Did Nadhim Zahawi use an offshore trust to avoid almost £4m of capital gains tax?

This has now been overtaken by events – Zahawi’s two contradictory explanations for why a Gibraltar company came to hold his founder shares in YouGov now both look fairly clearly to be false. So, whilst I could replace all of this piece with the single word “Yes”, I will instead update it properly over the next day or so. For the moment, see The Times’ excellent report here.

This is the third of my pieces on Tory leadership contenders1Updated 11am on 11 July with YouGov’s shareholdings back in 2000, which makes clear that the offshore structure was there from the start; updated at 12pm with a personal note.

Updated again 12.20pm on 11 July with the incoporation dates of Balshore and YouGov.

Then updated later that afternoon with more on Balshore thanks to the brilliant commentator “Tigs”.

Updated on 12 July reflecting Zahawi’s purported explanation for why Balshore got its shares, and referring to my full analysis of that claim here.

Updated on 13 July with the 2008 share sale, courtesy of @ChrisDavidStone.

Updated again on 14 July because my autocorrect just can’t can’t spell “Zahawi”
.

I’ve spent some time looking into Nadhim Zahawi’s tax affairs, and that’s culminated in Sunday’s FT story, and the report that follows below. I’ve used information in the public domain, my tax expertise, and input from other tax experts, to try to “reverse-engineer” Zahawi’s tax and corporate planning, and work out what’s going on. This may or may not relate to yesterday’s report in the Times that HMRC is investigating Zahawi, following a tip-off from the National Crime Agency.

Zahawi is an impressive businessman who deserves plenty of credit for his part in founding YouGov. However, his tax affairs raise some serious questions:

  • Zahawi and Stephan Shakespeare founded YouGov in 2000. Shakespeare held 42.5%. Another director, Bruce Copp, held 15%. The remaining 42.5% were held by Balshore Investments Limited, a company incorporated in Gibraltar. Zahawi held none, which is odd. All this is visible in YouGov’s first Companies House return.
  • What is Balshore Investments Limited? The 2009 YouGov annual report says “Balshore Investments is the family trust of Nadhim Zahawi, an Executive Director of YouGov plc” (see page 25 here). Balshore was established around the same time that YouGov was incorporated (compare this with this).
  • A perceptive anonymous commentator below spotted that the founder shares are stated in YouGov’s filings to be issued for the “knowhow expertise and effort” which was provided by Stefan Shakespeare, Neil Copp and Balshore Investments. Either Zahawi’s role in the company has been exaggerated, or Balshore was a front for Zahawi. Which is it?
  • Zahawi now says that Balshore provided capital to YouGov, and that’s why it got the 42.5% shareholding. I’ve been through the historic filings and accounts, and there’s no evidence of that. See my separate post here.
  • A company isn’t a trust – this is likely shorthand for “a company owned by a family trust”. We can see that a trust exists, separate from Balshore Investments Limited but linked to it, in other Companies House filings. These show that Zahawi’s parents each have “significant influence or control over the trustees” of a trust.
  • Zahawi denies that he benefits from the trust. But the obvious conclusion from the peculiar shareholdings is that Zahawi engineered for his family’s trust to hold the shares that otherwise would have gone to him, as the founder. The obvious rationale for this is tax avoidance. If Zahawi disagrees, he needs to explain why Balshore came to hold so many shares, and why Zahawi held none2Zahawi did acquire a small shareholding later, as did his wife, but these were a fraction of the Balshore holdings.
  • Zahawi says he and his wife “[do] not benefit from an offshore trust”. This is not quite the same as saying he, his wife and children, have never benefited from the trust and will never benefit from it. If Zahawi wishes to make the position clear, he needs to make a clear denial. Did any of his family benefit from the trust – payments, loans, anything? And could they in the future?
  • And – as the same commentator pointed out below – Zahawi absolutely did benefit from the trust in 2005, when a dividend that would have gone to Balshore was instead used to repay a loan YouGov had made to Zahawi. See page 36 here.
  • If Zahawi had held the shares directly, he would have paid over £3m of capital gains tax when they were sold in 2017. The trust likely paid no tax. So – unless there is an innocent explanation I am missing – £3m of tax was avoided.
  • The trust may also avoid UK inheritance tax on assets that ultimately will go to Zahawi’s children. If its assets were just the £24m, that would be almost £10m of inheritance tax avoided. Are there other assets in there? Are the trust assets fully subject to inheritance tax? Again, only Zahawi can clarify this.
  • Zahawi denies he was ever a non-dom. This is not correct. Zahawi was born in Iraq and moved here aged 11. Until age 16 he was absolutely a non-dom. At 16 he could have acquired a UK “domicile of choice”, but more likely remained a non-dom for some time. Being a non-dom is not tax avoidance – it’s just how the rules work. The question is what a person does with their non-dom status. Zahawi surely didn’t set out to deceive – he just didn’t speak to his tax adviser before issuing the denial. But that means we can’t believe anything else in the denial.
  • If Zahawi or his children have benefited from the trust, or could benefit, then why is it not included in Zahawi’s entry in the register of Members’ Interests or the register of Ministers’ Interests?

There may be straightforward answers here, and no tax avoidance at all. Only Nadhim Zahawi can clarify the position. He should disclose what was paid in tax on the YouGov disposal, and disclose the purpose and tax treatment of the offshore trust.

The suggestion that we have a Chancellor who’s used an offshore trust to avoid tax is hugely damaging to public faith in the tax system. Worse still, the chancellor is ultimately responsible for the UK tax code. The public has a right to know if there are specific and obscure provisions of that code from which the Chancellor personally benefits.

And there’s an obvious contrast with Jeremy Hunt, who made a similar sum from selling his company, but used no trust or holding company and, I expect, simply paid the tax.

A personal note: I’m not some hopeless naïf, gasping with horror at what are straightforward corporate arrangements. I was a tax lawyer for 25 years, I’ve acted for hundreds, perhaps thousands of businesses – large and small – and seen tax planning of all kinds. This is not normal. And I’m not a partisan, smearing a Tory for the fun of it – Tory Ministers have lauded some of my previous work.

What we know – the initial shareholders in YouGov

Nadhim Zahawi founded YouGov in 2000 with Stephan Shakespeare. Initially Shakespeare held 42.5% of the share capital, Neil Copp held 15%, and Balshore Investments Limited held 42.5%. Zahawi held none. This is all clear in YouGov’s first Companies House return.

The shares were stated in YouGov’s filings to be issued for the “knowhow expertise and effort” which was provided by Stefan Shakespeare, Neil Copp and Balshore Investments. Copp paid £287,500 cash; Balshore and Shakespeare paid nothing. This is reflected in YouGov’s first set of accounts, which show £287,500 share capital and premium, and nothing else. Balshore provided no additional funds.

Zahawi’s people are currently claiming that Balshore provided capital – but there’s no sign of this in the Companies House filings, the 2000 accounts or any later accounts. Startup companies get things wrong, but it tends to get corrected later when things become more formalised3There’s a neat example of this in the company’s second form 88(2) dated 25 October 2002 but backdated to 6 May 2000. It shows further shares being issued to Balshore and Shakespeare for £7,000 each – much cheaper shares than Copp received, and typical of founder shares. Presumably this reflects a deal the parties thought they made in 2000 but never formalised – strictly a breach of company law, but one with no real consequence once corrected. The idea hundreds of thousands of pounds of capital could disappear without trace, even after all the due diligence that comes with an IPO, is for the birds. Their explanation either isn’t correct, or the money vanished without trace. My full analysis of the historic filings and accounts, step-by-step, is here.

These shareholdings were reduced over time as shares were given to others involved in the business, and outside investors provided equity financings. When YouGov was listed on AIM in 2005, Balshore Investments held 18.77% of the shares (see page 15 of this document).

What we know – there is a family trust

Zahawi’s parents control an offshore trust which holds two Gibraltarian companies, one UK company, and has a minority interest in a US LLC.

There is clear evidence for this:

  • As the Guardian reported in 2017, a YouGov filing described a Gibraltar company called “Balshore Investments” as the “family trust” of the Zahawis. Zahawi then refused to answer whether he was the beneficiary of a trust.
  • The 2009 YouGov annual report says “Balshore Investments is the family trust of Nadhim Zahawi, an Executive Director of YouGov plc” (see page 25 here). This is not a one-off – the status of Balshore is also confirmed here and here. And given Zahawi’s senior role in YouGov at the time, it’s unlikely he was unaware of this disclosure.
  • A company is not a trust, so the disclosure is a bit mangled. Zahawi would surely not have mentioned a trust if no trust existed. So the obvious inference is that Balshore is owned by a family trust.
  • Strictly I’m sure it’s right that the trust is controlled by Zahawi’s parents. But the way such trusts work, one would normally expect that that Zahawi himself, and/or his children can be beneficiaries of the trust (now, in the past, or in the future). Why else would Zahawi arrange for the trust to receive his, very valuable, YouGov shares? If that’s right, it’s a way for Zahawi to get the benefit of owning the shares, but escape the tax.
  • I can now confirm the existence of a trust from Companies House filings. These show that Zahawi’s parents each have “significant influence or control over the trustees” of a trust which has significant control over a company called Crowd2Fund Limited. Balshore Investments Limited, used to be a shareholder of Crowd2Fund, but no longer is. So this provides independent confirmation that the trust and Balshore are linked.
  • YouGov disclosures also show that, from 2008, Balshore Investments held 25% of Privero Capital Advisors Inc, a US hedge fund advisor4See page 7 of this document. Privero’s barebones website indicates the company was established in 2008, but not much else – there’s very little indications of any activity, beyond that website and an old LinkedIn page. So possibly the company is now defunct – query what it once did.
  • Another Gibraltar company, Berkford Investments Limited, was used to buy Zahawi’s house in 2011. Very little additional information is available on Berkford; but this transaction may demonstrate how Zahawi and his family can benefit from his parents’ trust.
  • I applied to the Gibraltar company registrar for all information they hold on Balshore Investments Limited and Berkford Investments Limited. It’s not much – see here and here. Their shareholder is T&T Nominees Limited – the in-house nominee company of Triay & Triay, a Gibraltarian law firm. My assumption is that it holds the shares as nominee for the trust5Incidentally, one of the directors of Berkford Investments is Louis Philip Lombard, who appears to be head of IT at the Gibraltar Financial Services Commission, which seems somewhat odd.

So it seems reasonably clear that Zahawi’s parents controlled a trust, which held Balshore, which held the YouGov shares (possibly with other entities in the ownership chain). Neither the trust nor the companies it holds are mentioned in Zahawi’s list of Ministers’ Interests or Members’ Financial Interests. Parliamentary rules expressly require that property held in trust has to be disclosed (see footnote 47 here). The fact Zahawi does not himself control the trust shouldn’t change this. If, as I am assuming is the case, Zahawi or his children can benefit from the trust, then it should be disclosed (regardless of whether they benefit today).

What we know – the trust made at least £27m of capital gains

Balshore Investments Limited sold about £24m of YouGov shares between 2006 and 2017/18

  • On 14 July 2006, Balshore Investments Limited sold 830,478 shares for just over £3.6m (see page 15 of the YouGov annual report).
  • On 4 April 2008, Balshore Investments Limited sold 2,518,500 shares for just under £3.6m (see this directors’ share dealing report). Many thanks to @ChrisDavidStone on Twitter for finding this.
  • At some point between 31 July 2017 and 31 July 2018, Balshore sold its remaining stake – Balshore is not listed as a major shareholder in the YouGov 2018 annual report (compare page 52 here with page 56 here)6By that time Balshore had 8 million shares, just under 8% of the total. Down from 25% (the same as Shakespeare) in 2005, at the time of the IPO. The number is hard to track, given share splits over time, but it’s reasonably clear Balshore didn’t buy any additional shares after 2000. My assumption is that Balshore sold all its shares7It’s possible that Balshore didn’t sell all its shares, but retained a holding of less than 3% (so it’s not visible in the reporting), but it’s unclear why Balshore would do that; even if it did, that just makes the tax avoided prospective rather than historic, and the abolition of entrepreneur’s relief means the potential avoidance will be larger. – this will have yielded at least £20m8The share price was somewhere above £2.50 from July 2017 to July 2018, and as at 31 July 2017 Balshore held 8,029,100 shares (see page 52 here). £2.50 x 8,029,100 = £20m.

So likely total sale proceeds of £27m.

This is much, much larger than the returns made by Zahawi and his wife over their personal shareholdings. Zahawi’s wife, Lana Saib, held about 0.8% of YouGov shares, which she sold in 2007/8. I’m going to assume that was taxable in the usual way. And Zahawi held options over 359,447 shares. Again I’ll assume that was taxed in the usual way.

The obvious question is: why does the founder of a company hold less than 1% of the shares in his company, but his parents hold 19% (and originally 42.5%)? The obvious inference is that they were holding the shares on his behalf, to avoid the tax that would have been paid had he held directly.

Putting all this together, what actually happened?

Absent a better explanation of why Zahawi’s parents came to hold 42.5% of YouGov, I am assuming something like this happened:

  • Zahawi arranged for the YouGov shares that would have been his, as a founder of the company, to instead be issued to Balshore Investments, a Gibraltar company held by his parents’ offshore trust.
  • The trust was established when his parents were non-doms, and so the shares became “excluded property”, not subject to UK income tax, capital gains tax or inheritance tax, even if his parents subsequently became UK domiciled.
  • The shares were held through Balshore, and not by the trust directly, so that the trust did not hold “UK situs” property – that would have stopped the scheme from working.
  • Prior to 2008, Zahawi’s parents could have lived in the UK and remitted the trust funds back to the UK with no capital gain. After 2008 they would be taxed, but only on the post-2008 gain (this is all an over-simplification, because the post is too long already).
  • Once Zahawi’s parents left the UK, everything became easier, and they could deal with the trust property entirely free from UK tax. The one thing they couldn’t do is pay out the trust funds directly to Zahawi or his family in the UK – but there are plenty of ways he and his family could still have benefited from them.
  • The capital gain on the 2006 and 2017/18 share sales therefore avoided UK tax.

There are some additional complications9For example, section 13 TCGA will deem capital gains of a foreign “close” company to be gains of its UK owners; a possible solution here is that Balshore, whilst a Gibraltar company, was made tax resident in an EU country such as Cyprus, Malta or Luxembourg. Another possible solution is that the Zahawis took the position there were no UK “participators” in Balshore. Another is that they had left the UK by the time of the capital gain. There’s no way to know based on the information we have, but it’s reasonable to assume they were solved, as otherwise why would valuable YouGov shares be in a Gibraltar company held by a trust?

How much capital gains tax was avoided?

If the above is right, the actual tax paid on the £24m share sales was zero. To calculate the tax avoided we should look at the tax that would have been paid if the trust didn’t exist, and Zahawi held the shares directly, and sold them personally. Like Jeremy Hunt did.

I’m assuming Zahawi paid next-to-nothing for the shares originally, as he was a founder. So the £24m proceeds from the sales of the YouGov shares would all have been taxable capital gain.

Let’s do the math:

The £3.6m gain in 2006: the CGT rate at that point was 40%. But business assets benefited from a “taper” which after six years of ownership reduced the gain by 75%. So tax = £3.6m x 25% x 40% = £360,000.

The £3.6m gain in 2008: this sale was right before taper relief was abolished (and was stated to be motivated by that – presumably that was the other shareholders’s concern; Balshore, as a Gibraltar company, wouldn’t care). So again £360,000

The £20m gain in 2017/18: the rate was 20%, but Zahawi would have benefited from the special 10% entrepreneurs relief rate. From 2008 to 2020 there was a £10m annual limit to entrepreneurs relief. Tax = the first £10m at 10%, then the second £10m at 20% – i.e. £3m in total.

Total tax: around £3.7m.

Could there be inheritance tax avoidance as well?

Not on the original YouGov shares. The shares would, if held directly by Zahawi, have benefited from the very generous inheritance tax relief for business property (see my blog). No inheritance tax on them, and no avoidance needed.

But what about the cash the trust received after selling the shares, and any other assets purchased with the cash? If Zahawi held the cash/assets directly then that would have formed part of his inheritance tax estate. But if Zahawi can say the shares were contributed to the trust by his parents, who at that time were non-doms, then any non-UK assets (i.e. the shares in the Gibraltar companies) will be entirely outside Zahawi’s inheritance tax estate.

That suggests potential inheritance tax avoidance of almost £10m. More if the assets have grown since (as is likely).

Does the structure as described work?

If the above is an accurate description of what happened, then I would have very serious doubts that it is effective. Realistically the shares were not settled on trust by Zahawi’s parents – they were originally within the control of Zahawi, and he settled the trust via his parents. If I was HMRC I would challenge the 2017 capital gain position on that basis.

Of course if I am misunderstanding what happened, then my claim in the previous paragraph is irrelevant.

Caveat

Much of the above is speculation, based upon public domain information and my and others’ tax expertise. I will happily correct any technical mistake; and if Zahawi confirms or denies any element of this analysis then I will amend my post.

Credits

Thank you to all the tax experts – accountants, barristers and solicitors – who contributed to this research. I can’t name them, but I’m incredibly grateful for their help.


  • 1
    Updated 11am on 11 July with YouGov’s shareholdings back in 2000, which makes clear that the offshore structure was there from the start; updated at 12pm with a personal note.

    Updated again 12.20pm on 11 July with the incoporation dates of Balshore and YouGov.

    Then updated later that afternoon with more on Balshore thanks to the brilliant commentator “Tigs”.

    Updated on 12 July reflecting Zahawi’s purported explanation for why Balshore got its shares, and referring to my full analysis of that claim here.

    Updated on 13 July with the 2008 share sale, courtesy of @ChrisDavidStone.

    Updated again on 14 July because my autocorrect just can’t can’t spell “Zahawi”
  • 2
    Zahawi did acquire a small shareholding later, as did his wife, but these were a fraction of the Balshore holdings
  • 3
    There’s a neat example of this in the company’s second form 88(2) dated 25 October 2002 but backdated to 6 May 2000. It shows further shares being issued to Balshore and Shakespeare for £7,000 each – much cheaper shares than Copp received, and typical of founder shares. Presumably this reflects a deal the parties thought they made in 2000 but never formalised – strictly a breach of company law, but one with no real consequence once corrected. The idea hundreds of thousands of pounds of capital could disappear without trace, even after all the due diligence that comes with an IPO, is for the birds
  • 4
    See page 7 of this document
  • 5
    Incidentally, one of the directors of Berkford Investments is Louis Philip Lombard, who appears to be head of IT at the Gibraltar Financial Services Commission, which seems somewhat odd
  • 6
    By that time Balshore had 8 million shares, just under 8% of the total. Down from 25% (the same as Shakespeare) in 2005, at the time of the IPO. The number is hard to track, given share splits over time, but it’s reasonably clear Balshore didn’t buy any additional shares after 2000
  • 7
    It’s possible that Balshore didn’t sell all its shares, but retained a holding of less than 3% (so it’s not visible in the reporting), but it’s unclear why Balshore would do that; even if it did, that just makes the tax avoided prospective rather than historic, and the abolition of entrepreneur’s relief means the potential avoidance will be larger.
  • 8
    The share price was somewhere above £2.50 from July 2017 to July 2018, and as at 31 July 2017 Balshore held 8,029,100 shares (see page 52 here). £2.50 x 8,029,100 = £20m
  • 9
    For example, section 13 TCGA will deem capital gains of a foreign “close” company to be gains of its UK owners; a possible solution here is that Balshore, whilst a Gibraltar company, was made tax resident in an EU country such as Cyprus, Malta or Luxembourg. Another possible solution is that the Zahawis took the position there were no UK “participators” in Balshore. Another is that they had left the UK by the time of the capital gain. There’s no way to know based on the information we have
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