Why continue to use Jersey Structures?

Tuesday 03 May 2016

By Phillip Dearden, Tax Director, Equiom Solutions

Introduction

With the recent controversy surrounding offshore jurisdictions and the regular extension of the scope of UK anti-avoidance legislation aimed at offshore structures, you could be forgiven for believing that Jersey trusts and companies may not be very popular going forward. In fact there are still many reasons both residents of Jersey and the UK may continue to use Jersey trusts and companies to hold assets, including assets in the UK.

In the main, UK anti-avoidance provisions will seek to tax the income and/or gains of a non-resident trust or company on the person who set up the trust or company. This means that in most cases a UK resident and domiciled person will achieve no tax advantage from setting up a trust in Jersey. This has been the case for a long time. Nevertheless, there has been and still are a number of circumstances where UK or Jersey residents can achieve tax efficiencies from the use of Jersey trusts.

Jersey residents

Individuals who are Jersey resident and domiciled are generally outside the scope of UK Inheritance Tax (IHT). However, these people do remain exposed to IHT in respect of UK situs assets and in these cases it makes sense to form a Jersey company and use that to hold UK assets. In this way, the Jersey resident will not own any UK assets themselves and will avoid an exposure to IHT. Changes to UK law are anticipated which will render this strategy ineffective in the case of UK residential property but it will remain viable for other UK assets such as shares or commercial property.

When a Jersey resident and domiciled person passes away, their estate, or part of it, will often pass to UK resident family members. This means wealth passes back into the UK tax net. In some cases, such individuals might organise their estate so that some or all of their estate passes to a Jersey resident trust. In this way, a portion of the estate may remain outside the scope of UK taxation – it is likely that tax will be paid as benefits are made available to UK family members, but for a time funds may be preserved in a tax-free place and exposure to the UK IHT mitigated for as long as the trust exists.

UK resident non-domiciliaries

The taxation of UK resident non-domiciliaries is in a state of flux. A deemed domicile provision is shortly to be brought in which will apply so that after 15 years of residence a non-domiciliary will generally be taxed in the same way as a UK-domiciled person. Nevertheless, there are still attractions for such people to form trusts in Jersey. If a trust is set up prior to becoming UK deemed domicile, the trust’s assets may remain outside the scope of IHT and under the treatment proposed by the Treasury’s recent consultative document, trusts for such people may still create an effective Capital Gains Tax shelter.

Foreign donors

In some cases, a resident of a distant country might wish to make a gift to a UK resident individual. If the gift is significant, such a gift is placing wealth within the scope of UK taxation. An alternative might be for the foreign resident to place wealth in a Jersey trust which can then be invested for the benefit of the UK resident. As the UK resident needs funds, the trustees can make distributions to him which will probably be taxable, but the corpus of the trust can remain in Jersey in a tax-free environment.

Dead settlors

As noted above, UK tax law attempts to attribute the profits of non-UK companies and trusts to any UK resident individuals who have set up those companies or trusts. It follows that where those individuals have passed away, these attribution provisions cannot apply. This means that wealthy UK resident individuals may provide, in their wills, that some of their estate may pass to a Jersey trust for the benefit of UK family members. Income and gains may then be achieved by the trustees and, as the income and/or gains are achieved, no tax will be suffered. In this way, UK resident settlors may settle assets on Jersey resident trusts via their will, so that wealth is temporarily taken outside the scope of UK taxation. 

Summary

The increase in both volume and quantity of UK anti-avoidance provisions does mean that many tax planning strategies which were once effective are no longer viable. However, the above are examples of non-aggressive plans that remain viable and involve the use of Jersey trusts and/or companies. It goes without saying that weaving a safe path between UK anti-avoidance provisions is becoming very difficult and it is essential that appropriate tax advice is taken.