Jersey 2014 Meeting

Holding residential property through a non-UK company facilitated avoidance of inheritance tax on death and stamp duty land tax (SDLT) on sale. An annual tax on “enveloped” property (ATED) was intended to discourage this avoidance. The ATED charge has brought in more tax than expected: this may indicate further changes. The charge applies to non-natural persons owning a dwelling of a value more than the specified amount – Elm from April 2015, £500,000 from 6th April 2016. Capital gains tax will apply to all non-residents after 6th April 2015, apparently unless personal property relief applies. The changes have been made piecemeal and are complicated. De-enveloping can be expensive and is made more difficult by the General Anti-Avoidance Rule and measures against marketed schemes. There are traps for the unwary.

The SDLT rules on “higher threshold interests” are badly drafted. This is particularly relevant where a country estate is to be purchased. There are strategies for investment. There is no “one size fits all” solution. The tendency is for the purchaser to buy personally with a substantial mortgage, taking insurance to cover inheritance tax liability. Parents may buy jointly with the children – avoiding the “reservation of benefit” rules – with a governing agreement between them. Investment properties are not within the ATED regime.

A non-UK company resident in the UK may be liable only to the 20% corporate tax and not the 28% capital gain tax. A foreign company may own the land and lease to a forming subsidiary.

A trustee must act honestly towards the beneficiaries. The duty continues until he ceases to be trustee. A trustee with power to appoint his successor must exercise that power for the benefit of the beneficiaries. A protector or other person having such a power has a similar duty. A trustee may have a duty to resist dismissal, if he does not consider his departure in the best interest of the beneficiaries.

A departing trustee is entitled to be protected from uncrystallised liabilities – e.g. for tax. The incoming trustee may limit his liability – e.g. to the value of the trust assets or to a period of time. Indemnities give rise to several problems.

Assets require to be transferred from the outgoing trustee to the incoming trustee. The mere change of trustee does not automatically transfer the trust assets: until an asset is transferred, the old trustee becomes a bare trustee for the new trustee.

Statutory provisions vary from one jurisdiction to another – See Act 34 of the Trusts (Jersey) Law 1984, providing an exemption from the privity of contract rule. Section 43 and 44 of the Trusts (Guernsey) law 2007 have similar effect, and also provide a lien for the benefit of the trustee. Cayman law offers certain protection to an outgoing trustee – see s.4(1) of the Trusts Law.

A incoming trustee has entitlements and obligations – see the Jersey case of Essel and Bruce Trusts [2008] JRCO65. The incoming trustees should be put into the shoes of the outgoing trustee – see the Bird Trusts [2012] (1) JLR62. A change of trustees can be simple, but can also be complicated and expensive.

French succession law applies to French residents and French immovable property. If the deceased has two children, they get two thirds of his estate and his widow one third. A surviving spouse can opt to take a life interest in the whole estate. If there are no issue, the parents of the deceased can take an interest. The rapport (claw-back) prevents violation of the forced heirship rules. Non-French residents should make provision for their French real property separately from their will.

The EU succession regulations will come into effect in France in August 2015, but will not affect the forced heirship rules. Trusts are recognised in France, but do not override the forced heirship rules.

A person is resident in France if he has foyer (principal residence) there, or has a professional activity there or has his centre of economic interests there. Income tax (with social contribution tax) quickly rises to 60%. Capital gains tax is 19% for EU residents, 33½% for others – though there may be relief for Swiss, US or Hong Kong residents. Wealth tax is levied on net wealth, though new residents have a five-year exemption for their non-French assets. The threshold is €1.3m, and the rate 1.5%. Art and business assets are exempt. Inheritance and gift-tax on gifts between spouses is 45% above €1.805,000.

There is an element of exemption for transfer of a business to children. There are many tax treaties, but Switzerland has recently terminated its estate tax treaty.

Trusts are generally regarded as fraudulent tax evasion vehicles and have a wide range of exposures to tax and reporting requirements.

Negative publicity has fall-out. Tax planning is now not so private. HMRC does not like schemes, nor do the media. The media may seem to take pleasure in destroying reputation. They have a commercial imperative in publishing material that may damage reputations. Blogs and tweeting spread stories more widely. The tax man needs to be treated with cautious and respect. The privacy lawyer can help to preserve a reputation. The very successful client who participates in a tax scheme is a potential subject of media attention. It is better if he is well-prepared. Information is power: the privacy lawyer and tax adviser need to be well-informed.

To respond to a media storm, the client needs a media crisis team. A press statement needs to be prepared. It is also important to know when not to make a statement. An inaccurate or inappropriate statement can also be damaging. The publication of e.g. participation in a marketed scheme can cause adverse comment. So can inadequate internet security and conversation in public places.

Untrue statements can be challenged, but less so true ones, unless they include personal and private material. It is not a good idea to fail to answer an unexpected media phone call. It is better to deal with the call when you are prepared. It is not wise to attempt to speak ”off the record” or to say ”no comment”. It is better to request an email to know precisely what the media intend to say.

An on-line audit can be useful. Mistakes need to be corrected: sometimes, a quick call can bring an apology and correction, if you have the right and respected relationship with the media. Anonymous allegations are also damaging. The client may want to give out corrective statements. The media love appeals in open court. International exchange of information is going to increase the likelihood of media attention.

An early example of a business structure comprised a Curaçao holding company with a Dutch and an English subsidiary. The Curaçao profits were characterised as a royalty, thanks to the insight of a professionally qualified director. Similarly, a Dutch and a Liechtenstein company played an important role in disinvestment from South Africa, and in building a group of companies based outside South Africa, eventually acquiring a European business and a listing in Luxembourg, and later moving to NASDAQ. Employee benefit trusts were established for US-based managers. Later, the founders established charitable foundations. The younger generation appointed younger advisors.

The trusts and the foundations under discussion are those not carrying on commercial activities and accumulating their income. The key concepts are ”person”, ”resident” and ”beneficial ownership”. Art 4 of the OECD Model provides that the term ”resident” does not extend to persons taxable only on domestic income.

The New Zealand trust regime does not tax foreign income if the settlor is non-resident. The UK and Indonesian treaties treat such trust as resident. The Australian tax office ruling is unfavourable, but New Zealand treaties have a number of favourable protocols.

The 2014 update to the OECD Model treats a trustee as the ”beneficial owner” of trust income. In the new UK-Spain treaty the term ”person” includes a trust. In some cases, the benefit of the treaty accrues not to the trust but to the beneficiary. The exemption in the New Zealand statute depends on the residents of the settlor; the exemption in Cyprus depends on the residence of the beneficiaries. The Canadian Income Tax Act treats a trust as a taxpayer; its residence depends on it place of management. In Hong Kong treaties, the residence of the trust depends on its governing law. In Italy trusts qualify as taxpayers.

The issue of ”person” does not arise with foundations – e.g. in Australia, Liechtenstein and the Netherlands, though there can be difficulties with the Liechtenstein foundation, and the Netherlands foundation is not taxable and therefore not resident.

In the United Kingdom, where the settlor or his wife are able to benefit from a trust, the trust income is attributed to the settlor, but there is no similar attribution to his widow. Distributions out of trust income are generally taxable, though non-domiciled beneficiaries may choose not to remit the income distributed. Income accumulated and then distributed is not taxable, unless the trust was set up for tax avoidance reasons – which may not be the case where the settlor is non-resident or non-domiciled. Capital gains are taxable at 28% when distributed, but a loan may be made in lieu of an outright distribution.

A trust with a foreign settlor which has one onshore trustee and one offshore trustee can keep capital gains free of tax. An offshore trust maybe used to protect the non-domiciled from capital gain tax on onshore gains not remitted.

A new immigrant may use a trust to update the base cost of capital assets. The section 13 attribution of company gains to trustee participators now only applies where avoidance is intended.

Inheritance tax is charged on trust assets at the rate of 6% every ten years on the net value of the trust assets – i.e. after deduction of loans. An individual about to become deemed domiciled may put his assets into trust, so that they remain excluded property, even if the settlor is spouse is a beneficiary, and even if she makes a similar settlement. Settled business assets retain their exempt quality for inheritance tax. A settlor/beneficiary occupying trust property does not have deemed gains attributed to him, so long as he pays a full rent (against which mortgage interest may be deducted).

Trusts still offer confidentiality. A beneficiary does not need to disclose his interest, but this may be changing. In the United States, trusts are commonly used to avoid probate or protect against creditors or for many purposes other than tax.

This topic is more relevant than it was in 2007, when the speaker last addressed this topic. Regime changes, threatened nationalisations and Russian businesses threatened by Mr Putin – these are modern dangers to family wealth. Abdulla wants to protect his assets from claims on his death made by his Muslim relatives. He may find his planning constrained by foreign matrimonial property law, by previously declared trusts, by existing claims – e.g. arising from an early divorce or financially dependent persons, by lack of mental capacity or undue influence or by the location of his assets. ”Firewall provisions” need to be considered – e.g. those in section 87 of the Cayman Islands Trusts Law or similar provisions in Bahamas, Bermuda, BVI, Cyprus, Guernsey, Hong Kong, Isle of Man or Jersey. Sometimes these protect only against claims arising from the status of the settlor. The ”softness” of the courts varies among jurisdictions. In the Rybolovlev case, the Swiss Court overrode the Cyprus firewall provisions. In the B Trust case, the Cayman Court strongly upheld firewall provisions, but in the Poon case, the Hong Kong Court held that the trust fund was a ”resource” of the settlor, in that the trustee was likely to comply with his wishes, the Court treating past conduct as indicative of present power. In the TMSF case, the power of revocation was similarly regarded. Alongside the Charman divorce case, there was also a trust for children, which could not be attacked in the divorce proceedings.

To protect a client against regime change, a bilateral investment treaty can be useful – providing compensation for expropriation. Exxon successfully claimed compensation from the Venezuela government, and the Russian government was ordered to pay compensation for the acquisition of Yukos.

In general, the adviser should be realistic and not attempt to achieve too much.