Trusts have many applications and advantages, including the protection and preserving of assets, tax planning or just avoiding the expense and delays of obtaining probate under a will. They also provide a high degree of confidentiality.
The Isle of Man is at the forefront of best practice development in the area of trusts and was one of the first jurisdictions to introduce the regulation and supervision of trust companies. The Financial Services Act 2008 and the Financial Services Rulebook 2016 together with various secondary pieces of legislation, Codes and Practice Notes ensure that the Isle of Man’s regulatory regime continues to be compliant with international standards. Professional trustees must be licensed under the Financial Services Act 2008 and are regulated by the Isle of Man Financial Services Authority (IOMFSA).
The Isle of Man’s legal system is based on English common law including its trust laws which are derived from English common law and the rules of equity. Trust law was largely codified on island in the Trustee Act 1961 which was primarily based on the English Trustee Act 1925 when a formal trust law was introduced. This Act was amended by various pieces of legislation including the Trust Act 2001 and the Isle of Man Trusts (Amendment) Act 2015. Under the Hague Convention, Isle of Man law trusts are recognised by the signatories to the Convention as of 1985.
If all beneficiaries are resident outside of the Isle of Man, a trust will be exempt from both Isle of Man income tax on income arising outside the Isle of Man and income on bank deposit interest arising from within the Isle of Man. A trustee may therefore make distributions out of a trust fund established in the Isle of Man without any withholding or deduction of Isle of Man income tax. There are no inheritance, wealth, gift or capital gains taxes levied in the Isle of Man. Other indirect forms of tax, such as stamp duty do not apply in the Isle of Man however VAT does.
Regulations require trustees to know the identity of the settlor and ultimate beneficiaries of a trust. This information is kept completely confidential. Disclosure to third parties is only required in very particular circumstances and in certain instances must be accompanied by a court order. There is no public register of trusts in the Isle of Man. The ownership of trust assets can remain entirely confidential in most circumstances.
Forced heirship – mandatory laws that dictate the persons to whom and proportions in which an estate must be passed – is a particular problem in continental Europe and other civil law jurisdictions, as well as in countries of Islamic tradition. The Trusts Act 1995 was specifically drafted to provide that no Isle of Man trust will be invalidated simply because the trust avoids or defeats claims that may arise under forced heirship rights.