Ben Tustin, Manager Founding Director of Marlborough Trust in Guernsey, considers some examples of how the innovative Risk Purpose Trust (RPT) could be utilised.
With constant changes to non-UK domicile rules, and regular attacks from HMRC, you would be forgiven for thinking that the use of trusts for tax and commercial planning is now somewhat limited. However, this would be forgetting the very nature of the trust itself - to provide benefits in a highly flexible and adaptable manner.
It is this flexibility that led to the creation of the Risk Purpose Trust ("RPT"). The RPT was conceived, developed and implemented by Princeps Limited; a joint venture between Guernsey trust company Marlborough Trust, Robus Group, the Guernsey and Gibraltar based insurance managers and Richard Gale, insurance sector consultant.
The original idea was borne out of the use of healthcare trusts. We felt that the RPT could be used as either an alternative to captive insurance, or could sit alongside an existing captive in order to provide the parent company with more options, particularly when it comes to retaining profits and subsequently distributing capital and profit.
As part of the 2 year research and development process it became clear that the uses of a RPT were much wider than those originally envisaged. The potential applications extended to cover such things as:
1) Support and provision for the unforeseen expenses of a corporation generally
2) Potential legal expenses or court awarded costs arising out of litigation
3) Environmental liabilities
4) Gratuity payments, incentive payments or sports bonuses
5) Future repair costs or replacement costs (ie foreseen expenses)
6) Rent guarantees for landlords of large property portfolios
7) Potential pension shortfalls
8) De-commissioning Costs
9) Dilapidations Planning
10) Research and Development Costs
11) Anything else you can think of!
How does it work?
An RPT acts as a repository for funds from any corporation or corporate group which can then be used by the Trustees to fund expenses of the corporate as set out in the Trust Deed. The RPT receives contributions from the Company and those contributions are then used to support the Company.
An RPT is a Trust, with an independent Trustee (Marlborough), a Settlor (the Corporation) and Beneficiaries (the Corporation and its group companies). The Trust receives contributions from the Corporation in relation to risks or expenses for which it wishes to provide. The Trust holds these funds until they are required and then distributes them to the appropriate beneficiary.
So, that's the basic principle, but let's looks in detail at some live examples:-
1. A major UK brewery both produces beer and owns upwards of 2,000 pubs. They currently have a captive insurance company in Guernsey that covers the first £250k of losses per claim. Their current captive has the following disadvantages that would not be experienced by an RPT:
- They must provide sufficient capital to fund the captive's solvency requirement and suffer the net cost of providing that capital.
- They pay Insurance Premium Tax, charged on premiums remitted to the Captive.
- Regulatory Fees and the costs of dealing with regulatory supervision are payable.
- The investment restrictions on the assets in the captive are such that nothing more interesting than a bond fund can be held.
- The profits of the captive must be distributed to the parent every 18 months.
The aim of the captive was to reduce the insurance costs of the brewer by managing their own risk in the first instance, however they now experience all of the disadvantages mentioned above. Were the captive to be replaced with an RPT then not only are the costs mitigated, but also it allows greater flexibility for the brewer with regard to whether or not the RPT's assets are consolidated into their balance sheet. They can also then choose to take funds back into the UK or maintain them within the RPT, potentially indefinitely.
2. A Premier League football club has its players license their image rights to the club and subsequently attempt to exploit those rights with global merchandising. The club might establish an RPT and make contributions to it in order to fund futures unforeseen expenses. The RPT could then establish a company in Guernsey that will subsequently own the licenses to the players' non-UK image rights. The image rights company would appoint the appropriate professionals to exploit those rights fully in other territories, and profits would flow into the RPT without being subject to UK tax unless funds are remitted back to the club.
An example of an unforeseen expense may be that a first team defender is sacked for bringing the club into disrepute (quite likely these days!), and a new defender is bought in for a substantial transfer fee that results in the club slipping into loss making territory for that financial year. The RPT can then distribute sufficient funds to the club to cover this loss (sourced from both contributions and gross profits from the image rights exploitation) which may be found to be helpful when the club publishes its financial statements - particularly once the UEFA financial fair play rules start biting from 2013 .
A private equity fund acquires a startup company which has developed a new technology enabling more crude oil to be obtained from existing North Sea oil rigs than current technology.
The company acquires a rig that has a remaining expected life span of 10 years before decommissioning, with the intention of drilling for approximately 5 years to make maximum use of the new technology.
The problem here is the decommissioning of the oil rig. The UK government is, rightly, concerned about the risk posed by oil drilling companies when the useful life of their rigs has come to an end. The concern is that the drilling company will have distributed all of their profits with no funds available for decommissioning - leaving the taxpayer to pick up the bill. The government can therefore impose what is known as a section 29 notice on the company, resulting in sufficient funds having to be lodged with a 'security trustee' to cover the future costs (you can see where I'm going here).
The issue for the private equity fund is that assets are tied up, even though they intend to sell the rig before decommissioning, but more critically those assets come off the balance sheet of the company without a corporation tax deduction. The company could establish an RPT, and fund it over a period of time in order to cover this future known cost. Once again, suitable investments can be made by the RPT however, crucially, the contributions can, with the correct implementation, obtain a corporation tax deduction. This leaves the overall cost of providing the security substantially reduced for the company and therefore increases the returns to the private equity fund.
As can be seen from these 3 radically different scenarios, the RPT is fulfilling its remit of being adaptable to the relevant circumstances of the establishing company.
As mentioned above, the RPT has been launched aiming primarily at the UK market, although research and development for other jurisdictions is under way. Thus, from a UK perspective the tax treatment can be broadly summarised as follows:-
- No Insurance Premium Tax is payable on contributions to the RPT.
- Under advice and careful implementation the company should obtain corporate tax deductions on contributions.
- Distributions to the parent company are likely to be taxed, however this will depend upon the nature of the expense for which the RPT is providing funds.
- If the parent company is a 'close' company for tax purposes (controlled by 5 or fewer shareholders), then 10 year inheritance tax and exit charges may apply. However, our professional advisers will provide specific advice in this regard on a case by case basis.
- The Trustee will be non-UK resident for UK income tax and capital gains tax (CGT) purposes. Thus the funds will be outside the scope of UK income tax, unless UK source income is received from investments. The trust rate of taxation will apply to UK source investment income (50%) and dividends (42.5%).
So, the tried and tested trust concept is again morphed to provide what has turned out to be quite a broad ranging solution for corporates and risk funding generally. And after all, this is really nothing new, that's the essence of what makes a trust so unique. Adaptability, longevity and acceptability.
Originally published in Offshore Investment, November 2012
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.