Sovereign (UK) has been seeing increased interest from international clients – that are neither UK-resident nor domiciled – in establishing overseas (offshore) trusts. We are currently, for instance, in the process of setting up overseas trusts for three Chinese families that have emigrated to third countries, as well as a family based in the Middle East and a family based in Hong Kong.
Of these, only the Hong Kong-based family currently has an intention to move to the UK to take advantage of the new British National Overseas (BNO) visa, which allows eligible BNO citizens in Hong Kong, as well as their dependants, to live, work and study in the UK. In this case, it is essential that any assets situated outside the UK are transferred into an overseas trust (formally termed in the UK as a ‘non-resident trust’) before they move to the UK to ensure that they remain outside the scope of UK taxation, particularly inheritance tax.
What all these families have in common is liquid and movable wealth that is spread across several different countries. Their property assets are held in corporate names (or can swiftly be transferred into a corporate structure), while they receive business income from a diversified portfolio of trading companies. These trading companies can easily be consolidated into a group overseas holding company, which can then be settled into an overseas trust together with the company-held property assets.
An overseas trust that is established in a stable, tax neutral jurisdiction will provide these families with: increased security, because their assets will be protected from political or sovereign concerns; increased confidentiality, because the parties, assets and terms of the trust will not be in the public domain; increased versatility, because the trust can own commercial enterprises, open bank accounts, participate in international investments; and increased capital accumulation, because the trust itself should not be subject to tax on its income and capital gains.
The practical advantages of a trust are gained from the distinction that is drawn between the formal or legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries. It is therefore essential that the licensed trustee remains independent and exercises proper control over the administration of trust property.
While some of our clients are based only in a single location, many are international families with assets and family members spread across different countries. Sovereign has major experience in creating and managing trusts and estates with complex structures involving assets and beneficiaries in multiple jurisdictions and the legal, tax and compliance issues that arise when the laws of several jurisdictions may apply.
There are a number of different countries worldwide that have enacted trust laws but the quality and suitability of the legislation is variable. When selecting the best jurisdiction for establishing a trust it is important that it offers an English common law system with a strong tradition of enforcing trusts, modern trust legislation and low or no taxation for trusts.
Sovereign offers a compelling trustee service from a wide range of jurisdictions, enabling us to align with clients near to where they reside. We are often also chosen by independent financial advisers due to the extensive choice of trust domiciles in which we are authorised to operate and our competitive and transparent fee structure.
Sovereign is licensed to provide professional trustee services in the following locations:
- Onshore and European Union – Cyprus and Malta
- Mid-shore – Hong Kong, Mauritius and Singapore
- Offshore – Gibraltar, Guernsey and the Isle of Man
In this case, the settlors – the people creating the trusts – have chosen to set up offshore trusts in Guernsey and the Isle of Man and have appointed Sovereign as trustees. Guernsey and the Isle of Man are self-governing British Crown Dependencies and do not form part of the UK. Each jurisdiction has complete autonomy in all matters of internal government, including taxation.
Importantly Guernsey and the Isle of Man both have an English-based legal system and an established judiciary. They offer an experienced financial and professional services sector and the authorities encourage and ensure good governance. Neither jurisdiction imposes any additional layer of tax but they are compliant with international regulatory standards and cooperative and transparent in tax matters, including exchange of information.
Once a trust is created, the settlor must relinquish legal ownership of the trust assets. This can assist in preserving the continuity of ownership of particular assets, such as a business, within a family. By transferring legal ownership to the trustee, the beneficiaries can continue to benefit from the assets while avoiding any fragmentation of ownership.
Due to the complexity of the underlying trading companies, the settlors have also chosen to appoint ‘protectors’ to counterbalance the wide discretionary and fiduciary powers conferred on the trustees. Protectors are trusted friends or professional advisors with knowledge of the family, their interests and the intentions of the settlor. These protectors have a right of veto over the decisions of the trustees in respect of certain strategic powers under the trust instrument, for example in relation to distributions or investment decisions. They also have the power to appoint and remove the trustees.
In the case of each trust, the settlor has also been appointed as the primary discretionary beneficiary, while their family members have been appointed as ‘discretionary beneficiaries’, who may benefit at any time while the trust is running at the discretion of the trustees and pursuant to settlor requests made to the trustees and/or ‘final beneficiaries’ who receive any remaining assets when the trust is eventually no longer required.
It may seem a contradiction to put property into a trust if the settlor still wants to retain an interest, but there may be situations where this is beneficial. If the settlor becomes ill, for example, the trustees will be able to make payments of either capital or income to ensure that there is sufficient provision for the future.
The trustees will be the effective shareholder of the group overseas holding company, which has become the parent of the downstream trading companies. However, if there is a requirement for any beneficiary to receive a distribution – a request often made by a settlor – the directors of the holding company can elect to pay a dividend to the trustees that will enable them to make distributions to any one or more beneficiaries.
Movable financial assets such as a shares, bonds and financial instruments will generally be transferred ‘in-specie’ – in their current form rather than in an equivalent amount of cash – to a relevant holding company that in-turn will be held within the trust. In each case, the settlor has also requested the trustees to open a bank account into which further contributions to the trust can be made from their personal savings. This will be much easier to effect in Guernsey and the Isle of Man than it would if the trusts were established in other popular trust jurisdictions. The British Virgin Islands, for example, is not as well banked and may raise significantly greater regulatory issues worldwide.
A trust can be used to hold shares in a company owning immovable property – real estate – rather than the property itself, transforming the characterisation of an interest from immovable to movable. The trustees can also create a further asset holding entity in which to transfer the ownership of any works of art, antiques or luxury collectables, such as a cars or wines, that cannot easily be accommodated within an international pension scheme.
Where all the beneficiaries of a Guernsey or Isle of Man trust are resident outside Guernsey or the Isle of Man respectively, the trust will be exempt from assessment of income tax on income arising outside Guernsey or the Isle of Man and income on bank deposit interest arising inside Guernsey or the Isle of Man. The trustee can therefore make distributions out of the trust fund without any withholding or deduction for income tax. There is also no inheritance, wealth, gift or capital gains tax or equivalent forms of indirect taxation charged on the creation or transfer of assets to a trust.
Where a settlor properly disposes of assets during his lifetime by settling them on trust, the trust assets will not form any part of the settlor’s estate upon his death. A trust therefore provides an efficient vehicle for the transfer of beneficial ownership interests on the death of a settlor and, with careful planning, can offer attractive opportunities for tax and financial planning.
However the assertion that offshore trusts deprive onshore economies of tax revenues is not generally correct because the trust beneficiaries remain liable to tax in their own places of residence in respect of any distributions. Since there are a number of tax transparency initiatives including automatic exchange of information, tax authorities will hold the information required to ensure that beneficiaries who are taxpayers pay the correct taxes.
A trust may also enable a settlor to avoid any forced heirship rules that may be mandatory under the laws of his or her domicile, residence or nationality. The trust laws of Guernsey and the Isle of Man provide that a lifetime transfer of assets to a trust governed by their law will not be set aside because it contravenes the forced heirship rules of another jurisdiction.
A trust therefore offers a mechanism for preserving family assets in a secure and stable political environment while having the flexibility to allow payments to beneficiaries as the need arises. It is also a useful vehicle for people who may want to provide for those – infant children, the aged, the sick or disabled – that are unable to manage their own affairs. Trusts allow for the independent support of those who require it most.
A trust simply provides more flexibility and confidentiality than other legal forms designed to hold, preserve and transfer wealth. The best-laid plans can rapidly become obsolete due to unforeseen events, but a discretionary trust offers a mechanism for managing property that can adapt as conditions demand.
The establishment costs and ongoing annual fees are generally marginal in comparison to the value of contributions settled and the raft of major benefits that are to be enjoyed by the settlor and their beneficiaries.