On offshore trusts: the key question David Cameron has to answer

94364275_davidcameron-news-large_trans++eo_i_u9APj8RuoebjoAHt0k9u7HhRJvuo-ZLenGRumAWhere 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.

What if the Scottish Parliament election is just a repeat of May 2015?

The 2015 general election produced a considerable spike in turnout in Scottish constituencies. Following the election, I produced a projection that adjusted the election result for the turnout spike, in order to provide a better picture of the political situation based upon “normal” turnouts. Unsurprisingly, on the basis of exit polling, the spike in turnout was overwhelmingly attributable to the SNP. Perhaps a little surprising was that the spike in turnout actually had relatively little effect on the results in most constituencies. Only Paisley and Renfrewshire South and East Renfrewshire would have been saved for Scottish Labour; Edinburgh West, Caithness, Sutherland, & Easter Ross, and Ross, Skye, & Lochaber being saved for the Liberal Democrats; and Berwickshire, Roxburgh & Selkirk gained by the Tories.

Just for fun (yes, this is what constitutes fun in my sad world) I’ve projected those results onto the Scottish Parliament, and below are the results. However, it’s worth noting how I arrived at this projection, beyond simply adjusting for turnout.

Other assumptions

Having adjusted the turnout to something approaching a “normal” General Election level (which, it is worth noting, is still higher than a typical Scottish Parliament turnout level), and applied it to the constituency section of my model, it then became necessary to apply these results to the regional list votes, which is obviously more difficult. As noted previously, parties typically suffer a degree of “regional leakage”, with constituency support going elsewhere in the regional lists. The leakage proportion from 2011 was used (which has Scottish Labour dropping off quite considerably, with the SNP remaining fairly solid). This produces a significant “other” vote. This “other” vote was then allocated to the smaller parties in proportion with the figures in the recent Survation polling.

It is worth reiterating that this is not a projection, it is an extrapolation. Its primary purpose is not to forecast May’s election, as we all know how Westminster and Holyrood elections can produce wildly different results even when they are relatively close to one another. Rather, this extrapolation provides a yardstick against which the coming election can be measured, as well as some indication of where parties ought to be focusing their efforts, in light of the fairly significant political reset that has taken place.

The result

2015 as 2016The extrapolation sees another SNP near clean-sweep. Labour retains four constituencies: Coatbridge and Chryston; Cowdenbeath; Dumfriesshire; and Renfrewshire South. The Lib Dems retain their present two seats, and retake Ross, Skye, and Lochaber. The Tories retain their present three seats and gain Eastwood. In addition to those seats that change hands, the model produces a number of close contests: Edinburgh Central, Southern, Pentlands, and Western; Glasgow Provan; Dunfermline; Kirkcaldy; Aberdeen Central; Aberdeenshire West; East Lothian; and Dumbarton. If anyone is expecting some surprise results in May, they’ll likely come in one of those seats.

Overall, the result is broadly in line with current projections. With a majority of 7, the SNP are down one seat on their 2011 result. Labour’s total of 29 seats is at the upper-end of expectations, with the Tories gaining three seats in the more traditionally Conservative regions of the North East, South, and Mid Scotland and Fife. Figures from the Lib Dems are distorted somewhat by the fact that 2010 saw incumbents in some seats faring relatively well against the SNP tide. Jo Swinson’s vote in East Dunbartonshire translates to a Lib Dem seat in the West of Scotland list, while Charles Kennedy’s vote in Ross, Skye, and Lochaber would probably be a gonner absent the man himself. 

One striking feature of this extrapolation is how in line it is with current polling. While this might attest to the veracity of the polling, it may well also be that, as appeared to happen in polls in the run up to 2011, respondents are telling polling companies how they voted last time, as opposed to how they’re going to vote in May. In 2011, the polls only began to move to the SNP during the short campaign. It may well be that there’s still some movement to be seen in the polls after all.

Reforming local taxation: SNP and Labour proposals assessed

SNP vs LabourIn the past few weeks, both the SNP and Labour have revealed their proposals for reforming local taxation. While the SNP is proposing only modest tweaks to the existing Council Tax (a far cry from their previous pledges to scrap it), Labour is proposing a significant overhaul.

I, too, have undertaken some significant work in this field, with my proposals soon to be published in the British Tax Review. In the meantime, I’ve assessed both Labour and the SNP’s proposals against characteristics of good local taxation, as well as parties’ attempts to make local taxation, at least perceptively, “fair”.

Characteristics of good local taxation

Autonomous revenue streams

The rationale underpinning local government is that local decision-makers will sometimes make decisions that would not be made by central government. Divergence is the whole point of having local government. It therefore follows that in order to carry out those decisions, they should have at least some resources that are free from strings from central government.

Revenue expenditure by local government in Scotland is primarily funded from three sources: grants from central government; local taxation (Council Tax and Non-Domestic Rates); and sales, fees, and charges for services. Of these sources, grants from central government make-up by far the largest source of local authority income.

Central government grants come in both hypothecated and unhypothecated form. Hypothecated grants are grants that must be used for a specific purpose, while unhypothecated grants allow local authorities to decide how to spend the money. The “Concordat” between the Scottish Government and Scottish local authorities (acting through COSLA) was lauded for removing ring fencing from most of the central government grant.

However, Government was giving with one hand and taking-away with the other. The Concordat had a profound impact on the fiscal autonomy of local authorities, by requiring councils to freeze Council Tax at 2007-08 levels. Furthermore, though the Concordat removed specific ring fencing, the Scottish Executive (as it then was) sought to replace many of these controls with a package deal – local government agreed to deliver many of the Executive’s policies, including on class sizes, pre-school places, and police numbers.


Local taxation greatly enhances local accountability, by compelling local authorities to justify its spending choices to the electors from whom they raise revenue. Where the levels of expenditure bear little correlation to levels of taxation, invariably, the link between decisions of voters and decisions of representatives will be weakened. Given that fiscal autonomy has been the central issue in consideration of further devolution –with accountability frequently cited as one of the main reasons for further such devolution. There is a logical inconsistency in; on the one hand, seeing fiscal autonomy as essential for the accountability of the Scottish Parliament and Government; but not so necessary where local government is concerned.


One of the most frequent criticisms of the Council Tax in political discourse is that is it “unfair”. However, there appears to be little commonality as to what critics of the Council Tax consider to be “fair”.

Debates around local taxation have featured competing conceptions of what constitutes “fairness”. Margaret Thatcher considered the Rates to be grossly unfair. Her motivation for scrapping them is said to have been inspired by the plight of the “old ladies of Morningside living in six-bedroomed family houses who had no children at home and only had their bins emptied once a week.” Her solution to this was a poll tax. The rationale behind this poll tax was along the lines that as most people, regardless of the size of their properties or levels of income, consumed roughly the same amount of local services, they should all contribute equally to the provision of these services. Everyone paying equally for services consumed roughly equally was, in the mind of Thatcher, fair.

History recalls that large swathes of the population did not agree with Margaret Thatcher’s conception of fairness. Public discontent over the Community Charge was remarkable – inciting levels of public unrest seldom seen in British society. The source of their disquiet over the Community Charge was that it was, in their opinion, unfair. Under their conception of fairness, the charge was unfair because everyone paid the same, regardless of income – it took no account of individuals’ ability to pay.

Upon John Major’s accession to the Premiership, Michael Heseltine was appointed Secretary of the State for the Environment, with a special mandate to formulate a replacement for the Community Charge, and to do so quickly. The result was the Council Tax compromise. It is in part a tax on property insofar as the liability to charge varies in accordance with the value of the property you occupy. It is in part a poll tax because it doesn’t vary very much. And it is in small part an income tax insofar as the income level of the taxpayer is reflected in the availability of Council Tax Reduction (formerly Council Tax Benefit) to low earners.

Residence as a suitable basis for local taxation

If one of the primary justifications for local taxation is local accountability then taxation anywhere other than at the place of residence makes little sense. With the exception of elections to the City of London Corporation, and Business Improvement District (BID) referendums, voting franchises in the United Kingdom are based entirely upon individuals in their place of residence.

While taxation of income makes most sense in the place it is earned, and local taxation makes most sense at the location of residence, income appears to be an entirely unsuitable basis to tax at a local level. This leaves property taxes and consumption taxes as suitable potential candidates for local taxation.

Council Tax in the context of the tax system

It is a generally accepted principle of tax optimisation theory that efficient tax systems favour a broader base with a lower rate over a narrow base with higher rates. Property taxation is a useful tool for broadening the tax base. At present, a number of taxes on property presently exist in the UK. These include Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax, and Council Tax. However, with the exception of Council Tax, all of these taxes require some kind of transaction to take place. The Council Tax is, therefore, the only tax on static property presently in operation in the UK.

Furthermore, there is a considerable body of evidence that property taxes are amongst the most efficient taxes in existence. The OECD’s empirical research confirms that property taxes are, in general

more efficient than other types of taxes in that their impact on the allocation of resources in the economy is less adverse. This is because these taxes do not affect the decisions of economic agents to supply labour, to invest in human capital, to produce, invest and innovate to the same extent as some other taxes.

It follows from this that a tax on land alone (and not what’s built on it) is therefore even more efficient. As the amount of land is fixed, taxing it cannot affect supply. It is further arguable that taxing land alone creates additional economic efficiencies in encouraging efficient utilisation of land assets. However, there exist considerable difficulties in disaggregating the value of land from that which is built upon it, in particular where a considerable amount of time has elapsed from the point of development to the point of assessment. Furthermore, the value of land will inevitably be affected by the amenities and built environment surrounding it. It is perhaps unsurprising therefore that, notwithstanding the economic attractiveness of taxing land over property, the prevailing preference in international practice is for property taxes over land taxes.

Operation of the Council Tax at present

At present, every dwelling in Scotland is allocated into one of eight Council Tax bands. Councils decide what the tax bill will be for a “Band D” property, and then tax in all of the other bands is calculated by reference to a fixed ratio. This ratio is in the proportion 6:7:8:9:11:13:15:18 where Band A is 6, Band B is 7, and so on. So the Council Tax for a Band D property is 1.5 times the Council Tax for a Band A, while the Council Tax for a Band H is twice what is payable in respect of a Band D household. So the Council Tax is relatively flat in Bands A to D, and a bit more progressive for Bands E to H. A 25% discount is available for single occupants, and income-assessed reductions are available for low earners.

As can be seen above, 75% of all properties are in bands A to D. so for the overwhelming majority of Scottish households, there is very little difference in the amount of Council Tax you pay.

The SNP and Labour’s proposals

The SNP’s proposals for reforming the Council Tax are incredibly modest: slightly increase the multipliers for Bands E, F, G, and H, with no change to the lower bands. Despite the Local Tax Commission concluding that 57% of all properties are in the wrong band, the SNP do not plan to revalue properties, meaning the tax will still be based upon second-gear valuations from 1991.

By capping Council Tax increases at 3% per annum (presumably even if inflation is running ahead of that), the Scottish Government plans on tying local government to their preferred level of public service provision.

As proposals for reforming the Council Tax go, this is just about as conservative as it gets. Giving the impression that you’re making the tax more progressive while not actually changing anything for 75% of households smacks of cynical populism.

Labour’s proposals, by contrast, really are quite revolutionary, though some elements give the impression that the plan was worked out on the back of a fag packet. Under Labour’s plans, the system of bands would be scrapped altogether. A comprehensive revaluation would take place, and then (as I understand it) would be updated annually on the basis of local trends in property prices. The tax would then be calculated as follows: £450 + 0.35% of the first £180,000 of the property’s value; with any portion above £180,000 being taxable at 0.9%. Labour’s proposals also include a 3% annual cap, though it’s somewhat unclear what that 3% is actually of (The rate? The cap? Bills in cash terms?)

While it’s difficult to characterise Scottish Labour’s proposals as progressive, their proposal is a good deal more progressive than the status quo, and therefore also a good deal more progressive than the SNP’s.

There are other significant advantages to Scottish Labour’s proposals too. One key flaw in the Council Tax is that it isn’t buoyant – every year local authorities have to announce the level they’re setting the Council Tax at, because it doesn’t increase automatically with property prices. By contrast, the Chancellor of the Exchequer doesn’t have to announce increases to income tax levels every year because income tax is buoyant. Scottish Labour’s proposals have the virtue of buoyancy: in order for local authorities to keep up with inflation they won’t generally have to announce increases in rates.

Scottish Labour further proposes to give local authorities the power to levy a Tourism duty, which has the virtue of broadening the tax base further and diversifying councils’ revenue streams.

The key test for both proposals is the extent to which they make the hated Council Tax perceptively fairer. As the SNP’s proposals represent little more than a tweak to existing arrangements, the proposals do little to address the regressivity of the Council Tax. This is exacerbated further when we consider that 75% if properties are in Bands A to D, which won’t see any change to their multipliers at all.

Labour’s proposals, by contrast, create a slightly odd progression. The effect of the £450 floor is to make the tax regressive to property values up to £180,000 (albeit a good deal less regressive than the Council Tax), progressive from £180,000 up to £390,000, then the £3,000 cap causes the tax to regress thereafter. As can be seen above, Labour’s proposals also eradicate the sharp spikes in the tax burden that occur when a property is just above the threshold for a tax band.

Though Labour hasn’t produced revenue projections, my forthcoming article in the British Tax Review demonstrates how a proportionate system of Council Tax ratios raises more revenue than the status quo, though such projections are based upon tax bills as high as £5,500 for Band H properties. The fact that only properties valued above £300,000, which account for fewer than 10% of Scottish properties, will pay more than they do at present means that it is difficult to imagine that Labour’s proposals raise much additional revenue, if any.

Overall, Labour’s proposals for reforming local taxation are a good deal more progressive than the status quo and the SNP’s modest proposals. Though both parties seek to cap the size of the tax and annual rises, Labour is also proposing to give local government some additional sources of revenue – enhancing the autonomy of local government.

My own proposals for reforming local taxation will be published in the forthcoming issue of the British Tax Review, though I’ll be posting a sneak preview nearer the time. Stay tuned.