Protect your assets and avoid frivolous claims
Given the growth in the litigation culture, there's been a rush by many professionals that work in areas with a high risk of litigation to protect their assets.
The worry is that they could potentially be sued and lose a significant chunk of their wealth that they have accumulated over the years. The perceived risk of such litigation has grown due to the number of seemingly frivolous claims that have been made against wealthy professionals. The current view is that if your assets are obvious and easily reachable, you are pretty much a sitting duck.
So a separate 'asset protection industry' has grown based on this perceived threat to wealth, and which seeks ways that you can protect your assets.
The kinds of individual who is likely to be attracted to asset protection measures can basically incluse anyone with a reasonably substantial net worth, although it will be of particular interest to those working in professions where there is a high risk of litigation such as:
- doctors,
- lawyers,
- accountants
- builders
- consultants
- financial advisers
Essentially if you look as though you have deep pockets there is a risk.
Asset protection measures can be split into three main categories
Insurance
Pretty obvious in itself, but having good insurance can save lot of worry. Indeed most professionals would be required to have indemnity insurance to cover them for negligent advice or faulty goods and services. Whilst this provides a good 'base' level of protection it's unlikely that the policy would cover the full range of potential claims and other more comprehensive methods would be needed.
Limiting your liability
Another method to protect your assets is to consider using a limited liability company to trade from. In theory this separates your assets (house, car etc) from the company's assets.
However, the courts can and do 'pierce the veil of incorporation' in cerain circumstances. This means that they will ignore the limited liability protection provided by a Limited company and instead look to te shareholders or directors assets.
This is something that should be discussed with a lawyer, however there are a number of situations where this can occur. The main ones are under special insolvency act provisions for fraudulent trading or wrongful trading. Essentially if you carry on trading and incurring liabilities when you know or have reason to believe the company can;t meet it's liabilities the creditor an go after your personal assets to repay the debt.
Other situations where the veil can be pierced are:
- where the use of a company is a mere facade and is used for fraudulent purposes
- where a 'special relationship' exisited between a director/employee of the company such that a claim reasonably relied on a personal assumption of responsibility by the director or employee.
Therefore, the use of a company may not provide any additional benefits against such personal claims, but could be used to reduce the risk of general business claims. See our separate article (link at the bottom of the page) on when the courts will look through a company.
In terms of the type of entity used, you could choose between a limited company and a lmited liability partnership. Both offer a limitation of liability.
An alternative (particularly when combined with the wealth segregation activities below) is to consider an offshore entity such as a limited liability company ('LLC'). The LLC has fewer requirements in terms of meetings, directors etc, however it would cost much more to set up than a UK company (which can be set up for £30+) given it is overseas.
Wealth segregation
A final category of asset protection measures look at segregating or separating wealth from your estate. In effect, this means putting it outside the reach of any creditors.
The simplest way to do this is to ensure that you don't own the asset any more. You could therefore give it away. However if this was a sham arrangment, with you still actually having control over the asset or having the use of the asset (eg occupying a property that you had given away) the court would be likely to hold that this should be classed as part of your estate as you retained the 'beneficial interest' in the asset.
The use of a company, (above) is also an example of the how you can segregate assets, as by transferring to a company, you are also divesting yourself of ownership. As seen above the courts can and do ignore the company in certain circumstances. This is why when an individual is looking to exclude some of the their wealth from their estate, they will usually use offshore arrangments with a country that allows for entities that are very favorable to the settlors, but not to any creditors.
If you set up an offshore company to hold your assets if you are a shareholder in the company, a court would be likely to class the value of the shares/company assets as part of your estate.
Note that this is different from simply keeping quiet about the existance of the company. If you chose correctly (see our article on the best countries for privacy) you can ensure that shareholder details aren't named on any share register, and if they are it's only the legal owner that is named. You could then use nominees to hold the legal title to the shares, keeping your name off the documents.
Many people do this and are successfull on the basis that our creditors would need to find your assets before they can have a slice of them. One point that is worthnoting here is that if the segregated assets were to generate any income, this would need to be disclosed in your UK self assessment return (this would then make it practically impossible to deny the existance of the offshore assets.
That is why, in terms of asset protection, the use of a trust is more common than an offshore company on its own.
In a trust arrangement, the settlor (the person who transfers assets to the trust) legally gives over control of his assets to a trustee (or trustees), who manages and controls them for the benefit of a beneficiary or beneficiaries (of which the settlor can be one). Although the settlor will usually provide a letter of wishes, detailing how he would like the money to be managed it is the trustees who have legal control over the assets.
Trusts could traditionally be used to 'break the link' between an individual and his assets, and although this is now less the case trusts can still be effective. The courts do take a practical approach to this, and if you set up a trust, make yourself one of the beneficiaries and then obtain significant distributions from it on a regular basis, the court would be likely to class the assets as yours.
This isn't to say that it's not worthwhile using the trust as the offshore nature would undoubtably make it more difficult to enforce, however, to be on the safe side you'd be better off if you weren't a beneficiary and had only limited receipts from the trust. Similarly the occasional refusal by the trust would also assist in preventing the assets being classed as yours.
Rather than using an offshore entity many individuals use an offshore bank account to hold their cash. There is no real segregation of wealth here as the cash still plainly belongs to you. This is therefore purely a case of 'hiding' the cash and hoping no-one finds out about it. Given that banking secrecy laws in offshore jurisdictions are usually significantly stricter than UK laws, and unless criminal activity or money laundering is suspected, it's unlikely that your details will be made available to a third party.
You would need to be careful that any income generated on the offshore account was declared in you tax return, and if you didn't you'd then need to consider the impact of the EU savings tax directive which would either inform the UK tax authorities of the income, or withhold some tax from any interest paid. If this was the case, you'd probably be better to use an offshore account in a country not covered by the EU directive eg Bahamas, Labuan etc.
Asset protection for UK residents is a complex area, and this is intended as an initial guide only - the best course of action you can take is to take the advice of a lawyer with experience in this area.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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