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Learning to share

Learning to share

Derek Scott and Michael Pape explain why new tax transparency regulations may affect law-abiding HNWs and family offices as well as the tax evaders the regulations are designed to catch.

Derek Scott

Associate Partner

KPMG in the UK


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We have entered an era of unprecedented information exchange between tax authorities. Added to this, certain information will be available on a public register. The driver for this is the crackdown, by governments across the world, on tax evasion which has been facilitated through the use of overseas bank accounts and entities such as trusts and companies. However, this crackdown will also have an impact on those not engaged in tax evasion, including many family offices. This article breaks down the key changes and looks at the steps a family office can consider to comply, while maintaining confidentiality. 

Common Reporting Standard

Compared to current information-sharing agreements the Common Reporting Standard (CRS) is a real game-changer. Developed by the Organisation for Economic Cooperation and Development, the CRS allows for automatic and reciprocal exchange of financial information. A total of 96 jurisdictions have already committed to exchanging information, starting in 2017. For many jurisdictions the information to be exchanged will be in relation to periods from 1 January 2016.

What information will be exchanged?

In broad terms, financial institutions (including fiduciary providers, wealth managers, banks and family offices) identify ‘reportable’ accounts held by UK residents. This includes bank accounts but also investment entity (e.g. companies and trusts) accounts which are defined as a debt or equity interest. Unlike some previous agreements, under CRS there is no distinction drawn between non-UK-domiciled persons and those domiciled in the UK. For trusts, the UK resident could be the settlor, beneficiary or any natural person exercising effective ultimate control.

The basic account details exchanged include the name and address of the UK resident, the account number and the name of the reporting financial institution. The financial data reportable is income credited to the account, where relevant the redemption of investments (‘capital gains’) and the account balance or value. This is relatively straightforward for bank accounts but more complex for entities such as trusts. If the family office includes any trusts, it is necessary to establish whether the trust has any direct reporting obligations itself and, if so, what the relationship is between any UK-resident person and the trust. The information to be exchanged differs between settlors, life tenants and discretionary beneficiaries. For a settlor the information exchanged is the total value of trust property and payments to the settlor, while for a discretionary beneficiary it is the amount of distributions to that beneficiary.

Some trusts will have no direct reporting obligations but are likely to hold assets with a bank which does. As a consequence the bank would need to report details of the bank account held by the trust and details of the UK controlling persons as provided to them by the trust. A controlling person is defined as the settlor, trustee, beneficiary, protector and any natural person exercising ultimate control of the trust.

Public Beneficial Ownership

The UK authorities will also shortly be in possession of much greater information relating to non-traded UK companies through the register of Persons of Significant Control (PSC). Companies will be required to hold an internal register of those who own more than 25 per cent of its shares or voting rights by 6 April 2016 and to submit that register to Companies House from 30 June 2016. The register will publicly show the full name, nationality, details  of  interest and month of birth (residential address will not be made public). Failure to comply carries a criminal sanction, so this is not something that family offices with UK companies in their structure can afford to overlook.

If a trust owns more than 25 per cent of a UK company, the trustees are obliged to register as PSC. They also have a duty to disclose the names and similar personal details of anyone who has ‘significant influence or control’ over the trust, including (but not limited to) any settlors, protectors and beneficiaries. The UK government has attempted to oblige its overseas territories to adopt similar registers, without success so far.

In the EU, certain trusts which generate UK tax consequences will be required to keep a non-public (but accessible by HMRC) register to show the identity of settlor, trustee, protector, class of beneficiaries and any other natural person with effective control.

UK Property

It is estimated that £122 billion of property in England and Wales is owned by foreign companies. The UK government has announced its intention to make property ownership more transparent and has made a commitment that the Land Registry will shortly publish data showing which offshore companies own which land and property titles in England and Wales.

What to expect from HMRC

We can expect investigation activity to intensify. With its increasing investment in technology, such as the CONNECT data analytical software, HMRC appears to be confident it can cope with the volume of data it will receive. We expect this to include whether complex structures have reported all UK tax liabilities correctly.

The government has also announced new measures that will strengthen civil and criminal sanctions, including a new criminal offence for those who fail to declare overseas income and gains, regardless of any deliberate intent.

What actions should family offices take now?

Family offices should first understand whether they hold reporting obligations themselves. Next they should examine what information will be disclosed by each institution with which they hold assets,directly or indirectly, and when. Similarly, they should be aware what information will be accessible publicly. At the very least, that puts the family on the same footing as HMRC. Much of the tone of the debate around transparency is geared towards those who have deliberately evaded tax, whereas the vast majority of people who use overseas assets do so for commercial and personal reasons. It is not uncommon, however, that errors are made within overseas structures that were set up correctly but subsequently poorly implemented. The most common examples of this are remittances from accidentally mixed funds, benefits being provided by trusts and investment in UK source assets.

More often than not, such errors are only discovered as a result of a challenge from HMRC. The big difference is that CRS will increase the assets on HMRC’s radar. For those who have not paid the right amount of tax historically, whether deliberately or through error, making a disclosure to HMRC before it enquires is always the best strategy. A ‘final disclosure opportunity’ is being introduced by HMRC from April 2016 to April 2018.

Final thoughts

It seems very unlikely that we have seen the end of the revolution in tax transparency changes.  We could expect more changes in the area of beneficial owner- ship of all UK property, as well as HMRC seeking to use all avenues open to it to establish the beneficial owners or those who hold an interest in overseas trusts and companies.

There are already concerns over the erosion of privacy, and specifically the robustness of data security measures if certain information goes public. Ultimately, policy decisions havebeen made to cast the net wide in order to catch the small proportion of society who do not play by the rules. The key is that all those who will be impacted by these developments, for whatever reason, are prepared.

Derek Scott is Head of Private Client Tax Investigations at KPMG in the UK and Michael Pape is a Private Client Manager at KPMG in the UK

This article was originally published in Spear's 'The Future for Family Offices' supplement.

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