Originally written prior to the UK pre-budget report and published in STEP Journal, Guernsey supplement, November/December 2007
Guernseys tax neutrality, together with its location, stability and sophisticated infrastructure, has led to thousands of tax-planning vehicles being established in the island.
UK-resident, non domiciled clients (often referred to as Non-Doms) are perhaps the best known users of Guernsey trusts and companies to shelter UK tax. However, there are a number of means through which private clients are able to make use of the Islands tax-friendly status.
At a basic level the Non-Dom is able to open bank accounts on the Island and, by ensuring that their capital, capital gains and income are kept in separate accounts, can ensure that only the income and the capital gains that are remitted to the UK are subject to its taxes. Note that this applies only to non-UK source income and gains.
Alternatively, the more sophisticated Non-Dom may establish a trust and company structure. This allows trustees to distribute not only capital but also capital gains to the Non-Dom and his Non-Dom family members without a resultant liability to capital gains tax (CGT).
Advantages in the area of inheritance tax (IHT) may also be obtained. Non-Doms wishing to hold UK-situs assets can often use a Guernsey-based company to hold these assets, thereby taking the situs of the assets outside of the UK and thus outside its IHT net.
However, this benefit only applies if the Non-Dom is not deemed to be domiciled and instances may of course occur where a Non-Dom may actually be in danger of becoming deemed to be domiciled for IHT purposes. In such cases, advisers usually seek to ensure that any non-UK situs assets are placed into a discretionary trust before the deeming provisions apply.
In practice, most advisers will recommend that a trust and company structure is set up at inception, with the Guernsey company keeping the trust assets outside of IHT 10-year anniversary and exit charges.
The use of Guernsey vehicles to hold property also offers potential IHT advantages for the private client. However, the potential shadow director/benefit-in-kind charges can affect clients occupying family homes owned by trust and company structures, and these should be borne in mind.
Different advisers will recommend different approaches to resolve any potential problems and theses may include stringent management control, licences to occupy, double trusts or leasing arrangements.
Non-Doms wishing to develop land in the UK may be able to make use of the tax treaty between Guernsey and the UK to substantially reduce the overall tax burden on any subsequent profit.
UK Domiciled Clients
A number of opportunities also potentially exist for individuals planning to move from the UK. Depending on where the client is moving to there may be opportunities to shelter capital gains realised after becoming Non-Resident, or to protect wealth if moving to politically unstable countries.
Clients employed on an international mandate can use pension schemes in the form of Qualified Recognised Overseas Pensions to allow for the transfer of existing UK schemes or new unqualified schemes. Again, the attraction to the client is the fact that the pensions can be managed from Guernsey in a tax-neutral environment.
A range of opportunities are also present here. For example, employee benefit trusts (EBTs) can be used for a variety of reasons, from tax-efficient remuneration to enjoying the advantages of having the trustees in Guernsey rather than the UK and the general lack of taxation on trustee income (non-UK) and gains.
For close companies, funds can be settled into an EBT and subsequently lent to ex staff members. There will not normally be any corporation tax deduction on the contribution to the EBT (although there may still be some opportunities) but if lent interest free to ex-employees there may not be any benefit-in-kind charge and the debt will be deductible for IHT purposes. Many Guernsey firms have variations on the EBT and the opportunities available.
Other commonly-used structures include Employee Share Option Trusts or Plans. These are commonly formed in Guernsey for companies that are providing equity-based incentives to their employees. A key advantage in locating the trustee in Guernsey is the tax neutrality but many advisers also recognise that the Island has a pool of companies and staff with years of experience in managing such trusts, allowing for the efficient provision of bespoke services to private companies.
Finally, Guernsey is also used as a base for all sorts of purposes examples include yacht registration, securitisation vehicles, crewing or employment companies and family unit trusts. As well as tax-efficiency, Guernsey offers flexibility of approach and the presence of a concentrated pool of professionals, as well as developing user led trust and company legislation. This combination is at the heart of its attraction.
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.