IOM Offshore Trusts

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Placing Your Trust in the Isle of Man

Setting up a trust is a big step and one that requires specialist advice. After all, you are, in effect, placing your assets outside of your direct control.

So why should an expat choose the Isle of Man to set up a trust and how should you go about it? We have listed the main points on setting up an IOM trust below. We have also written up some useful articles on the types of trusts you will come across, trust jargon as well as what happens to your trust when you divorce. The links to these are at the bottom of this page.

1) What should I look for when establishing a trust?

From a tax point of view there is often little difference in which jurisdiction you choose to set up your trust as most jurisdictions such as the IOM have no or low taxes, which means there are generally no taxes on the trust itself. More importantly, Philip Dearden, tax director, PKF (Isle of Man), advises expats to look at other areas, such as are there stringent regulations in place to protect you? How qualified are the professionals? Do they speak the same language? How easy is it to keep in touch? How comfortable are you with the laws of the land? For example, in the case of the Isle of Man, the trust law is based on UK trust law so there is a level of familiarity in place.

2) What are the practicalities of setting up a trust?

The first step is to take advice from an adviser specialising in this area to ascertain whether a trust is suited to your personal circumstances. A list of these can be obtained by contacting the Society of Trust and Estate Practitioners (STEP). The areas you want to cover would include reasons for setting up a trust, as this would determine the type most suitable for your needs. Further aspects to discuss would be the implications of taxation - the disadvantages as well as the advantages. These are best explored with a specialist tax adviser. You would then need a lawyer to draw up the trust. Most advisers will work with an established network of professionals such as lawyers who they could recommend. But, again, a list of lawyers are obtainable from STEP. The lawyer would ensure that the trust does what the client ultimately wants to achieve.

3) Is there a minimum amount needed to set up a trust?

Much will depend on what type of trust you are setting up and why. For example, if you wish to set up a trust tied up with your Will to set some money aside for a specific purpose like a grandchild’s education, say, then this could be relatively small amounts such as £10,000. However, when it comes to offshore tax planning and family wealth management the sums are likely to be more in the £500,000 bracket. For smaller sums there is also the option of using the trust facilities offered by many of the insurance companies - see Offshore Bonds below - but Dearden warns that as these type of trusts are not bespoke, they may not necessarily achieve everything you want.

4) What’s the cost of establishing a trust?

Setting up a trust is not cheap. Anyone contemplating establishing a bespoke trust needs to be sure that the benefits of protecting your assets in such a structure justify the costs. So as we point out above, you would therefore need a sizeable chunk of assets to warrant establishing a trust. At the very low end of the trust scale, costs will be several thousands of pounds per year running up to several hundreds of thousands of pounds per year, depending on the size and complexity of the structure. It is therefore important that you shop around, taking into account the levels of service the beneficiaires will receive for paying such fees.

5) What about offshore bonds and trusts?

Lots of life companies on the IOM, particularly those who tend to sell their products through UK IFAs, will offer offshore bonds that have a trust facility as an add-on to the product. These are often used for inheritance tax purposes. For example, you can assign a bond into trust and once the trust is wound up the trustees can assign the bond to the beneficiary, which helps to reduce the tax liability. However it is important to remember that these types of trusts are not bespoke, they are not meant to deal with a variety of issues. They are designed to give the bond holder a particular tax advantage as part of a specific product, while retaining a certain amount of control. But if you are looking to protect all of your wealth, or have complex family issues to deal with then a bespoke trust will be more suitable.

6) Can I put my pension in a trust?

Pensions can be set up as trust arrangements in order that the assets can continue to work for beneficiaries. This type of arrangement has become much easier since legislation introduced in the last few years enables expats to transfer their UK pension into a Qualified Recognised Overseas Pension Scheme, or QROPS. Many countries and financial centres, including the Isle of Man, have now adapted their own legislation to accept QROPS. According to John Rimmer, chairman of the Isle of Man's Society of Trust and Estate Practitioners (STEP) and a partner with law firm, Appleby, using Isle of Man trusts for pension arrangements is increasingly popular for British expats due to the fact that the law is similar to the UK.

7) What happens if things go wrong?

The more time you spend on legal and compliance issues when setting up the trust, the less likely things will go wrong. If you are concerned about certain actions taking place, it is also possible to impose requirements for the consent of a third party. For example, you can stop the trustees making distributions without first obtaining the consent of a protector. This will be a named individual, such as a trusted adviser of the settlor. Of course it is possible to get redress from a misbehaving trusteee, but this must be done through the beneficiaries. "There are two aspects of how you can get redress against a misbehaving trustee. One is through their legal rights as beneficiaries of the trust. That may be through the courts, or it may just require some correspondence. But it would be for the beneficiaries rather than the settlors to complain, as it is the beneficiaries that have the interests and the rights under the trust. The other side of it is because professional trustees are regulated, they are subject to supervision by the Supervision Commission, so it's possible in appropriate circumstances and, in particular, if there's a breach in the rules of compliance, to make a complaint to the FSC," explains Rimmer. If there is cause to suspect that an area has been breached by one of the other professionals in the chain, such as the adviser, then it is possible to go the appropriate regulatory authority to get redress.

8) If I have an IOM trust do I need to tell the taxman in, say, the UK?

Anti-avoidance provisions are in place to ensure that you cannot just take all your wealth, dump it in an offshore trust and say goodbye to capital gains and inheritance taxes. As explained above, setting up a trust should be more about making provision for your family in the future and setting this up in the most tax efficient way. Generally speaking tax liability or duty to report any tax liability will fall on the trustees and the beneficiaries under the terms of the trust. Additionally, exactly what and how it is reported will depend on the jurisdiction of the trustees and beneficiaries. The rules can be complicated and should be dealt with when setting up the trust. For more information specific to the UK go to http://www.hmrc.gov.uk/cnr/nr_trusts.htm