These are achievable objectives for certain clients, but there are a myriad of issues to consider and decisions to take to reach this goal.
It must be stressed, of course, that appropriate legal advice should be taken before proceeding with any such planning.
They often carry an air of mystery with clients; some fabled, mystic structure shrouded in confusion. In fact, broadly speaking, an offshore trust is simply one which is managed by non-UK resident trustees.
Offshore trusts are settled most commonly for two reasons:
- The largest driver is often tax mitigation, which can vary hugely depending on the personal circumstances of the settlor and beneficiaries.
If the settlor is neither deemed nor actually UK domiciled then they can settle non-UK assets on trust which, with careful management, will put those assets outside the scope of UK inheritance tax forever.
Offshore trustees are liable for UK income tax on UK income only and are only liable to UK capital gains tax on UK real property.
Generally speaking, beneficiaries will only pay tax on distributions to the extent that the trust contains untaxed income and gains.
However, if the settlor is UK resident, anti-avoidance rules may cause the income and gains to be taxed on the settlor, though tax might not be payable if the settlor is eligible to be taxed on the remittance basis, makes the appropriate election and does not remit those funds to the UK.
It is essentially pointless for a UK domiciled settlor or deemed domiciled to settle an offshore trust.
- The second reason is for asset protection and succession planning purposes.
A trust keeps assets ring-fenced; compared to outright ownership, assets in trust have a good chance of outliving the divorces, debtors and deaths of family members.
The settlor usually leaves an accompanying letter of wishes that sets out their (albeit non-binding) wishes as to how the trustees should administer the trust.
By doing this, the settlor’s intentions can outlast the settlor and ensure that family wealth is maintained for future generations.
Having concluded that a trust is appropriate, there are several key decisions for a client to make.
The first is who should act as the trustees? Typically offshore trusts are managed by specialist corporate trust companies, which may also provide accompanying services such as acting as a corporate director for any companies owned by the trust.
However, trust companies range significantly from international, corporate giants to small, boutique outfits; choosing the right fit and cost to suit the client is a key step of the process.
Along with the trustees, clients must consider the legal structure of the trust: will the trust be a traditional discretionary trust? Who will have the power to appoint new trustees?
Should the settlor or anyone else be excluded from benefit for tax reasons or otherwise? Does the settlor want to appoint a protector, whose consent must be sought prior to any significant trustee decision such as making distributions or changing fundamental parts of the trust documentation?
Where to settle?
Another key decision is in which country to settle the trust. For UK tax purposes, this question does not matter provided the answer is not “the UK”.
However, the choice of jurisdiction can have a dramatic effect on the efficient administration of the trust.
- Does the jurisdiction even recognise trusts? Will that country seek to tax the settlor, trustees and/or beneficiaries as if they hold the assets outright?; and
- Is the legal landscape sympathetic to offshore trusts and the intentions of the settlor?
- For example, does the jurisdiction operate a system of forced heirship rules, under which individuals are required to make certain testamentary provision for spouses, children or other dependents?
- How rigorous is the jurisdiction’s creditor protection regulations?
- Does the jurisdiction operate transparent ownership registers for property or companies which threaten the client’s desire for privacy?
- More generally, is the jurisdiction a stable economic and political one, or is there a risk of future instability or a history of institutional corruption? There are good reasons that many offshore trusts are located in locations such as the Channel Islands, the British Virgin Islands, the Cayman Islands or Switzerland.
If a client is interested in settling a trust, a prudent adviser should first ask themselves whether a trust is appropriate for that client in all the circumstances. If they then proceed, then the above factors should be considered.
Clients never want structural or jurisdictional inconveniences that threaten their own plans; it is the job of the prudent adviser to anticipate these potential issues and advise accordingly.
This article was written for International Adviser by Aidan Grant, associate in the tax and estate planning team at law firm Collyer Bristow.