The three main banks have been nationalised. Inflation is high. The interest base rate is 18%. Foreign and domestic investors have lost money. Help is expected from the IMF. It is simple and quick to form a private (limited liability) company in Iceland. Only one shareholder and one director are needed. The minimum capital is around £2000. Shares can be denominated in any currency if certain conditions are met. There is no stamp duty. Companies pay income tax at 15%. Dividends to residents and EEA residents have 0% withholding tax; 10% is charged on payments to others. Interest paid to non-residents is free of tax but may nevertheless be deducted. Capital gains tax is charged on sale of shares, but there are exemptions for domestic and EEA companies. Partnership can elect to be taxed (at 23.5%) or transparent. Stamp duty is payable on initial capital, but not on additions. There are no CFC or transfer pricing rules, but there is a general requirement for arms length pricing. A dividend received is included in income but deducted upon assessment and so is effectively exempt, so long as it comes from a domestic company or a foreign company taxed in a comparable way. Capital gains are similarly exempt. These are strictly deductions, not exemptions. This rule can result in loss of carry-forward loss relief. In practice, a holding company should be separate from trading activities, which should be conducted by a different company.
Growth of personal wealth has focussed attention on asset protection. The professional advisor can be exposed to charges of conspiracy. In hard times, people become more litigious. Dissatisfied heirs, spouses on divorce, expropriatory governments, kidnappers and others pose threats. Forced heirship, will planning, preserving assets from family disputes and for future generations, tax planning, life assurance, partnerships, foreign bank accounts all raise asset protection issues. Asset protection trusts present a large topic. The contingent liabilities must be carefully assessed. The settlor or the protector can have too much power as in the re Stephen Jay Lawrence (US Court of Appeal 2002) and In the Marriage of Ashton (1986 ii Fam LR457) cases. Sham trusts and revocable trusts offer no protection. An asset protection trust should have another legitimate purpose. UK taxpayers liable to inheritance tax should look at vehicles other than trusts. The Proceeds of Crime Act 2002 and its equivalent can override the provisions of the trust. Protective Trusts and Foundations and family partnerships offer asset protection outside the field of trusts. Protected cell companies may be attacked in jurisdictions which do not recognise them. Several jurisdictions offer asset protection trusts, but a court in another jurisdiction may make an order against a settlor, a protector or the trust assets. Few families focus on the need to protect a family company against family disputes. Divorce is a particularly serious issue. In Charman, the dynastic trust had no true dynastic purpose. A pre-nup should be considered at a very early stage. Family constitutions may impose an obligation on family members to enter into a pre-nup. Or trustees may have power to add children to beneficiaries only if they are happy about their marital situation. Asset protection should generally be part of a wider planning exercise having a will and trusts in place in good time.
The United Kingdom, in 2006, returned to taxing the creating of a settlement, in addition to the existing periodic and exit charges. Can partnerships be used for estate planning and avoid these taxes? Yes, but they have their shortcomings. Trusts have many features not shared by partnerships. In England, the Partnership Act of 1890 embodies the principles of common law: a partnership is constituted by persons carrying on a business in common. A degree of commerciality is needed and may not be found in the mere retention of shares in a family company as it would in the management of an investment portfolio. Limited partnerships are formed under the Limited Partnership Act 1907. A Guernsey limited partnership does not require a business and is a legal entity. (N.B. In the UK, business assets can go into a trust without the tax cost). The number of partners is limited to 20. A Limited Liability Partnership is formed under the Act of 2000. Filing of accounts is required. A business must be carried on. Mr and Mrs Smith might have formed a trust for their children; they might form a partnership or a limited partnership. Minors can be partners, but can repudiate at 18. The parent can hold partnership shares on a bare trust for a child. Or the parent may assign a partnership interest to a nominee for the child. It is not certain that the tax liability follows the assignment. A bare trust, therefore, is to be preferred. Partnerships are transparent for income and capital gains tax; for inheritance tax, the asset is the interest in the partnership (so that business relief on the partnership assets may be lost). Parents should set up the partnership and give away a share. A partnership with fixed interests is not a settlement within s.43 of IHTA 1984. A gift with reservation needs to be avoided. Partnerships are not as flexible as trusts: in a family partnership, variation of partners rights may be a transfer for inheritance tax and a disposal for capital gains tax. Unless all partners can participate in management, the partnership will be a Collective Investment Scheme, but this problem may be solved by use of an FSA authorised person to manage the partnership.
The English concept of charity is narrower than that of philanthropy. The use of charities has been driven by tax considerations, and they are highly regulated. The Charitable Uses Act of 1601 arose from the dissolution of the monasteries. Its prologue is still on the Statute Book. Pemsels Case of 1891 set out the principles: public benefit means public benefit in the local community. The Charities Act 2006 extends objects. A charity may be a trust or a company limited by guarantee. There are also companies incorporated by royal charter. There are to be Charitable Incorporated Organisations. The UK does not have any purpose trusts. An English charity requires to be registered, and the Charity Commission has power to intervene and to re-arrange a charity by means of a scheme. Charities in the United Kingdom are generally exempt from tax. Unrelated trading income is not exempt (and may therefore be transferred to a company), and failure to distribute limits exemption. Gift Aid gives a tax benefit to the donor as well as the charity. The question of public benefit is a live issue. The non-UK philanthropist should avoid the United Kingdom, but an EU-wide philanthropic entity is being considered. Privacy and broader objectives can be achieved by an offshore purpose trust, and the philanthropist may be a protector and may lend rather than give funds. A UK service company may be used and should earn fees and pay tax. One may look at a private trust company, a purpose trust, a foundation. The use of an English charity is best limited to those seeking a UK tax advantage.
The presence of management and control has always been important. Record-keeping has also been crucial, and remains so. Tax authorities now have access to more information and exercise increased pressure. An entity needs to establish a tax base for its activities, and will need to comply with local regulatory requirements. The service provider needs to be fully involved in the clients business in order to limit his risk. In Wood v. Holden, the location of management and control was at issue. Cadbury Schweppes upheld the EU freedom of establishment. The claim in the Heinz case failed because of lack of economic substance. Company residence is determined by the true substance of the arrangement the location of control, administration and services. Offshore jurisdictions may also have an interest in local substance Madeira, Malta, Dubai. Other pressures emanate from the United States and the United Kingdom. The traditional requirements are board meetings, review of documents, decision making, banking control; all these need to be minuted and evidenced. Local insurance brokers, accounting, audit, legal work, liaison with contractors all point to local substance, as does the utilisation of local office space and staff. Historically, offshore jurisdictions have suffered from scarcity of resources, notably of staff, but reduced personal tax presents opportunities for staff recruitment.
Tax impacts a hedge fund at three points the investor, the investment manager, and the fund itself. Most offshore jurisdictions have taken steps to attract hedge funds, but mostly they are incorporated in Cayman and managed in a high-tax jurisdiction Mayfair, Connecticut, Switzerland. There are also regulatory issues. It is important that the offshore vehicle is not treated as resident onshore, even though the investment decisions are made onshore. In the United Kingdom, there is the Investment Management Exemption, governed by rules laid down by the UK Revenue. In the United Kingdom, domiciled managers commonly use an LLP, although a limited company is also used; non domiciled managers may receive dividends from an overseas company which owns a UK service company. In Switzerland, profits of a foreign branch may not be taxed. This offers an opportunity to allocate some profits to the foreign branch, and a ruling can be obtained. However, Switzerland does not have an Investment Manager Exemption, so that the benefit of the allocation can apply only to the administration profits. Asset protection and estate planning are very relevant to successful hedge fund managers. Unfortunately, this aspect is much neglected. Litigation is endemic: the threats come from investors, counter-parties, regulators, spouses, partners and others. The jurisdictions referred to in the book Tax Planning for Hedge Fund Managers have the various advantages mentioned there.
The new rules are lengthy and complicated. But the basics are unchanged. It is important that the taxpayer maintains his foreign domicile; he needs to be able to demonstrate that he is not resident permanently. The recent Gaines-Cooper case illustrates the difficulty in acquiring a foreign domicile and residence, but is not directly relevant to those non-doms interested simply in retaining theirs. The new remittance rules are a watered-down version of those originally proposed. They charge overseas earnings, other income and capital gains on the remittance basis, if an adult non-domiciled individual has been resident for 7 out of 9 years and makes a claim. He pays £30,000. He must nominate the income to be taxed: he is not obliged to nominate it all and may prefer to nominate only a small item. He is not entitled to any personal allowance or to the annual exemption for capital gains tax. It is wise for the taxpayer to remit a reasonable amount, but this was so in the past also. The new rules have, however, closed familiar loopholes source ceasing, temporary non-residence, linked debts, gifts made overseas to relevant persons. The concept of remittance is elaborately defined, with the purpose of closing loopholes. It is still possible to make gifts to adult children or open companies. There is an exemption for UK services which relate to overseas assets. There are also new rules for offshore companies and settlements. The 5% drawdown on offshore bonds remains.
The Protector watches over the trustee, talks to the trustee, is a captive to the client or has an essential relationship with the beneficiaries and the trustee people have various views. The concept derives from the Office of Lord Protector. A Protector is a power holder. There are tax issues. Is the Protector really a trustee? Are his powers fiduciary? Does the settlor retain power, through the Protector mechanism, to benefit from the trust? If so, does he have to take into account the tax position of the beneficiaries? Oliver Cromwell was the last Lord Protector. He described himself as the guardian of the people. The practice of having a protector (however called) in relation to the trust is now well established. His powers and duties need to be stated in the trust instrument to change the situs, veto distributions and investment decisions, add and exclude beneficiaries or terminate the trust. In Schroeder, the court held that the power of the protector was fiduciary. He needs to be the right person. His powers can be too wide, creating unforeseen tax liabilities. Protector remuneration needs to be provided for, and be appropriate. Possible powers include migration, removal and appointment of trustees. He may have exclusion of liability and indemnity. In the case studies, the change of trustee required the consent of the Protector; the family turned to the Protector for advice; the Protector had powers in relation to the top trust and also in relation to a trust of which a private trust company owned by the top trust was trustee. In Rawcliffe v. Steele, the Isle of Man Court determined that the power to remove and appoint trustees was a fiduciary one; there was a similar finding in Re The Circle Trust (2006) and Re: The Bird Charitable Trust and The Bird Purpose Trust (2008). There is no statutory power to appoint and remove a Protector, but the Court has such power. A Protector needs to have professional indemnity insurance. Some jurisdictions have statutory powers and duties for Protectors. Disputes in trusts can be resolved through appropriate mediation clauses.