Foresight Capital Partners

Though there may seem little in common between German property (earlier post on German property) and Isle of Man companies an investment holding company, called:

Speymill Deutsche Immobilien Company plc
http://www.investegate.co.uk/Index.aspx?company=SDIC

owns and manages more than 13,000 properties in German. The shares presently trade at 117p, and where originally placed at 100p on AIM. The company was established to construct a German retail property portfolio which would generate a 7%+ net yield with the possibility of capital up-lift. The argument behind the expected capital up-lift was that property in Germany could be purchased at below replacement cost, where the managers saw the German property converging to at least their replacement cost over time.

Anyway, this firm provides a good example and the typical holding structure which is set up here on the Isle of Man, with a local manager who will be locally regulated with a remote “investment adviser” who in this case is naturally located in Germany. The registered offices are within a stone throw from my office and their broker is strangle enough called Fairfax PLC (my family name).

Over the past few days I have been trying to decode the nature of the IOM regulatory environment for newspaper and/or journal articles on the general theme of investments. After this painful experience over the pass few days I came to the following conclusion which I wish to share, naturally for information purposes only.

After reviewing the legislation it seems that the Investment Business Order 2004, Statutory Document No. 673/04, specifies the nature of newspaper editorial with regard to “the giving of advice”. I quote from paragraph 19:

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Newspapers
19. The giving of advice (in the manner contemplated in paragraph 4) does not apply to advice given in a newspaper, journal, magazine or other periodical publication if the principal purpose of the publication, taken as a whole and including any advertisements contained in it, is not to lead persons to invest in any particular investment.
======================

See:

http://www.fsc.gov.im/lib/docs/fsc/Publications/ibo2004.pdf

Since all newspapers and financial journals treated as a whole do not (in my view) lead the reader to “invest in any particular investment”, I would conclude that any articles I (or a 3rd party) produces for such publications would not constitute advice.

There is also the issue of being deemed to having infringed the “holding out” condition which is detailed within the Telegraph article:

http://www.telegraph.co.uk/global/main.jhtml?xml=/global/2007/02/08/fiphishers.xml

The Isle of Man government has recently published a report produced by Aquatera Limited on the viability of various forms on renewable energy for the Island. The report available at:

http://www.gov.im/dti/Energy/

broadly concludes that Wind Power is the only viable resource in the near term using existing technologies. Moreover, analysis of the economics of an offshore resource details that the resulting revenue from such a project would repay the initial set-up and running cost after 13.73 years. Hence, such a project would only provide an internal rate of return of 5.1756% over 13.73 years. With the 10 year Gilt yield being around 4.82%, such a project (in my view) is not financially justifiable since its return over gilts is not enough to justify the inherent risk of such a project.

What about Onshore Wind Farms?

The report unfortunately makes no real attempt to explain why the much more obvious options of an onshore wind farm were not considered. In fact, the option of an onshore wind farm seems to have been discounted from the start, with the rationale given on page 47:

Due to the structure of the Manx planning process, the possibility for commercial scale onshore wind turbines has already been discounted.

Moreover, within the 143 page report the only other reference’s on commercial scale onshore wind farms is on page 18, which reads:

Onshore wind was specifically excluded from this report at the request of the DTI, as previous studies have already looked at the opportunities for this technology.

and on page 15, I found:

In the case of the Isle of Man there are some specific legal protection mechanisms that make onshore development of renewables particularly challenging.

Financial case for Onshore Wind Farms

Though the figures where not worked out for an onshore wind farm, after doing I little digging I found within the article ‘Land- vs. Sea-based Wind Farms’, at:

http://www.pbs.org/newshour/science/wind/landvssea.html

the following guidelines:

Cape Wind itself has an expected energy output of 38 percent of capacity over the course of a year, compared to the mid-to-high 20s or low-30s for onshore wind farms, noted Cape Wind’s communications director Mark Rodgers…

But one of the main challenges to building offshore is cost. The price tag of installing offshore sites can reach 50 percent to twice that of land-based wind technology, Calvert said

Hence, as an estimate I would suggest the drop in power of an onshore vs offshore site would be around 18%, but the reduced cost on an onshore vs offshore farm would be between a 1/3–1/2. Therefore, the cost per KWH would be reduced by 21% - 41% over 13.73 years. Implying an internal rate of return of 6.26%-7.30%, which would provide a return over gilt yield’s in proportion to the level of risk taken by the investor.

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….

I just finalized my performance figures for the period 1st Jan 2006 – 31st Dec 2006, and my own portfolio which is purely (a higher risk) capital growth portfolio I obtained a performance of 46.3% (in GBP), where as the 3rd party (lower risk) capital growth and income portfolio obtained a performance of 33.6% (in GBP).

Though over all I am reasonable pleased with the performance I did miss a number of opportunities and partially mishandled the markets during the sell-off during April-June. If I had got the April-June period completely right and had been a little more trigger happy (I missed at least two 75%+ opportunities this year due to being to slow to deploy capital), then I would have obtained at least 10-20% higher performance figures. Saying this, my macro positioning was just about right and at no point during the year was I in the red. The performance distribution last year was rather lumpy due to the April-June period, but as always I am happy to sacrifice smooth tranquil performance for over-all end-of-year higher performance.

In terms of my development as an investor which should always to kept central to any investment activity, since performance is mealy a consequence of an investors training, technique and ability. I feel I am moving forward in a number of ways. For example, over the last year I have been developing a more systematic, structured approach; which though does introduce the advantages of having certain structures (reducing the chance of good ideas falling through the cracks) still allows sufficient flexibility to think creatively. On a practical note moving to the Isle of Man last year has provided an environment where one can maintain aplomb, balanced state of mind, and distance oneself sufficiently from the prevailing views, news flow to endorse a dissident mind-set allowing significant out-performance.

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.