Why do people go offshore?

George HodgsonTaking a global view, the period since 2008 has been marked by unprecedented activity aimed at improving tax transparency. First of all we had tax information exchange on request. More recently the move has begun to automatic exchange of tax information. The same period has also seen enormous emphasis internationally on improving the availability of beneficial ownership information.

All this activity focused on improving transparency ought, logically, to have been bad news for the so-called ‘secrecy jurisdictions’. It is perhaps surprising, therefore, that the reality looks somewhat different.

Researchers at the European Parliament have dug out some rather curious statistics from the Bank of International Settlements. Over the period 2008-2015 cross-border deposits have grown on average by 2.81 per cent. Over the same period, cross-border deposits in the rest of the world have grown by 1.24 per cent. In other words, during a period of unprecedented activity regarding building transparency, the share of the offshore centres in the cross-border deposit market has actually gone up.

What does that imply? Some will undoubtedly represent this as clear proof that current transparency measures aren’t working. Indeed the same EU Parliament report that presents the statistics goes on to request ‘a study on the feasibility of a global register of all financial assets held by individuals, companies and all entities such as trusts and foundations’. This just goes to show that Big Brother still has his supporters!

Others might see the continued growth in offshore in an age of transparency as demonstrating that the appeal of offshore in reality has little to do with ‘secrecy’. It is hard to imagine that any client moving funds to one of the major offshore centres does not expect those funds to be reported at some point to their domestic tax authority. It is impossible to believe that any of their advisors do not know that at some point their client’s position is likely to be reported to their domestic tax authority.

The conclusion therefore has to be that most of the funds going offshore are there not for secrecy but for other reasons, for example geographic diversification; strong financial infrastructure; or tax neutrality. But it is clear that regardless of the move to transparency, offshore centres still have strong client appeal.

George Hodgson is Interim Chief Executive of STEP

STEP England & Wales Biannual Statement – July 2016

Alex ElphinstonWhatever may have happened over the last six months has no doubt been dwarfed by the EU referendum result and the seismic political fallout and current uncertainty on so many fronts – political, economic and financial – before we begin to consider the outcome of the Brexit negotiations.

STEP is monitoring the situation closely and is in discussions with other relevant professional bodies as well as maintaining lines of communication with civil servants and the like to do all we can to ensure our and our clients’ interests are taken into account. On this last point I hope you have seen the weekly digest of 30 June asking for comments as to concerns and opportunities. Please do respond to this.

While Brexit may be uppermost in our minds at the moment (closely followed perhaps for some by the perennial debate about the ability or otherwise of our sports players to perform), much else has been happening.

More than 300 attendees assembled for STEP’s second Global Congress in Amsterdam at the end of June. It was tremendous that the event was a sell out. Delegates came from 44 countries – a true sign of the global nature of the issues we currently face in our industry.

The focus of this Global Congress was ‘advising families across generations’ with sessions offered on private international law, conflicts, and the changing definition of ‘family’ on the first day, with the second day focusing on transparency, and looking especially at how members – as experts in their fields – can use their knowledge and skills to become part of the solution, informing the process and helping governments, the OECD and others to understand how trust and other structures work, and encouraging dialogue on issues that are critical to our world.All in all, the event was a great success.

And back in March we held the Branch Chairs’ Assembly (BCA), which was well supported with members of the Scottish regional committee in attendance as well recognising the many areas of mutual interest and common concerns at branch level. Members of the committee in Northern Ireland were also invited but unable to attend.

Particular themes coming out were:

  • The benefits of a central resource of the names of speakers and topics that branches have held to assist other branches in compiling their programme. STEP is looking at how best to provide such a resource.
  • Creating a higher public profile for STEP. This second point was consistent with feedback from the Leaders’ Forum last December and will be picked up in the ‘Your STEP’ initiative by STEP Worldwide before filtering back to the regional level for practical outworking.

We were fortunate to have Senior Judge Lush of the Court of Protection as our guest speaker who gave a potted history of some of the important court decisions relating to damages awards before suggesting that STEP provide qualifications for Deputies and case workers as there is no other body of which he is aware that is providing this on a holistic basis. We are looking into this possibility in conjunction with the Mental Capacity special interest group.

As it transpired, this was David Harvey’s last BCA and we wish him well for his future and thank him for his significant input to STEP over his 15 years as Chief Executive.

As always there have been numerous consultations and other issues over the last six months where STEP and the various committees have been actively involved – including the proposed hike in Probate Court fees, the Mossack Fonseca data leak, contributing to the revised code of Professional Conduct in Relation to Taxation (PCRT) and discussions with the Office of the Public Guardian (OPG) on some of their proposed changes. And this is before acknowledging the various different courses, webinars and other training and education events that have been organised across a wide range of subjects.

This will be my last report as chair of the regional committee and I want to thank all the staff at the STEP office for their tremendous support and enthusiasm over such a wide range of issues without which we would all be much the poorer and my role would have been impossible. I have also appreciated the dedication of members and others who give of their time and expertise on the various committees to help keep us up to speed on all the legislative changes (who can forget FATCA?!) as well as forging links with government departments and other influential organisations here and further afield. As a result STEP has often ensured a better understanding of the practical issues and seen changes made.

Finally my congratulations to all those who have been shortlisted as Private Client Awards finalists and the students who recently passed exams as well as those who won awards in the inaugural Worldwide Excellence Awards. The future of STEP should be in safe hands!

 

Alex Elphinston TEP is Chair of STEP’s England and Wales Regional Committee

HMRC takes aim at inheritance tax planning

Robin VosImagine a client comes to you looking to reduce the inheritance tax bill on his death. He cannot afford to make outright gifts, and so instead you suggest he sets up a trust for his grandchildren and makes an interest free loan to the trust. The trust will invest in a UK authorised investment fund. The client is therefore just giving away the growth in value so that, over time, as the loan is repaid and the money spent, the client’s estate will reduce. Not an uncommon situation.

Under regulations proposed by HMRC, you may well be required to report this sort of planning to HMRC under the ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) rules.

This is a serious matter. Failure to report when required to do so can lead to significant penalties for the ‘promoter’ as well as a range of other possible sanctions for both the promoter and the client.

The DOTAS regime was originally introduced in 2004 to ferret out information about marketed tax avoidance schemes. Arrangements only have to be notified if they fall within certain ‘hallmarks’. These include indicators such as whether the promoter is charging a premium fee or whether they ask clients to sign up to some sort of confidentiality agreement.

The DOTAS rules were first applied to inheritance tax in 2011. Currently they only apply to arrangements designed to get assets into a trust without paying the upfront 20 per cent lifetime inheritance tax charge.

In relation to other taxes, specific hallmarks were introduced to combat schemes in particular areas such as the use of losses, tax avoidance using financial products and attempts to get round the disguised remuneration rules for employment income.

However the proposed new regulations which will apply to inheritance tax are much wider. The starting point is that any planning which gives rise to an inheritance tax advantage will have to be notified if it contains steps which are ‘contrived or abnormal’.

The problem with inheritance tax planning is that much of what is done could be described as contrived or abnormal – ie the steps which are taken are not ones which somebody would normally take, unless they were trying to reduce their inheritance tax bill.

Targeting an entire tax with a filter based only on whether the arrangements are contrived or abnormal is a novel approach.

Whilst HMRC has promised guidance as to what it considers to be acceptable and what is not, the risk is that practitioners will be left not knowing whether what they are doing has to be notified. Many will make notifications just to be on the safe side. HMRC may well be overwhelmed with a deluge of notifications as a result.

The proposals are contained in a consultation paper issued on 20 April 2016. Anybody is free to respond to the consultation. Responses have to be submitted by 13 July 2016.

STEP will be submitting a response suggesting that the same approach should be taken for inheritance tax as with other taxes. This would mean that HMRC should identify specific areas where it sees abuse, and create hallmarks relating to those areas rather than attacking all planning which gives rise to any inheritance tax advantage.

The existing hallmark relating to attempts to get assets into trust, without paying the upfront inheritance tax charge, may not be the only area targeted. Others might include avoiding the reservation of benefit rules without incurring pre-owned assets tax, acquiring interests in excluded property settlements without falling foul of the existing anti-avoidance rules, abuse of agricultural property relief or business property relief and schemes to avoid inheritance tax ten year charges in relation to relevant property trusts.

As demonstrated by the example at the beginning of this article, the proposed regulations have the potential to affect much of the inheritance tax planning which practitioners will be dealing with on a daily basis. It certainly goes much wider than catching only abusive, marketed schemes.

The more responses HMRC receives, the more likely it is that it will understand that the regulations, as currently proposed, go too far.

 

Robin Vos TEP, a solicitor at Macfarlanes LLP in London, is chair of STEP’s UK Technical Committee