A comedy of errors

Sunday, 01 November 2015
John Harper considers a peculiar case on which he was recently asked to advise.

In 1996, Angus retired from his high-profile job in the UK and moved permanently to the delightful offshore jurisdiction of Utopia.1 A stickler for detail, and having received some general tax advice on the matter, he made sure that he divested himself of all UK situs assets and other connections with the UK, and paid all his UK taxes. Since that time, he has carefully recorded every night spent in the country of his birth, in order not to offend the ‘91-day rule’.

Soon after arriving in his new island paradise, Angus met up with a director of Flash Trust Company (Utopia) Ltd. He explained he had no intention of returning to the UK (even to be buried) and wished to be sure that his portfolio of shares worth about GBP2 million, and, for that matter, his newly built house in Utopia, would not cause either himself during his lifetime, or his executors upon his death, to suffer any UK taxes, particularly inheritance tax. He was advised that he needed a Utopia-law trust to hold the investments and, naturally, Flash would provide the trustees.

The trust was established late in 1998, by which time Angus had received notification that HMRC regarded him as being non-resident in the UK. He was further advised that it was usual to name three (UK-based) charities as beneficiaries of the trust. However, for his peace of mind, Angus was appointed the protector, as well as an additional beneficiary. It is noteworthy that the trust instrument clearly stated: ‘No resident of Utopia shall be a beneficiary of this trust.’ It also contained no information as to the protector’s rights, powers and duties. In fact, it was silent on such matters.

Angus prepared a letter of wishes, which, inter alia, included the following request: ‘During my lifetime, the trust funds shall be held as to capital and income for my benefit or as I may from time to time direct.’ It went on: ‘On my death, the assets of the trust are to be liquidated and transferred to the executors of my Utopia will.’

Angus transferred his shares to the trustees and looked forward to a quiet life.

Bumps in the road

The first unplanned event that occurred was in 2000 when Angus and his wife became engulfed in divorce proceedings. The financial outcome was that he was ordered to pay his ex-wife GBP825,000. Accordingly, Angus instructed the trustees to wire this sum to the ex-wife’s lawyers, which they duly did after having sold sufficient investments. In 2002, a deed was executed removing the three charities as beneficiaries. Angus was told that he was then the sole beneficiary of the trust.

All progressed smoothly until late 2014, when the new trust manager assigned to the case called Angus and suggested that, in 2004 and again in 2014, there should have been payments to HMRC based on the ‘ten-yearly charge’. This charge could apparently have been avoided if the settlor had been correctly advised to wait just a few more months before establishing the trust, when he would have no longer been deemed domiciled in the UK. The settlor/protector is now contemplating asking that all funds be sent to him and the trust terminated.

Myriad questions

The minds of students of the STEP Diploma in International Trust Management (and others) will, by now, be racing with excitement. Was there ever, or is there now, a valid trust? What will happen if the settlor dies while being the sole beneficiary? Is it wise to have a sole beneficiary? Are the trustees guilty of failing to give proper tax advice or of any other breach of trust? Did the payment to the ex-wife (a non-beneficiary) amount to a breach of trust? Why appoint the settlor as a protector as well? Could his protectorship be considered fiduciary in nature and, if not, why not? How can the trustees now make things right? In what capacity can the settlor now take the assets?

To answer these questions in full would require many more articles, but perhaps readers will wish to consider these matters for themselves.

  • 1The names of people, companies and, of course, locations have been changed
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John Harper

John Harper TEP is a part-time lecturer, delivering face-to-face courses for the STEP international diploma examinations all around the world.

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