Key takeaways from Equiom’s Channel Islands seminar
Friday 15 February 2019
Equiom Tax Directors, Monica Dixie and Kevin Renshaw recently delivered a seminar on two key topics affecting the crown dependencies – asset protection and succession planning considerations for investing in UK property and the new EU substance rules. Kevin provides answers to the key questions related to these topics.
What are the main challenges in succession planning?
When protecting assets and successfully handing them down to the next generation, the main risk we often come across with clients is that the beneficiaries of the assets are too young to be able to receive valuable assets and manage them properly. There is often the risk that there is a lack of maturity and the young person may be influenced by friends or led down the wrong path. One solution to this problem is to gift the asset through a trust, which allows the asset to be owned by the trustee but still used by the individual. Property is a good example of this as an individual can still live in a property even while it is held in a trust.
What types of structures are available for UK property ownership?
The traditional offshore company is no longer a panacea for UK residential property ownership. Special Purpose Vehicles (SPVs) were historically used to acquire individual properties and ring fence them. A company would hold one asset and ownership of that asset would not be contaminated or affected by any other assets. The SPV is not as popular a vehicle as it once was for a variety of reasons and the traditional trust has come back to the forefront.
For non-UK domiciled investors the use of trusts offer asset protection and succession planning benefits and can also deliver a very favourable tax outcome.
International investors who are neither UK-resident nor UK-domiciled have a choice of property ownership structures. They can quite easily use a trust to own a property directly or to provide funding for a family member to acquire a property. For those who are not familiar or comfortable with a trust, a Liechtenstein life policy is also a highly regarded asset protection vehicle, which can deliver a favourable tax outcome.
No matter what type of structure you decide on for your assets, it is important to review existing structures, making sure they are still appropriate and continue to meet your needs and overall objectives.
Turning to the hot topic of EU substance rules, what are they and what is required?
The EU substance rules were introduced to domestic legislation in the crown dependencies, some British overseas territories and a handful of other jurisdictions, with a view to preventing their inclusion on an EU blacklist for tax purposes.
They require certain registered entities in these jurisdictions to demonstrate substance by proving that:
- The entity is directed and managed in the jurisdiction where substance is required
- The entity’s core income generation takes place in the jurisdiction where substance is required
- The people, expenditure and premises which are required to undertake the core income generation are within the jurisdiction where substance is required
Which crown dependency companies do the rules apply to and when?
The rules affect companies which are tax resident in one of the crown dependencies and receive income from certain geographically mobile sectors including, banking, insurance, fund management, distribution and service centres, shipping, financing and leasing, IP companies, headquarters and holding companies. These rules take effect immediately for companies with accounting periods starting on or after 1st Jan 2019.
In some of the other jurisdictions which have substance rules limited partnerships are also in scope.
What happens if you don’t meet the requirements?
If you don’t comply there are sanctions. These include:
- Financial penalties
- Reporting when an immediate parent company, ultimate parent company or ultimate beneficial owner is resident in an EU Member State and
- Possible striking off in some cases
What do companies need to do?
Companies need to look at what they can do to increase their substance in the jurisdiction where they are subject to the EU substance rules to ensure they don’t incur any sanctions.
Directors should be considering the impact of this legislation and whether they need additional directors and support to demonstrate substance.
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This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.