By Caroline Roberjot and Adrian Howe

The idea of utilising a trust to protect assets is not new: asset protection via a trust dates back to the middle ages. Now with the increase in taxation rates in the UK and a desire for privacy, the intelligent investor is looking to protect their hard-won assets by the utilisation of offshore trusts.

In order to ascertain whether an offshore trust structure is appropriate you must first ascertain your domicile position. Domicile is quite a complex area but, broadly, if your country of origin is outside of the United Kingdom you may well be non-UK domiciled.

Unfortunately, if your country of origin is the UK, an offshore trust structure can provide little value. More bespoke planning may be appropriate for UK domiciles in some circumstances. But for non-UK domiciles purchasing UK property the offshore trust structure can provide significant tax savings.

If you are purchasing UK investment property in your own name, it is likely that capital gains tax will be payable when the property is sold and inheritance tax due upon death. By holding the property through an offshore structure both of these taxes can be effectively and legitimately mitigated.

An offshore trust is a legal entity evidenced by a Trust Deed into which the ownership of assets can be transferred by the settlor. The trust is then managed by a trustee, who is the legal owner of the assets, while the beneficiaries are the equitable owners (note that the settlor may be one of the beneficiaries). Any assets can be transferred into a trust such as property, cash, businesses and securities.

The trustee must be a neutral party who does not hold the assets for their own benefit, and acts only within the confines set out in the Trust Deed, administering the trust purely for the benefit of the beneficiaries. The trustee of an offshore trust would usually be a trust company, who as a professional trustee would have the expertise in trust and tax law to be able to ensure that the offshore structure is tax efficient but also within the realms of the law.

It is the transfer of legal ownership to the trustee that results in the tax mitigation and asset protection. It is common for the settlor to provide the trustee with a letter of wishes, which becomes a private document between settlor and trustee. This document does not have any legal standing but provides the trustee with guidance as to how to deal with the assets on a day-to-day basis and after the death of the settlor. The letter of wishes can be seen as a very flexible form of living Will.

Offshore trusts are established in a lower tax jurisdiction such as Guernsey, Jersey, the British Virgin Islands or Gibraltar in order to reduce tax liabilities that would normally be payable under UK law.

Advantages of offshore trusts

• To reduce or defer tax on income.
• To avoid inheritance tax
• To reduce corporation tax
• To assist in forced heirship planning (for residents of countries such as France, Saudi Arabia and Japan)
• To potentially remove assets from the reach of bankruptcy or litigation
• To protect assets from political uncertainty
• Maintaining the confidentiality and privacy of the settlor and the confidentiality and privacy of beneficiaries as the Trust Deed will not be a public document
• It is the duty of the trustee to act in the best interests of the beneficiaries

Possible downsides of offshore trusts

• The transfer of some assets to the trust may be a taxable action
• Care must be taken with the transfer of income to the beneficiaries so as not to attract tax
• The trust assets will be under the control of the trustee. It is normal for trustees to listen to the wishes of the settlor and/or the beneficiaries. However, ultimate decision-making resides with the trustee

It is clear that many investors find that using offshore trust structures has become essential for wealth management and planning. But care must be taken in selecting the right trust company to administer the trust. Both tax law and offshore trusts are incredibly specialist areas and professional advice should be sought to ensure legality, tax efficiency and to maximise effectiveness for the investor

Caroline Roberjot is a Partner at Carter Lemon Camerons (carolineroberjot@cartercamerons.com) and Adrian Howe is a Director at Marlborough Trust (Adrian.howe@marlboroughtrust.com)

THE VIEWS AND OPINIONS EXPRESSED IN THIS ARTICLE ARE THOSE OF THE AUTHORS AND NOT NECESSARILY THOSE OF SAVILLS PRIVATE FINANCE