STEP

Title Research

Competing with the elite

  • Author : Martin Hall
  • Date : April 2011
ABOUT THE AUTHOR: Martin Hall TEP is Manager at Tenon (IOM) Ltd

Mention the Isle of Man and you may think of the Manx cat, TT motorbike races or green rolling hills; however, this idyllic island, set in the middle of the Irish Sea, is an influential player among the global international financial centres. Its government understands its responsibilities to its finance sector, while also appreciating its ongoing obligations to meet the high standards set by the Organisation for Economic Co-operation and Development (OECD), of which the Isle of Man (IOM) is a member. The proactive approach by Tynwald, the island’s parliament, in enacting legislation has been highlighted on a number of occasions over the past decade, and its continued commitment to be a leader ensures that our picturesque island continues to be in the elite of international financial centres.

Past

The introduction by Tynwald of the Trustee Act 2001 (‘the Act’) was an important piece of legislation with wide-ranging implications for all trusts and trustees and dealt with a number of areas, in particular the duty of care of a trustee, wider trustee investment powers, the delegation by trustees of their powers and also increasing the statutory perpetuity period to 150 years.

Previously trustees had to be mindful of their common law duty of care, whereby the Act places a statutory duty of care on the trustees, ensuring they exercise such care and skill as is reasonable, but having regard to any special knowledge or experience they have or could be reasonably expected to have, if acting as trustees in the course of a business or profession. This also provides some subjectivity to the criteria for judging the exercise of ‘due care’.

The duty of care that trustees must exercise in relation to investments is also important – ensuring the suitability of investments for a particular trust and giving consideration to whether the investment is adequately diversified. Trustees are also required, unless considered not appropriate, to take advice on the investments contained in the trust. However, in general terms, the trustees are placed with more onerous duties regarding the investments of the trust.

With regard to the delegation of powers, the Act sets out to remove uncertainty surrounding the limitations on trustees in relation to entrusting their functions to third parties. This is done by providing provisions for the delegating of certain functions to agents, nominees and custodians. The delegation of investment management functions requires the trustees to prepare a policy statement clearly setting out the investment parameters and functions of the investment manager. This ensures the trustees consider the investment objectives of the trust.

While it’s clear this legislation results in more work and responsibility on trustees, the Isle of Man’s objective was to create a trust vehicle that would ensure greater protection to beneficiaries of trusts that are managed and administered from the Isle of Man, therefore enhancing its reputation.

In order to retain its pre-eminent position, Tynwald introduced new corporate legislation in 2006 (‘the 2006 Act’), to complement the existing 1931 Companies Act. This marked the biggest change in Isle of Man company law for 75 years. The key features of the 2006 Act for corporate providers on the island included allowing only one director, which could be an individual or corporate, a registered agent instead of a company secretary, and streamlining of statutory filing requirements. The key features for clients utilising a company incorporated under the 2006 Act include unlimited corporate capacity, no preclusion of financial assistance, simple merger and consolidation procedure, and flexibility in relation to share capital and dividends.

In 2006 the island also introduced a standard rate of income tax for companies of zero per cent and a rate of ten per cent for banks, land and property on the island; in addition it introduced a tax cap for individuals, which is presently set at GBP115,000 per individual or GBP230,000 per married couple.

The advent of the 2006 Act on the island and the resultant introduction of the New Manx Vehicle (NMV) provided a flexible commercial vehicle for large and complex commercial transactions. One popular use over the years for NMVs has been foreign companies utilising them to raise funds through AIM listing, this also allows the foreign companies to take advantage of the zero rate of corporate tax.

Current

In October 2010, Tynwald introduced a new type of pension – the S50(C) scheme pension. This is ideal for accepting transfers of UK tax-relieved pension funds into an IOM Qualifying Recognised Overseas Pension Scheme (QROPS). QROPS were introduced by HM Revenue and Customs in the UK in 2006 to allow UK pensions to be transferred overseas and are open to anyone who has a UK tax-relieved pension fund and has either retired abroad or intends retiring abroad.

This scheme is much more attractive than the previous IOM QROPS offerings, as no IOM tax is deducted on pensions paid to non-Manx residents and there is no IOM tax on death. In addition 30 per cent of the fund transferred, plus all growth following transfer, could potentially provide a tax-free commencement lump sum payment on pension drawdown.

For example, Mr Smith, who is aged 45 and resident in the UAE and has a UK pension transfer value of GBP500,000, with a low-risk investment attitude, has the opportunity to transfer his UK pension to a QROPS. With a modest 4 per cent investment return pa, by age 65, Mr Smith’s retirement fund would be worth approximately GBP1.1 million. Mr Smith has to set aside at least GBP350,000 (70 per cent of his UK tax-relieved fund) to provide his pension but he can take approximately GBP750,000 as a tax-free lump sum. If the fund remained in the UK, the tax-free lump sum would be approximately GBP275,000 (25 per cent of the fund value on pension commencement).

The member must have been non-UK-resident for at least five years before the majority of UK tax charges fall away. These include the tax charges on death (55 per cent unless the member is under 75 and has not commenced pension drawdown in which case it is nil). The residual pension funds can be passed to heirs per the member’s wishes (in a lump sum or as a pension) and there is no IOM or UK taxation on death providing the member was not UK-resident for at least five tax years.

There is no requirement to purchase an annuity and the legislation provides a wide variety of investment options, although it does prevent the holding of assets for personal enjoyment and personal tangible moveable property, such as yachts, jewellery, fine wines and antiques.

In the 2011 Budget the Manx government announced proactive legislation changes in light of increasing pressure on the attribution regime for individuals (ARI). This was the only element of the zero-ten regime for companies that was considered harmful. Broadly, ARI results in Isle of Man-resident shareholders being treated in a different way to non-residents. The EU’s Economic and Financial Affairs Council (ECOFIN) had met in December to consider whether the ARI was harmful within the scope of the EU code.

Rather than waiting for the outcome of ECOFIN conclusions, the Manx government took another positive step for its fiduciary industry.

Future

The future looks bright for the island as Tynwald is hoping to enact legislation in 2011 for the creation of foundations.

Following the drafting of the proposed foundation legislation the Isle of Man government stated its aim was to add to the products already available to the financial services sector and so to allow access into new markets and increasing the competitive environment.

The Isle of Man is a common-law jurisdiction and has historically utilised the trust instrument. Foundations have their origins in civil law jurisdictions and are often seen as an attractive alternative to trusts with clients from civil law jurisdiction. The concept of foundations is not present in English common law.

Under the proposed legislation, an Isle of Man foundation will be a separate legal person and, unlike traditional trusts and companies, the foundation will be self-owning. As well as having a foundation instrument the foundation must also have a set of rules. The instrument will contain details of name, its objects, the names and addresses of council members, and names and addresses of the registered agent.

The rules must provide for a council, a registered agent, and may provide for an enforcer (similar to those seen on purpose trusts), details of the dedication of assets. The dedication of assets need not take place straight away, and this act does not make the dedicator a founder, but once it has taken place the details of the dedication must be specified in the foundations rules. The rules must also detail the term of a foundation and also what will happen to the assets of a foundation on a winding up.

A foundation has to have a council. The council is responsible for the administration of the assets of the foundation and to carry out its specified objects. A council must have at least one member who has to be over the age of 18. Similar to director’s duties, the Bill specifies that the members of a foundation’s council must act honestly and in good faith and in the best interests of the foundation.

The rights of a founder of a foundation relating to its assets and the entity itself are detailed in the foundation’s rules. If so permitted by the foundations rules, the rights of the founder may be assigned to another person.

A foundation need not have beneficiaries on establishment, and can be added at any time, and a beneficiary does not automatically have an interest in the foundations assets. However, should a beneficiary become entitled to benefit from the assets of a foundation and a benefit is not provided, he/she can seek an order from the High Court to enforce the benefit.

The foundation is a blend of a trust and company; however, it may not favour UK residents as the current raft of HMRC anti-avoidance legislation has no specific guidance on how they will look to tax foundations. However, one of the principal attractions for using an Isle of Man foundation will be specific clauses within the Act that excludes forced heirship, therefore making it ideal for those clients from civil law jurisdictions.

As we move into the next decade this new legislation continues to show the Isle of Man government’s commitment to ensuring the island continues to compete with the elite of offshore jurisdictions.


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