We have a question from a trustee of a small family trust set up in Jersey 1992 by a deed of variation of his late mother’s will who at the time of her death was resident in the Channel Islands. He is a UK resident and taxpayer. The Trust is registered under Jersey law and he mainly uses it to help support family members and grandchildren in their education.
He is the current sole Trustee and deemed ettlor for IHT purposes. The beneficiaries are himself, his wife, his two daughters and four grandsons. Because of decision in Marshall v Kerr (1994) STC 638(HL) he is treated as the settlor for purposes of CGT. This decision did not affect the situation regarding IHT and therefore the Trust is effective for IHT mitigation on the Trust assets but not for any other purpose. All trust assets must be kept out of the UK in order for them to remain effective for IHT purposes on his death.
Due to a tragic family event, he would now like to purchase a property abroad in Spain to make a disabled friendly retreat for all the family. The trust funds amount to £600,000 in cash and a similar amount invested in an Offshore Bond with Canada Life based in Isle of Man.
The Spanish legal system does not recognise Trusts so the Trust cannot buy the property. It is prohibitively expensive and complex for him to set up an offshore Company to buy the house. So the question is if Trust assets – say £500,000 were used to buy a house for holidays in Spain what would be the most tax efficient way of doing this without bringing the Trust funds distributed to buy the property into the UK IHT net?
Obviously Spanish IHT will be a factor on the Death of the owner(s) of the house but it seems as if Spanish IHT can be mitigated if the house is left to several family members. Again any thoughts on this would be welcome. The property we understand is likely to be in the Valencia region of Spain.
There doesn’t appear to be any reference to the domicile status of any of the parties?
Malcolm Finney
Dear Malcolm et al
You are absolutely correct; a fundamental omission so my abject apologises! The Trustee (deemed settlor for UK IHT) and all of the beneficiaries are UK resident and Domiciled.
Very many thanks for your thoughts.
Simon
Sorry, I have more questions than answers.
You’ve mentioned twice that the son/trustee is the deemed settlor for IHT, but also that the trust was established by a deed of variation and that the trust is IHT efficient.
If the DoV complied with s.142 IHTA, wouldn’t the deceased be the settlor for IHT purposes? If the deceased was UK dom when they died, the trust would be subject to the relevant property regime. If they were non-dom, the trust would be excluded property.
If the son/trustee is the settlor for IHT purposes, how is the trust efficient for IHT purposes?
As to answers (subject as above), your options are either:
- buy via a Spanish company (depending on the Spanish treatment of a trustee being a shareholder)
- distribute to the two daughters who can then buy the property
Either the value stays in the trust or it must be distributed to family members, all of whom are UK domiciled so subject to IHT.
Andrew Goodman
Osborne Clarke LLP
The Trust lends money to the Settlor and he then buys the property with the money that has been lent to himself ?
Thank you all and I must apologise for not being more fulsome in setting out the case more clearly.
Andrew - thank you -The deceased at the time of her death was resident and domiciled in Guernsey - hence why after the DoV the son was the deemed settlor for IHT purposes. As the Trust is offshore and always has been it is effective for IHT purposes on the Son’s death.
Simon
Idea, you could try a French Société civile which would be held by the “Settlor” Trustee to which the Trustee lends the money under a compte courant d’associé, using unpaid or partly paid-up “parts”. You will need one other member and the trustee could act as gérant. The SC could then purchase the Spanish property using intra-EU recognition of legal entities. Such an SC is not required to file French accounts, unless it rents its property out, which I understand is not the object. As its asset is a Spanish immovable, with no French assets, the French tax administration will have little interest in it as there is no IFI liability and as the loan basically negates the SC’s value there is practically no NAV. The French SCI is its own “paradis fiscal” in France, but is to be handled with care and attention outside it.
The aim of the partly paid or unpaid parts (shares) is to further reduce any French succession or gift exposure.
You will need a friendly French hand or accountant in the South to house the registered office in France for a small fee and, as to the Beneficial Ownership declaration, you could even try to put the trustee in as Beneficial owner ès qualité in the baneful Formulaire M’BE. Technically that should not undermine the offshore UK IHT treatment either. There may well be CGT advantages as well which I will leave to others.
I will not propose an Andorran société collective which is geographically closer which has unlimited liability, although they are sometimes used. The Spanish do not always treat Andorran entities with gloved hands.
10 May 2021.
Dear Simon,
I see that most of the replies do not seem to answer your problem directly, and it will be interesting to see the final result. I do not follow the statement in your initial problem about forming companies being prohibitively expensive. In Gibraltar they can be formed for about US$2,000 and annual running costs would be about the same. This not expensive. Having the Spanish property owned by such company may be an answer. In any event Spanish tax advice is needed on the transaction co-ordinated with UK and Jersey tax advice. We use a law firm in Barcelona for such Spanish tax purposes. The suggestion about loans etc is a way around the immediate problem, but the loan still has to be repaid at some time in the future, again requiring proper tax advice. Winding up the trust in favour of the two daughters has also been suggested. If you do not speak French I would be cautious on the use of a French entity, as misunderstandings can result in disaster. Sorry not to be more helpful, but co-ordination of the tax advice and the basic final plan from fluent English speaking advisers is going to be key.
We have done this for several clients in the past, and requires lots of patience and cross checking. International based accounting firms are useful in this respect but can be very expensive, so be warned. Small locally based firms can be very effective and cheaper.
Once in place, the plan when properly set up should work like clockwork.
You should plan for the letting of the Spanish property in due time and income tax consequences, as whilst at this time the family may not intend such activity, situations change over time and the grand children may have totally different ideas and uses for the property, or even wish to sell the same and remit the monies back to the UK.
Yours sincerely,
Peter Double / Probate Resealing Services.