By Kevin Renshaw, Tax Consultant and James Russell, Managing Director of Equiom Asia.
For many years trusts have been used in common law jurisdictions to facilitate asset protection and succession planning strategies. When buying UK based assets, offshore trusts in the British Crown Dependencies of Jersey, Guernsey and the Isle of Man are often the preferred vehicles for high net worth individuals for their efficient tax and estate planning benefits, offering clients good opportunities to optimise their tax footprint and secure assets for the future while retaining significant control.
Ties between Asia and the Crown Dependencies have traditionally been strong through private wealth structuring, and more and more wealthy families are looking at structuring options in these offshore jurisdictions. High net worth families in Asia have, to some extent, embraced the concept, but control (or lack of it) has always been a significant barrier.
The advent of the Private Trust Company (PTC) has gone a long way to address this concern with senior family members, selective members of the next generation and professional trustees combining to form the board of the PTC and drive decision making and corporate governance.
The dual objectives of asset protection and succession planning can be delivered by a PTC structure. It provides a tried and tested way of protecting assets from third parties and potential hostile claims and creates flexibility around the distribution of assets to specific beneficiaries. It also enables the creation of income rights while the income generating assets remain within the trust.
For assets physically situated in foreign jurisdictions whose legal systems follow common law, like the UK, a trust can be an ideal vehicle for UK real estate and in particular UK residential property that is occupied from time to time by family members.
The asset protection benefits of having the real estate asset held outside of the patriarch’s or matriarch’s personal name (or a BVI company of which they are the shareholder) is clear - a trust delivers these benefits while at the same time allowing family members to occupy the property as beneficiaries of the trust.
It is also interesting to note that ownership within a trust protects from the highest rates of Stamp Duty Land Tax and is completely outside of the Annual Tax on Enveloped Dwellings charge - a tax introduced in 2013 which now requires tax of £236,250 per annum to be paid on the most expensive properties and even £25,200 per annum on a modest £2m central London property.
Intrinsically tied in with succession planning is Inheritance Tax or Death Duties. Until quite recently the UK operated a benign regime, where foreign owners of UK residential property could utilise an offshore company ownership structure and be removed from any UK Inheritance Tax (IHT) exposure. But in 2017 fundamental changes were made to the UK legislation which now treats the offshore company as transparent, with the result that the death of the shareholder triggers a 40% IHT charge.
It doesn’t matter that the owner may have never visited the property or even set foot in the UK, their death will still trigger UK Inheritance Tax.
A trust, however, is continuous. It survives the death of the settlor as its assets are outside the estate of the deceased and outside of UK probate. This continuity allows for UK residential property to be held within a trust and be protected against a 40% IHT charge on the death of the settlor. The gross asset values, rather than net of tax amounts, are passed on to future generations.
With more than 40 years’ experience of servicing families with cross-border structuring options, Equiom has a team of experienced professionals advising on asset structuring in the UK-oriented offshore jurisdictions of Jersey, Guernsey and the Isle of Man. Alongside our global presence and network of expert advisors, we assist our clients with their needs no matter where they are and what time zone they are in. Our Asia teams are based in Hong Kong, Singapore and Japan and we are dedicated to providing beneficial, tax-efficient and geographically flexible solutions for our clients.
For more infomation on this topic, contact James Russell or Kevin Renshaw today to find out how we might assist you.
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.