Julian Allason on new ways to keep the taxman’s grimy mitts away from your shapely assets
‘THERE HAS BEEN a colour shift in the spectrum,’ muses the eminent banker. He is off duty and very definitely off the record. But what he is saying in code is what many asset managers already suspect: a quiet upheaval is underway, one that threatens to undo years of tax planning on the part of those resident or domiciled in European countries.
At what accountants, with customary lack of attention to the natural world, term the blue end of the spectrum are the basic procedures to ensure that one’s business and personal affairs are organised in such a way as to expose them to the least taxation – from any quarter. Some of the assumptions on which these are based may now be out of date.
At the end of the spectrum, where temperatures rise to a point at which ordinary accountants leave the room, exists the plethora of highly technical schemes with eye-watering set-up costs, but exceptional pay-offs. Unless, of course, one is unfortunate enough to become the subject of a test case by national tax authorities (although that is said to be an insurable risk).
Since the introduction of UK inheritance trusts a quarter of a century ago, red schemes have saved high net worth individuals billions. And, by like token, cost tax gatherers the same colossal amounts. The banker’s advice to friends was unusual but effective: select a scheme sufficiently narrow in its application to for work for you, but not to register too high a radar signature on Inland Revenue screens. Only gaps costing the Treasury serious money are considered worth plugging with legislation.
Now the spectrum has been extended into what is termed infa-red, with what amounts to personal financial make-overs. These aim to put the subject’s assets beyond the grasp of fiscal authorities across the European Union. Intriguingly – and perhaps disappointingly – an infared makeover does not require an extended island sojourn.
Indeed Caribbean or South Pacific layovers are considered distinctly old hat by the most cerebral practitioners of infared, and large yachts should only be indulged in once the scheme has become full operational.
None of this should be confused with the illegal black part of the spectrum, in which dubiously acquired money remains grubby even after extensive laundering. Such is the European Union’s hunger for cash with which to fill its own fraud-induced black hole, that ill-laundered gains are now of its highest targets for attack, and rightly so.
ALTHOUGH RECOVERIES TO date gave been pitiful, community-wide expertise is growing in the wake of the establishment of pan-European agencies with investigative powers. The blind eye that was turned to the laundering of French and Italian under-the-bed money through Mafia-connected builders upon the introduction of the euro in 1999 is unlikely to wink again.
The result then was the widespread enhancement of Mediterranean villas. Today the euro-mountain seems set to stay under the bed for the most part, although investigators are convinced of continuing seepage across Lake Lugano from Italy to Switzerland.
A number of factors have caused this energy shift in the tax-avoidance spectrum. And not all of them have to do with changes in fiscal regime. An increase in French house prices has made more than 25,000 Britons – and many more French – subject to the ISF annual asset tax on second homes worth more than €750,000 and triggered an exodus that has added to the 100,000 French tax exiles living in Switzerland alone.
Changes in general areas of law are also causing waves. Composite law practices embracing both fiscal planning and matrimonial law now cite divorce as the single biggest threat to newly achieved personal wealth, with inadequately protected inherited wealth not far behind in vulnerability.
The belief, widespread in several European countries, that pre-nuptial agreements are effective only in the United States is no long true, if it ever was. Indeed, specialists have now developed a portfolio of measures to protect personal estates against the event of marriage failure, although they are singularly reluctant to talk about them publicly.
An English landowner who recorded his affairs prior to a second marriage describes the process akin to being measured for a bespoke suit: ‘Several fittings at which my financial inside leg measurements were taken,’ he grins. ‘Followed by some careful cutting of the fabric.’
Like a Savile Row suit, the result did not look new, but provided support and protection where required and should, with the occasional nip and tuck, last for the foreseeable future. Ownership of assets, investment priorities, and inheritance were carefully considered, as well as the sensitive question what would happen in the event of a second matrimonial failure.
At this point a swatch of possible options were produced, the more exotic patterns being rejected immediately. The process involved legal, accountancy, banking, and investment advice and was not cheap, but imbued the wearer with a sense of bullet-proof self-confidence.
The question naturally arises as to who should submit themselves to such a far-reaching review. In Britain, where a modes country house would likely cost in excess of £1 million, the consensus seems to be that anyone with net assets worth £5 million would be wise to take action.
For foreign nationals working here with high income and perhaps lower net worth, the beneficial level might be better assessed at annual remuneration of £200,000 and above. Even at lower income strata, accountants suggest that an appraisal might be beneficial given the changes afoot.
Such services are available in number of quarters. Larger accountancy firms, legal practices with expertise in trust law, and the more private banks should all be able to assemble the necessary tailoring skills. Generalists, especially retail bankers, are unlikely to be up to date with the latest developments. Which, of course, is the object of the exercise.
SPECIALIST NOW TALK of a permanent alteration in global climate. ‘International tax regulation is undergoing rapid change,’ observes Andrew Penney, partner at law firm Speechly Bircham and one of the UK’s leading authorities. This means that arrangements entered into as little as five years ago could seen be dangerously exposed.
Even the nomad option, whereby tax gypsies move around so much that they avoid residence in any one country, is now falling victim to complex rules introduced to raise the tax take of national governments, notable those of the hard-pressed EU zone.
Nor is it just golden oldies like Monaco, that ‘sunny place for shady people’ in Maugham’s phrase, which suddenly look like unsafe havens. Italy, which under the Berlusconi government introduced tax concession attracting an influx of foreign residents, looks a lot less appealing following Prodi’s victory.
Even the Cook Islands, sunkissed atolls in the South Pacific, whose tiny civil service does not include an inspector of taxed, appears less enticing these days. Abuse of its relaxed attitude to banking (and just about everything else except Sabbath observance) by former CIA employees and New Zealand gangsters has left the archipelagian state with alarmingly high visibility on the radar of western revenue services.
The mere possession of a bank account there can trigger suspicion of money-laundering – and a detailed tax audit – an American accountancy journal has suggested.
In short, tax sheltering, which once offered so many appealing possibilities for island hopping in the company of buxom blondes, is now possessed of more traps than a greyhound stadium. ‘Cayman is yesterday’s story,’ one international accountant admits sorrowfully.
But what then is today’s? The answers are remarkable – when the right questions are asked. Today, the single most important rule is to select a tax haven where the regulations of your own tax domicile are properly understood. For those residents, though not necessarily domiciled in Britain that means the Channel Isles, which also have the most skilled practitioners by Andrew Penney’s reckoning.
Such expertise is less evident than formerly in Bermuda, where bankers in the British overseas territory have focused their attention on the American market and on reinsurance – and in the process raised their fees to levels unlikely to appeal to any but the most careless plutocrat.
Among offshore investment specialists, Jersey and Guernsey enjoy high repute, although Swiss fund management of accounts based there is often preferred. Now, fortunately, is it necessary to take up residence in the overcrowded Channel Islands to enjoy the benefits.
Improbably enough, two of the most popular tax havens amongst the jet-setting cognoscenti are Singapore and New Zealand, where no taxes are levied when the trust, settler, beneficiaries, and assets are not ‘in jurisdiction’. More prosaic – yet practical – is the Dublin tax-free zone where insurance bonds are available that comply with European insurance rules.
SO FAR, SO dull – but what of the financial secrecy for which Switzerland and other havens were celebrated? Of the estimated CHF 3 trillion in assets managed in that country, some 40 per cent are handled by Geneva-based institutions. It is no coincidence that the city is also headquarters to so many international organisation and their well-paid employees, many of whom enjoy political connections if not familial relationships with ‘les grandes fromages’ back home.
‘The diplomatic bad I still the Swiss banker’s best friend,’ says a grinning London-based forensic accountant, although the gentlemen in question would doubtless dispute this. The recent merger mania experience by Swiss asset managers reflects an almost Darwinian adaptation to changing government attitudes to wealth-sheltering.
While Swiss banks remain discreet (and continue to offer a convenient carry-to-you-car service for gold bullion) and federal law does not regard tax evasion as a criminal matter, fraud is nonetheless taken very seriously. European revenue authorities have discovered that a fraud allegation levelled against a target tax evader usually brings swift disclosure from the Swiss.
Elsewhere, the US National Security Agency was rumoured in the intelligence community to have cracked banking codes in the Turks and Caicos islands at the behest of the US Internal Revenue Service – one reason why specialist advisors now counsel clients not to plan their affairs on the basis of secrecy as a protection. Nonetheless this does not seem to have deterred the widespread desire to have some ‘rainy day money’ buried on a desert island.
Discretion, though, is all. A base in a major commercial centre such as London is far less likely to attract protracted investigations by tax authorities than a haven in, say, the Caribbean. Indeed some countries have followed Mexico’s lead in blacklisting the more notorious offshore centres. For UK residents domiciled in Britain, there may be insufficient fiscal savings to justify the cost of establishing and maintaining offshore shelters.
But, as noted, that is no longer the only reason to see protection. Recent changes in the way courts in Britain and the US interpret divorce laws have rendered prudent the protection of inherited wealth. With pre-nuptial agreements now accepted by courts in both countries, sheltering of such assets is becoming increasingly common, if not yet routine.
Some things never change, though. For a Swiss town with a population of just 53,000, Lugano has a lot of banks – over a hundred at the last count and each with a thriving foreign exchange business and a department specialising in international tax law.
Only as the mist clears and Italy comes into view on the other side of the lake is there a hint of why a convoy of armoured lorries should daily ply between this tranquil lido and the vaults of Zurich. For its cargo of exported euros haemorrhaging from one of the European Union’s founder members represents a rare sign of an industry that prefers to operate in the shadowlands of the world financial community.
It is a part of the spectrum from which ethical practitioners are at pains to distance themselves. The eminent banker observes: ‘To take legitimate steps to protect one’s assets for the next generation is really a duty.’
More to the point, such action is likely to lead to peace of mind, and to prove far more effective in the long run than black routes. The colossal sums lying forgotten in dormant anonymous accounts in Switzerland and elsewhere serve as mute testimonial to that.