Offshore 101, or: Can we please stop asking David Cameron to resign?

One of my favourite things about the Liberal Democrats is members don’t just get stuck into debates – they go looking for the evidence to back up what they’ve got to say. That’s why this week’s furore around what David Cameron did or didn’t do has been so frustrating.

The Panama Papers are fascinating to me, as a lawyer and a would-be tax specialist. It looks likely that when the dust has settled there will be evidence of money laundering, of tax evasion, of tax avoidance and of regulatory failings. But so far most journalists and commentators are throwing around words like fund and trust as if they’re the same thing, and treating tax avoidance, tax evasion and money laundering as equivalent acts. Unfortunately, much of the social media discussion so far has accepted these red herrings.

In the interest of raising the level of debate, here’s my beginner’s guide to off-shore investing:

What’s the difference between a fund, a company and a trust, and why should we care?  

An investment fund does what it says on the tin: it takes funds from investors and invests them to make a profit. Investment funds like the one David Cameron invested in are nearly always structures based around trusts or partnerships, not companies, and for tax purposes that matters.

A company is a legal person, which means it can hold money in its own right and it pays taxes. Companies pay corporation tax (currently charged at 20% in the UK) on money that you or I, as individuals, would pay income or capital gains tax on. That means if you decide to get your income from, say, your fees for speaking at corporate dinners paid to a services company (a la Ken Livingstone), you could avoid paying the difference between the corporation tax rate and what would have been your income tax rate – that saving can be up to 30%. If you move that company to an “off-shore” location where you can get an even more favourable corporation tax rate, you could potentially save even more.

Trusts and partnerships are different because they aren’t separate entities. They hold your money on your behalf, and owe any benefit from managing that money straight back to you. Because they aren’t separate legal entities they doesn’t pay any tax, but that doesn’t mean no tax is payable on gains. They are called “tax transparent” because you can “look” straight through them to find out who actually owns the money, and tax that person.

Did David Cameron pay less tax because his investment was “off-shore”?

No. There are places in the world where investment in offshore funds still has tax advantages. If funds are taxed directly but the investors still have to pay income tax on the profit (so the money effectively gets taxed twice), moving the fund off-shore can get rid of one layer of tax. In other places, the tax system forces investors to recognise and pay tax on any gain every year, whether you withdraw the investment or not – if the fund is offshore, they might not be recognised as making an gain. That second scenario is how the UK dealt with funds income before 1984. Since then, though, funds on and off-shore have been taxed the same way and you’re no better off with an offshore fund.

Whenever David Cameron received money from Blairmore, HMRC didn’t care where the fund was located – they only cared about David Cameron and where he was resident. That means he paid exactly the same taxes he would have paid if he’d personally gone out and bought shares in a UK-based company (like Tesco), received dividends on them for 13 years, and then sold them off again. Every time the fund paid a dividend, he paid full UK income tax on it, and when he finally pulled the money out in 2010 he paid all the capital gains tax he owed.

But I heard he didn’t pay any Capital Gains Tax?

No he didn’t, but not because he did anything dodgy. Capital gains tax applies to long term investments where you get a one-off payout when you sell the item instead of regular income. As with income tax, you get an allowance so you don’t pay capital gains tax on the first chunk of profit you make when you eventually sell off the asset.

This makes sense: it encourages people with relatively small amounts of savings to invest in longer term and slightly riskier prospects like stocks, shares and property instead of leaving their money sitting in current and savings accounts. This is good for the investment market because it frees up capital, and it’s also good for small investors as over the longer term these riskier products tend to produce better rates of return.

In 2010, when David Cameron sold the units, the CGT allowance was £10,100 per person, per year. Married couples can consolidate their two allowances, which was what the Camerons did, so when they made a profit of £19,000 it came in at under their combined £20,200 allowance.*

If it’s not advantageous for tax reasons, why bother setting an investment fund up offshore?

There are a few reasons to set up a fund in an “offshore” location. Usually, it’s nothing to do with the choice of the investors – it’s all about removing administrative burdens from the group managing the investment.

If you go into a high street bank tomorrow and ask about their shares ISAs, they’ll be able to offer you a few because they use fund managers who set up many different funds investing in different types of products, using different investment strategies, and offering different levels of risk and return over different time periods.  These funds often run for set periods (5-10 years) and it’s easier for management companies to set up and shut down lots of different trusts in fund-friendly regimes like the British Virgin Islands (where Blairmore was originally based), than it is in the UK.

Sometimes it is privacy-related, for those who really don’t think your money is their business, but this is more difficult since the introduction of worldwide tax information sharing agreements (the UK has had one of those with BVI since 2008).

Wouldn’t it all be easier if we made offshore trusts illegal?

No. For a start, it would be very hard to make offshore trusts illegal without making all trusts illegal. Preventing UK residents from investing in something that would be a perfectly legal structure in the UK just because it’s not in the UK is contrary to pretty much every free-trade and movement of capital agreement we have, and the principles behind them.

Trusts are a fantastic English legal invention with a long history that has been copied all over the common law legal world. They are used, among other things, to stop adults swindling minors out of any cash they inherit, and to make sure charitable donations are used for the cause the charity was set up to promote. They are very common for investments because they protect consumers from unscrupulous money managers running off with their cash, and makes sure they can take all the benefit from any gains.

There’s also no evidence that getting rid of off-shore trusts would help you get to money that might actually have come from money launderers and tax evaders.

I’ve heard the phrase “a sledge hammer to crack a nut” a lot in the last few days, but that isn’t really accurate. In legal terms, banning offshore trusts would be like taking a sledge hammer to a beautiful filigree box that someone happens to have hidden the nut inside, and then finding that the nut rolled out of the wreckage when you weren’t looking.

*The Camerons made roughly 7.5% interest compounded annually over 13 years, so in the boom years of the early noughties it was a solid (but not stellar) rate of return.

Image of pound coins used as a “featured post icon” for this post is by William Warby.

* Alice Thomas is a member of the Federal Board and leads the FB working group on the disciplinary procedures. She is a solicitor based in Southwark who joined the Lib Dems in her hometown of Bromley & Chislehurst in 2006, just in time for her first by-election and has been campaigning ever since.

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57 Comments

  • paul barker 14th Apr '16 - 1:08pm

    Leftwingers need to ask themselves why Tory papers are so anxious to destroy The Tory PM; the answer of course is that Cameron is leading the campaign for “Remain”. By joining the attacks on The PM The Left are helping the extreme Right.

  • Antony Hook Antony Hook 14th Apr '16 - 1:39pm

    This is a brilliant and very helpful article.

  • Of course, Cameron is careful enough not do anything illegal, or at least not so obviously as to let it stick. But none of the above has has any bearing at all on the fact that what he has NOT declared (and he has only revealed details since 2010, AFTER he had had time to get his ducks in a row before becoming PM) was not against the interests of the British taxpayer, with whom he always claims to be ‘in it together’.
    Nor does any of it undermine the basic fact that, while pretending to be tough on tax loopholes for mass consumption , he is desperate to continue to allow offshore tax avoidance to avoid the wrath of billionaire Tory financiers and newspaper owners.
    Brexit may part of it, but only part of it, Paul – those same billionaires are less able to control what happens in the whole EU, because it is a much larger entity.

  • Good and helpful article Alice.

  • Simon McGrath 14th Apr '16 - 2:17pm

    This is a very good article but there is one thing I dont think iS quite right:
    “That means if you decide to get your income from, say, your fees for speaking at corporate dinners paid to a services company (a la Ken Livingstone), you could avoid paying the difference between the corporation tax rate and what would have been your income tax rate – that saving can be up to 30%”
    In order to be able to use the money in the company you have to pay dividends – which are then taxed. Osborne has just put through a big increase in the tax on dividends so while there are advantages they are nothing like 30%

  • You claim that Blairmore’s off-shore status did not help it to avoid UK corporation tax, since it would not have been liable to pay such tax even if it had been in the UK.

    Yet several respected commentators – such as Robert Peston and Ed Howker, the Independent hack who first covered Blairmore in 2012 – have stated categorically that Blairmore’s off-shore location enabled it to avoid paying UK corporation tax.

    Moreover, Michael Crick has helpfully tweeted an extract from Blairmore’s 2006 prospectus which asserts unambiguously that the directors deliberately located the company off-shore so as to avoid being liable for UK corporation tax :-

    https://twitter.com/MichaelLCrick/status/718397165735960576

    Why would the Blairmore directors (Ian Cameron being one of them) say such a thing, if what you are telling us here is true?

    As an aside, David Cameron told Robert Peston that “anybody” could have bought units in Blairmore, but the FT reports that investors had to stump up a minimum of £100,000! Sickening.

  • On a financial note :-

    “The Camerons made roughly 7.5% interest compounded annually over 13 years, so in the boom years of the early noughties it was a solid (but not stellar) rate of return.”

    Actually the stock market stiffed during the early noughties. Between 1997 and 2010 the UK stock market grew by the equivalent of barely 1% per annum (with the average managed fund performing hardly any better), so I’d suggest Blairmore’s performance was a lot more stellar than you think. (I’m assuming Cameron was receiving his dividends during the period rather than reinvesting them, since Peston’s interview gives that impression.)

    In the five years since Cameron cashed in, the Blairmore fund value has apparently nosedived. Very lucky – or shrewd! – timing by our PM.

  • Martin Land 14th Apr '16 - 2:50pm

    I’m the first person to attack a Tory, if not for good reason then just because they are a Tory.
    But Cameron has done nothing wrong. The fund he invested in was perfectly legitimate and he did not avoid CGT as he wasn’t liable for it. Ahhh, I hear you cry, but perhaps it was unethical. But nearly all of us have a pension pot or company pension of some sort and a chunk of that will be invested in similar funds. Let’s get off this silly moral high horse and concentrate on those individuals and companies who really are screwing the system.

  • Alice

    Shhhhh. Don’t interrupt the No. 10 press operation while they are setting themselves on fire.

    They are doing a spectacular job of not explaining the situation. I’m going to sit it out until they have done maximum damage before commenting. There are several approaches that could be deployed to educate on the situation but they are not trying any of them.

  • @Martin Land
    Are you seriously suggesting there is any similarity at all between a low-paid worker putting a few quid in to a pension fund each month, and not really understanding how that money is used, and a wealthy businessman setting up an off-shore fund deliberately for tax-avoidance purposes (see Michael Crick tweet above) for use exclusively by “high net worth” individuals?

  • Alice Thomas 14th Apr '16 - 3:11pm

    Stuart – there are several different types of fund, which are then treated differently depending on their sources of income and how they pay out taxation, and its not been publicly discussed exactly which kind Blairmore is so I cannot be certain. What I can say is that authorised investment funds in the UK, as far as I understand them, are officially taxed at a special low corporation tax rate (currently 20%), but are actually expected to distribute any income to investors each year in what HMRC describes as “interest dividends”, and then can use these to set off against any profit made. The effect is that they pay out all they make each year and don’t ever incur a corporation tax liability.

    In terms of Blairmore’s publicity materials, putting a summary of the expected tax treatment of your fund in the information materials is pretty standard (it may even now be a regulatory requirement). Given that you, the investor, will also be charged CGT and income tax, it makes sense that you don’t also want your money to be subject to corporation tax when it sits in the fund: that isn’t tax avoidance, it’s preventing double taxation.

  • Alice Thomas 14th Apr '16 - 3:14pm

    Stuart – the FTSE all share average for 1997-2010 was 5.04% I believe, so I’m happy to consider 7.5% good, but I still wouldn’t call it stellar when a plain tracker would have got you 5-6%.

  • for use exclusively by “high net worth” individuals

    It clearly wasn’t exclusively for the use of ‘high net worth’ individuals, as David Cameron used it and he is not a high net worth individual.

    (High net worth individuals are those who have more than $1 million in liquid, investable assets; ie, not including money tied up in their home, etc. While David Cameron is certainly affluent, there’s no reason to suspect he is anywhere near that level. Boris Johnson, on the other hand, might well be.)

    Also, a real high net worth individual almost certainly wouldn’t use a shared fund of the kind we’re talking about: they would have their own dedicated fund and fund manager.

    So no, Blairmore almost certain was too small a deal to be of any interest to real high net worth individuals.

  • Alice Thomas 14th Apr '16 - 3:41pm

    Stuart – high net worth individuals can invest for themselves, but most people still benefit from these funds anyway because their investments are consolidated with others through brokers, high-street bank or building society products and pension funds. A value of £100,000 or pretty easy to meet if you’re a pension fund.

  • Alice Thomas 14th Apr '16 - 3:59pm

    Stuart – to address a few points:
    1. Although there are different tax treatments for different types of fund and its impossible to know what structure Blairmore would have taken on if it had been set up in the UK, one of the most common types (authorised investment funds, or AIFs) in the UK are technically subject to corporation tax at a special 20% rate, but don’t actually pay any as long as they pay out all income every year in what HMRC calls “interest distributions” which are tax deductible.

    2. I haven’t seen the wording of the Blairmore documents, so I can’t speak to that specifically, but it is pretty standard to set out your tax treatment in publicity documents as this is part of sensible financial transparency: if Blairmore didn’t investors would be put off. I also understand the fund was established in 1982, before the tax treatment of offshore and onshore funds in the UK was standardised so may have had extra incentive to include this material. Given that individuals pay full taxes on the income they receive from the fund, most investors will always prefer funds where the fund itself is not taxed. This is not tax avoidance, except in the sense you are avoiding double taxation.

    3. Small investors also benefit from the £100,000 minimum by buying into pensions, high street bank investment products and other funds which consolidate their cash with that of others and then invest in funds like Blairmore. For a pension fund, £100k is small potatoes.

  • Jayne Mansfield 14th Apr '16 - 4:06pm

    @ Alice,
    Thank you for an informative article.

  • Eddie Sammon 14th Apr '16 - 4:14pm

    A very good article. As a former financial adviser my understanding is that there is no benefits to investing offshore for the individual unless they plan to retire in a tax haven or they are non-domiciled.

    To keep things simple: lots of funds are based offshore and I used to choose funds without even checking where they were domiciled. For a standard UK investor it didn’t matter.

    The question is though was Blairmore holding actually based in Panama? Wasn’t Ian Cameron the fund manager? We need to maybe tighten up the company residence rules, but Cameron did nothing wrong and I think it would be pious to expect people not to accept shares in their parent’s companies after they have received legal advice that it is OK.

  • @Dav
    “High net worth individuals are those who have more than $1 million in liquid, investable assets; ie, not including money tied up in their home, etc. While David Cameron is certainly affluent, there’s no reason to suspect he is anywhere near that level.”

    There is no single definition of HNW. In the US it’s usually taken to mean £1m (about £700K), but UK investment companies typically define it as a mere £250K.

    Obviously we don’t know all the details of Cameron’s finances, but we do know that he recently received £500,000 in inheritance money and owns a £3.5m house in Kensington which he lets out (and hence should be included in his net worth calculation).

    So for him NOT to be a high net worth individual – even by the American definition – he’d have to have squandered the £500,000 cash, have no other assets, and have debts of nearly £3 million. I think that’s about as likely as his beloved Aston Villa avoiding relegation.

  • Obviously we don’t know all the details of Cameron’s finances, but we do know that he recently received £500,000 in inheritance money and owns a £3.5m house in Kensington which he lets out (and hence should be included in his net worth calculation).

    You’ve mistyped: the gift was £200,000, not £500,000.

    And we don’t know the size of the mortgage on the house: the equity in it could be substantially less than £3.5 million.

    Nevertheless, I will concede that if you use the lower definition of ‘high net worth’ then the Camerons probably do count.

  • @Eddie
    “The question is though was Blairmore holding actually based in Panama? Wasn’t Ian Cameron the fund manager?”

    Several tax experts – including Richard Brooks – have pointed out that this is the crux of the matter. If Blairmore was run from Britain, as sems to have been the case, then really it ought to have been regarded as based here for tax purposes – the signing up of dozens of retired Bahamians as “officers” of the company notwithstanding. Alice hasn’t addressed this point at all.

    And you’re all overlooking the fact that Blairmore themselves stated unequivocally that they had deliberately set themselves up off-shore to avoid UK tax liability. Why would they say that, if there was no advantage to be had? And why – if their activities are not in principle taxable – is it widely reported that they are now paying Irish corporation tax?

  • @Dav
    “You’ve mistyped: the gift was £200,000, not £500,000.”

    You are incorrect – he received £300,000 direct from his father and two gifts of £100,000 from his mother. That’s £500,000.

    He also received £3,052 in interest “from a high street bank” in 2014-15, which tends to suggest he has a lot of cash.

    With that, the £3.5m second house, and £200K annual salary, it would be pretty extraordinary if he were not HNW, or even VHNW. None of which I begrudge him, but let’s at least be realistic about it.

  • Alice Thomas 14th Apr '16 - 5:32pm

    Stuart – so far every attempt I’ve made to comment hasn’t worked, but I’ll give it one more try:
    1. There is more than one kind of UK fund, each of which is treated differently for tax purposes, so we can’t know for certain what structure would have been chosen and what the tax treatment of Blairmore would have been if it was onshore. What I can say is that one of the most common types of UK fund, an authorised investment fund or AIF, is theoretically subject to a special 20% corporation tax rate but as they can deduct any payments made to investors as what HMRC calls “interest distributions”, and they usually distribute all of their income annually or use it to pay managers expenses, effectively they pay no corporation tax.

    2. Again without seeing the Blairmore publicity materials its hard to comment specifically, but it is normal practice to include a statement on your tax treatment (and good for the consumer as they need that information to decide whether the effective rate of return will be worth it for them). Given that UK resident individuals will pay full tax, it makes sense for them to invest in funds that are not themselves taxed separately – otherwise the same profit will be taxed twice. It is also worth pointing out that Blairmore was set up in 1982, before the treatment of income from off- and on-shore funds for individuals was standardised so that may be why it was originally included.

    3. “Normal” individuals do benefit from funds like Blairmore because their pension funds and other investment products are consolidated with many others and these then invest in funds like Blairmore. For the individual, it makes no difference if that money is invested directly by them or by their pension fund on their behalf so nobody is losing out.

  • Alice Thomas 14th Apr '16 - 5:45pm

    Simon McGrath – thanks for you excellent comment.

    You are right, of course, that dividends are taxed as income but until this tax year the income tax rate you paid were subject to a 10% notional tax credit to try and even out any corporation tax already paid, so it wasn’t as high a rate as normal income. (They have just introduced a £5000 tax exempt amount for dividend income, and a special income tax rate starting at 7.5% above that, so it may still be more advantageous to use a company rather than take the money directly as income). You can also use a company structure to do things (i) like share income earned by one person between several shareholders (such as your wife, as Ken Livingstone was accused as doing) thus taking advantage of their credit/tax exempt amounts/potential lower notional income tax rate, (ii) leave the money in the company but borrow off the back of the value of your shareholding (although this is more difficult with close companies rules), or (iii) only pay it out as on liquidation of the company, in which case it will be charged at CGT rates, if it counts as a chargeable gain at all.

    You’re also right that Osborne has been making these loopholes smaller or cutting them off altogether wherever possible though.

  • Eddie Sammon 14th Apr '16 - 7:19pm

    Thanks Stuart. I haven’t read much what other tax experts have said about it – I’ve mainly be concerned what the commentariat has been saying about it, but yes that was the issue that jumped to me straight away: where was the fund really run from?

    There is nothing necessarily wrong with doing something purely to avoid tax. One could say they are moving to Monaco to avoid tax. Entirely legal.

    Just a general point on fund structures: Most UK funds set up nowadays are OEICS, which are a company structure, but there is little difference between these and Unit Trusts, which are a trust structure. There is a bigger difference between Investment Trusts, which are actually different to Unit Trusts, in that they can borrow more money so take on more risk.

    You also have UCITS funds (EU regulated), Non-UCITS (Non-EU regulated, but possibly UK regulated) and QIS, which are the least regulated and can only be marketed to experienced investors, often called hedge funds.

    I have just done some research using a popular free industry website and it seems Blairmore Holdings was originally unregulated, possibly QIS, but now it is full UCITS, but still based in Ireland:

    http://www.trustnetoffshore.com/Factsheets/Factsheet.aspx?fundCode=NWBH&univ=DC

    The above technical information is probably better for Alice to look at and other specialists. But for general UK investors or those new to investing this is a good website:

    https://www.moneyadviceservice.org.uk/en/categories/investment-types

  • Eddie Sammon 14th Apr '16 - 8:08pm

    By the way, on fund domicile and regulation: this also ties into the EU referendum: funds that apply fully with EU regulations, like seemingly Cameron’s Dad’s old fund now, can be marketed to standard investors across the whole EU, which I guess is probably why they converted to this structure.

    Please don’t get mixed up with Alice’s very good distinction between a fund, a company and a trust. I’ve just dug a little deeper into fund structures and it also ties into what David Cameron said on TV which is that the main reason they went offshore was for regulation purposes, not tax.

    If anyone wants to correct anything I’ve said then feel free. My knowledge is rusty.

  • I’ve got to admit I sort of want him to resign. It’s more about the feeling that he’s yet another career politician taking the electorate for granted and the hypocrisy than what kind of gift or fund it was or how much it netted him.

  • Alice Thomas 14th Apr '16 - 10:51pm

    Glenn – I actually think that’s the real motivation behind a lot of the reaction and though I disagree I would totally understand it. This is not in reference to you, but part of the reason I wrote this though is because it’s so annoying to have people hide their true motive behind inaccurate and careless justifications, especially when there’s plenty of real, quality investigative work to be done with these papers.

  • david thorpe 14th Apr '16 - 10:52pm

    the following lib dem politicians benefit from offhsore cash right now….

    paddy ashdown
    simon hughes
    vince cable?

    why? because they recieve pensions drawn from the mps pension fund, which has assets in tax havens…

  • @Alice Thomas
    “the FTSE all share average for 1997-2010 was 5.04% I believe, so I’m happy to consider 7.5% good, but I still wouldn’t call it stellar when a plain tracker would have got you 5-6%.”

    You must be including dividend reinvestment to get a figure as high as 5.04%. I deliberately excluded that and only calculated capital return on the index itself, since Cameron himself has stated that he was receiving dividend income while he owned shares in the fund, so he can’t have been reinvesting all (if any) of his dividends.

    Long-term rates obviously vary depending on your chosen date range. I can only find end-of-year figures, so I’ve just recalculated the average compound growth rate from the end of 1996 to the end of 2009, since we know Cameron sold his shares in February 2010. The FTSE all-share index grew by a compounded rate of 2.5% pa during this period. At that rate, Cameron’s initial £12,000 would have grown to a mere £16,500 over 13 years, instead of the £30,000 it grew to in the family off-shore fund. Not for nothing did Einstein say that compound interest is the most powerful force in the universe!

    Even if you reinvested all dividends (which Cameron didn’t), the all-share only grew by 5.7% pa during the period, which would have turned his £12,000 into about £24,500. Cameron took dividends and STILL massively out-performed the FTSE. It’s not accurate to say Cameron did not much better than someone with a tracker. I’ve had a tracker for years so know this to my cost!

  • @Alice Thomas
    “we can’t know for certain what structure would have been chosen and what the tax treatment of Blairmore would have been if it was onshore”

    This is a rather more cautious assessment than your original article. You’re right, we can’t know for sure, so perhaps we should just take the Blairmore prospectus at its word (Eddie will also find this interesting, given what Cameron told the TV interviewer) :-

    “The Directors intend that the affairs of the Fund should be managed and conducted so that it does not become resident in the United Kingdom for United Kingdom taxation purposes. Accordingly… the Fund will not be subject to United Kingdom corporation tax or income tax on its profits.”

    I think “intend” is the key word there.

    Alice, what are your thoughts on the legal situation vis-a-vis whether Blairmore was genuinely run in the Bahamas (by a retired Bishop and about 50 various other Bahamians who at various times were employed as officers of the company) or whether it was controlled from the UK? See Richard Brooks’ comments here :-

    http://www.theguardian.com/news/2016/apr/04/panama-papers-david-cameron-father-tax-bahamas

  • Eddie Sammon 15th Apr '16 - 12:50am

    Sorry, it seems I misheard David Cameron’s interview and he said it was set up after exchange controls went (I thought he said because of exchange controls) so they could invest into a dollar denominated fund. UK funds can be dollar denominated too, but apparently Panama having a currency pegged to the dollar makes it better to base it there.

    http://www.ft.com/cms/s/0/01f5b790-fd9f-11e5-b5f5-070dca6d0a0d.html#axzz45qV5Y31o

    It still looks a bit suspicious to me, but it isn’t a resigning matter and the offshore fund structure is something that has been fairly standard for a long time.

  • Alice Thomas 15th Apr '16 - 7:48am

    Stuart – I’m using the overall growth in the FTSE all share in each year averaged across 1997 to 2010, so not including reinvestment income. We must be using figures from different sources and since I can’t know which are correct, and anyway the relative impressiveness of the rate of the return is not the point of the article, I’m going to leave that there.

    I did not comment on the tax treatment of Blairmore in the original article, only of Cameron, and that remains the same whether the fund had been based onshore or offshore. He would have paid no more or less tax if the fund were onshore.

    Again, that statement quoted from the Blairmore documents is a pretty standard statement of tax treatment, and I don’t believe it changes my earlier assessment. The reason it says “intend” is to ensure the directors are responsible for the statement while simultaneously making clear they cannot guarantee that treatment. That is sensible legal language.

    I can’t speak to the detail on Blairmore’s management from the conflicting information available: so far, in looking for information for example, I’ve found claims it was resident in Panama, in the Bahamas, in British Virgin Islands (which I believe is actually correct) and managed from the Bahamas, Switzerland and Panama. Given the papers haven’t been published, it’s very hard to tell. There are differently regulatory reasons for using each – from favourable currency arrangements for dollar-denominated funds in Panama to no requirement to be a regulated manager under UK law. All I can say is that, quite rightly, the regulatory regime has moved on so we are now in a position where it is very hard to prove central management and control where you’re main management team are UK based. Blairmore are still succeeding in meeting these requirements as they are still based offshore in Ireland.

  • To quote Mark Steel in today’s Independent – “Some people even insinuated the reason the millions of pounds were placed in the Bahamas was to avoid tax. But there are many other valid explanations, such as the need to keep the money warm.”

  • Mark Baird,
    Exactly.
    It seems we’re supposed to feel that he is being unfairly victimised by the “politics of envy”. He’s a lame duck with zero credibility and that’s only when he isn’t an international punch-line because of ***gate!

  • Sue Sutherland 15th Apr '16 - 2:26pm

    Thank you for your very informative article Alice. I hope you can get involved in making any new policy on tax avoidance for the party. I think that what is happening is a general revulsion that the wealthy can legally avoid paying tax while the little guy is using food banks to feed her family. This may well have been news to some.
    Politically, when public opinion turns in favour of the sort of society we are working to establish, I think the only thing we must do is take advantage of it. So now is the time to develop and shout about policies to crack down on tax avoidance in order to create a more equal society.

  • T A GILBERT 15th Apr '16 - 5:28pm

    Thanks for the work that has gone into this article, Alice, and from many of the commenters, too. But a follow up article explaining where you DO think the Conservatives are colluding on tax avoidance would be very useful, Alice! Our ministers seemed to me to think they were dragging their heels on ending tax avoidance?

  • @Alice
    “I’m using the overall growth in the FTSE all share in each year averaged across 1997 to 2010, so not including reinvestment income. We must be using figures from different sources and since I can’t know which are correct, and anyway the relative impressiveness of the rate of the return is not the point of the article, I’m going to leave that there.”

    Apologies for pursuing this further, but I’m afraid your maths is way out. You might not think this an important point, but since you claimed the Blairmore performance was “not stellar” compared to a bog standard tracker – which is not true at all – I think it’s worth getting this right so as not to give the wrong impression that Cameron didn’t do any better than somebody walking in to their local building society and opening an ISA, which is what you seemed to be implying.

    You can get full historical FTSE all share data here :-

    https://uk.finance.yahoo.com/q/hp?s=^FTAS&b=1&a=00&c=1997&e=15&d=03&f=2016&g=d

    The average index value in 1997 was 2236. 13 years of compound growth @ 5.04% (as you claim) would have meant the index hitting 4238 in 2010. In fact the index averaged 2816 in 2010 and never got any higher than 3107. The ACTUAL average rate of growth was more like 1.8%.

    Hence, had Cameron invested his £12,000 in a tracker in 1997, and not reinvested the income, he’d have made about £3,000 by 2010. Luckily for him, he had access to a far superior family fund which turned in a profit about six times that much i.e. £18,000.

    The relevance of this – beyond the humdrum observation that the rich always seem to get the best deals somehow – is that the healthy returns from Blairmore are not unrelated to its tax-avoiding off-shore status.

  • Eddie Sammon 15th Apr '16 - 8:18pm

    Hi Stuart, we shouldn’t get bogged into a debate about the fund’s specific performance. I think we need to explore what we should do about offshore funds in the future because the issue is much bigger than this specific fund.

    Clearly people should be allowed to set up funds in whichever country they like, but maybe the residence rules should be reviewed.

  • @Alice Thomas
    “I did not comment on the tax treatment of Blairmore in the original article, only of Cameron”

    That’s a bit disingenuous, given that Blairmore is a family-founded firm (and is even named after the Camerons’ ancestral pile). He was no ordinary customer.

    “that statement quoted from the Blairmore documents is a pretty standard statement of tax treatment, and I don’t believe it changes my earlier assessment”

    But your earlier assessment was that Blairmore would not have been subject to UK corporation tax even if it had been based here. If that’s true, why did Blairmore themselves claim that they were based off-shore for the purpose of avoiding paying UK corporation tax? Could they have known something about their affairs you don’t?

    “Blairmore are still succeeding in meeting these requirements as they are still based offshore”

    And what are those requirements exactly? A cynic (or indeed a respected tax expert like Richard Brooks) might suggest that the “arrangements” consist mainly of simply telling HMRC you’re based off-shore (even if you’re not really) and then paying a company like Mossack Fonseca to find enough retired bishops to appoint as company officers in the base country so that it looks kind of legit from a distance.

    I’m actually less interested in the legality of all this than the morality of it. I actually wouldn’t criticise anybody simply for avoiding tax if it were fully within the law – in fact I thought Jimmy Carr was very harshly treated (including by Cameron) for this reason. What Carr did was far more aggressively evasive than what Cameron (or his dad) have done, but to my mind Cameron is the worse of the two because he’s the one who got elected PM on the back of endless insincere waffle about “opportunity for all”. Carr is just a guy who tells jokes.

  • Alice Thomas 15th Apr '16 - 9:37pm

    Stuart – I believe I’ve already answered the question on publicity materials so will refer you to my previous comments. I agree with Eddie and stand by my earlier comment that the numbers are not the central purpose of the article (although I believe I was correct that we are not only using different sources for our FTSE numbers but clearly also in different ways because even with the Yahoo numbers I get a £21,000, or £9,000 profit over 13 years; also worth pointing out Blairmore was dollar-denominated so likely invested in things other than the FTSE, though I appreciate if it were tracking the NYSE it wouldn’t necessarily have done much better). It may be helpful for you to look at HMRC’s guidance, which is freely available, on the definition of “central management and control”, which is the test Blairmore has to withstand.

    The purpose of this article is not actually to excuse Cameron (although I don’t think he’s done anything he needs to be excused for). The purpose is to highlight the way that poor understanding and imprecise language clouds the discussion.

    That’s why I want to point out that calling it a “family fund” and then a “family-founded firm” is exactly the kind of inaccurate use of language I’m trying to get at. It is a fund (not a firm) and was not established, as the phrase “family fund” suggests, on behalf of or even mainly for the benefit of, the Cameron family, any more than my local hospital was established for the benefit of my family just because my mother happens to work there and sits on the board of trustees, and I’ve benefited from their services. The fund was open to a wide range of investors, including professional investors and other funds. The fund currently has over £31m in management – that is not all family wealth.

    David Cameron could invest in any fund like that, because he happens to have personal wealth: he probably picked him father’s because it was easier when he knew about it already, but nothing we’ve seen suggests he got special treatment, on fees, tax treatment or otherwise.

  • Alice Thomas 15th Apr '16 - 9:45pm

    Nick Baird – there are definitely tax efficiency reasons to set up certain structures in certain offshore locations. But to pretend there aren’t other reasons, and deny that in many cases there are no tax benefits to being offshore is just as disingenuous. The tax system is constantly getting attacked for its complexity (often rightly) – what I’d really like to see come out of this article is some recognition of the nuances from both sides.

  • Alice Thomas 15th Apr '16 - 9:52pm

    TA Gilbert – as we’ve discussed in another forum, the purpose of this article is not to provide my personal view on tax avoidance but to address some of the most obvious confusions around legal and financial terminology, which I hope is helpful for other members who don’t have a professional background in this area.

  • Peter Davies 16th Apr '16 - 4:22pm

    “This [CGT allowance] makes sense: it encourages people with relatively small amounts of savings to invest in longer term and slightly riskier prospects like stocks, shares and property instead of leaving their money sitting in current and savings accounts.”
    Blairmore was as you said a “solid” investment. Its profits did not appear as capital gains because of the nature of the investment but because it chose to reinvest rather pay dividends. It probably did this largely to allow its beneficiaries to take advantage of the CGT allowance. I very much doubt that any of the money in the trust would otherwise have been sitting in a current account but if it were then the bank would have invested it in similar assets. The CGT allowance has almost no beneficial incentive effects and is in effect a £3000 gift to those wealthy enough to use it.

  • Alice Thomas 16th Apr '16 - 7:34pm

    Peter Davies – I understand that David Cameron received both interest distributions/dividends on which he paid income tax from the fund (so was not avoiding paying income tax rates by reinvesting in that way) and a capital gain on selling all the units. Again, we don’t know enough about the investment strategy/status of the fund to know, but the value of units in a fund can move independently of just accumulated reinvestment value of assets managed, especially where units are tradable.

    I also don’t quite follow the logic on the incentive of CGT. When I said it was “good for consumers” you know that even if your bank were to invest in these products with the money from your current account they don’t pass it on to you: standard interest rates (currently 0-3% at best) are much lower than most longer term capital investments, and you have to pay income tax on all of it. The statement that it was “good for the investment market” is partly because high street banks don’t invest most current account money in riskier/longer duration products. Where people have accepted a low rate of return in exchange for easy access to their money, the bank would not be acting appropriately to lock large proportions of that cash up. Even if all the arrangements are through the same bank, by buying into their investment funds by your own choice, it becomes a lot clearer that you fully intend to invest that way, and they can free up all of the capital you give without having to make low-risk decisions on your behalf.

    If you receive the CGT allowance you do not pay tax on the first £11,000 (which I assume is what you mean by £3,000, as 28% CGT on £11k is £3080 in tax?). By contrast, interest income has only just started (as of April 2016) to have a tax-free amount attached to it and it is only on the first £1,000 of income (or by your calculation £200 in tax saved).

    There is, therefore, a lot of incentive for an ordinary consumer to invest in capital products like unit trusts/tracker funds if they have a relatively small amount of savings (say £1-20k) because a large proportion, and even all, of the profits will be returned to them tax-free. This incentive is at least as much, if not more so, that someone whose savings will produce a profit large enough to suffer some of the 28% CGT tax rate.

  • Peter Davies 16th Apr '16 - 8:04pm

    low and middle earners can generally save tax free anyway. The incentive to invest in capital products is greatest for those who have used up their pension and ISA allowances.

    Most people who want capital growth invest through vehicles which produce high growth and low income but with underlying assets which might just as easily produce income. That means that while individuals change their investment strategies and pay less tax, the funds available for long-term or high risk investment don’t change.

  • Eddie Sammon 16th Apr '16 - 8:26pm

    Peter Davies, the incentive to invest in capital products is also great for people not in one of the higher rate tax brackets. This is something that pension reformers such as Steve Webb want to solve by introducing a flat-rate tax relief of about 30%, but we have to be careful because anything less than 30% would make pensions tax inefficient for people who are higher rate taxpayers in retirement, if they decide to withdraw all their money.

    Regards

  • A Social Liberal 16th Apr '16 - 9:40pm

    Alice

    Perhaps you can explain where others were unable. What is the advantage of setting up a company dealing in dollar based investments in Panama rather than the US? What is the reasoning for having that company manned by officers who at face value were recruited for where they come from rather than their financial acumen (a self styled bishop for example)? Finally what are the advantages for someone who knows about the staffing shortfalls (through that investors familial connections for instance) in investing in such a company rather than a more appropriate US company?

  • Alice Thomas 17th Apr '16 - 1:44pm

    Social Liberal – although Blairmore was set up by a Panamanian legal services firm, Mossack Fonseca, I understand the fund was established in the British Virgin Islands. For UK investors looking to invest in dollar-denominated funds in the early 1980s (Blairmore was established in 1982) I understand this was easier to do outside of the UK but in a state with which the UK had relatively simple financial capital transfer arrangements (which it does with BVI, as a British Overseas Territory). Unfortunately, for the full reasons why this is the case you will need to talk to someone with more detailed understanding of the regulatory and tax systems at the time – Blairmore was established several years before I was even born!

    In terms of staffing, I understand the description of Solomon Humes as a primarily a bishop is misleading. He was a lay bishop for his church, which I understand means he was not ordained and it was not a full time role. He worked in financial services for his entire professional life, including at Coutts Bank. As such he seems to have been well-qualified.

  • “low and middle earners can generally save tax free anyway. The incentive to invest in capital products is greatest for those who have used up their pension and ISA allowances.”

    The real incentive to invest in capital products with a higher growth potential is to build up capital! Something any financially astute 20-somthing who is able and prepared to save a relatively small amount each month and wish to get the maximum return on their investment.

    Whilst for some, having an ISA wrapper around a bank savings account is all they can handle, others however are more able to take on risk and are prepared to invest abroad in emerging markets etc. and hence come face-to-face with the limitations of what can and can not have an ISA wrapper applied. Also if they dig a little they will come face-to-face with the reality of management fees and currency exchange rates.

    In the past whilst working for a French company, I used a French bank account because, it enabled me to avoid the 2~5% levy per transaction the banks charged just to convert Euro purchases into Sterling. Additionally, with respect to French shares, yes I could hold them within a UK fund, but then this merely hid the fact that the UK stockbroker had an arrangement with a French stockbroker, so one transaction incurred both a UK stockbroker fee, a French Stockbroker fee and two currency conversion fee’s (stockbroker fee and investment monies) – Such overheads, particularly on small transactions could easily eat into any profits or monies received from dividend payments…

    So there are good reasons to have offshore investments and that is before we consider double and triple taxation…

  • @Alice
    “I understand that David Cameron received both interest distributions/dividends on which he paid income tax… and a capital gain on selling all the units.”

    That’s incorrect. Cameron told Robert Peston he paid no CGT. Incidentally, though Cameron is himself confused about whether he actually owned shares or units in Blairmore (he’s claimed both), the fact is that Blairmore was not a unit trust, it was an investment company (now officially an OEIC as Eddie said) so Cameron owned shares, not units.

    “The purpose is to highlight the way that poor understanding and imprecise language clouds the discussion.”

    You mean like calling it a “unit trust” when it wasn’t a unit trust?

    “calling it a ‘family fund’ and then a ‘family-founded firm’ is exactly the kind of inaccurate use of language I’m trying to get at. It is a fund (not a firm)”

    Blairmore was founded by Ian Cameron and was a company incorporated in Panama in 1982, as stated on the front page of the infamous 2006 prospectus. It was a firm, and one founded by Cameron’s dad, so I’m puzzled you should object to me calling it a “family-founded firm”. Going back to your original article, you’re simply wrong to state that Blairmore was not a company. (See link to prospectus in next post.)

    “It may be helpful for you to look at HMRC’s guidance, which is freely available, on the definition of “central management and control”

    I’d already done that, which was why myself (and Eddie just before me) highlighted this as a central issue, and why I was surprised you hadn’t even mentioned it in your article.

    The original Guardian scoop had some strong evidence that central control decisions were in fact being made by Ian Cameron and his friends here in the UK. That’s why Richard Brooks was strongly of the opinion that HMRC would have been asking some searching questions had they been aware of the information at the time. If you haven’t seen the Guardian report, it is here :-

    http://www.theguardian.com/news/2016/apr/04/panama-papers-david-cameron-father-tax-bahamas

  • @Alice
    Some more suggested reading…

    More info on alleged phoneyness of Blairmore’s off-shore status :-

    http://uk.businessinsider.com/ian-camerons-part-in-blairmore-holdings-2016-4

    http://www.taxjustice.net/2016/04/08/what-david-cameron-got-wrong/

    Some interesting info on the retired Bishop who was supposedly running Blairmore’s fund for millionaires while living in a wooden shack :-

    http://www.thesun.co.uk/sol/homepage/news/politics/7063413/Boss-of-firm-linked-to-PM-lived-in-a-shack.html

    The full text of the 2006 Blairmore prospectus; see page 38 for the bit where it asserts that the fund is based off-shore so as to avoid liability for UK tax :-

    http://globaldocuments.morningstar.com/documentlibrary/Document/ec3dcb9ffb02c630042fa1ac2c7d56de.msdoc/original

  • @Alice
    “I believe I was correct that we are not only using different sources for our FTSE numbers but clearly also in different ways because even with the Yahoo numbers I get a £21,000, or £9,000 profit over 13 years”

    Sorry but there’s only one way to calculate compound growth :-

    P = C(1 + r) ^ t

    Where P = future value, C = initial value, r = rate of interest (in form 0.01 for 1%), and t = number of years.

    Your calculations suggest that the FTSE grew by the equivalent of 4.4% pa – which is massively out. The true figure was 1.8% as I mentioned earlier, which you can verify yourself by putting the FTSE 1997 average (2236) in to the above formula.

    Whatever formula you are using is wrong, or you are not applying it correctly.

    Incidentally it turns out that when Cameron said he sold his Blairmore shares for “about £30,000” what he actually meant was £31,500. (It must be nice to be so well off that £1,500 is not even worth mentioning.) This means his compounded annual growth was more like 7.7% rather than the 7.5% you quoted.

  • Alice Thomas 18th Apr '16 - 11:14am

    ““I understand that David Cameron received both interest distributions/dividends on which he paid income tax… and a capital gain on selling all the units.”
    That’s incorrect. Cameron told Robert Peston he paid no CGT.”

    Please note I said “a capital gain” not “he paid CGT”. As I state in the article, he made a capital gain (of roughly £19,000) but as this was under the CGT allowance he paid no CGT on that amount.

    if Blairmore had been onshore, the distinctions between shares and units would be more important. As it stands, since offshore funds are necessarily set up under structures that are not always directly equivalent to the English/UK legal definitions of a unit trust or fund company, HMRC treats offshore funds as one type of entity – so describing them as units or shares is often irrelevant. Please see HMRC manual SAIM 6000 for details of this treatment, which is in accordance with all of my earlier descriptions of it as an offshore fund.

  • @Stuart – I think in your arguments you are mixing two very different things:
    1) The UK tax liability of Blairmore Holdings, the fund management company.
    2) The UK tax liability of UK investors in the Blairmore fund, of which David Cameron was one.

    I think Alice has covered the second issue and concluded just as the Guardian did, there is no evidence that David Cameron used Blairmore to evade UK taxes (and neither did Blairmore advertise itself to potential investors as being a UK tax avoidance/evasion investment vehicle, going so far as to be registered with HMRC as a “Distributor Fund”) and from the information released, had paid all UK taxes due on the dividends and gains he made from his Blairmore investment and had liquidated his investment prior to becoming PM. So no real story here, just the press relishing FUD stirring.

    The first however, is a little more complex. However, from an customer/investor viewpoint (and this is really the only one that matters, given the majority of businesses are customer/investor funded), the less the management company takes in fees and charges, the more money is left for investment purposes and so make customer/investors happy!

    So tax efficiency here is important because all costs end up in the fee’s and charges paid by the customers/investors. Yes fee’s might only be 1~2% of a funds value, but if the fund is only growing 4.4% pa, a 1% increase in fee’s reduces the overall growth by nearly 25%. [Hence why the government made so much fuss about fee’s when it set up the child trust fund and stakeholder pension.]

    I would therefore assume that Blairmore Holdings structured itself and located it’s key operation centre’s such that it would incur minimum duty and tax liabilities in the markets it chooses to invest in. Obviously, only Ian Cameron knew the full rationale for the structure and specific geographic locations chosen in 1982 for Blairmore Holdings and why the Panama company was relocated to Ireland in 2010.

    The effect of all this hopefully enables Blairmore Holdings to incur the minimum amount of duties and taxes on it’s stock trading activities and that business overheads and staff costs also incur the minimum of tax. Hence it is here that there questions may arise over whether Ian Cameron correctly reported any monies received from Blairmore Holdings to HMRC.

  • …hit the length limit!

    Finally, putting the two pieces together we can see that the tax efficiencies put in place by Blairmore Holdings, enabled more monies to be retained by customers/investors and hence subject to local (UK) taxation – so David Cameron received larger dividends and a final capital gain of circa £19,000 rather than potentially circa £14,000 if Blairmore had been located onshore and Blairmore had been paying UK taxes on it’s operations.

    I suspect from HMRC’s viewpoint, given this is an investment company, whilst they would like to receive tax revenues from the company, they were happy to share the risk and gamble on receiving the income tax payable on larger dividends and potentially a slice of the much larger capital gains. A bit like the arguments around pensions contribution tax relief and taxation of pension drawdown.

  • @Roland
    ” I think in your arguments you are mixing two very different things:
    1) The UK tax liability of Blairmore Holdings, the fund management company.
    2) The UK tax liability of UK investors in the Blairmore fund, of which David Cameron was one.”

    I really haven’t – I’ve been 100% aware of the difference between the two from the start, as I think you’ll see if you go back to my earlier comments. In my comments I’ve been concentrating on the fund itself since I have never claimed Cameron’s income tax/CGT arrangements were dodgy in themselves, only mentioning Cameron’s personal situation where it seemed relevant.

    “Finally, putting the two pieces together we can see that the tax efficiencies put in place by Blairmore Holdings, enabled more monies to be retained by customers/investors and hence subject to local (UK) taxation – so David Cameron received larger dividends and a final capital gain of circa £19,000 rather than potentially circa £14,000 if Blairmore had been located onshore and Blairmore had been paying UK taxes on it’s operations.”

    This is precisely what I was alluding to (very vaguely) earlier when I mentioned that the status of Blairmore was relevant inasmuch as it may have impacted on the value of Cameron’s profits. I had read an article somewhere (alas I don’t have the link) from a “tax lawyer” who argued the same point – that Blairmore’s lack of tax liability was OK since the benefits would just end up as increased income for the investors and be taxed that way instead.

    But of course that argument raises a few more questions. Did all these benefits really get recycled to UK tax-paying investors? And besides, Cameron paid no CGT on his gains, so how exactly did HMRC benefit, apart from the incoem tax on dividends?

    I think there will inevitably be more information to come out and we certainly need someone to write an article like the one Alice has written, but without all the errors and imprecise language.

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