Tax planning backfired?

Recently aviation tycoon Clive Joy hit the headlines, but not for his expertise in aerospace issues. It was because in the course of a bitter divorce Joy has been accused by his wife of warehousing his millions offshore.

Shortly before Nichola Joy was granted a decree nisi last year, she obtained a freezing order over her husband’s worldwide assets, alleged to be £35m. She had argued that assets held in a BVI trust were in reality his to do as he pleases. His lawyers claim that he now has only £66,000 to his name, not enough for protracted divorce litigation. The couple have therefore resorted to court over a £450,000 Bentley, currently in France, which they both hope to use as security for their legal costs in the next stage of battle.

This labyrinthine international case highlights firstly the role that tax efficient offshore trusts can play in lengthy High Court divorces, and secondly that trust assets are not immune to the family courts’ attentions.

Many high net worth individuals do not appreciate when they set up the trust that should things go wrong with their spouse the trust assets may be under attack as part of a “nuptial settlement”. The court can freeze the worldwide assets of the Settlor spouse including, on occasion, overseas trust assets. The BVI court will in turn decide whether to make a freezing order locally if requested by the UK court. The English family courts will scrutinise these trust assets and any attempt to shield what a party can in reality control.

In a number of cases, a party (usually a husband) has denied with vigour that they can access the trust assets. However, the paper trail showing the course of dealing between the Settlor, the trustees and trust administrators will reveal whether the Settlor can in practice get what he wants from the trust or trusts. The courts will always consider how far the Settlor has retained control. The English court can and will vary a nuptial trust so as to redistribute assets, albeit satellite litigation overseas may be required to achieve this. Failing settlement out of court Mr and Mrs Joy will eventually obtain a judgment after many days of court time and expensive litigation.

What is not at issue is that the English injunctive powers, disclosure procedures, the flexibility of court awards and notably the calibre of our Family Division judges combine to make London the most attractive venue for many warring couples. Following the recent criticism however by Sir James Holman, a leading Family Division judge, of out of control’ foreign divorce cases, which he said were ‘squeezing out needy litigants’, the sheer complexity of these offshore trusts issues can clog the courts for weeks as well as adding millions in costs.

It remains to be seen how the Government’s recently announced stance against aggressive tax planning will impact the tax shelter devices brought to the family courts.

Clare Renton, family law barrister, 29 Bedford Row