High Court determines offshore trust scheme with multiple valuations can’t be cast off as a ‘mistake’

BVWire–UKIssue #32-2
November 16, 2021

The last several months have seen multiple agreements designed to reduce international tax competition and minimise the abuses that result from offshore asset schemes. At the same time, HMRC have initiated a “nudge letter” campaign to taxpayers who may be holding undisclosed crypto accounts—and the UK’s High Court has done its part by denying a request to reverse an offshore Employee Benefit Trust scheme on the grounds of “mistake.”

The ruling in the case of Bhaur & Ors v Equity First Trustees (Nevis) Ltd & Ors [2021] EWHC 2581 (CH) offers a thorough explanation of the type of complex structures wealthy families use to minimise taxes. Mr and Mrs Bhaur ran a property partnership that incorporated and set up a first remuneration trust for the benefit of employees, funded by a partial transfer of the properties.

Then BVI company (BVI) was set up with interests transferred. Soon after, a Nevis company was formed and the property BVI held was transferred to Nevis, which created a second remuneration trust (the specifics of these transactions are fully documented in the High Court decision). These weren’t enough, so properties and shares were transferred to “an employee” in Nevis who would use the assets to purchase annuities that would be transferred to yet another Nevis trust.

Some of the assets transacted business with new companies formed in Mauritius. The Bhaur family acted as investment advisor and collected fees from many of these various entities, and experts valued various corporate assets to support transfers at each stage.

It all worked until the scheme tried to make payments to junior members of the Bhaur family in 2016. HMRC demanded substantial tax payments on these benefits paid to “employees,” so the Bhaurs challenged the payments and the junior family members refused to accept them. Realizing that the scheme had not achieved its goal, and that the trustees intended to dissolve some of the trusts and give 90% of the assets to the default trust beneficiary (in this case, the National Society for the Prevention of Cruelty of Children), the Bhaurs asked that the first and second trust be set aside on the grounds of mistake, saying that the scheme was unlawful and dishonestly promoted.

The High Court dismissed the case and refused to set aside the scheme, including either of the remuneration trusts. The judge referred to the new structure as a “dangerous game of double or quits,” which was consciously played and which strongly suggested there was no mistake when the Bhaur family first entered into the scheme.

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