GUEST POST/Estate-planning advice for Konrad Mizzi

This guest post has been written by a London-based practitioner in tax and wealth planning.

Let’s start with Minister Mizzi, as we have more information about his affairs than we have for the rather more shady Keith Schembri. We’ll say that Mizzi has met me at my office, by appointment, so that I may review his financial affairs and give him with investment and tax advice for inter-generational wealth management and planning, as he says that his wife and children are his main concerns here.

I will complete a detailed Know Your Client (KYC) exercise as required by law. This involves asking a great many questions about the client’s circumstances and covers the following information.

Full personal details
Health details
Residence and domicile details
Tax reporting information (what level of tax is paid, and so on)
Liabilities (mortgages, loans, credit cards)
Detailed and precise breakdown of assets, estimated value and ownership
Protection (insurance, such as medical, property, car, life and so on)
Precise breakdown of sources of income
Precise details of existing wills and testamentary dispositions (who will inherit on his death)
More and more information along the same lines

This document may typically span 11 to 50 pages and is required by law. Many people will have experienced this when they go to the bank and ask to open an account.

Any adviser whose client does not want to disclose full details for KYC purposes may not proceed to give advice unless the client is ready to sign “an execution-only waiver”.

An execution-only waiver (or a non-advised basis) is where the client has refused to provide the information needed to give advice that can be determined to be appropriate and suitable. Therefore the adviser cannot be held responsible for the advice given in these circumstances. International or multi-national firms will usually refuse to provide non-advised service unless it is in exceptional circumstances, generally as a one-off.

Minister Mizzi’s declared assets are: around €300,000 cash deposited at the bank; one jointly owned flat in Malta, with a mortage; one jointly owned house in London.

My advice would be as follows. Should he consider paying up the outstanding mortgage on the Malta flat with the cash in the bank? If he can earn higher interest by reinvesting that cash than he is paying on his bank loan, then no – not if his current income comfortably covers his loan repayments. The loan details would have been part of the KYC exercise.

Let’s assume that the loan costs 4% per annum and that the repayments – together with other outgoings, such as utility bills, fuel, supermarket bills, and so on – leave a comfortable disposable income margin which is greater than what he needs for discretionary expenditure. He should, in that case, invest his capital.

Konrad Mizzi is registered in Malta for tax purposes, so his best option would be to set up a jointly-owned single premium whole-of-life policy which could invest in EU-harmonised funds, such as equity funds, bond funds, money market funds, property funds and so on. Gains and income within the policy would grow free of any tax, and when he decides to redeem part or all of the policy (withdraw money from it) the tax element would be very favourable – very little would be chargeable to tax.

If he were to invest €300,000 and it grew to €500,000 in 10 years’ time, he will have had €0 of tax to pay and nothing to declare. If he switches into Malta asset funds three years before winding up the policy and having the monies paid out to him, he would still have no tax to pay in addition to the withholding tax deducted at fund level in those last three years.

His house in London is a second home because he is resident in Malta. It therefore would not qualify for the ‘main home’ or ‘principal residence’ capital gains tax exemption in the UK. But as Mizzi is not resident there, and is not likely to live there within the next five years, he could sell the property with all gains up to 5th April 2015 exempt from UK capital gains tax. It is only capital gains (the difference between the purchase price and the selling price less renovation costs and costs of purchase and sale) accrued since April 2015 that are taxable, i.e. very little of very little.

Mizzi does not pay tax in the UK and he is domiciled in Malta (and there is no doubt about this), so UK inheritance tax on non-UK domiciles only applies on assets in the UK. Assuming that he owns the London house with his wife, and the value is less than £650,000, there is no liability to UK inheritance tax (“IHT”). IHT applies at 40% on assets above the nil rate band allowance of £325,000 individually, £650,000 for married couples.

In these circumstances, it would be bad and unsuitable advice (or mis-selling) for me to recommend the use of a trust or an offshore company. The asset base simply doesn’t justify it and there is no tax that he would mitigate or avoid by using a trust or an offshore company.

If he did use an offshore company to hold the London house (and this could easily be a Cyprus- or BVI-registered holding company), that would completely avoid IHT in the UK if the property value had to shoot up to, say, £1 million. But the costs would simply not justify the exercise at present.

My professional opinion is that a trust is most certainly not necessary to safeguard, tax-shelter or protect Minister Mizzi’s financial affairs. It serves no purpose based on his declared, existing asset base. The situation would be different if, for example, he had a child suffering from long-term disability or other family situations where future guardianship is required in view of medical, health or mental health issues. But then it would be a trust registered in Malta and not an offshore trust.

It is my professional view, too, that a company of any kind is most definitely not required to safeguard, tax-shelter or protect Minister Mizzi’s financial affairs. It serves no purpose based on his declared, existing asset base. It would be unnecessarily cumbersome and awkward to manage and use, most especially so a company in Panama, which jurisdiction is blacklisted in many parts of the world.

Minister Mizzi does not qualify as a high net worth (HNW) individual with an asset base of at least US$ 15 million, which means that the use of an aggressive tax mitigation strategy is completely unnecessary and irrelevant. The use of an offshore company in Panama and offshore trust is New Zealand qualify as an aggressive tax mitigation.

If anyone came to me saying that a Maltese resident formerly working in the UK has a Panama company held by a New Zealand trust, I would immediately conclude that the only possible reason for this cumbersome and clunky arrangement is that they are hiding something. This could be either the siphoning off and hiding of ill-gotten gains; criminal tax evasion on legal gains (but all Minister Mizzi’s legal gains are declared); hiding the proceeds of past tax evasion from, for example, selling a large asset or earning income in another country which hasn’t been disclosed and due tax paid where applicable; the proceeds of crime, which includes embezzlement, bribery, fraud and other ‘financial crimes’.

The advice which Minister Konrad Mizzi received, to set up a company in Panama and transfer its ownership to a trust in New Zealand, isn’t “naïve and politically insensitive”. It is wrong and unsuitable advice, and therefore the Malta Financial Services Authority would normally have started an investigation immediately into Brian Tonna’s ability to advise individuals, as required by ‘conduct of business’ rules.

It appears that Nexia BT did not advise the Inland Revenue Department about the setting up of a trust by a Maltese resident, as required by law. It appears that they were hiding something. It also appears the Minister Mizzi did not advise the Inland Revenue Department that he was the ultimate beneficial owner of a company in Panama. It appears that he was hiding something too. It appears, too, that Minister Mizzi’s company administrators tried to open bank accounts in Dubai and Panama, but were rejected. Why Dubai and Panama?

This is an extract from the Financial Secrecy Index Report:

The United Arab Emirate of Dubai is ranked 10th in the 2015 Financial Secrecy Index, based on a very small scale weighting of 0.1 combined with a notably high secrecy score of 77. 0.2 Dubai is one of seven of the Dubai (UAE), and hosts an important secrecy jurisdiction and offshore financial centre based in Dubai City.

Although the Dubai International Financial Centre (DIFC) describes itself as “an onshore financial centre,” Dubai is unquestionably one of the world’s best known tax havens or secrecy jurisdictions built on an increasingly complex array of offshore facilities: freetrade zones; a low-tax environment; multiple secrecy facilities and lax enforcement.

In addition, Dubai has a strong culture of an ask-no-questions, see-no-evil approach to commercial or financial regulation or foreign financial crimes. It has consequently attracted large financial flows and some of the world’s most high profile criminals. A significant slice of the inbound money comes in the form of cash or gold.

Why Panama? This is an extract from the same report:

Panama ranks at 14th position on the 2015 Financial Secrecy Index, with a high secrecy score of 72 but a small global scale weighting. Coming within the top twenty ranking, Panama remains a jurisdiction of particular concern. Long the recipient of drugs money from Latin America, plus ample other sources of dirty money from the U.S.A. and elsewhere, it is one of the oldest and best known tax havens in the Americas. In recent years it has adopted a hardline position as a jurisdiction that refuses to co-operate with international transparency initiatives.

In The Sink, a book about tax havens, a U.S. Customs official is quoted as saying: “The country is filled with dishonest lawyers, dishonest bankers, dishonest company formation agents and dishonest companies registered there by those dishonest lawyers so that they can deposit dirty money into their dishonest banks. The Free Trade Zone is the black hole through which Panama has become one of the filthiest money laundering sinks in the world.”

It is my professional opinion, as a financial services expert, that the only reason that Dubai and Panama were chosen as locations in which to open bank accounts is because they are amongst the world’s most secretive jurisdictions. Financial crime elsewhere finances considerable elements of their domestic economy and therefore it is a case of ‘honour amongst thieves’. They won’t tell on you because they need you to go there. You know it and they know it.

Minister Mizzi and Mr Schembri have New Zealand trusts and offshore companies in Panama and the British Virgin Islands because they have something to hide. Some of it appears to have been happening already, some of it may have been about to happen shortly, and much of it may have been planned for a full two terms in government.

I close off by quoting again: “Panama is one of the filthiest money laundering sinks in the world”.