Posted: 13 May 2010
Issue: Online only
Categories: Events, White papers, Features
Keywords: Guernsey, private trust companies, family limited partnerships, QROPS, qualifying recognised overseas pension schemes, employee benefit trusts, employer financed retirement benefit schemes, PTCs, FLPs, EBTs, EFRBS

Speakers offer authoritative updates on PTCs and FLPs, QROPS, and EBTs and EFRBS

Free-to view video highlights of this year’s Guernsey Fiduciary Forum are now available online.

The high-profile event – held at the Grange St Paul’s Hotel, London – played host to speakers who provided authoritative updates on the structures being utilised throughout the offshore wealth management sector.

The three main areas covered by the forum – private trust companies and family limited partnerships, QROPS, and employee benefit trusts and employer financed retirement benefit schemes – are précised below, accompanied by links to concise footage that greatly expands on each summary through in-depth analysis, case studies and key points from a variety of experts in the fields of tax and law.

The QROPS section below features additional technical footage of case studies presented at an earlier event.

Private Trust Companies and Family Limited Partnerships

Lawyers Ashley Crossley from Baker & McKenzie and Russell Clark from Carey Olsen examine structures for the international entrepreneur.

They particularly consider the advantages of private trust companies (PTCs) and family limited partnerships (FLPs) for those with complex financial affairs, and discuss the regulatory framework in Guernsey for PTCs and FLPs.

The video includes case studies showing how these can be used in practical situations, although FLPs are discussed only in the context of the international entrepreneur, not for pure UK tax planning.

A PTC is a corporate trustee established to act as a trustee for a trust or a number of trusts. 

PTCs give reassurance to commercial trust service providers where there are high risk assets in the trust, or companies trading in areas where the trustees have little experience.

A more positive reason for forming a PTC would be to allow more junior members of the family to get involved in the financial affairs of the family’s assets by joining the board of the PTC, without control being lost by the more experienced members.

There are several different approaches to owning the PTC shares. While it is common to use a charitable trust, the speakers propose a non-charitable purpose trust to hold the shares in the PTC – holding shares in a company is a valid trust purpose in Guernsey provided there is an ‘enforcer’ appointed.

Family Limited Partnerships (FLPs) are seen as an alternative to trusts because they offer similar levels of flexibility and management of assets over several generations, but without some of the drawbacks of trusts.

Culturally they can be more acceptable in certain countries where trusts are not as well understood. They often have fewer problems with gift taxes, with the transfer of assets into the FLP not generally triggering a liability in the way that a transfer into trust might do.

View the PTCs and FLPs footage

QROPS

Roger Berry, chairman of the Guernsey QROPS Committee, notes the growing interest in this type of pension for the UK expatriate, and reviews some finer details of issues relating to HMRC, legislation and taxation.

QROPS are qualifying recognised overseas pension schemes, and are intended for those who are leaving or have left the UK and want to transfer their pensions.

QROPS were introduced by HMRC because of EU free movement rules, but they are not restricted to those working elsewhere in the EU, and there is no need to transfer to the jurisdiction in which you are working – it is in this ‘third jurisdiction’ area that Guernsey operates .

One of the key provisions to bear in mind is that the administrator of the pension has to report back to HMRC for so long as the pensioner is either resident in the UK, or has not yet been non-resident for five years. After that period most (though not all) of the reporting requirements are lifted.

One main advantage of Guernsey QROPS is that there is no need to purchase an annuity.

While it is possible to avoid doing so in the UK as well, the residue on death can then be taxed at up to 82%, and this has driven many people to move to a QROPS. There is no deduction of tax at all from either the income or the residue on death in Guernsey.

However, Guernsey in general takes a cautious approach to QROPS, and does not therefore get into problems with HMRC. One of the current issues in QROPS is their use for ownership of residential property.

Although QROPS have been suggested as a way round the restrictions on UK schemes, this is not the case, and further guidance has now been issued following discussions with Guernsey.

Guernsey is considering increasing the commencement lump sum from 25% of the fund to 30%, and increasing the limit for trivial commutation to £30,000. Appropriate clients for QROPS are those who have left or will be leaving the UK with an accrued pension to transfer. The pension must be capable of transfer, which will not be possible if the clients have already taken an annuity.

However the ‘soft benefits’ are often just as important – people who are leaving the UK frequently want to make sure that they have broken all links with the UK.

The presentation concludes with a case study of a typical client couple leaving the UK to retire permanently in Portugal.

View the QROPS footage

View additional QROPS technical case studies:

QROPS case study 1
QROPS case study 2
QROPS case study 3

Employee Benefit Trusts and Employer Financed Retirement Benefit Schemes

Lawyer Jane Wolstenholme from Wedlake Bell examines the use of employee benefit trusts (EBTs) and employer-financed retirement benefit schemes (EFRBS).

This features analysis of how both these structures are treated from a taxation perspective.

EBTs are trusts established by companies for the benefit of some or all of its employees. Although they are often used to support employee share schemes or deferred bonus schemes, and have some favourable tax rules, they are very flexible and can be used for many other purposes.

However HMRC are concerned about some of the uses that they consider to be aggressive.

A corporation tax deduction for the payment into the EBT depends on using the funds to provide an employee benefit. Loans to employees have been shown by case law not to be a qualifying purpose, and this is also now backed up by legislation.

However, the insistence in the Dextra case that loans were investments and not emoluments may help in arguing that the IHT avoidance provisions (below) should not apply to such EBTs.

EBTs can be effective at avoiding inheritance tax and for extracting wealth from a company at a lower overall rate of tax. The anti-avoidance legislation particularly impacts close companies, with a potential IHT charge on participators when a transfer is made to a trust, but there are provisions which can exempt EBTs from this charge when properly constructed.

EFRBS may have more of a future than EBTs. An EFRBS is an arrangement whereby an employer makes arrangements for retirement and death benefits for its employees, often under trust.

It is therefore in principle an EBT, but the more restrictive conditions may mean that it enjoys a better tax regime. For corporation tax it is an EBT, so no deduction can be claimed until the benefits are paid, which is the main disadvantage.

However, there is no income tax or NIC on the employee (or employer) at the time of payment into the EFRBS, although there will be an income tax charge on receipt of the benefit. While an onshore trust would have an income and capital gains tax liability, an offshore trust in Guernsey does not.

The benefit for owner-managed businesses is the extraction of the profit from the company with a minimised tax burden – suffering the corporation tax but not the immediate income tax and NIC liability.

There are no subsequent investment restrictions, for example on the purchase of a residential property, and there are no restrictions on the way that the benefit is paid. For example a lump sum could be taken on retirement when not resident in the UK or any other high-taxed jurisdiction.

It would appear that payments can also be made to the dependants of the original employee, with the possibility of lower rates of tax.

Loans made from EBTs to participators will need to be repaid on death, thus reducing the liability to IHT. The money is then available for use to benefit the other beneficiaries, which may well include the family.

As well as the lack of corporation tax deduction, the other major disadvantage of EBTs in particular is the likelihood that avoidance will be targeted by future legislation and by the continued close attention from HMRC.

View the EBTs and EFRBS footage

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