On offshore trusts: the key question David Cameron has to answer
Where trusts are concerned, there are three different roles:
- A settlor (or trustor, more commonly in Scotland), who places the assets into trust in the first place.
- A trustee, who strictly speaking owns the assets, but not for his or her own beneficial interest. The assets held in trust do not form part of the trustee’s personal assets.
- A beneficiary, who will ultimately receive the income and/or capital from the trust.
Sometimes, one person can hold more than one role. For example, it might well be that the settlor is also the beneficiary of the trust – but he or she wants to be removed from the day-to-day management of the assets. Similarly, a settlor might also be the trustee, with the intention of protecting certain assets that he or she intends upon passing to their children when they reach a certain age. While in certain trusts, the beneficiaries have a direct proprietary interest in the trust (i.e. a legal entitlement to receive trust income or capital), other trusts are discretionary in nature – whereby the trustees can decide who they make payments to, when they are made, and how much. As there are no fixed beneficiaries of a discretionary trust, no one can be said to be a beneficiary of such a trust until they have actually received a benefit. Nonetheless, most such trusts are set up with a specific understanding that the trustees will make such payments to certain specified persons, notwithstanding their discretion. You literally trust the trustees to act in accordance with your wishes. Such trusts are particularly convenient when you want to conceal the real beneficial owner of assets.
The most common use of trusts, therefore, is for Inheritance Tax purposes. For example, payments into discretionary trusts can create significant tax advantages, as Inheritance Tax is payable at the point at which the money is transferred into the trust (as opposed to when you die) at half the usual rate. A nil-rate band discretionary trust is a common feature in every middle class will (they still have some advantages even following the introduction of the transferrable nil-rate band).
It is particularly common for Members of Parliament to set up trusts for innocuous purposes too. For example, someone who owns a business who is elected to Parliament might well want to return to that business when they cease to be an MP, in which case the wise thing to do is to place their ownership of that business into a trust in order to avoid creating a conflict of interest.
However, offshore trusts are an altogether different animal, with secrecy and tax avoidance at the core of their purpose. For example, trusts pay income tax just like everyone else. So if your plan is to place investments into a trust, and then re-invest the income from those investments so that the value of the trust grows further, the amount that you can re-invest will be curtailed by the fact that every year income tax will be payable on that income before it can be re-invested.
If, however, your trustees are located outside of the United Kingdom, but say, in a tax haven, then that recurring income tax is no longer an issue. The capital held in the trust can grow and grow, free from the encumbrances of recurring taxation. Tax is only payable in the UK on a remittance basis – that is to say when a UK-resident beneficiary receives a payment out of a trust he or she must declare that payment as part of their tax return. The beauty part is that this only happens once, rather than annually, and payments can be deferred until necessary or convenient.
This is why the explanations given by David Cameron in response to questions about their own interests in offshore trusts have been far from comprehensive.
Yesterday, David Cameron said
“I have no shares, no offshore trusts, no offshore funds, nothing like that. And, so that, I think, is a very clear description.”
Except that it’s not a very clear description at all. What did Dave mean by that? Does he mean that he has never set up a trust? That he’s not a trustee? That he’s not a beneficiary of any trust? This not-very-clear answer prompted Downing Street to issue another statement, denying that the PM or his family “benefit from any offshore funds”, with the seemingly deliberate present-tense of that denial raising more questions than it answered. The subsequent denial is more unequivocal, declaring that there are “no offshore funds/trusts which the prime minister, Mrs Cameron or their children will benefit from in future.”
From this, therefore, it is clear that the Prime Minister does not benefit from any offshore trusts, nor does he have any beneficial interest in any offshore trusts from which he can call in future. But what about one of those discretionary trusts, mentioned above? While it’s entirely possible to say quite unequivocally that you will not benefit from interest-in-possession trusts, it is impossible to say with any certainty that any of us will never be the beneficiaries of an existing discretionary trust in the future. The nature of such trusts is that they are discretionary, and a trust in which someone has no direct beneficial interest might, nevertheless, some time down the line, exercise their discretion and start making payments to you.
This is where the Prime Minister’s explanation is still inadequate. While the Telegraph has posed three questions that the PM still needs to answer, the key question is this: did Ian Cameron set up any discretionary trusts? If he has, then the persons to whom that trust has made payments in the past will be the best indicator of the sorts of persons to whom such a trust will make payments in the future.
I feel slightly sorry for David Cameron – he has clearly hasn’t done anything wrong. His father was a shrewd high-financier, who will doubtless have gone to considerable lengths to ensure his family was provided for. How was he to know that Baby David would grow-up to be Prime Minister? If Ian Cameron did set up an offshore discretionary trust with his children as intended beneficiaries then Dave can hardly be blamed for that. What the public is, rightly, concerned about, however, is the perception that the government’s inaction on tackling this sort of avoidance might, perhaps subconsciously, be due to a feint expectation by the Prime Minister and the Chancellor that they too might, sometime down the line, be the beneficiaries of such trusts. This is why nothing short of full disclosure will settle the issue, and the sooner that happens the less painful it will be for everyone.