An update on trusts

Date: 10 Jul 2024

Citywealth

In this industry update, the trusts sector takes centre stage. Citywealth speaks to experts in this area for insights on recent regulation changes, tech advances, and more.

Post-election insights

For those in the UK, the election predictions didn’t lie. There has been speculation for months within the industry about what a potential Labour government could mean for wealth management work; now that the new Government is confirmed, are things any clearer?

Long term protection of wealth

Citywealth spoke to Owen Byrne, Partner at Broadfield law, for his perspectives on trust management and administration following the recent general election. Owen advises UK domiciled clients on wills, trusts, powers of attorney, tax planning and the administration of estates. He specialises in the long term protection of wealth between generations, merging technical advice as to tax efficiency with each family’s differing circumstances. He is a member of the Law Society and STEP.

Byrne said: “We now have certainty as to who is running the country for the next five years, but there is still a period of uncertainty for trustees, beneficiaries, and their advisors – in much the same way as for any individuals – whilst we wait to hear how the new Government wants to deal with its Budget.”

“Behind properly run trusts there is always good planning – as trustees we know:

• What taxation regime we are in
• Generally what our beneficiaries’ needs are at the moment and might be in future (e,g, educational costs now, house deposits in future)
• Key beneficiary dates – i.e. when they will turn 18/21/25 or at the other end, retire
• When our assets are going to pay income (and in a family business dividends will be discussed with the directors to be made at the right times).

and of course that planning will carry on for the foreseeable future, but trustees will now have to consider how whether current plans might be accelerated to take advantage of the certainty of known tax rates now.”

“So as trustees we will survey the scene with advisors and beneficiaries and do so logically: what we know versus what are merely guessing at, however educated those guesses might be.”

Zoning in on the big question mark around tax, Byrne continued: “Thinking of the taxes most at issue for trusts, inheritance tax (IHT) and capital gains tax (CGT), we know

• What the rates are in force at the moment
  • That the only mention of IHT in Labour’s Manifesto was in respect of the use of offshore trusts to avoid it.
  • The only mention of CGT was in respect of ‘private equity being the only industry where performance-related pay is treated as capital gains’.
  • that IHT and CGT were NOT in the list of taxes in the Manifesto that Labour would not increase (being National Insurance, the basic, higher or additional rates of Income Tax, or VAT).
  • That VAT is coming on school fees, to be in its first Budget,
  • That the OBR, to which the government has said it would turn to for forecasts on proposed changes, needs 10 weeks between receiving the government’s plans and providing its response, so a Budget can’t come before mid September even if plans were handed to them tomorrow, and
  • That there are other pledges in the Manifesto which need funding.

We guess, rather than know, that IHT and CGT rates won’t be coming down.”

“Trustees, beneficiaries and their advisors will go over what planning might be already in contemplation and to see if they want to bring that forward, to make use of known tax rates as they stand today. With a view to the beneficiaries’ needs, where the funds for school fees are coming from a family trust, discussions will already be starting between the trustees and investment managers as to tweaks to the investment holdings to increase the income and with an eye on what that might mean to the capital and those beneficiaries entitled to it.”

The prospect of a rise in CGT in the near future

“Some trustees and beneficiaries might be worried about the prospect of a rise in CGT in the near future, so if there were already plans to pass an asset out of the trust, these plans might be brought forward to make use of known rates, but don’t forget many trusts don’t have tax planning as the rationale for creating them; they are there for vulnerable beneficiaries possibly who can’t have the funds outright, or in a continuing trust for a surviving second spouse but being held long term for children from a first marriage, so can’t be passed out of the trust.”   

“However much the taxation regime might change, trustees still have to deal with the situation of the beneficiaries – so a move which might be good for tax might not be in the best interests of the beneficiaries and the protection of wealth down the generations.”

Jurisdictional updates

For further insights on the current temperature on trusts, Citywealth peered across the pond to Jersey. Internationally renowned for its wealth management work, an innumerable amount of trust structures are held in Jersey for residents living elsewhere. Recent discussion during industry lunches has revealed to us that this is popular practice particularly for those UHNW individuals living in Dubai, who want to enjoy the lifestyle offered in the Middle East whilst keeping their assets safe in an established jurisdiction, like Jersey.

Citywealth spoke to Sarah Bartram-Lora Reina, Director at IQ-EQ. Trustee Director in the Family Office Division in Jersey, Sarah is responsible for managing assets held in trust on behalf of beneficiaries, acting on boards of corporate trustee and corporate director companies in a number of jurisdictions. Sarah is the former President of the Jersey Association of Trust Companies since 2021 and Chair of the Jersey Charity Tribunal since 2018.

We started by asking if there have been any recent, or upcoming, legislative or regulatory changes that will impact the structuring and administration of trusts. Bartram said: “Last year, we saw regulatory changes to the recast Schedule 2 of Proceeds of Crime (Jersey) Law 1999 which affected private trust companies and those trustees undertaking lending as a business. This required additional reporting to the regulator, the Jersey Financial Services Commission and also a requirement to appoint an anti-money laundering service provider (AMLSP).   In the near future, there will be a consultation issued by the government on Jersey’s trust law, Trusts (Jersey) Law 1984 to ensure that it remains robust and current.”

On the topic of current trends in the industry, Bartram answered: “Trustees are very much seeing that for some of our clients, the next generation are being invited to partake and be more involved in meetings to discuss their objectives for family wealth (the next great generational wealth transfer).   This new generation wants their family wealth to have social and environmental impact, as well as create investment growth.   In Jersey, trustees are mindful of being able to have a meaningful conversation, whilst also meeting their fiduciary duties; and have been upskilling in sustainable finance.”

She added: “Another interesting observation is that a significant number of beneficiaries and settlors reside in crucial jurisdictions that have either recently had elections or are currently undergoing them. This has led to a review of the family’s wealth structuring, in anticipation of changes, leading to new wealth planning structures or restructuring of existing ones.  The subject of relocation is also being looked at by families with some moving to other jurisdictions that meets the family’s personal and business needs.”

Finally, we asked about new frontiers for the industry. As one of the oldest and most traditional areas of wealth management, how have technological advances improved the structuring and execution of trusts, if at all?

Bartram explained: “Last year, we saw the introduction of the first data trust in Jersey, which collected data from sensors on cyclists to understand more about cycling in Jersey.   The data trust had a regulated trustee where the data was stored, can be analysed and used by interested parties.     With the ongoing growth in technological developments, the increased volume and ability to access data for value, leads to other potential opportunities that a Jersey data trust could be used for.”

“As a result of the need to adapt during the Covid-19 pandemic, there has been a significant shift in how trust administration is approached, and to increase efficiencies. There are more digital processes in place such as digital signatures becoming the norm over wet ink signatures (therefore removing the need to print documents), pre-populated automated onscreen forms reducing the need to rekey in data and reduce error rates, and also the ability to speak with beneficiaries/settlors virtually wherever they may be in the world and linking in their professional advisors. There are also regulatory technologies available to assist with compliance monitoring, reporting, and data security.”

Citywealth also had the opportunity to speak to Nicola Bruce, Partner at Appleby, who is based in Bermuda. Nicola has a wealth of experience in offshore private client work, having worked in Bermuda for many years advising on both trust law and trust litigation. She has acted for some of the world’s highest net-worth international families on complex matters including the establishment, amendment and restructuring of trusts, and transactions involving substantial business assets held in trust. Citywealth had the pleasure of having her as a panel member at our 2024 Forum, where she staunchly fought for the corner proclaiming that trusts are not dead!

Bruce provided some more international insights, highlighting two notable changes to trust laws and regulations in Bermuda. On corporate income tax, she said: “In 2021 the OECD agreed on a global minimum tax framework, ‘Pillar II’, which envisages countries imposing tax in respect of revenue generated by non-resident entities in other jurisdictions in certain circumstances where the effective tax rate payable by certain groups of entities is less than 15%.  In light of Pillar II it made sense for a lot of jurisdictions with light or no taxes on businesses to adopt new taxes.  Bermuda therefore adopted the Corporate Income Tax Act 2023 (‘CITA’). CITA imposes a new 15% income tax (the ‘Tax’) (which will come into effect on 1 January 2025) on certain Bermuda entities which are part of a large multinational group (in this context, ‘entity’ is defined widely enough to potentially include trusts/ trustees).”

“The vast majority of private trust structures will be clearly outside of the scope of the Tax – mainly because it does not apply to any structure where the annual revenue in the consolidated financial statements of the ultimate parent entity of the structure in at least 2 of the 4 fiscal years immediately preceding the fiscal year in question is less than EUR 750 million.  For the biggest trust structures, legal and accounting  advice will be needed to ascertain whether the Tax applies and there may well be technical reasons it does not, depending on how the structure is organized and the other circumstances.” 

“For wealthier families, it does now make sense, when setting up new trusts, to consider having different structures for different family members (e.g. four new trusts for four children, instead of one trust for all of them).”

On ethical investments, Bruce summarised: “Legislation on ethical investing has been recommended to the Bermuda government by the Bermuda Trust Law Reform Committee (the ‘Reform Committee’) and is looking likely to be on the horizon. The Reform Committee has proposed amending the Bermuda Trustee Act 1975 to clarify the law and enable trustees to consider settlor and beneficiary views on ethical investments when making investment decisions.”

“At the moment in Bermuda (and other major trusts jurisdictions) there is uncertainty as to the ability of trustees with a general power of investment to exercise investment powers for reasons other than maximum financial gain. The proposed new law, if enacted, will clarify this (I should clarify that it is not being proposed that trustees should be able to bring their own views on ethics to the table – but simply that they should be expressly permitted to consider (as opposed to being bound to follow) wishes on ethical investments communicated to them by the beneficiaries/settlor).”

“One can imagine interesting discussions on this in Bermuda and elsewhere as trusts grapple with ethical investment – for example generational disagreements about whether funds should be invested ethically – and what exactly that entails.”

When asked about trends she is seeing via the industry and instructions from clients, Bruce answered: “We have seen a real uptick in ‘friendly’ court applications in Bermuda this year either pursuant to section 47 of the Trustee Act 1975 or pursuant to s4 of the Perpetuities and Accumulations Act 2009. Section 47 permits the Bermuda courts to confer on the trustees of Bermuda trusts the power to effect ‘expedient’ transactions which they would not otherwise have the power to effect (which can include the variation of beneficial interests).  This legislation is very helpful where trusts are no longer fit-for-purpose but do not have appropriate amendment provisions to enable them to be varied to remedy the relevant issues.” 

“Because the section is so flexible and the Bermuda courts are so experienced with these applications (with a wealth of jurisprudence resulting), and because such applications can proceed without beneficiary consent in Bermuda (which would often be problematic to obtain for tax reasons) trusts have re-domiciled here from other jurisdictions to re-structure.” 

Bruce continued: “The kind of changes we are seeing include the amendment of beneficial provisions, the amendment of protector provisions and the amendment of administrative provisions driven by onshore tax concerns.”

“Applications under s4 of the Perpetuities and Accumulations Act 2009 are increasing as well, to disapply perpetuity periods. The Bermuda courts generally grant such applications in all cases where the trusts are sufficiently large that it makes sense for them to be seen as dynastic and for the benefit of multiple generations (where the alternative would be their terminating in the near or medium term, with the result that vast wealth would vest in just a few generations, who may either be spoiled by it, or may suffer negative tax consequences). Again, it is possible for trusts to re-domicile to Bermuda and then make an application to the Bermuda courts to disapply their perpetuity period (subject to advice in the jurisdiction where they are currently located).”

Thank you to all of the experts who contributed to this article.

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