Foresight Capital Partners

Before 2006, Trusts provided a good way for UK residents to pass wealth to the benefactors of their estate while retaining control. However, after the 2006 Budget changes using a trust now involves an immediate 20% inheritance tax penalty. For this reason is it now common practice to use a Company structure the hold assets where a proportion of the shares in the company are given to the benefactors. This allows wealth to pass to the next generation but at the same time allows some control to be retained via the rights in the company shares.

For UK residents with UK domicile typically a UK Company will be used since using an offshore Company structure will be subject to various anti-avoidance provisions. However, a UK Company though providing a long term solution for IHT planning does raise some problems. The primary one being Corporation tax where all gains on investments minus costs will be deemed profit. It is possible to mitigate this problem by setting up an Investment Trust (as some ultra HTW individuals have done) which does not pay Corporation Tax on investment gains, but for the majority of HNWs this strategy is just not practical because of the complexity and cost involved.

Isle of Man Solution

There are a number of offshore jurisdictions which can be used to mitigate these problems but the solution I detail below is particular to the Isle of Man. The Isle of Man does not impose any capital, wealth or estate taxes, and hence is an ideal location for those wishing to manage CGT and IHT exposure.

The approach involved first moving offshore to the Isle of Man, which is very simple for UK nationals since they have no residency restrictions, after obtained residency an IOM Company should be establised. Since the IOM Treasury does not levy any capital taxes, the capital gains which the IOM Company makes on its investments will not be taxed however the investment income generated will be taxed at a rate of 18%. Saying this, even the income can be set against some `Allowable Expenses’ as detailed at:

http://www.gov.im/treasury/incometax/technical/practice/PN68-97.xml
http://www.gov.im/treasury/incometax/technical/practice/PN74-99.xml

There may be instances when the structure may involve a trust where the typical structure in such instances is having, a Trust which owns IOM Company which owns UK Assets. Note that when a Trust is introduced into the equation you will nearly always raise more interest with authorities and introduce complexity into the set-up and administration process which will most likely result in additional costs. My personal view is that even if you want Trust like features within the proposed structure then in nearly all instances the easiest approach is to use Company constructs (with special conditions in the articles of association) to mimic the desired effect.

Now the investment decisions of such a IOM (Holding) Company will need to be undertaken by the nominated directors who will typically be the parties who established the holding structure. Though the Company is a distinct legal entity from the directors and hence to director’s are arranging and dealing in investments for a third party, if the arrangement is private (i.e. not marketed) and has a maximum of 50 shareholders then it will typical be deemed an Exempt International Scheme and be exempt from Finance Regulation as detailed at:

http://www.gov.im/fsc/policy/regcollective.xml

in particular,

Exempt International schemes are not subject to the provisions of section 11 of the FSA. They must have less than 50 investors and their relevant constitutional documents should expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Such schemes are regarded as private arrangements and are not subject to regulation. The manager of more than one exempt scheme must be licensed.

One final point I wish to make is that UK assets (such as UK stocks, UK real estate etc) held within an offshore company will not form part of your UK estate with regard to UK IHT. If on the other hand the assets are held for example within a UK stockbrokers nominee account (which will be domiciled in the UK) then the assets will form part of your UK estate and be liable to UK IHT irrespective of your domicile or residence. But by holding the same assets within an IOM Holding Company which has a nominee account at the same UK stockbrokers the underlying assets will not form part of your UK estate, and hence if you are deemed IOM domiciled then these assets will be omitted from your estate for UK IHT purposes.

According to the Adam Smith Institute (see http://www.adamsmith.org), Tax freedom day is now 3rd June, which means that we now spend more days each year working just to pay tax than at any time during the 1970s where income tax level where as high as 80%. In 1997, 2M people where higher rate income tax payers and now the figure is 3.5M, with inheritance tax the situation is even worse….

The Isle of Man (Manx) trust law is very similar to the trust law within England, and the taxation of trusts can be rather complex. Saying this, in order to simplify matters the Isle of Man Tax authorities divide trusts into Manx Trusts and non-Manx Trusts.

What are Manx and non-Manx Trusts?

A Marx Trust is any trust where either one of the trustees is an Isle of Man resident, or where the trustees have delegated the management of the trust to a person who is an Isle of Man resident.

A non-Manx Trust is a trust where none of the trustees are resident if the Isle of Man, and where the management of the trust has not been delegated to an Isle of Man resident.

Tax Trust Income not Capital

With regard to Trusts the Manx tax system will only tax income of the Trust and/or beneficiaries and does not tax the capital/wealth of the Trust or the beneficiaries. For this reason in the following discussion we will only refer to the procedures used for the taxation of the income.

Types of Manx Trust and how they are taxed?

Manx Accumulation Trusts

Where part or the entire income of the trust is accumulated and where the beneficiaries are Manx resident. In this instance the trustees are taxed on the accumulated income. Distributions of taxed income to the Isle of Man beneficiaries are treated as capital distributions and hence the beneficiaries are not due to additional tax. Note that it may not possible to allot income as ‘distributed’ to a beneficiaries even if it is not paid out.

In instances where the income in distributed (gross) to the Isle of Man resident beneficiaries, the distributions will be treated as income distributions with the beneficiaries accessed accordingly.

Tax Free Manx Trust

A Manx Trust will not be taxed in the following circumstances:

1. Where the settlor and the beneficiaries are not resident in the Isle of Man and the income is not Isle of Man sourced. Where a proportion of the income of sourced from the Isle of Man then only that income will the accessed.
2. Where the settlor is resident on the Isle of Man but the beneficiaries are not. The tax free status can also be preserved if any Isle of Man beneficiaries are excluded from any benefit from the Trust.

As a general guide of Offshore Tax planning I would recommend the TaxCafe guide:

Non-Resident and Offshore Tax Planning
http://www.taxcafe.co.uk/non-resident-offshore-tax.html

it accessible, easy to read and tells you what you need to know and nothing more (which is a great feature of any tax guide). You can buy it online and once the CC purchase has gone through you will be emailed a PDF copy and receive the hard copy in a week or so. TaxCafe also provides a book entitled ‘Worlds Best Tax Havens’ which I found less useful (compared with the first guide) but still a useful book to have on your bookshelf.

A work with is not concise but is very interesting is:

Offshore Tax Planning, 12th Edition
By Giles Clarke, MA (Cantab), PhD, FTII, Barrister
http://www.lexisnexis.co.uk/marketing/campaigns/taxation/offshore_tax_plan.html

at 120 GBP its not cheap, but it is certainly more economical buying this book than getting the some information out of a specialist tax lawyer. It is a rather technical long book but if you are seriously about planning complex issues such as Inheritance Tax (IHT) using offshore structures then time invested reading this work, or at least portions of it is time well spent. Please note that even after reading such works you are likely to still need the services of the specialist lawyer but at least you will be in a position to have more informed discussions with the lawyer and hopefully arrive at a better final solution as a result.