barrister or a former tax inspector and specialist in resolving investigations? How would it pay for this advice, trust funds or from its insurance? How long would it take to resolve: 3 years, 8 years or 10 years – and how much wealth would be left after the investigation?

As a Fellow of the Chartered Institute of Taxation, solicitor and author of ‘When you are Super Rich who can you Trust?’ GFOS is well positioned to know how tax authorities undermine an offshore structure and what to do to protect the assets. GFOS also knows where to seek the best possible advice, how to save on costs and how to stop an investigation going on for years, if not decades.

Family Disputes

GFOS also asks what would happen if one or more members of the family were to die or become disabled? How would decisions be made; how would you choose which family members would be given a voice or vote and how would any dispute be resolved?

GFOS reviews the structure and the family to see where family disharmony could arise and how to deal with it.

What would your trustee, if you have one, do on the death of a family member? Would it take a legal opinion, call a family meeting, divide up the wealth and distribute it, how would it decide who was to get what and when?  

GFOS also looks at the family assets and asks how they will be distributed such as the family business, family home, the art collection, yacht and private plane?

GFOS recognises that making a decision is not just a matter of being prescriptive – which rarely resolves disputes. In companies, disputes are often most effectively resolved through good governance. GROS therefore seeks to incorporate good governance into all its structures which seeks not only what should be done – but also how and by whom.

Third party claims disputes or threats

Family wealth can also be eroded by third parties.

What would you do if a creditor claimed against the family assets? Family wealth can be protected by trusts, but some families prefer not to transfer international wealth into trust, because they do not wish to transfer control to a professional trustee or third party.

GFOS is fully aware of this concern and asks the family what control it wants and who should it be given to. It then puts in place a trust structure which provides protection for the assets without losing control and in a manner, which reduces the risk of an attack from a third party.

GFOS has thirty years of experience in working with some of the wealthiest families in the world and in numerous jurisdictions. It knows that wealth attracts opportunistic third parties which can lead to years if not decades of disputes and litigation which can be avoided with careful planning and structuring.

GFOS

As a tax specialist and lawyer GFOS is well positioned to work with a family, review its structure and put in place mechanisms and processes not only to protect the family and its assets but also to make sure it works with the  right people to resolve any concerns as and when they arises, to protect your wealth for you and for future generations.

GFOS: provides you and your family with control, substance, good governance, privacy, protection and preservation of wealth, and puts in place the right people to work with you as and when needed.

CONTACT DETAILS

Caroline Garnham :     caroline@garnhamfos.com

What can we expect?

Offshore trusts began to emerge the moment exchange controls were lifted which in the UK was in 1979. There were clear benefits in setting up trusts offshore; tax advantages, smooth succession, privacy and asset protection so it wasn’t long before thriving fiduciary businesses in most offshore financial centres was established.

Now nearly forty years later cracks are beginning to emerge. Who really takes the decisions as to what to invest in and how and to whom to distribute?

I will give you three case studies to explain just how tricky some situations can be. All are based upon real scenarios but, with the names and details changed

Mohammed has lived most of his life in the UK and has a UK domiciled father. His mother and father are still alive and living in the UAE, where his father runs a successful business. When Mohammed’s children reached school age, his mother who is non-UK domiciled set up a trust in Guernsey for Mohammed and his children, primarily for their education and well-being.

Mohammed recently received a letter from HMRC claiming that the trust should be treated as a gift from his father to Mohammed and would be taxed accordingly. The amount of the claim is £2,345,162, but in addition HMRC is claiming £4,790,324 as a 200% penalty which virtually wipes out the fund.

Money held offshore is no longer out of sight and out of mind since 2018. HMRC now has all the information it needs to make such a claim against Mohamed. The professional trustee of his trust is obliged to collate all financial details, which it then gives to the Guernsey authority. It then exchanges this detail with HMRC in the UK. HMRC then compares this with what Mohamed has declared in his self-assessment and put in a claim.

Most taxpayers hope that HMRC will follow the letter of the law. From the documents it is clear that his mother was the settlor, but HMRC takes the view that she would have received the funds from her husband and therefore he is the economic settlor.  HMRC like any other tax authority does not merely accept what a deed says at face value – and if it can raise more revenue by reinterpreting the facts it will do so.

Mohamed is not convinced that his professional trustees are the best people to handle the investigation. They want to pursue this matter by challenging HMRC’s reinterpretation of the facts. However, Mohamed would prefer to negotiate with HMRC in face to face meetings with a team of former HMRC inspectors.

The second case involves Charlotte. Her mother, Maureen, lived most of her life in Monaco. She set up a Will trust for Charlotte and her brother Mark. The professional trustees Maureen appointed used the trust fund to invest in Charlotte’s property development and interior design business. Over the years the trust fund quadrupled in value, from £4,382,267 to £19,347,423. She was now very concerned that on her death the trustees would distribute the trust fund equally between herself and Mark.

Charlotte is very fond of her brother but, does not wish him to share in her hard-earned business which she wants to leave to her children. She would like her team of lawyers to negotiate with her brother, rather than allowing her trustees to handle the negotiation. She has the highest opinion of her trustees, but is simply not convinced that they are the best people to negotiate on her behalf

The third case involves Farouq. He had worked closely with Tim a Fellow of the Chartered Institute of Taxation for many years and they both shared an interest in golf often slipping away for a swift round of 18 holes. He wanted to use Tim to set up a trust structure for him now that he was coming up to fifteen years of UK residence but, was concerned that setting up a trust may not be Tim’s area of expertise.  

I directed Farouq to Chapter 6 of my book, ‘When you are Super Rich who can you Trust?’. When dealing with your entire estate, it is essential to appoint the right adviser, and not just someone who is a golf buddy of Farouq’s. To make the appointment objective Farouq needs Tim to give him three recent case studies, ask if he has an appropriate precedent, enquire whether his precedent includes good governance provisions and how much it will cost. If Tim struggles with any one of these tasks, he may not be the right adviser for the job.

If you would  like to find out more or wish to book a meeting with Caroline or buy a book e mail caroline@garnhamfos.com or phone 020 3740 7422

The Rich List - are they under threat?

One of the highlights of my year - the Sunday Times Rich List came out last weekend. The rich are getting richer – so it would appear - the top 1,000 richest people in the UK have net wealth up from last year’s £723.5 billion to £771.3 billion.

Robert Watts and his team of researchers are of course highly professional in researching their facts and figures, but it would be interesting to compare their list with the information HMRC now has at its fingertips under the OECD Automatic Exchange of Information which became operative last year.

Under this initiative all financial institutions must provide the financial details of any client which does not live in its jurisdiction. This means that for every person mentioned in the Sunday Times Rich List the UK HMRC has precise details of all their financial assets held offshore – and will use it to raise taxes.

 – and in addition, it will then charge penalties of up to 200%. For some people this will wipe out their fortune. Although this will take at least three to four years before its impact is felt and registered in the Rich List the impact could be significant.

Many of my clients are already making plans to leave the UK. This is not because, they have not taken and implemented good legal advice, but because no matter how good the advice they do not like the thought of living in a Marxist led country and with the ever-present threat of a tax investigation.  

Many of my clients see Jeremy Corbyn, not as a worry, but as an irritant. John McDonnell the Shadow Chancellor is on record as saying that in the first 100 days in power he plans to raise the threshold at which the highest rate of tax of 45% becomes payable from £150,000 to £80,000. This is not a threat to many of my clients who will simply shield their money in a corporate vehicle, until the Jeremy Corbyn storm has passed. However, this hike in taxation is a real threat for a young family living and working in London and trying to make ends meet. For these people this tax rise is a game changer.

John McDonnell also talks of introducing the ‘most comprehensive set of anti-tax avoidance measures ever introduce by a British government so the that the super-rich and big corporations pay their tax just like the rest of us do. The public are fed up wit runaway inequality and a Labour government will take action to address it’. Please!

This is the same old scratchy political mantra – that we hear from every political party.  

We already have a distinctly unlevel playing field in tax collection and zero tolerance of planning to avoid tax– HMRC now has all the information it needs to tax the wealthy who have money offshore, without having to wait for leaks or rogue employees.

John McDonnell may proclaim to want to make a real difference – but in fact all he needs is already in place. He just needs to turn up the existing screws - until the ‘pips squeak’. Use the information gleaned under the OECD Automatic Exchange of Information to argue that the structure is a sham and tax the underlying assets as if no structure was in place.

However, this danger seems lost on many of the people Robert Watts interviewed. They are still talking about putting money offshore as if to be out of sight and is to be out of mind of HMRC– it is not!

But one change McDonnell may consider is to tax British citizens rather than UK domiciles. In which case it may be necessary to ‘ditch your UK passport’ as one entrepreneur was quoted as saying in the Robert Watts article.

For most of my clients this would again be an irritant, but it does not bother too many. They can easily get a passport in either Malta or Cypress which would have the added benefit of the freedom of movement throughout Europe.

But despite all this gloom and doom, most of my clients are sanguine.

On Jeremy Corbyn ‘The British electorate isn’t stupid enough to vote those guys in twice.’ Once jobs start drying up because the wealth creators have skipped the country, and the economy is failing they will soon switch allegiance.

And about the undermining of offshore structures – ‘Someone, somewhere will think of a way around the attack’ Which is of course, true. But this won’t happen until the wealthy stop seeing offshore as a solution and if your adviser is still promoting a trust with a protector – switch advisers.

If you would like to know how to plan to avoid a total wipe out call Caroline on 020 3740 7422 or email on caroline@garnhamfos.com.