Top ten do’s and don’ts of offshore companies and trusts
25th October 2012
There are many reasons to choose an offshore vehicle, whether that be to set up a company, hold money on trust for future generations or to mitigate your tax bill.
Tony Mead, a specialist in offshore matters and partner at law firm DWFM Beckman, gives a list of “do’s and don’ts” of choosing to set up offshore.
1. Why offshore
I am often asked about the main reasons for using offshore companies and trusts, and whether they can legally be used by UK residents. The answer is a qualified “yes” in the case of resident non-domiciled individuals (res non-doms), subject to professional advice. The definition of “resident” will change in April 2013, with regulations due in December 2012.
2. Major assets
A brief walk around the harbours of Monte Carlo or St. Tropez will reveal a plethora of ‘super yachts’, registered in places such as Tortola in the British Virgin Islands. Ships are regulated by the maritime laws of the country in which they are registered. Those that impose less stringent requirements on owners are favoured as there is usually a significant saving to be made in operating costs. Usually vessels are owned by companies incorporated in the same jurisdiction, with much the same applying to civil aircraft.
3. Asset protection
Asset protection trusts (domestic and offshore) are often considered when wealth is exposed to creditors or spouses. Jurisdictions such as Belize have a mechanism enshrined in their legal system whereby trusts can only be challenged, with difficulty, through their courts, with foreign court orders proving ineffective. In reality, it is the vulnerability of the individual that is the Achilles heel. A robust legislative system protecting the trust does not protect an individual from his trust entitlement being seized or remedies by a home court against them. As part of prudent planning by a (solvent) settlor who seeks neither to defraud creditors nor leave his family impecunious, the use of trusts can provide a useful layer of protection.
4. Trading and investment
Many offshore companies are for trading or investment. It may be a Special Purpose Vehicle to hold a single asset or carry out one transaction, or a trading company. Shares would normally be held by a trust. Prior to 2006 there were tax advantages for using Real Estate Investment Trusts with the Jersey Property Unit Trust an example. These have fallen out of favour as the tax advantages (primarily the exemption to four per cent Stamp Duty Land Tax) have been withdrawn, but the structures still exist and mainly hold institutional commercial property in the UK.
UK law has a unique view of domicile. A person generally takes their domicile of origin from their father and that remains until an alternative domicile is adopted (domicile of choice). It is not easy to lose a domicile of origin and takes some determination to acquire a domicile of choice. It is referred to as an ‘adhesive concept’.
The concept of ‘deemed domicile’ is only IHT related. Res non-doms will be deemed UK domiciled for IHT purposes where they have been UK resident for 17 out of 20 tax years. Res non-doms must settle non-UK situs assets in offshore trusts before becoming deemed domiciled. Once settled, such assets will remain excluded property for IHT purposes, even after the settlor becomes deemed domiciled.
Sadly, it is not uncommon for some to think they can put their assets in a trust and then continue enjoying them as if they were their own, or even take them back if they need to.
Unsurprisingly this concept is deeply flawed. A settlement requires the settlor to transfer the assets to trustees who acquire legal ownership, which they hold on trust for the beneficiaries. It is for the trustees to make their decisions (often regulated by statute) as to how the assets should be used and, in the case of a discretionary trust, how and when both capital and income should be distributed. The trustees can take notice of beneficiaries’ wishes but are not bound by them as they have a duty to act in the interest of all beneficiaries. They cannot be directed by the settlor, even where he acts as protector, often not a wise choice. Revocable trusts are also available, mainly in the United States, but are vulnerable to attack and give little protection if the settlor becomes insolvent.
Offshore companies or, should I say, overseas companies with low effective corporate tax rates, no withholding tax requirements on payment of dividends, and access to international tax treaties, are used where trade or investment involves multiple jurisdictions. A trust may form a holding company with one or more local subsidiaries. If there is no double tax treaty between the local company and holding company, another company in a jurisdiction that has a suitable treaty may be interposed, subject to anti-treaty shopping provisions. Dividends can then be paid to the holding company and onwards to the trust in a most tax efficient manner.
8. Residential property
CGT does not apply to a Principal Private Residence. Investment property is subject to CGT at 28%, although it is currently exempt for non-residents. This is due to change from 2013. IHT will apply to non-doms if their personally held estate in the UK exceeds £325,000.
Until 6 April 2008 an offshore trust owning an offshore company holding residential property was popular as tax free gains/capital payments could be made. Prior to 6 April 2013 the trust/company is not taxable. After that date CGT may be due if the trust sells the shares of the company or if the company sells the property. Many existing trust/company ownership structures provide an exemption from IHT.
9. Other issues
Residential property owned by an offshore company raises the possibility of HMRC assessing the occupiers as being “shadow directors” and assessing them on a benefit in kind. Many who have held their assets in such a way have been advised to become tenants paying a market rent equivalent to the benefit in kind, although there are other solutions.
There is no such thing as a “nominee director”. Most regulated jurisdictions require at least one local director, and it is prudent for decisions to be made by local directors in that jurisdiction. It is also advisable for the majority of the board to consist of non-UK based directors and board meetings to take place in the company’s jurisdiction.
If it is determined directors are acting under direction, it is not a great step to suggest the company is controlled from the UK, if that’s where the beneficial owner resides – who may have acted as either or both of the above – and should be taxed accordingly as a UK resident company on its worldwide income.
Nominee shareholders are bare trustees, holding shares on trust for the beneficial owner to whom they are liable to account. The assets of a bare trust are treated for tax purposes as if the beneficiary holds the assets in their name and they are taxable accordingly.
Read the full article in International Adviser here.