Originally Published in Wealthbriefing, June 2007
History and Background Located off the south coast of England in the English Channel, the Channel Islands were caught between the French and English in their many wars. Over several centuries, the islands were granted autonomy from the English Crown.
The currency is the British pound.
Legal System The Bailiwick of Guernsey is part of the British Isles (being a possession of the Crown) but not part of the UK. Its own government body, known as the States of Deliberation, legislates on internal matters, including fiscal and taxation. The UK Parliament may legislate, with consultation, on behalf of Guernsey on matters relating to defence and foreign policy. The Bailiwick of Guernsey includes the islands of Guernsey, Alderney, Herm, Jethou and Sark.
Sources of Law
Trust Creation and AdministrationTrusts have been recognised under Guernsey law for many years. The full statutory basis under which trusts established in Guernsey are governed is by the Trusts (Guernsey) Law 1989, as amended (Trusts Law). This legislation regulates the validity and administration of trusts and the appointment, duties and powers of trustees. The Trusts Law assists in identifying matters applicable to Guernsey trusts, as well as separately identifying those provisions applicable only to foreign trusts. The Trusts Law is currently being reviewed with a new consolidated and updated law due by early 2007.
The foundation of much of the local common law in Guernsey is the customary law of Normandy which still has great significance in relation to the law of real property and inheritance in Guernsey. More recently, the law in Guernsey has become more Anglicised. The courts in Guernsey generally have regard to the laws both of Normandy and of England when deciding the cases before them. In addition, relevant common law judicial decisions from other jurisdictions are persuasive.
Property, Estate and ProbateGuernsey’s inheritance laws remain based on Norman Customary law as varied by local statutes, rather than on English rules. A consultation document on proposed revisions to current inheritance provisions was issued in early 2006, for anticipated change in law later in the year. It is proposed that there be no distinction between legitimate and illegitimate heirs. As Guernsey is a ‘forced heirship’ jurisdiction, certain members of the family of a deceased person are entitled to an interest in the estate of the deceased, irrespective of the terms of any will.
Guernsey law distinguishes between real and personal property. The Guernsey rules for real property situated in Guernsey apply irrespective of the domicile of the deceased owner.
TaxationThe principal taxes in Guernsey are income tax and dwelling profits tax. The latter has been introduced to tax the profits of speculative property development.
IntroductionThe Trusts Law applies to trusts created both before and after its commencement. The aim of the Trusts Law was to clarify rather than restrict the activities of trustees and the purposes for which trusts are set up. The Trusts Law applies to Guernsey trusts and provides for "a trust proper law of which is the law of Guernsey". It applies to foreign trusts only with respect to enforceability in Guernsey. There are no registration or filing requirements for Guernsey trusts.
Guernsey has ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985, and has made specific provision for the non-recognition of foreign judgments and the exclusion of foreign inheritance laws.
Most Frequently Used TrustsThe Trusts Law provides for a variety of different types of trust. It is possible to construct trusts that may be varied, that accumulate income, and that provide for maintenance and advancement. Protective trusts also exist. Typically, the majority of trusts created in Guernsey are on discretionary or life interest terms.
Proper Law of a TrustThe proper law and forum of trusts established and/or administered in Guernsey is set out in the Trusts Law. Unless the proper law of the trust is set out in the trust deed, the law with which the trust has its closest connection at the time of its creation will be applied.
The court in Guernsey has jurisdiction over both Guernsey trusts and foreign trusts where a trustee is resident in Guernsey, where any property of the trust is situated or administered in Guernsey, or where the terms of the trust provide that the court in Guernsey is to have jurisdiction.
Creation of a Trust
Validly constituted trusts
Trusts, other than a unit trust, may be created by oral declaration, by an instrument in writing (including a will or codicil), or by conduct. Indeed, no technical expressions are needed for the creation of a trust. A unit trust is created only by written instrument. However, a trust will not be valid if it purports to do anything contrary to the law of Guernsey, has no identifiable or ascertainable beneficiary, or the court declares it invalid. A properly constituted trust is generally valid and enforceable in Guernsey.
Despite Guernsey having entrenched forced heirship laws, the courts will not invalidate a Guernsey trust where it has been properly constituted, even if the transfer of assets into the trust is in breach of any foreign rule of forced heirship.
Duration and termination of a trust
A trust will terminate 100 years after its date of creation unless it is terminated sooner or it is a charitable trust.
Beneficiaries must be identifiable by name or by reference to a class or relationship to another person. A settlor may be a beneficiary. Where there is no identifiable or ascertainable beneficiary, the trust, to be valid, must be created for charitable purposes. Currently, non-charitable purpose trusts cannot be created in Guernsey. A beneficiary’s interest in a trust is personal property and, subject to the terms of the trust, may be dealt with or charged accordingly.
All trustees acting in a professional capacity must be licensed by the Guernsey Financial Services Commission (Commission). The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 (‘Fiduciary Law’) regulates all trustees and trust companies that carry out ‘regulated activities’, a defined term.
The minimum number of trustees is two unless:
- only one trustee was originally appointed
- a corporate trustee resident in Guernsey is acting, or
- the terms of the trust provide otherwise.
Normally the trust deed will govern the process by which trustees are appointed and may retire. Where the trust deed is silent, a new or additional trustee may be appointed by:
- the existing trustee
- the last remaining trustee
- the personal representative or liquidator of the last remaining trustee, or
- the court.
The office of Public Trustee provides a trustee of last resort.
In regard to the retirement or removal of the trustee, a trustee other than a sole trustee may resign office by delivering a written notice of resignation to the co-trustees. Further, when a person ceases to be a trustee, that person is obliged to do everything necessary to vest the trust property in the new or continuing trustees.
The overriding duties of a trustee are to observe the utmost good faith and to act as a prudent person exercising reasonable skill and care. Trustees must not profit from their trusteeship or cause or permit any other person to profit from the trusteeship. Subject to the terms of the trust, trustees must act impartially between beneficiaries or charitable purposes.
Trustees must ensure that trust property is properly held/vested/controlled by them, and must preserve and enhance the value of the trust property. They must keep accurate accounts and records of their trusteeship.
Corporate trustees of trusts in Guernsey are subject to special provisions whereby all directors of the corporate trustee, including deemed directors, act as guarantors in respect of breaches of trust unless they ought to be fairly relieved because they were unaware of the breach of trust (and were not reckless or negligent in being so unaware), or expressly objected and voted against the breach of trust.
Although the term protector is not referred to in the Trusts Law, its use is acknowledged in the Trusts Law. A trustee may consult or obtain the consent of another person before exercising any function, and that person is not, by virtue of being so consulted or giving or refusing such consent, deemed to be a trustee.
Role of courts
The role of the court is to rule on procedural and incidental matters arising under the laws of Guernsey. The court has jurisdiction over Guernsey trusts and, in certain situations, over foreign trusts. Trustees may apply to the court for directions in managing the affairs of the trust, and the court will make such order as it thinks fit. If trustees do not comply with a court order, the court may order that someone else be nominated to carry out the order, at the expense of the person in default.
Trust AdministrationThe general administrative powers of trustees are generally set out in the trust deed. However, where a transaction cannot be effected because the necessary power is not vested in the trustees, the court may confer on the trustees the necessary power.
Although the Trusts Law sets out restrictions on trustee investments, in practice most trust deeds exclude these restrictions. Nevertheless, even though the trust deed may allow the trustees to have very wide powers of investment, the trustees remain subject to their fiduciary duty.
Maintenance and Advancement
Subject to the terms of the trust, in the case where a beneficiary is a minor, and irrespective of whether or not there is a vested interest, the trustees may accumulate income until the beneficiary reaches the full age. Alternatively the income, or part of it, may be applied for a beneficiary’s maintenance, education or general benefit.
Trustees have the power to advance or apply for the benefit of a beneficiary part of the trust property prior to any beneficiary obtaining an absolute entitlement.
Variation of a Trust
The terms of a trust may be varied in any manner provided by those terms. Powers of variation are used to vary the terms of a trust without the need, and more importantly the cost, to make an application to the court. Sufficiently widely drawn trust deeds prevent the need to apply to the court. Where all the beneficiaries are in existence, competent and have been ascertained, they may as in Saunters v Vautier require the trustees to terminate the trust and distribute the trust property.
Confidentiality and DisclosureThere is no law requiring registration with any authority of the names of settlors, beneficiaries, or the trust itself.
Subject to the terms of the trust providing otherwise, trustees have a duty to provide full and accurate information of the state and amount of trust property to both beneficiaries and settlors.
The Code of Practice issued by the Commission to Trust Service Providers states that all trustees who are subject to the Guidance Notes should ‘maintain confidentiality except where disclosure of information is required or permitted by any applicable law or by guidance published by the Commission, or authorised by the person(s) to whom the duty of confidentiality is owed’.
Rights of CreditorsTransfers Into Trust
The court may determine that a trust is invalid and unenforceable where the trust was established by duress, fraud, mistake, undue influence, misrepresentation, or in breach of fiduciary duty.
Trust property which has been dealt with in breach of trust can be traced and recovered unless it is no longer identifiable or it is in the hands of a bona fide purchaser for value without notice of the breach of trust or someone else who derived title through such a purchase.
There is no limitation period which reduces the period within which claims from creditors in other jurisdictions can be brought against a trustee or to recover from the trustee trust property or its proceeds.
Rights of Trustees and Beneficiaries
According to the Trusts Law and confirmed by the court, directors of a trust company do not owe a fiduciary duty to the beneficiaries of a trust of which their company is a corporate trustee.
Provision for Private Trust Companies
Private trust companies do not act as trustee for business or profit. They must act for a clearly defined number of trusts for an identified group of beneficiaries. Private trust companies may apply to the Commission for a discretionary exemption from licensing. As part of the discretionary exemption process, the Commission will impose restrictions on the activities of the company and its management.
The current fee chargeable by the Commission for considering an exempt application is GBP590. No annual licence fee is payable while the exemption remains in place.
Other Forms of Legal Entities
Commonly Used Legal EntitiesCommonly used legal entities include:
- companies limited by shares, pursuant to the Companies (Guernsey) Law 1994, as amended
- companies limited by guarantee, pursuant to the Guarantee Companies Ordinance 1997
- protected cell companies (PCC), pursuant to the Protected Cell Companies Ordinance 1997, as amended
- limited partnerships, pursuant to the Limited Partnerships (Guernsey) Law 1995, as amended, and
- incorporated cell companies (ICC), pursuant to the Incorporated Cell Company Ordinance 2006.
The ICC permits the existence of separate legal entities (incorporated cells) within another legal entity (the incorporated cell company). Unlike a PCC, which has separate and distinct "cells" whereby assets and liabilities of a cell are largely segregated from those of the other cells, an ICC has one or more incorporated cells within it, each ring-fenced by virtue of their separate legal existence from other incorporated cells and the ICC itself.
Companies Limited by Shares
Companies are registered through the Royal Court. There must be at least two subscribers to the Memorandum of Association of the company.
The authorised share capital of a company is stated in its Memorandum of Association. Document duty is payable on formation of the nominal authorised share capital. Currently this duty is one half of one per cent or a minimum of GBP50. Normally, therefore, the basic share capital is stated as GBP10,000.
There is no limit on the number of directors, but there must be at least one director who is also an officer. Corporate directors are permitted.
Disclosure and Other Requirements
Prior to incorporation, the company’s name must be approved. Information concerning the objects of the company, its beneficial ownership and tax status must be disclosed and supplied to the Commission. Companies may be formed for all legal purposes; however there are restrictions on formation of companies undertaking regulated activities, e.g. trust companies.
Introduction and DevelopmentsGuernsey is a comparatively low tax jurisdiction. The principal tax in Guernsey is income tax (Income Tax (Guernsey) Law 1975, as amended). Currently, there are no capital gains, inheritance, stamp duty or value added taxes.
General Concepts of Tax Liability
The extent of an individual’s liability to income tax is determined by the extent to which that person is resident in Guernsey. Individuals who are solely or principally resident are assessed to tax on their worldwide income. As of 1 January 2006, the definition of ‘residency’ for individual local tax purposes has been refined.
Rates and Exemptions
Tax on income is charged in Guernsey at a flat rate of 20 per cent, subject to permitted allowances and deductions. Generally, tax is charged on all income arising or accruing in Guernsey, no matter to whom it belongs, and all income arising or accruing outside Guernsey that belongs to taxable persons. Income includes income receipts, as well as profits of an income nature.
Individuals residing in Guernsey are entitled to deduct personal allowances from their total income in arriving at the sum of taxable income. Personal allowances are available to an individual according to personal circumstances during the year of charge.
Tax evasion and Avoidance
Tax evasion is a common law offence in Guernsey. Proceeds of a tax-related offence fall within the anti-money laundering regulations. Where the authorities are of the opinion that the main purpose of the transaction was tax avoidance, they may take appropriate measures to counteract the avoidance.
Taxable Period and Filing Requirements
Income, other than trading income, is assessed on a calendar year basis. Tax returns are issued in January each year and must be completed and filed within 21 days. By concession, this period may be extended.
Non-resident Shareholders and Trusts for Non-residents
If the settlor is not resident in Guernsey, trusts in Guernsey are taxed according to the residence status of the beneficiaries.
Where there is doubt about the tax status of a trust, trustees or beneficiaries, reference should be made to a non-statutory Statement of Practice which clarifies the extent of a trustee’s liability where not all beneficiaries are Guernsey resident.
A Guernsey-resident trustee may have liability to Guernsey income tax. However, where all the income of the trust is payable to beneficiaries resident outside Guernsey, the liability of the trustees is restricted to trust income arising in Guernsey, other than Guernsey bank interest. Guernsey bank interest is taxable only if there are Guernsey-resident beneficiaries.
If the settlor and the settlor’s spouse are irrevocably excluded from benefit or if the settlor is non-resident in Guernsey, income accumulated in a company owned by, but not distributed to, the trust is not subject to Guernsey income tax if the company itself is not liable. Guernsey source income, other than bank interest, continues to be subject to Guernsey income tax.
In 1952, Guernsey entered into a double taxation arrangement with the UK and in 1955, with Jersey.
Companies which are incorporated but not resident in Guernsey may be granted exempt status on receipt of an ‘exemption tax’ currently totalling GBP600 per year. Also, international business companies may apply for international tax status and negotiate an annual rate of tax between one per cent and 30 per cent for a five-year period. A combination of the new Company Registry proposals and implementation in 2008 of Guernsey’s future taxation strategy means that tax rates for Guernsey companies will change with effect from 1 January 2008. All companies (except for a defined group such at utility companies) will have their effective rate of tax reduced to zero. A new tariff of statutory fees is currently being considered.
Anti-money Laundering Rules
The Guernsey anti-money laundering provisions have been strengthened by the Terrorism and Crime (Bailiwick of Guernsey) Law 2002, which is closely based on the UK model. Guernsey has the backing of the Financial Action Task Force, and in February 2002 was described as being close to complete adherence to their 40 recommendations. All trustees are required to be licensed under the Fiduciaries Law, and are under a duty to observe the Guidance Notes produced by the Commission. The Guidance Notes provide for proper identification and verification of the settlor and principal beneficiaries. Revised Guidance Notes are due to be issued by the end of 2006.
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.