Trust sector update

By Rosemary Marr, Investec Trust (Guernsey) Limited, Guernsey (02/01/2008)

The initial reaction of trust practitioners in the International Finance Centres (IFCs) to UK Chancellor,  Alistair Darling's pre-budget report may have been one of relief in that, it seemed on the face of it, there may not be too much damage to the interests of UK-resident beneficiaries of offshore structures. On further consideration, however, it is quite clear that the anti-avoidance mechanisms which are likely to be put in place will make life more difficult for those seeking to legitimately avoid taxation of income and capital gains remitted to the UK. It has always been possible to avoid tax by converting income and capital gains so that they are non-taxable remittances in the hands of a UK resident. With the government promising that draft legislation will be published before the end of the year, now may be the time for trustees to review trusts with UK-resident beneficiaries.

Thankfully, the IFCs have developed a diverse geographical range of financial services opportunities, and are no longer wholly dependent on sourcing work from any one jurisdiction, whose fiscal environment might change at the stroke of a pen. Diversity is the key to the continued success of a jurisdiction whose economy is dependent on its financial services sector. However, we do see economic cycles where, for example, certain types of work may be more popular and more profitable than others.

Financial service providers may also be affected by legislation over which they have no influence or control. In the 1980s and 1990s, the imposition of the Undertakings for Collective Investments in Transferable Securities (UCIT s) European Directive led to the exit of some significant retail fund sector business from Jersey, for example, to Luxembourg and Dublin, both of which benefited from being members of the European Community. In response, Jersey's funds industry has moved towards funds for institutional expert and specialist sectors, such as alternative investments. With the support of government and legislators, as well as input from more pragmatic regulators, a framework has been developed which has made Jersey a popular location once again for the funds industry.

More legislative changes are also in the pipeline to introduce a new class of funds - Unregulated Funds for Eligible Investors - subject to the approval of Jersey's government. One cloud on the horizon is the proposals for offshore funds contained in a discussion paper concerning changes to the offshore funds regime, which was issued on the same day as the UK pre-budget report. The UK government has indicated that it has an objective of simplifying the rules associated with offshore funds, and to provide greater certainty for investors. The proposals also include amending the definition of what constitutes an offshore fund; abolishing distributor status and replacing it with reporting funds and non-reporting funds.

Whilst funds are currently enjoying a renaissance, there is a fairly popular view that the private, as opposed to the corporate, trust work is less fashionable. However, just as the funds regime has evolved into a more attractive proposition, the trust industry has not been complacent. Guernsey, for instance, has undertaken a wholesale revision of its trust law, resulting in the Trusts (Guernsey) Law, 2007, which should receive Royal assent by the end of the year.

The extensive changes and reforms include:

  •   The removal of the 100-year limit in respect of the life of a trust. Perpetual trusts can now be created;
  •   The creation of non-charitable purpose trusts. The legislation makes it clear that trusts may now validly hold property, or exercise certain specified functions without conferring a benefit on any person, and expressly authorises the reservation or grant of specified powers by or to the settlor or a third party;
  •   The creation of a statutory, non-possessory lien over trust assets in favour of retiring trustees, thus alleviating the need for chains of indemnities in some cases;
  •   The clarification of the circumstances in which information may have to be provided to beneficiaries.

Importantly, the introduction of non-charitable purpose trusts will place the island in a better position to compete for both private client business and commercial trust opportunities such as securitisation work, with which its near neighbour, Jersey, has been so successful. Guernsey is also making revisions to the Companies (Guernsey) Law, 1994, has invested in the modernisation of its Company Registry, and has overhauled its intellectual property environment.

Meanwhile, in Dubai, one of the relative newcomers to the market after enacting its Trust Law in 2005 is Waqf Trust Services (WTS). WTS is the world's first Islamic trust service provider, exclusively offering Sharia-compliant trust services, operating from the Dubai International Finance Centre. Whilst there is significant outward investment from the Middle East, one of the objectives of this latest strategy may be seen as a move to preserve the region's assets within the Middle East itself. Dubai aims to develop its international finance centre so that it achieves the same stature as London, New York, and Hong Kong. Its stock exchange, the Dubai International Financial Exchange (DI FX), established in 2005, suffered a slow start for the first two years of its existence, with very few listings. A 'tie-up' with a major partner, or even a high profile acquisition, would be a boost to the DI FX and should not be unexpected. In the meantime, the government has taken steps to issue new regulations so that the path is cleared for local (UAE) companies to list on the DI FX, thus providing much-needed liquidity to this new and integral part of Dubai's financial services infrastructure.

One well-publicised event in 2007 was the ratification of the Hague Convention on Trusts by both chambers of the Swiss Parliament, giving greater legal certainty to trusts. Although Switzerland does not have its own trust law, Switzerland still retains its position as the dominant offshore centre in terms of volume of assets owned by, or managed on behalf of, trusts. It remains a favoured jurisdiction for private banking with its reputation of client confidentiality. There is definitely a 'buzz' in Switzerland, and an enthusiasm for trust business; so much so that the Swiss Association of Trust Companies had been formed with a number of stated meritorious objectives.

Whilst the Swiss have recognised the value of the trust and the benefit that the structure brings to managing their clients' affairs, other territories are turning to the foundation as an additional planning tool. For those clients from civil law jurisdictions who may well be uncomfortable with the trust concept, foundations could be seen as more attractive. Both Channel Islands are considering introducing a foundation law -Jersey is further down the process than Guernsey - and it is understood that the Isle of Man too may well follow suit.

Diversification is the key to a wellbalanced and secure financial services sector. There may well be certain types of work which become fashionable as a result of commercial, fiscal, or economic factors. A good example of this is the growth in the numbers of ultra high net worth individuals, which has stimulated a demand for family office and multi-family office-related services, such as managing investments and other family assets, attending to taxation issues, and disbursing funds to family members. Private trust companies are often used for family trusts sometimes operating through the family office.

Along with the increased demand for family office services, there has been a shift in attitude towards philanthropy. Whilst tax efficiency may well be part of the motive for charitable giving, increasingly successful families are looking to use their donated wealth to make a difference to the world. Whether through a trust or a foundation, charitable giving is more targeted and performance-related than it has been in the past. It is certainly the topic of the moment, both for high net worth individuals and their advisors. In recent times some notable individuals, such as Bill Gates, Warren Buffet and George Soros, have donated billions of dollars to worthwhile causes. Whilst philanthropy may be fashionable at the moment, it is a trend which we expect will continue and gain momentum as more people consider how best to use their money to make an impact for positive change.

The reforms and new legislation introduced by the IFCs are as a result of successful co-operation and partnerships between governments, regulators, and financial services practitioners themselves. The relationship between clients and trust service providers can also be a successful one, but it is important that practitioners are aware that the best solution for a client is never an 'off-the-shelf ' product. Each client deserves to be treated as an individual, and offered a solution which is tailor-made for his or her family's own circumstances.