Offshore Trusts

Jonathan Crowther considers some topical issues arising out of onshore attitudes to
offshore trusts

The UK’s Inland Revenue has always shown great respect for the trust concept since it has an essential role to play in a modern economy, but that respect has always been tinged with a degree of hostility. The reason is simple. The trust has been, and remains, despite decades of anti-avoidance legislation, an excellent vehicle for tax mitigation. In a way this is a shame because the focus of the uses of trusts has been on their tax mitigation role very much to the neglect of their estate and family protection roles.

Both roles of trusts were brought into sharp focus in a recent case heard before the Special Commissioners, referred to simply as A Beneficiary.
The beneficiary in question was resident and domiciled in the UK but her parents were divorced and her mother was Japanese. Her maternal Japanese grandfather was substantially wealthy and wished to make provision for his granddaughter while protecting his fortune from his daughter, whom he regarded as a spendthrift. He was advised to set up an offshore discretionary trust which held UK investments through an underlying offshore company (thus avoiding the 25 per cent/34 per cent income tax charge on UK source income at the rates applicable to trusts).

Offshore Trusts - Tax Efficient

Such a trust is extremely tax efficient if it can be shown that “the purpose or one of the main purposes” of creating it was not “avoiding liability to UK taxation” since income can then be accumulated offshore and remitted as a tax-free capital payment into the UK.

The Commissioners decided that the beneficiary’s grandfather had no such motive in mind when he created the trust since there was no evidence that he had sought UK tax advice: it was offered to him gratuitously by his advisers. In this case, a genuine family protection motive coupled with a desire to avoid Japanese inheritance laws and tax avoided the UK’s anti-avoidance legislation. Proof, if proof were needed, that the tax tail should never wag the commercial or estate-planning dog.

Offshore Trusts - Settlement Provisions

Companies are increasingly using trusts to hold assets off balance sheet. A trust must have an identifiable beneficiary to exist and, for that reason, nearly all trusts include a long stop charity as a beneficiary in case all of the named beneficiaries should die. To use a trust for commercial purposes it is therefore necessary to employ a charitable trust whose real purpose is commercial, although the charity or charities named as beneficiaries do usually benefit to some degree. Jurisdictions such as Jersey have been uncomfortable with this practice of ‘genetically modifying’ a charitable trust and have now introduced legislation which allows trusts to be set up for special purposes rather than specific beneficiaries.

Offshore Trusts & Legal Machinery

At a social event, Mr Gilbert had taken Mr Gold aside and told him about the policy and asked him to “look after Carol and the kids” should anything happen to him. On Mr Gilbert’s death the life company had paid the proceeds of the policy to Mr Hill as Mr Gilbert’s executor. The Court ruled that the proceeds should have been paid to Mr Gold as trustee of a secret trust for Carol Gilbert and her children rather than Mr Hill as executor of his will since a trust “for Carol and the kids” was sufficiently certain.