Offshore trusts are widely used in tax planning strategies. Offshore depends, of course, on the residence status of those who wish to avoid or mitigate a tax charge. UK residents often use trustees resident in the Channel Islands or Isle of Man. For those in North America, Caribbean jurisdictions are popular.
What determines whether or not a trust is offshore? How is the residence of trustees determined?
Where the trustees are individuals the residence of the individual trustees is usually the determining factor. However, most offshore trustees come within a corporate structure and in such situations a more sophisticated test might apply.
The Supreme Court of Canada recently considered the question of trustee residence where the trust had been established in Barbados. The court compared companies to trusts:
- Both hold assets that are required to be managed;
- Both involve the acquisition and disposition of assets;
- Both may require the management of a business;
- Both require banking and financial arrangements;
- Both may require the instruction or advice of lawyers, accountants and other advisors; and
- Both may distribute income, corporations by way of dividends and trusts by distributions.
The function of both companies and trusts is, at a basic level, the management of property.
Lawyers reading this may need to lie down for a few moments. In the legal jurisdictions making up the UK, a trust is conceptually a million miles from a company.
The Supreme Court decided that the residence of a trust should be determined by the principle that a trust resides for Canadian tax purposes where “its real business is carried on” – where the central management and control of the trust actually takes place. It had been found as a fact (before a lower Court) that the main beneficiaries exercised the central management and control of the trusts in Canada. They made the investment decisions. The Barbados corporate trustees had only a limited role to provide administrative services and little or no responsibility beyond that. On this test, the trust must be resident in Canada.
The Supreme Court explained that adopting a similar test for trusts and corporations promotes “the important principles of consistency, predictability and fairness in the application of tax law”.
Whether a court in one of the three UK jurisdictions would make a similar comparison between trust and company is a moot point. However HMRC guidelines suggest that a central management and control test could apply to offshore (to the UK) corporate trustees.
Those individuals seeking to benefit from the use of an offshore trust as part of a tax planning strategy should take care to ensure that all decisions regarding investment and distributions are taken by the trustees while outside the UK.