Category: Private Client

Effects of Covid-19

Covid-19 has impacted across the world, not leaving any country unscathed or any individual unaffected. Fortunately, many countries are now moving out of lockdown and will hopefully avoid future spikes of new cases.

Many ways of life and practices have changed significantly. This Article considers three areas, relating to preservation of wealth, where new trends are emerging; private client work, individuals seeking to relocate and corporate planning.    

Private Client Work Trends

Working as private client advisors across a number of jurisdictions, Dixcart are seeing a definite shift in emphasis in terms of what clients are now seeking as their primary objectives, in relation to managing their wealth.

The health and protection of individual family members, which has always been very important, has become paramount, and greater attention is being applied to succession planning. Wills are being reviewed and a move towards actively involving the next generation, with family wealth planning, is taking place.

We are witnessing an increasing desire for change of residency, both personal and corporate, coupled with an elevated need for more ‘complete’ advice, not just piecemeal, from specialist advisors. Often a personal move will link to a need to re-think and to re-structure corporate and asset protection vehicles.

There is an increased demand to diversify risk, in particular, in relation to:

• Residence
• Business
  location
• Investment
  location
• Protection
  from government insecurity or interference

There is also an appetite for greater asset protection, with tax neutrality being a key driver. Private clients also wish to ensure that assets are being held in jurisdictions offering economic and political stability, as well as robust legal systems.

There is an increased demand for hybrid structures and a migration of companies to ‘safe havens’.

Trends In Terms of Individual Relocation

Covid-19 has made us all stop and think about what matters most in life and what we consider to be our main priorities. Where we live and our day-to-day lifestyle is now a very important consideration.

New work practices involving working from home and the mastering of on-line meetings and webinars, initially imposed by Covid-19 restrictions, have made many people realise that they do not have to travel to an office in a city, to work on a daily basis.

It is notable that a number of smaller countries, many of them islands, managed Covid-19 well; locking down early, suffering few cases and therefore moving more speedily out of lockdown, in comparison to other countries.

Dixcart has offices in a number of such locations: Cyprus, Guernsey, Isle of Man, Madeira and Malta. Portugal and Switzerland are also regarded as managing the pandemic very well.

If you would like further information regarding these countries, the type of lifestyle that they offer and the tax advantages that are available to individuals moving there, please see Dixcart’s detailed: Residence and Citizenship Programme (Comparison Table).   

An increasing number of high net worth individuals are now seeking to be resident in a different jurisdiction to where their business is ‘resident’. For personal residence, as well as for corporate and asset location, as indicated above, there is a requirement for jurisdictions that are regarded as safe havens.

Priorities for a safe haven in terms of individual residence include; political and social stability, lack of government interference, a relaxed lifestyle and a pleasant and healthy environment in which to raise children and/or retire.

Corporate Planning Trends

Whilst there has been a slowdown in transactional work and deals during the lockdown, we have noted a number of corporate clients taking the chance to  focus on planning for their emergence from this hiatus, and ensuring that they have the necessary tools to take advantage of opportunities that may present themselves.

This has ranged from; restructuring their present corporate and operational structures, to establishing new structures that are ready to act fast when presented with attractive deals. Corporate vehicles and/or arrangements that are established and ‘ready to act’ are valuable for corporate groups, especially if the establishment of banking relationships and any potential integration into group funding facilities, treasury and reporting functions, and corporate governance regimes, has already been set-up.

By speaking to professional advisors and corporate service providers such as Dixcart, clients can get ahead and deal with any potential challenges or time delays in advance.

We are also seeing a move towards organisations seeking to remove or restructure inefficient or ineffective arrangements, including redomiciling structures to well respected and compliant jurisdictions.

Additional Information

The Dixcart model of providing integrated advice: private and corporate, across a number of jurisdictions meets the needs of the post Covid-19 era.

We place great emphasis on teamwork and sharing of professional skills within and across the offices, our teams know and regularly meet each other (in person or more recently with regular on-line catch ups).

During lockdown, our inter-office collaboration has increased still further, enabling us to provide solutions, using a mix of relevant asset protection vehicles, across jurisdictions, to meet the particular needs of each client.

If you have any questions, please speak to your usual Dixcart contact or email us on: advice@dixcart.com.

Background

In 2007, Malta enacted specific legislation regarding foundations. Subsequent legislation was introduced, regulating the taxation of foundations, and this further enhances Malta as a jurisdiction for international private asset planning.

Foundations have been described as the civil law alternative to trusts.

There are three types of foundations in Malta:

• Private foundations are established for the benefit of a beneficiary or group of beneficiaries.
• Charitable foundations are public benefit foundations exclusively promoting a social or public purpose on a non-profit making basis.
• Purpose foundations are established for a purpose, without beneficiaries and generally have a philanthropic objective, although they can be established with a  private purpose.

Why Establish a Foundation?

There are numerous reasons why a foundation may be of benefit, which apply to a private foundation established in Malta: 

• Confidentiality: the foundation deed states the foundation’s name, its registered address, a description of the initial endowment with which it was formed, and its purposes and objects.
• Asset protection: if a home country is not politically or economically stable, a foundation can be established overseas and assets transferred into it (professional advice should always be taken in the home country, prior to any transfer taking place).
• Securitisation vehicle: Maltese law allows for the use of a foundation in place of a trust, as an appropriate vehicle for the securitisation of debt.
• Succession planning: a foundation can generate a greater degree of privacy and flexibility than may be possible with a will alone. Foundations can be used to avoid the separation of family estates and to prevent disputes between heirs.
• Spendthrift beneficiaries: foundations can be created to prevent reckless heirs from spending family wealth on the death of their parents, by limiting their interest to income or to capital (at least until they reach a certain age, or until they fulfil certain requirements). Foundations can be drafted in such a way that a beneficiary is ‘excluded’, if they are, for example, declared bankrupt.
• A solution for the care of individuals with special needs and minors: a foundation can be used to make special provisions for beneficiaries who will be unable to care for themselves on the death of the founder, and in situations where it may be appropriate that one heir should benefit more on the death of the founder, as they require a greater amount of care, with its associated costs.
• Lifestyle planning: partners who are not married, or whose family arrangements are not straight-forward may find that some countries’ legal systems do not provide adequate solutions on their death or separation. In such cases a specifically drafted foundation can be used to ensure that partners, and children of such partners, are treated as the founder intends.

Characteristics of Maltese Foundations

• Maltese private foundations are regulated by the ‘Second Schedule to the Civil Code of the Laws of Malta’. New legislation introduced a registration procedure, which has been designed in a way to safeguard the privacy of Maltese private foundations.
• A foundation can only be constituted by virtue of a public deed ‘inter vivos,’ drawn up by a notary public or by means of a will. Once the foundation is constituted, it is registered with the Malta Registrar of Legal Persons.
• A private foundation is limited to a maximum period of 100 years.
• An interesting feature of a Maltese foundation is that segregated cells can be established within a foundation to achieve particular purposes with particular assets. The segregated cell does not have separate legal personality; however the assets and liabilities of the cell are ring-fenced from other assets and liabilities of the foundation and/or other cells.
• In terms of Maltese legislation, it is possible to re-domicile a foundation into and out of Malta.
• A foundation may be terminated at any time if all of the beneficiaries agree, provided they are all alive, none have been convicted of a crime or are minors. If the founder is still alive his consent would also be required. Termination obligations must be included in the deed.

Maltese Foundations: A Choice to be Taxed In One of Two Ways

• A foundation can either be treated as a company, which is both resident and domiciled in Malta, OR as a trust.

Taxation as a Trust

A Maltese foundation can irrevocably elect that the foundation be treated as a trust, for tax purposes.

An election to be treated as a trust gives rise to beneficial private asset planning opportunities, particularly where the founder and beneficiaries are not resident and/or domiciled in Malta. In such a situation no tax and/or duty will be payable in Malta. This applies on settlement and in relation to the income, attributable to the foundation.

Taxation as a Company

If a Maltese foundation decides to be taxed as a company, as with other companies in Malta, the income and/or gains realised are subject to tax in Malta on a worldwide basis at the flat rate of 35%.

However, on the distribution of qualifying foreign or local source income, by the foundation in favour of its beneficiaries, the beneficiaries will generally be entitled to a refund of 6/7ths of the Malta tax paid by the foundation, giving an effective tax rate of 5%. This assumes that the beneficiaries are not resident and/or domiciled in Malta.

A number of reliefs are also available to foundations, as well as to companies – amongst these are; the full imputation system, participation exemption, and access to appropriate unilateral agreements, Malta also has wide network of Double Tax Treaties.

How Can Dixcart Assist?

The Dixcart office in Malta can assist in the establishment and management of a foundation in an efficient manner and to meet the agreed objects of the foundation.

Additional Information

For further information about Maltese foundations and the benefits that they offer, please speak to Jonathan Vassallo: advice.malta@dixcart.com at the Dixcart office in Malta. Alternatively, please speak to your usual Dixcart contact.

Since the breakout of Covid-19, more individuals are now reviewing their estate and putting practical measures in place regarding succession planning. Although not a catalyst for encouraging individuals to review their affairs, Covid-19 has certainly reinforced the importance of it.

Covid-19 has provided a reason for many families to ‘take stock’ and to put in place or revise practical measures regarding succession planning. 

Since the breakout of Covid-19, more individuals are now reviewing their estate and putting practical measures in place regarding succession planning. Covid-19 is certainly not the main catalyst for encouraging individuals to review their affairs, it has definitely reinforced the importance of it. 

In a number of countries, succession planning can be complex, particularly some Latin American countries and other Civil Law countries, where forced heirship rules still apply. Unless alternative plans are put in place early, at least part of an estate, will be automatically divided between surviving family members, rather than shared according to the individual’s preference. 

International taxation is another reason why individuals may wish to put structuring measures in place. Many high net worth individuals and families incorporate one or more of a Corporate Family Investment Structure, a Trust or Foundation as part of their planning.

8 steps to successful succession planning 

1. Identify exactly what the intended outcome of the succession planning should be.
2. Establish policies and set up a review procedure to ensure the adequate preservation and transfer of wealth to the next generation.
3. Review the ownership structure of any relevant businesses and other assets. Some family businesses may have employees they would also like to include within the planning, just as much as family members.
4. Understand how relevant local laws would apply, in relation to inheritance. Consider where all relevant family members are resident, and also tax resident, and what the implications of this might be regarding the transition of family wealth.
5. Consider or review structuring options, including the use of holding companies and/or family wealth protection vehicles such as family investment companies, foundations, trusts, etc.
6. Review international investment structures, including the holding of real estate, from a tax and asset protection perspective.
7. Confidentiality procedures needs to be developed to deal with relevant confidential information requests from financial institutions and third parties.
8. Identify key successors and their roles, develop open communication amongst family members, especially regarding decision making and ongoing processes. 

All of the above steps should be considered in order to protect an individuals or family’s wealth and/or business(es) in the case of unexpected events occurring; it is also imperative to review the above steps on a regular basis and seek advice regarding the most appropriate legal structures.

Corporate Family Investment Structures 

A family investment company is a company to where the shareholders are drawn from different generations of the same family. The use of a family investment company has grown significantly in recent years, particularly in situations where it has become difficult to pass value into a trust, without incurring an immediate tax charges but there is a desire to continue to have some control and influence over the family’s wealth preservation. 

For more information regarding the benefits of a family investment company: Why use a Corporate Family Investment Structure and Why Use a Guernsey Corporation?

Trusts, Foundations & Private Trust Companies 

Trusts continue to be a popular structure when undertaking estate and succession planning and are used by many Common Law jurisdictions. A trust is a very flexible instrument; at a basic level, the concept of a trust is relatively simple: The Settlor places assets in the legal custody of another (Trustee), who holds the assets for the benefit of a third party (the Beneficiary). 

The Trustees are those who oversee and control the trust. Their role is to deal with the assets according to the Settlor’s wishes and manage the trust on a day-to-day basis. Therefore, the consideration of who is appointed Trustee is extremely important. 

In a similar vein a Foundation can fulfil many of the same functions in Civil Law countries. Assets are transferred to the ownership of the Foundation which is governed by its Charter and managed by a Council for the benefit of the beneficiaries. 

A Private Trust Company (PTC) is a corporate entity authorised to act as a Trustee and is often used as an asset protection vehicle. The use of a PTC can enable the client and his/her family to actively participate in the management of the assets and decision-making process. 

Switzerland recognised trusts with the ratification of The Hague Convention on the Law Applicable to Trusts (1985), on 1 July 2007. Switzerland is in the process of enabling its own trust legislation and already trusts from other jurisdictions, formed under their specific rules, are recognised and can be administered in Switzerland. The use of a Swiss company as a Trustee can be attractive with the perceived extra layer of confidentiality afforded by Swiss legislation. 

An English, Guernsey, Isle of Man or Maltese Law based trust with Swiss Trustees can offer a number of tax efficiencies as well as advantages in terms of wealth preservation and confidentiality. Dixcart can establish and manage such trust structures. More information regarding the benefits of using a Swiss Trustee can be found here: The Use of a Swiss Trustee: How and Why?

Summary

During periods of uncertainty and global turmoil, as inflicted by Covid-19, more of our clients are focusing on making sure they are safe-guarding their family wealth for future generations, offering stability and long-term security. Succession planning and the transfer of wealth to the next generation is a critical issue that should not be overlooked. Not only is it a means to implement generational transition, but also to protect and structure a business. The ability and understanding of the next generation as to how to deal with the organisation and management of the wealth being passed to them is also an important consideration.

The Dixcart Group has over forty-five years’ experience in assisting clients to run and manage Family Offices. We are very familiar with the issues facing families in this ever-changing international world and have extensive experience in providing trustee services across a number of jurisdictions. 

We work with each family wealth structure to coordinate communication with the family and their advisors or to provide access to, and liaison with, additional independent professional advisors. Plans can be put in place to allow for changes in a family’s structure and relationships to be recognised. We also make sure that during the implementation of such structures, relevant tax implications are reviewed and there is full transparency. More information can be found here: Private Client Services: Trusts, Foundations, Family Office. 

If you would like further information regarding effective structuring and succession planning, please speak to your usual Dixcart Manager or contact: advice@dixcart.com.

A Changing World

Particularly, in light of the recent Covid-19 pandemic, many individuals are considering how they can best protect their family health and their family wealth, across future generations.

Many have already set up family offices and use Trusts and/or Foundations as wealth preservation vehicles within these.

This Article is intended for those considering taking such steps.

Dixcart has offer 45 year of experience in helping establish Trust and Foundation vehicles and providing Trustee services. We are licensed to offer these services across the six jurisdictions of; Cyprus, Guernsey, Isle of Man, Malta and Switzerland.

What will be most appropriate, depends on your circumstances and we strongly advice that you take professional advice: advice@dixcart.com.

Questions and Answers

What is the History in Relation to each Vehicle?

Trusts have been used in common law countries for many hundreds of years, for a variety of reasons. With the development of international business, international tax and estate planners were quick to realise the benefits of using offshore trusts in mitigating tax liabilities and assisting in the flow of family wealth through the generations.

Historically, clients from civil law countries have been more familiar with the concept of the Foundation. However, now they are becoming increasingly aware of the benefits of Trusts, and it is the same in terms of common law countries and Foundations.  

How Can a Trust or Foundation Help Preserve Wealth Across Future Generations?

It is a legal arrangement where the ownership of the ‘Settlor’s’ assets (such as property, shares or cash) is transferred to the ‘Trustee’ (usually a small group of people or a trust company) to manage and use to benefit the ‘Beneficiaries’, a third person, or group of people, under the terms of a Trust Deed.

A Foundation creates a separate legal entity with its own legal personality, distinct from the ‘Founder(s)’, who transfers assets into the Foundation, the ‘Council’ manage the Foundation and the ‘Beneficiaries’, benefit from it.

Charitable foundations are the most common and the majority are set up to exist in perpetuity. This means that control over the foundation and its assets can be passed to countless generations of the family.

Are Trusts and Foundations ‘Private’?

In most jurisdictions, no requirements currently exist to register a Trust or for any document or information in connection with the Trust to be placed in the public domain, and the arrangement may therefore be kept completely private.

Limited information in relation to Foundations will be publicly available, but there is currently no requirement that the identity of the Founder, Beneficiaries or purposes of a Foundation should be made publicly available.

Trusts and Foundations can, therefore, both be private arrangements under current rules.

What are the Key Differences Between a Trust and a Foundation?

A number of the key differences are outlined below: 

• A Trust is not a legal entity; a Foundation is a registered legal entity.
• The ownership of the assets in a trust rests with the Trustee whilst the Foundation owns the property concerned directly.
• A Foundation is more structured than a Trust as it is governed by its Charter and Articles or regulations.
• Potentially, a Foundation provides more certainty than a Trust and
  it is less likely to be treated as a potential ‘sham’, particularly in
  civil law jurisdictions.
• Unlike most Trusts, the Beneficiaries of a Foundation may be denied
  rights to information and they generally do not have any equitable or
  other forms of ownership of foundation assets.
• Trusts are intrinsically more flexible than Foundations.
• A Trust can be used for commercial purposes but Foundations, except under limited circumstances, cannot be so used.

What are the main Reasons for having a Trust or a Foundation, in addition to Wealth Preservation?

In addition to the preservation of wealth, selected distribution of assets and favourable tax treatment, Trusts and Foundations are used to achieve the following:

• Circumvention of forced heirship laws
• Asset protection
• Confidentiality
• Continuity on death
• Philanthropy

Dixcart Offices Regulated to Provide Private Client Services:

Dixcart has six offices with extensive expertise in providing Private Client Services, including the provision of Trusts and Foundations:

• Cyprus: Dixcart Management (Cyprus) Limited is regulated and holds a full fiduciary licence under the Cyprus Securities and Exchange Commission.

Email: advice.cyprus@dixcart.com.

• Guernsey: Dixcart Trust Corporation Limited is regulated and holds a full fiduciary licence under the Guernsey Financial Services Commission. Dixcart Trust Corporation Limited is a member of the Guernsey Association of Trustees.

Email: guernsey@dixcart.com.

• Isle of Man: Dixcart Management (IOM) Limited holds a full fiduciary licence and is regulated by the Isle of Man Financial Services Authority. Dixcart Management (IOM) Limited is a member of the Association of Corporate Service Providers.

Email: advice.iom@dixcart.com.

• Malta: Elise Trustees Limited Dixcart House is regulated and holds a full fiduciary licence under the Malta Financial Services Authority.

Email: advice.malta@dixcart.com.

• Switzerland: Dixcart Trustees (Switzerland) SA is a certified member of Swiss Association of Trust Companies (SATC). Dixcart Trustees (Switzerland) SA is affiliated to “Association Romande des Intermédiaires Financiers (ARIF)” a Swiss self-regulatory organization (SRO) officially recognised by Swiss Federal Financial Market Supervisory Authority (FINMA).

Email: advice@switzerland.com.

 Summary and Further Information

Trusts and Foundations can be used to achieve many objectives. The choice of jurisdiction for a Trust and/or Foundation is important and is generally governed by the specific circumstances of each family/family office.

If you would like additional information, please speak to your usual Dixcart contact,  one of the Dixcart offices above, or email: advice@dixcart.com

Family investment companies continue to prove popular as an alternative to trusts in wealth, estate and succession planning.

What is a Family Investment Company?

A family investment company is a company used by a family in their wealth, estate or succession planning which can act as an alternative to a trust. Their use has grown significantly in recent years, particularly in instances where it is difficult for individuals to pass value into a trust without immediate tax charges but there is a desire to continue to have some control or influence over the family’s wealth protection.

Benefits of a Family Investment Company include;

1. If an individual has available cash to transfer into a company, the transfer into the company would be tax-free.
2. For UK domiciled or deemed domiciled individuals there would be no immediate charge to Inheritance Tax (IHT) on a gift of shares from the donor to another individual as this is deemed to be a potentially exempt transfer (PET). There will be no further IHT implications for the donor if they survive for seven years following the date of gift.
3. The donor can still retain some element of control in the company providing the articles of association are carefully drafted.
4. There is no ten year anniversary or IHT exit charge
5. They are income tax efficient for dividend income as dividends are received tax free into the company
6. Shareholders only pay tax to the extent that the company distributes income or provides benefits. If the profits are retained within the company therefore, no further tax would be payable, other than corporation tax as appropriate.
7. International families making direct investments into UK companies as individuals are liable to UK Inheritance Tax on those UK situs assets and it is also advisable that they have a UK will to deal with those assets on their death. Making those investments through a non-UK resident family investment company removes the liability to UK inheritance tax and removes the need to have a UK will.
8. Memorandum and articles of association can be bespoke to the family requirements for example having different classes of shares with varying rights for different family members to suit their circumstances and to meet the wealth and succession planning objectives of the founders.

Trusts vs. Family Investment Companies

Below is a comparison of key features and benefits to individuals, assuming that individual is not actually or deemed to be UK domiciled. 

	Trust	Family Investment Company
Who’s in control?	Controlled by the trustees.	Controlled by the directors.
Who benefits?	The value of the trust fund is for the benefit of the beneficiaries.	The value of the entity belongs to the shareholders.
Flexibility around payments?	Typically, a trust will be discretionary, so that the trustees have discretion over what payments, if any, are made to beneficiaries.	Shareholders hold shares, which may be of different classes and which may allow dividends to be paid to shareholders. It is difficult to change interests after inception without tax consequences and therefore, the interests associated with each shareholder may be considered less flexible than a trust.
Can you roll up income and gains?	It is possible to roll up offshore income and gains within a trust.Tax is paid when amounts are distributed to UK resident beneficiaries, chargeable to income tax to the extent there is accumulated income in the structure and capital gains tax if there are gains in the structure.	A family investment company can roll up income and gains, however, to the extent the person who established the company still has an interest, income tax would be payable on an arising basis. It is also possible for the company to be incorporated offshore with UK directors. This would give rise to a corporation tax liability at company level but then no further taxes at shareholder level until amounts are distributed from the company.
Laws in place?	Long established jurisprudence in family law and probate situations. Position continues to evolve.	Company law is well established.
Governed by?	Governed by a trust deed and a letter of wishes, both of which in most instances are private documents.	Governed by articles and shareholders agreement. The articles of a company are, in many jurisdictions, a public document and therefore any matters of a sensitive nature will generally be included in a share-holders agreement.
Registration requirements?	There is a requirement for any trusts with a UK tax obligation/liability to be included on a register of trust beneficial ownership. This private register is maintained by the HM Revenue & Customs in the UK.	Shareholders of Guernsey companies are included on a beneficial ownership register maintained by the Guernsey Companies Registry. Unlike the UK persons of significant control register, this is a private register.
Taxed in Guernsey?	No tax in Guernsey on income or gains.	No tax in Guernsey on income or gains.

Why Use a Guernsey Company?

The company will pay tax at a rate of 0% on any profits that it generates.

Provided the company is incorporated offshore and the register of members is kept, as required, offshore it is possible to retain ‘excluded property’ status for IHT (apart from UK residential property).

The shares in the company are not a UK situs asset. If the company is a private Guernsey company, it does not need to file accounts. Whilst there is a beneficial ownership register for companies in Guernsey, this is private and not searchable by the public.

In contrast, a UK company would file accounts on public record, and directors and shareholders would be listed on Companies House, a free searchable website, whose shareholders have a UK situs asset regardless, of where in the world they live.

Additional Information

If you require additional information on this topic, please contact your usual Dixcart adviser or speak to Steven de Jersey in the Guernsey office: advice.guernsey@dixcart.com.

The Dixcart Group has more than 50 years of experience in managing private wealth and assisting individuals and their families in matters of succession, estate planning and in the efficient administration of their affairs. 

The Dixcart Group can assist with the formation and administration of trusts, foundations, private and managed trust structures and other family office services and is able to offer these services through six fully regulated and independent entities positioned to enhance the Group’s offering for clients with interests all over the world. 

Our services are tailored to each specific client with the assistance of the clients’ own lawyers, chartered accountants and tax advisers together with input from specialists within the Dixcart Group. 

See Family Office for further information or download the PDF: Dixcart Group – Private Client Services: Trusts, Foundations, Family Office

For more information on managing private wealth, please contact us.

Family investment companies are becoming increasingly popular as an alternative to trusts for wealth, estate and succession planning.

Why has the use of Family Investment Companies Grown? 

Their use has grown significantly in recent years, particularly in instances where it is difficult for individuals to pass value into a trust, without being liable to immediate tax charges, but there is a desire to continue to have some control and/or influence over the family’s wealth protection.

Benefits of a Family Investment Company include:

1. Assuming that an individual has available cash to transfer into a company, the transfer into the company is tax-free.
2. For UK deemed domiciled individuals there would be no immediate charge to UK Inheritance Tax (IHT), on a gift of shares from the donor to another individual, as this is deemed to be a potentially exempt transfer (PET). There will be no further IHT implications on the donor if they survive for seven years following the date of the gift.
3. The donor can still retain some element of control in the company, providing the Articles of Association are carefully drafted.
4. There is no ten year anniversary or IHT exit charge.
5. Family Investment Companies are income tax efficient for dividend income as most dividends will be received tax free into the company.
6. Shareholders only pay tax to the extent that the company distributes income. If the profits are retained within the company no tax would therefore be payable by the shareholders.
7. International families making direct investments into UK investment companies as individuals, are liable to UK IHT on those UK situs assets and it is also advisable that they have a UK will to deal with those assets on their death. Making those investments through a Family Investment Company removes the liability to UK IHT and removes the need to have a UK will. This is as long as the Family Investment Company is offshore and the individuals are non-UK resident, or non UK resident non-dom (or non-deemed dom), to receive the IHT benefit.
8. Memorandum and Articles of Association can be bespoke to the family requirements. There can, for example, be different classes of shares with varying rights for different family members, to suit their circumstances and to meet the wealth and succession planning objectives of the founders.

 Why Use a Guernsey Company?

There are a number of reasons why it is efficient to use a Guernsey Company in a Family Investment Company structure: 

• The company will pay tax at a rate of 0% on any local profit that it generates (the Guernsey Corporate Tax Rate).
• Provided that the company is incorporated in Guernsey and the register of members is kept, as required, in Guernsey, it is possible to retain ‘excluded property’ status in relation to UK IHT (with the exception of UK residential property).
• The shares in the company are not a UK situs asset. If the company is a private Guernsey company it does not need to file accounts. Whilst there is a beneficial ownership register for companies in Guernsey, this is private and not searchable by the public. In contrast a UK company would need to file accounts on public record, and directors and shareholders would be listed on the Companies House website, a free and searchable website. The shareholders would, in addition, be deemed to have a UK situs asset, regardless of where in the world they live.
• The compliance and regulatory requirements for non-UK companies are often considered greater than for UK companies. However these requirements are easily and efficiently navigated with the right professional firm, and with appropriate planning. 

Further Reasons Why Family Investment Companies are Increasing in Popularity

Family investment companies are also becoming very popular in the UK, particularly amongst UK residents and domiciled individuals. This is largely due to the ability to roll up income and gains, having paid only corporation tax. In addition, if all income is in the form of dividends, there should be no liability to tax. 

Regardless of whether there is a UK tax position to consider, a Family Investment Company may be more familiar and better understood than a trust, for many families’ wealth planning and asset protection.

Additional Information

The Dixcart Group has fifty years of experience advising clients on wealth management strategies to best meet specific circumstances and we understand the often complex issues involved.

The Dixcart office in Guernsey provides advice to several private clients and has extensive expertise in establishing and managing Guernsey corporate structures.

For additional information regarding Guernsey Family Investment Companies, please speak to John Nelson or Steve de Jersey at the Dixcart office in Guernsey: advice.guernsey@dixcart.com, or to your regular Dixcart contact.

What is a Family Investment Company and Why Have One?

As anti-avoidance legislation aimed at trusts, is increasing, people are looking for alternatives to protect a family’s fortune.  Whilst many people are happy to pass ownership to others they often wish to retain control.

Family investment companies (“FICs”) are being used increasingly by wealthy families to protect their family fortunes.

• The key to their success is that it is possible to split ownership from control. Ownership rests with the shareholders whereas control rests with the Directors of the company.  The family will then own shares in the company.  The Articles will include provisions designed to ensure that control of the company is retained by the Founders, and that assets are protected, as far as possible.

Typically the Board will have the right to appoint successors and the shareholders will have entered into a Shareholders’ Agreement, not to exercise their voting rights to appoint or dismiss directors, without the Board’s prior approval.  In this way the Founders can retain control, until such time, that they identify suitable successors for this role.

The Articles can also be drafted to give the Directors’ the sole responsibility to declare dividends.  By use of different classes of shares, it is also possible to pay dividends to different classes of shareholders, at different times.

Inheritance Tax Benefit from a UK Perspective

It is possible for the Founders of an FIC to gift shares to family members and/or to gift cash to family members to use to subscribe for shares in the FIC.  These gifts are potentially exempt transfers and, if the donor survives 7 years, there will be no charge to UK inheritance tax.

Typically the Founders will retain some shares and the rest will be owned by other family members or even a trust.  When a company is valued, a minority shareholding interest attracts a discount.  Whilst the discounts for investment companies are not as large as for trading companies, a minority interest means that the value in an individual’s estate is less than it would have been, had the assets of the FIC been owned directly by the individual. This therefore generates an additional inheritance tax saving.

Asset Protection

One of the main reasons for using an FIC is to try to protect the wealth of the family for future generations.  There are many risks, other than taxation, to a family fortune and these include; spendthrifts, investment incompetence, bankruptcy and divorce.

The Articles of the FIC can include provisions that entitle the FIC to buy back shares in the event of the bankruptcy or divorce of any of the shareholders, at market value. As detailed above, this will be less than the value of the underlying investments, in the case of a minority shareholding.

Control of the dividend policy and  built in controls to prevent the pledging of shares can protect spendthrifts from themselves.

Income Tax Benefits from a UK Perspective

If the FIC was a UK tax resident company and the intention was to pay out all of the profit as dividends, an FIC might not then be the best structure to use. In this scenario, there would be corporation tax on the profit, at the company level, and the shareholders would also be liable to tax on the dividends paid to them.

• These effects could be mitigated by providing some of the capital of the company as shareholder loans. Capital can then be extracted by way of loan repayments.

It should be noted that dividends paid out of post-tax profit, by UK companies and most offshore companies to FICs, will not be subject to additional tax at the level of the FIC.

• Alternatively, if the aim is to invest capital and accumulate profit during the years of accumulation, income and gains would only be subject to UK corporation tax. The UK rate of 19% is currently far less than UK personal income tax and capital gains tax rates.

A company with an investment business may also deduct management expenses whereas individual investors may not.

Training Family Members

Many families set up investment committees for the FIC, consisting of family members.  This not only gives family members a voice but can act as a valuable training ground for younger family members.

Conclusion

FICs can be effectively used for estate planning and, in some circumstances, also for income tax planning.  Careful planning should be undertaken when establishing such structures to take into account the personal tax position of the Founders and any relevant anti-avoidance legislation.

Additional Information

If you would like additional information regarding when and how the use of a Family Investment Company can be most beneficial, please contact us advice@dixcart.com. Alternatively please speak to your usual Dixcart contact.

Please also see our Private Client page.

Property in the UK can be owned by a company or by an individual and the method of ownership and the status of the company or individual involved will affect the tax treatment.

Tax on Rental Profit

1. Where an investment is made in UK commercial property in the name of a non-UK resident company and the company does not carry on a trade in the UK, basic rate income tax (currently 20%), is payable on rental profits.

To achieve the favourable tax treatment outlined above, it is important to use a non-UK resident company to acquire the UK property and that the company is managed and controlled in a manner that ensures it remains resident outside of the UK for tax purposes.

Where an investment is made in UK commercial property, in the name of a non-UK resident individual, applicable tax rates are equivalent to UK income tax rates (up to 45%).

2. The UK Government has announced that it will bring non-UK resident companies with UK property income within the scope of corporation tax from April 2020. This will mean that UK rental profit will be subject to UK corporation tax at a rate of 19%.

Implications of Falling Within the UK Corporate Tax Regime

While the lowering of the tax rate is positive, falling under the UK corporation tax regime will mean that, from 2020, the UK’s corporate interest and loss restriction rules will be relevant:

• The corporate interest restriction rules restrict a group’s deductions for interest expense and other financing costs to an amount commensurate with its taxable activities in the UK.  The rules will apply to groups with a net interest expense of more than £2million per annum and could significantly restrict the deductibility of financing costs, leading to a significant increase in tax liabilities.
• The corporate loss restriction rules restrict a group’s deductions for carried-forward losses to £5million.  Above the £5million allowance, only 50% of profit can be covered by carried-forward losses. While this rule may not have such a significant impact, as the interest restriction rule, the impact should be considered.

Capital Gains

From April 2019, non-UK residents holding UK commercial real estate have been subject to UK tax on their gains. This measure brought the UK into line with most other tax jurisdictions and the concept that land should be taxed where it is situated.

The good news is that a rebasing of property costs took place as of April 2019, meaning that only gains from that point onward will be charged to tax.

The new rules will also apply to sales of interests in “property rich” vehicles – that is, entities that derive at least 75% of their gross asset value from UK land. Gains on the disposal of any interest in such a vehicle, amounting to 25%, or more will become liable to UK tax.

Property Developers and Traders  

In 2016, anti-avoidance rules were introduced to counteract any claim that a development or dealing trade relating to UK property was actually being carried on outside the UK, and therefore not subject to UK tax.

Profits from a development project are therefore within the scope of income tax or corporation tax, depending upon who is carrying it out.  These rules also apply where there are arrangements to sell the development company, rather than the land itself. They apply where shares, for example, are sold and they derive at least 50% of their value from UK land.

Stamp Duty Land Tax (SDLT)

Acquiring a UK commercial property directly  incurs a charge to SDLT (a purchase tax) as follows:

No such tax generally arises when acquiring a company that itself holds UK property. As a result, there is a benefit in acquiring and disposing of UK commercial property via a company vehicle, particularly where that company is based in a jurisdiction that does not charge transfer tax on share dealings.

Value Added Tax (VAT)

The sale of a freehold or long leasehold title to a commercial property will, by default, be exempt from VAT. However, property owners have the option to ‘opt to tax’ their property, which may make the sale of that property subject to VAT (but, as a consequence, also entitles the property owner to claim credit for VAT charged to them on their overheads).

This is a complex area and, when acquiring UK commercial property, due diligence will be required to establish whether the property is subject to VAT or not, and what impact this may have for the purchaser.

On Death – Inheritance Tax (IHT)

From 6 April 2017, all UK residential property, whether held directly or indirectly, became liable to UK IHT (with the exception of property owned by diversely held vehicles).

• UK commercial property held directly by an individual is similarly liable to a UK IHT charge; however, commercial property held via a non-UK resident company is not.

There is, at this time, no indication that commercial property held indirectly through a company or similar vehicle will give rise to an exposure to UK IHT; however, in light of recent changes this might be a logical next step.

How Dixcart Can Help?

Dixcart can assist with reviewing existing UK commercial property ownership structures and whether action is advisable to restructure such investments.

Our UK tax specialists and commercial property lawyers can, if required, implement any resulting planning and restructuring recommendations. Please contact Paul Webb in the UK office: advice.uk@dixcart.com.

Wealth – a Responsibility

The transfer of wealth to the next generation is a critical issue. The ability and understanding of the next generation as to how to deal with the organisation and management of the wealth being passed to them is also a vital consideration.

A family’s financial wellbeing can be lost or reduced in disputes over control and management of the wealth. Unfortunately the old English expression “from rags to rags in three generations” can often become true.

Planning is Critical

Extensive initial planning, during the lifetime of the creator or current custodian of a family’s wealth, needs to take place to ensure that the next generation successfully receives, manages and enjoys the wealth. The next generation must also understand the benefits to be gained by accessing appropriate professional expertise to protect and preserve their inheritance.

In situations of substantial family wealth it is fundamental for a successful transfer of the wealth, to establish an atmosphere of trust and communication between the members of the family. In addition, an understanding of the issues to be addressed with long standing and trusted professional advisers should be considered. It can be of great value to organise a family office structure either in conjunction with a professional advisory firm or independently.

Importance of the Availability of Family Office Services in a Number of Jurisdictions 

During the past forty-five years, the Dixcart Group has developed the ability to establish family office structures through a number of Dixcart offices in a variety of jurisdictions.

This has enabled family offices, which are managing the wealth of international families, to develop holding and investment structures in a tax neutral manner. This is key as family members often live in different jurisdictions, experiencing a variety of taxes and with  each jurisdiction demanding a different structuring approach.

A Changing World: Challenges and Opportunities

The transparency of ownership within international investments places greater emphasis on suitable and robust investment structures. Where the access to wealth is publicly acknowledged and disclosed this can potentially create a personal security problem for many wealthy individuals, which can provide motivation for individuals to move jurisdiction.

Changes to taxation expectations around the world are also now dictating the movement of individuals to jurisdictions where the imposition of tax has less impact than in the countries in which they currently live.

This movement of family members around the world presents opportunities to:

• Put in place tax neutral structuring of investment positions for the benefit of the current generation
• Provide the initial overview and planning necessary to ensure the responsible maintenance, management and distribution of the wealth to the next generation

What is Dixcart’s Approach?

Dixcart works with each family wealth structure to coordinate communication with the family and to provide access to, and liaison with, additional independent, professional advisers.

Plans can be put in place to allow for changes in a family’s structure and relationships to be recognised. Dixcart can coordinate variations in structure to accommodate individual and specific family wishes, whilst complying with the overall family office policy.

Summary: Appropriate Structures and Effective Communication from the Start

As wealth owners move from one jurisdiction to another, an opportunity to  restructure  the ownership of family wealth for succession planning purposes presents itself. Simultaneously, this provides an opportunity to implement the initial organisation of an ongoing family office and the tax neutral organisation of  family affairs.

When wealth passes down generations, openness between the family, together with effective communication and coordination, will help to ensure that potentially destructive family disputes are avoided or, at minimum, are more easily contained.

Additional Information 

If you would like further information regarding effective structuring and planning for inheritance please speak to your usual Dixcart contact or to one of the professional advisers in the UK office: advice.uk@dixcart.com.

Please also see our Dixcart Domiciles page.