Isle of Man
The Isle of Man offers wealthy families a politically stable, well-regulated and practical base in which to establish wealth and business succession planning structures. Modern and robust legislation, highquality professional advisers and service providers, and a reputation for cost-effectiveness, all contribute to the island’s attractiveness as a trusts jurisdiction. Isle of Man trusts are used to achieve many objectives, including:
Family provision and wealth preservation;
Business succession planning;
Protecting assets against personal liability;
Charity and philanthropy;
Pensions and employee benefit schemes; and
Orphan ownership vehicles in the context of financing transactions, securitisations or private trust company structures.
Manx trust Law has its roots in English Law. It is based on common law principles, supplemented and enhanced by legislation which, for the most part, mirrors its English equivalents. The decisions of the English courts are highly persuasive in the Manx courts and the Judicial Committee of the Privy Council is the highest court of appeal for the Island.
A trust arises out of the separation of the legal title to property and the right to enjoy or benefit from that property. It involves one person (the settlor) transferring the ownership of property to another (the trustee) to hold for the benefit of a person or class of persons (the beneficiaries) or for a specific purpose. In most cases, the settlor expresses the terms of the trust in a document (the trust deed) and the trustees must administer the trust in accordance with those terms and with the Law. A Manx trust is not a legal entity; all the business of the trust is carried on by and in the name of the trustees.
What assets can be held by a trust?
Shares and stocks in both quoted and unquoted companies
Real and intellectual property
Life assurance policies issued on the life of the Settlor
Most other types of asset
Advantages of an offshore trust
Private relationship, for example, in the Isle of Man offshore trust deeds are not publicly registered
Tailored to specific family requirements
Recognised in all common Law jurisdictions
Increasing recognition in important civil law jurisdictions
An important tool in international income, capital gains and estate tax planning
Used by corporations for employee benefit plans, retirement and stock option schemes, insurance plans and special financing arrangements
Isle of Man Trusts (Amendment) Act 2015 is now in force.
The Isle of Man Trusts (Amendment) Act 2015 (the “Act”) brings into force the following three principles: 1. abolition of the “Two Trustees Rule”; 2. abolition of the Perpetuity Period going forward; and 3. certain matters to be determined by governing law under the Trusts Act 1995.
Definition of a Trust
A trust relies on the distinction between the legal ownership in property and the equitable interest in that property.
The trustee is given the legal ownership interest, which enables him to deal with those assets as if they were his own property, subject to the terms of the trust deed. The beneficiaries have an equitable interest in the property which represents the rights to enjoy the benefit of the property subject to the terms of the trust deed. The beneficiaries can enforce the trust against the trustee and can, if necessary, take legal action against the trustees.
Also commonly referred to as a “Grantor”, the Settlor establishes the trust by transferring the trust property to the trustee(s) to hold under the terms of the trust. The settlor may also be a beneficiary of the Trust or act as the Protector.
A Trustee is obliged to manage and dispose of trust property in accordance with the term of the trust instrument. A trustee can be either an individual or a body corporate.
Prior to the new Act, there was a requirement for an Isle of Man trust (in certain circumstances) to have either a trust corporation (this was defined in the legislation and the corporation needed to meet prescribed criteria including a specific class of licence from the Isle of Man Financial Supervision Commission) or two individuals acting as trustee(s).
This old rule originated from the Settled Land Act 1892 and was seen as prohibiting the effective administration of trusts.
The abolition of the two individuals requirement acknowledges that there is a well regulated professional trust industry in the Isle of Man and that one trustee especially in the case of a corporate trustee is sufficient to carry out the role effectively.
Those persons who are able to provide trust services are:
Fiduciary service providers licensed by the Financial Supervision Commission of the Isle of Man to conduct trust services under Class 5.
– Manx Advocates
– Manx Accountants
The trustees have a duty to ensure that the administration and management of the trust is done in the best interest of the beneficiaries and to act fairly and impartially towards the beneficiaries at all times.
The Trustee Act 2001 imposes a statutory “duty of care” in certain circumstances. It requires a trustee to exercise such care and skill as is reasonable in the circumstances, having particular regard to:
Any special knowledge or experience that he has or holds himself out as having; and
If he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind or business or profession.
The beneficiaries are those people for whose benefit the trust is established. They can either be named or described by reference to a class of person in the trust instrument. Beneficiaries have the right to enforce the trust against the trustees but may also enforce their equitable ownership interest against others as necessary.
The role of “protector” is optional but they are frequently appointed. The role of the protector is:
– To provide guidance to the trustees.
– To provide comfort to the settlor that the trust is being administered in accordance with his/her wishes and intentions.
The role can be undertaken by a qualified professional in the course of normal business activity or by a person who is acquainted with the particular circumstances surrounding the trust e.g. Settlor or relative. The protector does have a fiduciary duty to the beneficiaries.
Termination of Trusts
Unless specifically provided for in the trust deed, the deed as executed is binding and cannot be changed. However it is possible to include a specific power of revocation in the trust instrument, thereby making the trust revocable.
Types of Trusts used in the Isle of Man
The most commonly used form of trust in the Isle of Man (and the offshore world generally) is the discretionary trust. The trust deed gives the trustees wide discretion to apply the income and capital of the trust assets for the benefit of a class of beneficiaries. The trustees decide which beneficiaries will benefit and how much they will receive; the beneficiaries have no right to receive a distribution, merely a hope that the trustees will exercise their discretion in their favour. The settlor may give guidance to the trustees, typically in the form of a letter of wishes, explaining how he or she would like the trustees to exercise their discretion, but the settlor cannot bind the trustees.
Life Interest Trusts
One or more specified beneficiaries (known as life tenants) have a right to receive a fixed share of the income from the trust property for a specified period (usually their lifetime). Capital is held either on fixed interest trusts or at the discretion of the trustees for specified beneficiaries to benefit after the life tenant’s death.
Trusts for non-charitable purposes are permitted in the Isle of Man under the Purpose Trusts Act 1996. The purposes may be of any kind provided they are certain, reasonable and possible, and not unlawful, contrary to public policy or immoral. The trust must be created in writing and provide for the appointment of an enforcer independent of the trustees whose duty is to enforce the trust in respect of applebyglobal.com 3 its non-charitable purposes. A purpose trust must have at least two trustees, at least one of whom is a “designated person” (broadly, a regulated professional person within the Isle of Man); the designated person is then subject to record-keeping obligations for the trust within the island. Purpose trusts are commonly used in conjunction with asset financing transactions, securitisations or to hold the shares of a private trust company.
Trusts for charitable purposes may be established in the Isle of Man. The trust’s objects will be exclusively charitable if they fall under one of the following categories:
– the relief of poverty;
– the advancement of education;
– the advancement of religion; or
– other purposes beneficial to the community.
The objects must also be for the public benefit. Any charity operating in the Isle of Man, and any Manx body operating as a charity anywhere in the world, is required to register with the Isle of Man Charities Registry under the Charities Registration Act 1989.
Employee Benefit Trusts and Pension Trusts
These are trusts to motivate employees by providing performance related benefits settled in trust by an employer or to house pensions funds (individual and occupational) for the benefit of their employees.
The most commonly used form of trust in a financial services environment is an inter vivos discretionary trust which is created by the express and intentional declaration of the settlor. The declaration is normally a written “deed” also referred to as a trust instrument; trusts can be established by will on the death of a settlor.
A Private Trust is not registered in the Isle of Man registry and is not required to file annual accounts.
Abolition of the Perpetuity Period going forward
Traditionally, a trustee has been unable to hold settled land in a trust indefinitely. The Act removes the requirement that a beneficiaries interest in a trust must vest with a specific time frame.
A Settlor can, if they wish, still include a defined period within the trust deed.
Isle of Man Trust Taxation
Taxation is a dynamic area and the latest information can be obtained from the Income Tax Division’s website at www.gov.im/treasury/incometax. There is no capital gains tax and no inheritance, gift or estate taxes in the Isle of Man. Manx trusts with Manx resident beneficiaries are subject to income tax at 20% on undistributed income. However where the beneficiaries of a Manx trust reside outside the Isle of Man and the income is generated outside the Isle of Man there will be no Manx taxation in respect of trust income.
Financial Statements Required
The duties of the Trustee(s) include providing the beneficiaries with a full and proper explanation of the dealings of the trust. There is no statutory provision covering the format that the trust accounts must take, accounts need not be audited but if an audit is deemed appropriate the trustees can arrange for an audit which will be paid for out of the trust assets.
Private Trust Companies (PTC)
A private trust company (PTC), a company which exists for the sole purpose of acting as trustee of a specific trust or trusts, can be an attractive alternative to using an institutional trustee. In essence, the settlor incorporates his own company to act as the trustee of the trust he is settling. The PTC regime in the Isle of Man is straightforward and practical, and, with no associated government licensing or registration fees, is one of the most cost-effective among the offshore finance centres. Provided they are not held out to the public as undertaking trust business, and that the administration of the underlying trust or trusts is carried out by a regulated corporate services provider in the Isle of Man, PTCs are exempt from the normal licensing requirements of the Financial Services Act 2008.
Typically, the shares of the PTC would be held in an Isle of Man purpose trust, the purpose being to incorporate, promote and maintain the PTC. The terms of the trust may provide for a mechanism by which board appointments are effected in accordance with the settlor’s wishes (or any other formula). A Manx foundation might also be used for these purposes. The benefits of using a PTC include:
PTCs provide a means by which the client, or their family, can retain a greater degree of control over the trust affairs without compromising the validity of the family trusts. The client can compose the board of directors with themselves, family members and trusted advisers who have a heightened knowledge of the family’s business and financial affairs and are empathetic to the needs of the beneficiaries. Careful thought needs to be given to the composition of the board of the PTC and also who is to have power to appoint and remove its directors.
Avoiding future changes in trusteeship
Having a PTC as trustee of family trusts will avoid the need for future changes of trusteeship. Instead, only the management agreement between the PTC and the regulated corporate services provider would need to be terminated and a new agreement entered into between the PTC and the new service provider.
Ownership of the structure can remain confidential when structured with the use of a purpose trust.
TBA has a large specialist trust and private client team consisting of three directors, a senior associate, two associates and a trainee. Our specialist team has extensive experience of advising clients in relation to the establishment and structuring of trusts and foundations, estate planning, trust and estate litigation, international tax investigations and TIEA requests.
Further information on these alternative structures is available on request.