The advantage of a Trust owning your property

Intro:

Most people prefer not to think about what will happen to their property on death. However, failure to make proper plans can create real problems and cause great expense (including tax liabilities) for next of kin, problems that they will be forced to sort out at a time when they are emotionally upset and most vulnerable.

Making a will is a sensible way for an individual to put his or her affairs in order. However, the administration of a deceased’s estate can be costly (often around 4% of the total value of the estate), result in long delays (normally at least one year, even for a simple estate) and very often involve a large tax bill (inheritance tax or estate duty rates are often extremely onerous).

One alternative to making a will is to set up a trust during one’s lifetime. With careful planning this can eradicate delays, costs and taxes and provide other benefits such as protecting assets from future creditors or providing anonymity. For many reasons the use of trusts as a means of holding and passing on family wealth, even for modest estates, has increased dramatically in recent years.

So what is a TRUST?

The concept:

Unlike a company, a trust is not a legal entity. It is best described as a relationship; an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who holds the property for the benefit of specified people or objects (the beneficiaries). A trust deed sets out the terms and conditions upon which the trustees must hold and administer the trust assets. The trust deed also sets out the rights and interests of the beneficiaries.

A trust can also be created by a will but if assets are "transferred" to trustees during lifetime they should be unaffected by the subsequent death of the settlor. Another word for "transfer" is "settle"; hence the transferor of the assets is called the settlor and the trust is often referred to as a "settlement".

Those unfamiliar with the trust concept may be concerned about transferring ownership of their property to a trustee. However, the duties of trustees have been developed over centuries through English equity and common law and are now in many cases codified in statute law. This law distinguishes between legal ownership (trust assets are held in the name of trustees) and beneficial ownership (only the beneficiaries may benefit from the assets). Further, even greater duties are imposed on professional trustees who, in reputable and well-regulated jurisdictions such as Gibraltar, for example, are required to be licensed.

Where can I set up a Trust?

Virtually all low tax or zero tax common law jurisdictions have some form of trust law. Gibraltar is at the forefront of best practice development in the area of trusts and was one of the first jurisdictions to introduce the regulation and supervision of trust companies. Professional trustees must be licensed under the Financial Services Ordinance 1989 and are regulated by the Financial Services Commission (FSC).

Gibraltar trust law is derived from English common law and the rules of equity, supplemented by certain legislation. Gibraltar’s Trustee Ordinance is based on the Trustee Act 1893. "Asset protection trusts" are also permitted although all trusts provide some element of asset protection.

CONFIDENTIALITY

Regulations require trustees to know the identity of the settlor and ultimate beneficiaries of a trust. This information is kept completely confidential. Disclosure to third parties is only required in very particular circumstances and must be accompanied by a court order.
In the case of asset protection trusts, the register maintained by the Registrar of Dispositions to record the transfer of assets to asset protection trusts is closed and its contents privileged.

TAXES

The vast majority of Gibraltar trusts are set up as discretionary trusts so that beneficiaries only have a contingent interest. The beneficiaries can therefore avoid any tax liability until assets are distributed to them.

Trust income is exempt from tax in Gibraltar if the trust is established by a non-resident, has no Gibraltar beneficiaries and derives no income locally (other than bank interest). The terms of the trust must expressly exclude Gibraltar residents from being beneficiaries.

ASSET PROTECTION TRUSTS

Asset protection trusts (APTs) are permitted in Gibraltar. These must be registered with the Register of Dispositions and require that:

the settlor is an individual
the settlor is not insolvent at the time of the disposition
the settlor does not become insolvent in consequence thereof
the disposition is registered.

If these requirements are satisfied the disposition will not be voidable by any creditor of the settlor and the application of the Fraudulent Conveyances Act and the Bankruptcy Ordinance are excluded.

Only professional trustees licensed by the FSC can act as trustees of APTs and an application fee of £300 is payable upon registering the trust and £100 is payable annually to maintain the registration.

So what are the main advantages of a TRUST?

Trusts can be very useful means of tax planning. They can be very flexible, even the settlor can continue to benefit from the trust assets, and have many other advantages including:

Asset protection

All trusts provide some element of asset protection but specifically see APTs above.

Tax planning

A properly established trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate duty.

Avoiding the expense and delays of probate

In common law jurisdictions the need to obtain a grant of representation (probate or letters of administration) before a deceased’s estate can be wound up and distributed can cause delay, expense, unwanted publicity and upheaval.

Confidentiality

There is no public register of trusts or trustees. The ownership of trust assets can remain entirely confidential in most circumstances.

Avoiding forced heirship

Forced heirship is a particular problem in continental Europe and other civil law jurisdictions, as well as in countries of Islamic tradition. A trust can be used to overcome forced heirship claims.

Estate planning

Many settlors prefer to make complex arrangements for the distribution of their assets. They may wish to provide a source of income for a spouse or make provision for the education of children. A trust is a very convenient and flexible method of making such arrangements.

Protecting the weak

A trust allows a person to provide for those who may be unable to manage their own affairs such as infant children, the aged or persons suffering from certain illnesses.

Preserving family assets

Preserving family assets against mismanagement or spendthrifts is a common motivation for establishing a trust. An individual may wish to ensure that wealth accumulated over a lifetime is not dissipated or divided up but is preserved as one fund. The fund can then accumulate further with provision for payments to members of the family as necessary, preserving some assets for later generations.

Continuing a family business

A settlor may want to ensure that the business he has built up will continue after his death. If the company shares are transferred into a trust prior to death the unnecessary liquidation of the family business can be prevented.

If family members have little business experience, the trustees could be instructed to retain the shares, keep the company running and provide payment to members of the family from dividend income.

Flexibility

A discretionary trust can provide a structure that is capable of rapid change as circumstances demand.

Property Holding

A portfolio of international property can all be held under one single Trust. In some circumstances, depending on local laws, a "local company" may be required to sit under the trust (i.e. it’s common for a Jebel Ali Offshore company to hold Dubai property, and have a Trust acting as a shareholder of the company).

For further details of the benefits of holding real estate through a trust and offshore company structure please ask for Sovereign’s property holding information sheet.

Trust services are principally provided by Sovereign Trust International Limited which is licensed as a professional trustee by the Financial Services Commission of Gibraltar – licence number FSC00143B, and Sovereign Trust (TCI) Limited which is licensed as a professional trustee by the Financial Services Commission of the Turks & Caicos Islands – licence number 029. Both companies are regulated and are covered by our professional indemnity insurance. Fees for establishing a suitably drafted trust and for the provision of trustee services will be quoted on a case-by-case basis. Please contact your nearest Sovereign office for a copy of our trust brochure and/or an exploratory discussion.

Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, it does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.

Obligatory revaluation of all properties from next Jan 1st

If your property has been revalued since Jan 1st 2004 then breathe easy. If not, read the following notice from Sovereign Group's eagle-eyed Algarve team. In fact read it anyway as it is another bureaucratic nightmare in the making.

"Together with the proposed 2012 Portuguese Budget is a document proposing rectification to the 2003 general property reform.

The 2003 changes established a 10 year period to achieve a general revaluation for tax purposes of all property in Portugal. In addition the Memorandum of Understanding concerning the economic assistance promised earlier this year to Portugal by the EU and IMF established a promise that the conclusion of the general revaluation should be achieved by the end of 2012.

Thus the Government has made various alterations to the IMI Code (CIMI) in order to regulate the general revaluation of urban property including alteration to the body responsible for achieving this.

As from 01.01.2012 the old rules established to value existing property will be revoked and there will be a general revaluation of all properties that have not been revalued since 01.01.2004 and that, at 01.12.2011, are not undergoing revaluation under the CIMI scheme.

This revaluation will be led by the Finance Department (DGCI) assisted by other authorities and the local Câmaras who will be obliged to send property plans either electronically, or in paper format, to the Finances to assist with valuation. It will not be obligatory for the property to be visited to be revalued and the new values obtained will come into effect on 31.12.2012 for payment of IMI in 2013.

There will be some changes to the existing formulas used to value property and the levels of those will be established by 30.11.2011.

Notification of the new values will be made electronically where possible and by registered post where not.

There will be a period of 30 days in which an appeal can be lodged and a second valuation requested at a cost to the taxpayer of not less that €204. This second valuation must be made within 60 days of original notification of the valuation.

Sovereign comment:

Many properties that have been registered with the same title holder for many years including those held by companies could see a dramatic increase in the tax value and consequently in the municipal tax payable. In addition, the “capping” system introduced in 2003 to prevent a tax payer suffering large increase in municipal taxes payable, will no longer apply.

Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, this information does not constitute legal or other professional advice. We do not accept any responsibility, legal or otherwise, for any error or omission.

Are you aware of the role of offshore companies in property investment?

Introduction:

Dubai Land Department have recently announced, (as of January 1st, 2011) that it is has banned the registration of Dubai property in the name of virtually all “offshore companies” or companies not registered onshore in Dubai. The one exception to this “offshore company ban” is the Jebel Ali Offshore Company. This new rule does not effect individuals, only foreign or “offshore” companies looking to purchase property.

The following Q&A is to inform non GCC purchasers and investors, of the implications of the Land Department’s new rules, and how the recent changes will affect foreign companies purchasing and registering property in Dubai:

Why would one use a company to purchase a property in Dubai:

There are a number of good reasons why the use of Offshore Companies has become so popular when buying local Dubai property. The most obvious reason would be the avoidance of complicated inheritance procedures. A company does not die. If your property is held in a low cost offshore company, you (and your partner or partners) can own the shares of the company as you see fit. So rather than have your individual names on the title of the property, you have a company name. This is a very easy method for joint investment, for confidentiality, and for organising ones assets under a manageable structure (and in many cases, in a Common Law structure).

So the only “Offshore Company” that I can currently use to buy property in Dubai, is the Jebel Ali Offshore Company?

Correct. This applies only in Dubai. For example, you can still buy property in Abu Dhabi through a BVI company.

The Dubai Lands Department decision of Jan 1st 2011, has confirmed that it will NOT register property title to any foreign company, unless that company is registered offshore with the Jebel Ali Freezone.

But can a foreign company own the Jebel Ali Offshore Company?

Yes. You can for example, use a BVI company, or a common law Trust, to hold the shares of your Jebel Ali Offshore Company. You will still need to clearly show the Lands Dept evidence of the ultimate individual owner(s), with attested share certificates and passport copies.

What about if my property is not yet delivered? I have signed the purchase agreement before January 2011 in my personal name, can I now switch to a company name?

The Dubai Lands Department have an interim property register, and main property register. Until your property is listed on the actual main property register (which happens after handover), then it is possible to change the title from an individual name to a Jebel Ali Offshore Company, providing you can show that there is no change in the beneficial ownership (i.e. the same individual on the initial agreement, is the same owner behind the company).

But will there be an additional transfer fee, if the sale and purchase agreement is not currently in the name of a Jebel Ali Offshore company?

In order for the registration of title to take place, the developer of the property must issue a No Objection Certificate consenting to the registration in the name of the Jebel Ali Offshore Company. As mentioned above, normally the developer will want to see clear evidence that the person named on the sale and purchase agreement, is the same person as the beneficial owner behind the new Jebel Ali Offshore company. The developer normally charges an administration fee, which should not be more than Dh3-5,000, to issue the No Objection Certificate.

If the developer and Jafza both issue NoCs to the Land Department authorising the registration in the name of the Jafza offshore company, it is normal that the registration can be completed without charging an additional transfer fee, again provided that the ultimate beneficial owners of the new Jafza offshore company are the same as those mentioned in the original sale agreement.

What if my BVI company already holds the title deeds to my property in Dubai?

The recent changes to the policy only apply to registrations of titles taking place from January 1, 2011, and do not affect any that took place prior to that date.

Does Jafza allow offshore companies to own property anywhere in Dubai?

From the 2006 Circular that Jafza issued, it stated that Jebel Ali offshore entities could own property in any project in Dubai that were owned by Dubai World, Dubai Holdings and Emaar Properties.

Whilst we understand that there is no restriction on any freehold property, Jafza offshore companies must still obtain a “No Objection Certificate” from Jafza, in order to register title at the Land Department.

To date, we have not ever had a refusal for an “NOC”, when clients are looking to own property outside the projects listed on the 2006 circular.

How is the Jebel Al Offshore Company set up, how much will it cost me?

Set up is fairly straightforward, with the normal due-diligence required on all proposed Directors and Shareholders. It will take about 4-5 days in incorporate, and requires the shareholders of the company to visit the freezone and sign (or provide a Power of Attorney to someone to act on their behalf).

The cost at set up is USD$4,250, and annually there is a registered agent fee of $1950. Sovereign Dubai is one of the oldest registered agents with Jafza, and we have a dedicated corporate services department of 25 people who are there to assist with all company formation enquiries.

What if I want to sell my property, and it is owned by the company, how do I do it?

You have two choices here, you can either sell the property OUT of the company, by simply signing the sale documents as a Director of the company, or you can sell the shares of company, (assuming the company only holds one asset, which is the house). The Lands Dept WILL need to be notified of the change in beneficial ownership of the company, with certified documents to be provided from Jebel Ali Freezone (all of which we can assist with).

QNUPS: the secret to escaping inheritance tax?

Many UK expatriates do not realize that they remain UK domiciled and therefore subject to UK inheritance (IHT) on their worldwide estate at a rate of 40% after allowances. This can come as a major shock to a family after the death of the breadwinner.

What can be done about this? There are options. Long term expatriates may have the chance to establish a foreign domicile. If they can do that they lose their liability to IHT on foreign assets. I will write more about this and the recent changes to the procedures for establishing a foreign domicile in a later article.

Transfers of wealth on death between husband and wife are exempt from IHT but only if the spouse is also domiciled in the UK (or both are non- domiciled). This catches out many expatriates who have married a foreign passport holder who is likely to be domiciled elsewhere. Even then the IHT is only delayed rather than avoided because on the death of the survivor the tax will be payable on the passing of the family assets to the next generation.

IHT is avoided on any assets given away to another an individual at least seven years before death. This is rarely an attractive option as any attempt to continue to enjoy the assets will normally result in the Reservation of Benefit rules applying and the tax being charged on the donor's death. And persons rarely know when they are going to die and will rarely be content to rely on their relatives to maintain them so generally this is a non-starter for the majority.

It is possible to transfer assets to a Family Investment Company and give away the capital value whilst retaining control and the income. Again, I will write more about this in a later article.
Another option, and one which is finding increasing favour, is the recently available Qualifying Non-UK Pension Scheme (QNUPS).

QNUPS have not yet been widely used because the legislation enabling such schemes was only recently made effective. The enabling legislation, which also created the better known QROPS, was passed in 2004 in response to the EU pension's directive 2003 which was designed to further the EU principle of free movement of capital. The legislation became effective in 2006 but QNUPS could not be used until HMRC passed the accompanying regulations. They only got round to doing that in 2010. As you might imagine, HMRC were not massively keen on allowing UK persons to create offshore pensions over which HMRC have little or no control and no ability to tax.

A QNUPS can invest in a wide range of assets, much greater than a normal UK pension. A QNUPS can invest in residential property and make loans to its members to purchase personal assets rather than having the constraints of trying to borrow from a bank. This can be very attractive in the current climate as banks normally only lend if you can prove you don't need the money and are even stricter now. An UK pension can do neither, or at least not without a significant penalty charge.

A QNUPS is exempt from UK IHT on the member's death and this is the biggest advantage. The coalition government have recently abolished IHT for approved UK pension schemes. However they have replaced this 40% tax with a new special tax charge of 55% imposed before the benefits are paid out to the beneficiary. The charge applies irrespective of where the member was resident before death and where the beneficiary receiving the benefit is resident. A QNUPS fund is exempt from the new 55% charge.

The advantage of a normal UK approved pension over a QNUPS is that contributions attract tax relief. Contributions to a QNUPS do not attract relief. But that relief is now capped at maximum of £55,000 per year so all UK resident individuals should have both a QNUPS and a UK approved pension. They should maximise their relief by transferring £55,000 of their income into an approved scheme (before tax has been suffered) and then transfer as much as they like of their taxed income into a QNUPS to obtain the long term advantages noted above. It is pointless putting this taxed income into a UK pension.

There can be problems if the only reason for setting up a QNUPS is to avoid UK IHT. There is a danger that, where the member is in ill health and sets up the QNUPS with the sole objective of avoiding IHT, HMRC could seek to attack the arrangement. They would do this by trying to claim the pension was essentially a sham and was no different to a normal trust. This could lead to the member suffering a lifetime IHT charge on the transfer into the QNUPS and a further charge on his death if he were to die within 7 years which is likely in such circumstances. But there are so many other advantages in setting up a QNUPS that it should be easy to point to, and have well documented, these alternative and additional motives and thereby rebut this suggestion if it were ever made.

In order to be a QNUPS the scheme must fulfil certain conditions. The scheme must have the same retirement age as applies in the UK; it must provide an income upon retirement; it must be open the local population in the jurisdiction where it is established and recognized for tax purposes in that jurisdiction.

The UK government has shown that it is not beyond raiding UK pensions when it needs money to prop up its own finances. At the moment it needs money arguably more now than at any time since the Second World War. This is not unique to the UK government. Most of the EU governments are in the same boat. UK taxes are unlikely to go down and any UK pension is at the mercy of the UK government. It would seem eminently sensible to try and remove pension assets from the UK tax system and to get them outside the influence of the UK government. There is no suggestion that these schemes are not going to be around for the long term but why wait? This facility is available now and there is no guarantee that it will be available later. Anything which puts assets into a friendlier tax climate allows more flexibility in their administration and draws down and carries substantial IHT tax advantages would seem to be a very attractive proposition which everyone should grab with both hands.

So to summarise. UK expatriates who have an existing UK pension should transfer it to a QROPS scheme as soon as possible. UK residents should continue to setup a UK pensions for the first £55,000 per year to take advantage of the tax relief on the contributions. Those who wish to contribute more than £55,000 should set up a QNUPS. UK expatriates who remain UK domiciled set up a QNUPS especially if they may return to the UK as then they will not only get the UK IHT advantage but also the underlying income and capital gains will be exempt from UK tax. If a UK expatriate is not planning on returning to the UK then the family investment company may be the preferred option as it is simpler and cheaper and more flexible. Every UK expatriate should do one or the other as to do nothing will prove very, very expensive.

KISS CONFIDENTIALITY GOODBYE

A nasty little employee of the one of the major Lichtenstein banks recently sold details of all their account holders to the German and UK tax authorities. Employees of various Swiss banks have done something similar. I can imagine its very lucrative work. The US and the UK have persuaded the Swiss authorities to roll back their banking secrecy and allow details of account holders to be passed to them. The offshore financial centres (OFC’s) have signed Tax Information Exchange Agreements (TIEAs) with many onshore countries. Those OFCs controlled by any European Union country now automatically exchange details of accounts earning income with the home country of the account holder. So what is going on? What has happened to the right to privacy and banking secrecy?

The onshore countries now have a legal means to obtain information about any offshore account or offshore trust or company structure. If they do not have a legal means than it seems they are quite prepared to purchase the information from a thief. What happened to reach this situation?

In 1996 the OECD commissioned a report which was delivered in 1998 and listed all “tax havens” who engaged in “harmful tax competition”. The OECD threatened these tax havens (now called OFCs) with all sorts of nasty stuff because their low tax rates attracted investment away from the OECD member states. The implication was that anybody who had a tax rate lower than the OECD norm were being unfair. Boo hoo! Another source of irritation was that the OFCs wouldn’t reveal who was doing what in their jurisdiction.

Many argued that nations shouldn’t be trying to dictate tax rates to others and in 2001 Paul O’Neil the then US treasury secretary of all people put a big dent in the project by stating “The United States does not support efforts to dictate to any country what its own tax rates or tax system should be, and will not participate in any initiative to harmonise world tax systems. The US simply has no interest in stifling the competition that forces governments - like businesses - to create efficiencies. ………….The work ………must be refocused on the core element that is our common goal: the need for countries to be able to obtain specific information from other countries upon request in order to prevent the illegal evasion of their tax laws by the dishonest few.”

The illegal tax evasion he was referring to doesn’t take place offshore. There is nothing to stop someone setting up an offshore company or trust. That person may well have an obligation to report the existence of that company or trust on their home tax form and their home laws may well attribute the undistributed profits within that structure to them and trigger a tax charge. If so a simple offshore structure will not achieve any tax advantage provided the correct reporting is made.

The OECD’s main complaint was that some of their tax payers were “forgetting” to submit the required information on their tax forms. The secrecy found offshore encouraged them to think they could get away with this. Even now some offshore practitioners still rather irresponsibly promote this idea of hide it and don’t declare. How will they find out is still a common question. Some suggest that you should keep all records hidden in a bank vault, not make phone calls to your offshore service provider and other such nonsense. It’s this type of stuff which gives offshore practitioners a bad name. What these numpties should be advising on is how to achieve the desired tax saving with a structure which legitimately and legally avoids or defer taxes onshore. It is nearly always possible.

The OECD threatened sanctions against any jurisdiction which did not agree to sign up to an exchange of information programme. Hong Kong was left off of the list of tax havens– not because it didn’t correspond to the OECD’s definition but probably because the OECD didn’t feel that it could bully China. Those funny little offshore islands were a different matter. They were easy to take down. All OFCs have now committed to signing TIEAs under which information about ownership of offshore structures could be exchanged on request. Quietly over the last few years Cayman, BVI and all the other recognised OFCs have signed TIEAs with most onshore countries. The OFCs haven’t exactly advertised they have been doing this but the TIEAs are there and in place.

Next came the EU savings directive under which EU member states agreed that they would force banks within their jurisdictions, or jurisdictions under their control (so that included most OFCs ) to automatically pass information back to the home tax authority of any other EU resident who banked within their borders and earned income on the account. Switzerland reluctantly signed up. The result is that many EU residents have switched their banking to Hong Kong or Singapore en masse and the private banks in both have flourished as a result.

But how does this exchange of information work in practice?

Anyone who has set up an offshore company or trust will be familiar with the amount of “due diligence” paperwork required by the service provider. As a matter of law the Corporate Service Provider (CSP) must confirm your identity, residential address, source of funds and fully understand the intended business of the structure. Normally that requires you to provide a certified copy of your passport, an original utility bill or bank statement, documentation proving the source of funds injected into the structure and a detailed explanation of the business to be undertaken.

Service companies can provide you with nominee shareholders and professional directors, trustees, dummy settlors or whatever but they must still correctly identify the beneficial owners of a company and the “client” and beneficiaries of any trust. This information must either be lodged with the offshore agent who forms the structure or under certain circumstances the Hong Kong firm can instead undertake to provide the information upon request. For example, if you instruct an Hong Kong firm to form a Cayman Island company (Cayco), they must obtain the due diligence and pass it to the Cayman firm or undertake to give it to them upon request. There is no way round this. The Cayman firm risks losing their licence if they fail to get the information or the undertaking.

Now presume Cayco purchases a property in the UK which it later sells for a profit. If Cayco was owned by an UK domiciled tax resident the gain would normally be attributed to the owner and be taxable on him-even if he doesn’t receive the profit so the UK Revenue may be very interested to know who owns Cayco. If any UK resident has been involved in the property purchase or sale by, for example, instructing estate agents, lawyers or arranging finance the UK can ask Cayman to confirm if that person owns Cayco. The “Competent Authority” in Cayman will ask the Cayman service provider if Joe Sixpack from the UK owns Cayco and they must tell and Cayman then tells the UK.

If the owner happened to be an UK tax resident they would cross reference the gain made by Cayco to that individual’s UK tax return and ensure that he has correctly declared. If he hasn’t then they would investigate, audit, fine, imprison or generally be quite unpleasant to him.

So that’s the way it is or will be very shortly. There is no confidentiality offshore any more. If you have made arrangements offshore which you wouldn’t want revealed or wouldn’t stand up to scrutiny, think again and seek advice.

Now Hong Kong is being asked to sign up for similar exchange of information. In Hong Kong’s case this would be achieved by relevant clauses in tax treaties. Various commentators have suggested that Hong Kong can increase it’s competitiveness by having a range of tax treaties and that we are losing business to Singapore who have 50 treaties whereas we only have 5 comprehensive ones. If an Hong Kong resident invests abroad then he is likely to be faced with withholding taxes which could be eliminated or reduced by a treaty but it is normally possible to obtain that same reduction by routeing the investment via a suitable treaty jurisdiction. I can see little advantage to Hong Kong in negotiating further treaties apart from appeasing the OECD and G20 members who are putting increasing pressure on Hong Kong to accede to their desire for information.

Do you need to worry about this? The answer is probably not if you live in Hong Kong and intend to stay here. It is unlikely that you are using offshore accounts to avoid or evade taxes as the profits on these accounts would not be taxable in Hong Kong. If, however, you intend moving back home then this will all become very relevant and you had better make sure you’re planning works, is compliant and legal. Hoping your new home tax authority will not find out would be rash in the extreme. They can. They are doing.

Family Affairs

Nobody likes to think about their own mortality. It is a surprising statistic that in the UK two thirds of the population die without leaving a will. I would presume that the figure in similar in other countries. In the majority of cases this is not the biggest problem in the world because there is not much of an estate to bequeath and what there is automatically goes to the next of kin- which, if they should care, is probably exactly in line with their wishes. For wealthier people, as typified by those who play golf or read golfing magazines, this is likely to be a major problem but such persons normally take a little more care over their wealth and how it is passed on.

The alternative to a will is a trust. Trusts can have huge advantages. They allow the distribution of the wealth to be controlled so that children get looked after but do not necessarily get a huge lump sum of cash which might cause them to go party mad and disincentivise them from having a career or job. Frequently wealthy bread winners want their spouse to be well looked after but they do not want to risk the spouse re-marrying and the new partner running off with all the money. They want the bulk of their capital to be preserved for the children or even grandchildren. All this can be achieved through trusts. Setting up a trust also forces the settlor to put his affairs in order early by transferring the assets to the trustees so that on death there is little or nothing to be done thereby saving those left behind the heartache, worry, expense and delays which are necessarily involved in administering an estate. Even a simple estate can cost up to 6% of its value in fees to administer and take a minimum of two years to get sorted. This is not attractive for anybody-apart from the lawyers. Trusts provide a means of avoiding all that.
The disadvantage of a trust is that it involves… well… a level of trust. Assets have to be passed over to trustees and the settlor loses control. In a previous article I wrote about the joys of private trust companies. These provide a method of setting up a trust and retaining a good degree of control. They remain attractive and are being used increasingly by the sophisticated client.

There is another option. This is being increasingly used by UK domiciled persons who are restricted in their ability to transfer assets into trust by the 20% lifetime inheritance tax charge which applies to substantial transfers. These entities will be attractive to a whole range of persons because they are simple and easy to understand and relatively simple to set up and administer. They are known as Family Investment Companies (FICs) in the UK. We also refer to them as common law foundations as they are similar to the civil law foundation found in Lichtenstein and elsewhere but are much easier to understand by those brought up by in a common law system.

FICs are a company. The usual form of a company is limited by shares. A share has three important characteristics being: a)The right to vote and therefore control the company; b)The right to receive income in the form of dividends; c) The right to the capital and the underlying assets owned by the company. Usually a share will carry all three rights but it is quite possible for it to carry only one or two of these three. By splitting the rights and obligations we can create interesting results.

For example, let us assume that Mr. A is an UK national living in Hong Kong. He does not intend to spend the rest of this life in Hong Kong so is almost certainly UK domiciled and subject to UK IHT on his worldwide estate. His first preference would be to pass the assets into trust to avoid UK IHT but he cannot do so as the transfer to the trust would attract the 20% charge. If he gives assets away to another individual seven years before his death then he avoids UK IHT and the 20% charge entirely but that would leave him without assets to look after himself and therefore reliant on his beneficiaries. He would also lose control of those assets. Neither is attractive. Instead we set up an FIC. Mr. A is issued with all the voting shares and therefore keeps total control. He also jointly retains, along with his wife, the income producing shares because although he does not envisage spending the capital he does want to ensure his lifestyle and spend the income. The capital shares can be given away to his wife and children whilst he is in good health. This structure means that all his assets are conveniently bundled together in one package so his executors do not have to try and find them, take control and administer them according to the will. UK IHT is massively reduced as he has given away the capital seven years before death. Clearly the income producing shares do have some value but it is minor compared to the capital shares. Sweet and simple.

This type of structure would be effective for most persons who are in danger of being subject to inheritance tax or estate duty in their home country or anywhere else in the world. There is no estate duty in Hong Kong but just because you are resident in Hong Kong does not mean you are exempt from estate duty everywhere else in the world. Assets are frequently charged to estate duty in their country of location irrespective of who owns them. If they are owned by a company then, because a company never dies, local estate duty is eradicated. Hong Kong residents will often have estate duty considerations in their own county of birth and anywhere they have invested but this type of structure can remove those liabilities.

The structure above will also be of relevance to those who have parents back in their home county with wealth to pass on. We frequently get asked about whether we can help reduce estate duties on their estate. Funnily enough the beneficiaries are often more concerned about this! For those living in the UK a trust is going to be unattractive because of the 20% charge. Giving away assets seven years before death is going to be unattractive because of the reasons I gave above i.e. loss of control and having to rely on relatives for future upkeep. There is nothing to stop a UK resident from setting up one of these structures. For most it will not give income or capital gain tax advantage without further planning but that is not the aim. It is a way of eradicating or considerably reducing estate duties.

The plan can further be refined by using a company limited by guarantee or a company limited by both guarantee and shares. Most people will be familiar with companies limited by guarantee even if they do not know it as this is the basis of most clubs and societies. When you join a club you become a member, rather than a shareholder , of a company limited by guarantee. That membership is retained only for as long as you are alive or for as long as the club (company) committee decides you are worthy and suitable and abide by the club rules. This type of company can be sued as an FIC. Using an FIC avoids the need for a will and probate on the underlying assets as they are all owned by the company. A probate is still required to pass on the voting and income producing shares. So if the votes and income rights are held by members rather than shareholders those rights would expire on the death of the owner and then new members could be elected with those rights thereby transferring them without the need for further procedure and the avoidance of probate entirely. Hybrid companies are able to issue both shares and memberships so the various rights and obligations can be mixed and matched between the two to create whatever result is required and suits the circumstances of the family.

This type of structure is the latest big news in UK estate planning but can be used by anyone anywhere else in the world to good effect. It doesn’t remove the need for a will as there will always be personal assets outside the structure but it does provide a convenient and relatively cheap and simple method of dealing with the majority a person’s estate.