Trusts may face taxing times

Double-barrelled Budgets have had a varied impact on the Isle of Man and will give trustees food for thought, says Jane Bates. Jane Bates is a Scottish solicitor in practice with Isle of Man-based Mann & Partners.

A double-dose of anticipation was experienced on the Isle of Man on 17 March. At 10.30am, Richard Corkill, the Isle of Man Treasury Minister, presented his budget to Tynwald, the island's parliament, preceding by a few hours Chancellor Gordon Brown's presentation of the Budget at Westminster.

But despite having produced perhaps the biggest single reforming budget for generations for the UK, Gordon Brown's budget had far less impact in the Isle of Man than had been expected, or feared.

The absence of changes to inheritance tax to close perceived avoidance loopholes was a surprise, and an attack on residence and domicile issues also failed to materialise.

But it would be dangerous to assume that these issues have now disappeared.

It remains to be seen what surprises await offshore centres in the consultative document on the introduction of a General Anti-Avoidance Provision, due in April.

In the meantime, there are measures which will give offshore trustees food for thought in the coming months.

The removal of the privileged CGT status for pre-1991 trusts, and the imposition of CGT on UK beneficiaries of “Robinson settlements” that have non-resident settlors when gains are remitted to the UK, will provide some short-term challenges in attempting to mitigate potential taxation liabilities prior to the introduction of the new measures in April 1999.

This surprising one-year window of opportunity is likely to give the trust and tax planning industry a short-term boost.

CGT planning will be only one factor in deciding if settlors of such trusts and members of their immediate family should cease to benefit. Administration of grandchildren trusts will also require more consideration to avoid tainting.

Changes to capital gains tax (CGT) residence rules are not seen as a major disincentive, but the new tapering may reduce the incentive for some to move offshore. There is still a view that many will wish to avoid even CGT at 10 per cent.

The offshore life assurance industry must now consider how to counter an effective top tax rate of 6 per cent per annum of total premiums paid on personal portfolio bonds, which could amount to a large amount of tax on the life of the policy.

The requirement for non-resident insurance companies operating in the UK to appoint a “tax representative” is seen as an indication of how the Inland Revenue is policing UK residents' use of offshore policies.

Also of some concern on the Isle of Man a jurisdiction where confidentiality is paramount is the merging of the Contributions Agency of the DSS with the Inland Revenue and the consequent fear that, because the national insurance regimes of the island and the UK are parallel and closely linked, information made available to the Contributions Agency may find its way to the Revenue. Assurances are being sought as to the “ring fencing” of information.

Corkill's decision to increase Non-Resident Company Duty from £660 to £750 is not seen as being enough to discourage the use of these companies.

But their use is currently under consideration, along with the activities of corporate service providers on the island.

An increase in fees may do little to deter the real abusers, while discouraging the legitimate users.

But until the consultation process is complete, any firm decisions in relation to non-resident companies would be premature.

The statement that the Isle of Man will follow the UK into the European Monetary Union, as and when the UK decides to take this step, raised interest. Many financial institutions think Euro accounts should be made available for clients of banks on the island from 1 January 1999, to facilitate commercial activity in Europe.

The island's Budget also reflected the realisation that the activities of businesses must reflect the commercial rather than just the fiscal aspects of business on the island.

There is an increase in competition for “offshore” business from London and Dublin, as well as from traditional offshore competitors, but the Isle of Man, being outside the EU, continues to have attractions and sees itself as complementing the role of other business centres, providing a niche market of services.

The island's economy has grown at the rate of 25 per cent in four years, providing a base for delivering an international commercial market that is not dependent on pure tax planning in order to survive.

If this strategy succeeds then the moral issues surrounding the tax planning industry and the current interest shown by the UK in the regulatory regime will become less relevant.