13/07/2014 1 2014 Student Conference Clive Beer (Savills) Michael Hooke & Mark Michael (Deloitte) Penny Lovell (Close Brothers) Ben Thomason (Asset Leverage Consultants) Victoria Yates (Yates Legal) Chair: Tony Pitcher (LGL Trustees) Sponsored by: SS CO C P t db Vi t i Yt TRUSTS IN COMMERCIAL ARRANGEMENTS AND TRANSACTIONS Presentedby Victoria Y ates 10 July 2014
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TRUSTS IN COMMERCIAL SS CO C … slides for...Contractor 13/07/2014 8 Purpose Trusts – Exit Trusts Insolvent Corporate Structure Parent Company Holding Company Trustee of Purpose
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Transcript
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2014 Student Conference
Clive Beer (Savills)Michael Hooke & Mark Michael (Deloitte)
1. Key features of trusts• SegregationSegregation• Flexibility• Confidentiality
2. Classification of commercial trusts
• Investment Trusts• Finance and Security Trusts• Purpose Trusts
3. Potential issues to be aware of
Key Features of Trusts
1. Segregation• Split of legal ownership and beneficial interest in assets• Split of legal ownership and beneficial interest in assets• Trust fund neither part of trustee’s estate nor beneficiaries’ estate
• Obligations on trustee provide protection to beneficiaries
2. Flexibility• Full discretion of trustee within the terms of the trust instrument
f f h• Very few restrictions on terms of the trust instrument• Trust is a relationship, not a legal person (see article 2, TJL)
3. Confidentiality• Terms of trust not a matter of public record
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Classification of Commercial Trusts
1. Investment Trusts• To hold assets
2. Finance and Security Trusts• To facilitate financial arrangements
3 P T t3. Purpose Trusts• To achieve a specific aim
Investment Trusts - JPUTS
Unithold UnitholdS i
JPUT
er 1 er 2
0.01% of units
Security over units
L
99.9% of units
Trustee 1 as
trustee of JPUT
Trustee 2 or
Nominee
UK Commercial Real Estate
Bank
Loan
Security over rent account and
real estate
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Investment Trusts – Family Unit Trusts
Structure during Settlor’s Lifetime
Trust for Trust for son and
Trust for d ht
Trust for d
Settlor directed trust for principal
spouseson and heirs
daughter and heirs
son and heirs
Family Unit Trust
Economic Units in FUT giveholder pro rata share ofincome and capital profitsgenerated by assets held inFUT
Voting Units in FUT giveholder right to nominate oneperson to Family AdvisoryCommittee
Investment Advisory Committee (composition
determined by FAC)
Family Advisory Committee (FAC)Trustee/PTC
Investment Trusts – Family Unit Trusts
Structure following Settlor’s death
Trust for Trust for son and
Trust for d ht
Trust for d
spouseson and heirs
daughter and heirs
son and heirs
Economic Units in FUTtransfer to pre‐existing trustsfor spouse and children. Canbe structured so that maleheirs receive double the
Voting Units in FUT transferto pre‐existing trusts forspouse and children. Can bestructured so that male heirsd f l h i i
Family Unit Trust
heirs receive double theshare of female heirs
Investment Advisory Committee (composition
determined by FAC)
Family Advisory Committee (FAC)Trustee/PTC
and female heirs receiveequal numbers of units
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Finance and Security Trusts –Debenture Trusts
L d L d L dL d
Trustee of Debenture Trust
Lender Lender LenderLender
Borrower
Finance and Security Trusts –Quistclose Trusts
Lender Borrower Creditors
Loan for Specified Purpose
Loan Monies held on Trust
until applied for Specified Purpose
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Finance and Security Trusts –Turnover Trusts
Parent Company
Loan Subordination
Intragroup LoanIntragroup Loan Repayment
Borrower Subsidiar
yBank
Bank Loan
Finance and Security Trusts –Employee Benefit Trusts
Employees as
b fi i
Employees as
beneficialbeneficiaries of EBT
beneficial owners of shares
Trustee as
trustee of EBT
Trustee as
nominee
Employer Shares or £
of EBT ee
Shares in Employer
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Purpose Trusts – Voting Trusts
I t /b fi i l I t /b fi i lInvestors/beneficial owners
1. Investment Trusts • Trustee’s exposure to risk• Dominion Corporate Trustees Limited & Dominion Trust Limited v Capmark Bank Europe Plc [2010] EWHC 1605 (Ch)
2. Finance and Security Trusts• Nominee holdingsNominee holdings
3. Purpose Trusts• Exit strategy
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Thank you
Presented by Victoria Yates
Yates Legal
victoria.yates@yates‐legal.com
01534 481 007
www.yates‐legal.com
Introducing Investment Management
For Professional Advisers Only
"Rule Number One: Never lose money.Rule Number Two: Never forget Rule Number One."
- Warren Buffett
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Close Brothers Asset Management Bespoke portfolios are individually tailored to each client. Your appointed fund manager has individual discretion over both asset allocation and individual security selection within your portfolio. The effect of this is that your portfolio and its performance will be specific to you, even when compared to a portfolio with a broadly similar mandate. You should be aware that as a result of individual fund manager discretion, you may outperform or underperform the ‘average’ client portfolio.
This material was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it This document is intended for information purposes only It does not constitute investment advice or a recommendation
Important information and risks
receive it. This document is intended for information purposes only. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any investment. Except in so far as liability under any statue cannot be excluded, neither Close Brothers nor any officer, employee or associate accepts any liability (whether arising in contract, in tort, negligence or otherwise) for any error or omission in this document
Issued by Close Brothers Asset Management which is a trading name of Close Asset Management Limited and is part of Close Brothers Group plc. Close Asset Management Limited is registered in England and Wales and authorised and regulated by the Financial Conduct Authority. Registered number: 01644127. Registered office: 10 Crown Place, London EC2A 4FT.
Quite simply, we invest for clients to create and preserve wealth. Whilst remaining in cash is often seen as the safest option, it is not going to benefit your clients over the longer term
What do investment managers do?
Manage wealth of private clients as they evolve over time
Investment Objective
Income - Live off capital
Growth - Grow capital
Risk
Lower
Medium
Higher
Unique needs
Jurisdiction
Tax
Currency
Strictly private and confidential
Personal Client Specific
“…Wealthy clients wish to be treated as individuals and not put into a basket…”
The first task of an investment manager? See where the client fits in and devise an appropriate
investment strategy to meet their needs
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Choosing an investment manager?
Strictly private and confidential
Choosing the correct manager for your clients is absolutely essential. So what should you, as Trustees, be looking for and what should you know to help you make that decision?
• The philosophy
• The process
• The people
• The product
Philosophy – Active vs. passive
ActiveActive PassivePassiveActiveActiveAims to out perform a
benchmark
Markets are not perfect. Inefficiencies can be exploitedE t l i bl
PassivePassiveAims to match benchmark
Beating the market is foolish.
Strictly private and confidential
Expert analysis enables informed decisions to beat the market Defensive positioning for falling markets
Markets are efficient Low cost optionNo fund manager interference
World ex UK11.95 Europe ex UK FTSE World Europe ex
UK Index
UK large cap17.89
Japan8.57
Europe ex UK24.08
World ex UK5.65
World ex UK9.70
Japan1.32
US11.78
Emerging markets bonds
19.07
Cash-0.4
US10.16 Japan TSE TOPIX Index
US15.1
World ex UK7.83
UK small cap22.40
Cash2.72
UK large cap7.36
UK corporate bonds-4.06
UK corporate bonds10.78
US17.97
Emerging markets bonds
-1.18
UK large cap9.97 Asia ex Japan
FTSE World Asia ex Japan Index
Commodities11.72
UK corporate bonds6.68
UK large cap20.78
US0.99
Gilts5.27
Commodities-10.91
Gold9.39
World ex UK16.69
UK large cap-2.18
Emerging markets bonds
9.93Gilts
FTSE British Government All Maturities Index
Gold7.04
Gilts6.60
US16.68
UK corporate bonds0.74
Cash4.22
US-13.39
Emerging markets bonds
7.74
UK large cap12.62
World ex UK-6.12
Japan2.82
UK corporate bonds
iBoxx Sterling Non-Gilts Index
Emerging markets bonds
6.09
US2.76
Emerging markets bonds
16.37
Gilts0.69
US3.14
World ex UK-17.12
Commodities5.87
UK corporate bonds8.38
Japan-11.85
Gilts2.70
Global BondsJP Morgan Global Government N=bond Index
Strictly private and confidential
Portfolio construction is not so simple
Worse
Source: FE, Close Brothers Asset Management as at 5 April 2013
For Professional Advisers Only
UK corporate bonds5.67
Cash2.40
Global Bonds15.94
Emerging markets bonds
-0.71
Global Bonds2.25
Europe ex UK-23.99
Cash-0.27
Global Bonds7.46
UK small cap-12.53
Gold1.42
Emerging markets bonds
JPMorgan Global Emerging Marekts Bond Composite Index
Gilts2.1
Commodities1.27
UK corporate bonds8.99
Commodities-10.47
UK corporate bonds1.81
UK large cap-28.33
Gilts-1.16
Gilts7.20
Commodities-12.68
Global Bonds-0.47 Commodities
Dow Jones UBS Commodities Index
Cash1.58
Global Bonds-2.20
Gilts7.93
Japan-10.48
Japan-6.78
Asia ex Japan-31.01
Japan-6.7
Europe ex UK5.75
Asia ex Japan-12.93
Cash-0.45 Cash FTSE Cash on Deposit
index
Global Bonds-8.07
Gold-2.24
Cash2.67
Global Bonds-11.58
UK small cap-10.55
UK small cap-43.91
Global Bonds-10.38
Cash-0.45
Europe ex UK-14.71
Commodities-5.40 Gold S&P GSCI Gold Total
Rturn
The benefits of income and compounding returns
Source: Bloomberg, 27/06/2014
Strictly private and confidential
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Understanding the risks of investing
Country Risk Inflation Risk Market Risk
Strictly private and confidential
Currency Risk Liquidity Risk Short fall Risk
• What is the investors ‘time horizon’?• What type of investments will the investor make?• How much money will the investor need to invest to reach his goals?• Does the investor have short-term financial goals?
Common questions for the client
g• Does the investor have short-term financial needs?• Will the investor need to live off the investment in later years?
Strictly private and confidential
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Challenging an investment manager?
Do you have your own money in your fund?
Who is the most important person in your team?Who is the most important person in your team?
How well do you know all your stocks?
How passionate are you about the asset class?
In what kind of market will you do well?
How do you understand risk?
Strictly private and confidential
You claim that you actively manage the portfolio by changing the asset allocation. How do you determine which asset classes aregood or bad?
How do you make investment decisions?
How have you performed throughout a complete market cycle?
Use a financial advisor/ investment managerMake sure you understand your financial circumstances, your tolerance to risk, and your
Get emotionally attached to investments that have served you well in the pastBuy at the top and sell at the bottom
Do’s and Don’ts of investment management
Do Don’t
circumstances, your tolerance to risk, and your long term needs and goals.Invest for the long termTake advantage of cost averaging by making regular investmentsMake sure you only invest in things you understand, and that you understand the basics of investing before going ahead.Review your investment strategy regularly.
Buy at the top and sell at the bottomTry to time the markets, especially equity markets, by frequent short-term tradingRush into investmentsPut all your eggs in one basketMake investments purely on the basis of their tax benefitsPay too much attention to media headlines about successful or less successful investments
Strictly private and confidential
investments
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Conclusion
Strictly private and confidential
Taxing TimesWhat Offshore Trustees need to know about UK Taxes
• Trusts are a separate legal entity created when an individual (the “Settlor”) transfers his or her assets (the “trust fund”) to another individual or company (the “trustee”) who holds and manages these assets for the benefit of others (the “beneficiaries”) named by the settlor. The trustees are required to act within the rules within the trust deed. A protector may also be appointed to oversee the work of the trustees and has the power to replace them if necessary.
• Trusts are confidential and flexible and carry a number of potential practical benefits:
• It is important for trustees to be able to identify whether settlors and beneficiaries are UK resident / domiciled as this dictates the tax implications which they will need to consider.
• Following approximately two years of consultation, a new statutory residence test came into force on 6 April 2013into force on 6 April 2013.
• Prior to that, residence status had been determined based on a combination of past decisions by the courts and guidelines issued by HMRC. In some circumstances, this led to uncertainty for taxpayers over their status.
• The aim of the test is to set out some more objective criteria and, whilst quite involved, does give all parties concerned more certainty over their position.
• The test has three main constituent parts• The automatic non-UK residence test
• The automatic residence test• The sufficient ties test
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Taxing TimesDomicile
• General Law concept – not defined by statute
• Different from residence
• Affects liability to inheritance tax, income tax and capital gains tax
• An individual is normally domiciled in the country in which he has his permanent or natural home or where he has a ‘settled intention to permanently reside’.
• An individual has one domicile at any one time (and one alone!)Origin - at birth - father’s (or, where illegitimate, mother’s) domicileDependency - on change of father’s (or mother’s) domicile during minority or prior to 1974 domicile of wifeChoice age 16 onwards actively shed domicile of origin/dependency
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Choice - age 16 onwards – actively shed domicile of origin/dependency
• Domicile is ‘adhesive’ (i.e. difficult to shed).
• Shedding domicile requires severing ties with the old jurisdiction and permanently settling in a new country with the intention to remain there permanently or indefinitely.
• The burden of proof is on the person asserting the domicile status
Taxing TimesDomicile
Deemed domicile
Only relevant for Inheritance tax and is not applicable for income tax or capital gains tax
An individual is deemed domiciled in the UK for IHT if:
• They are actually UK domiciled at any time in the past 3 years; or,• They are UK resident for at least 17 out of last 20 tax years.
• Taxable on UK source income.• If the remittance basis is claimed, only taxable on non-UK source income if it is
remitted to the UKremitted to the UK.
Capital gains tax
• Taxable on UK source gains.• If the remittance basis is claimed, only taxable on non-UK source gains if proceeds are
remitted to the UK.• Capital payments from non-UK trusts are taxable on the remittance basis, regardless
of the situs of the assets sold by the trustees.
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Inheritance tax (not deemed domiciled)
• Only liable to IHT on death on, or on transfers of, UK assets.• Transfers of “excluded property” are outside scope of IHT.• Non-UK assets held within a trust established by a non-UK domiciled individual should
be excluded property, even if the individual subsequently becomes deemed domiciled.
We will analyse some example trust structures in the following slides which will demonstrate the UK tax considerations which it is often necessary to consider.
Th UK t d t hi h ill b d f llThe UK taxes and tax areas which will be covered are as follows:
• Capital Gains Tax (CGT), including the Section 87 regime.• Income tax, including the Non-Resident Landlord Scheme and anti-avoidance
provisions• Inheritance tax (IHT)• Annual Tax on Enveloped Dwellings (ATED) • Capital Gains Tax on Enveloped Dwellings (CGTED)
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Taxing TimesTypical Structure 1
• Annual Tax on Enveloped Dwellings (ATED) will be payable by the company as the property is worth £2m+ and is occupied by the settlor (not exempt) – note the reduction in ATED thresholds. Trust
• On sale of the property CGTED will also apply. The increase in the value of the property from 6 April 2013 will attract a 28% tax charge.
• UK Res / Non Dom settlor so s87 TCGA is applicable in respect of rent free occupation. An annual capital payment equal to the annual rental value is deemed to have been paid to the settlor (benefit). The capital payments are matched to capital gains realised in the whole structure, in this case when the property is sold.
• PPR relief would not be applicable on a sale of the property as the property is not held at trust level.
• Inheritance Tax is not applicable as the trust owns shares in an offshore company. As the settlor is non UK domiciled this is ownership of a foreign asset and therefore outside the IHT net.
• The settlor is occupying the property rent free so no income tax is due by the company but note possible shadow director exposure.
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UK Residential Property £2m+
occupied by Settlor (Rent free)
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Taxing TimesTypical Structure 2
• The Jersey company is liable to UK income tax (20%) on net rental income. The company may register to participate in the non resident landlord scheme in order to receive rents gross.
• Returns are due annually by 31 January, payments are due 31 Trust y y y p yJanuary and 31 July.
• UK source income arising in the Jersey company will also be taxable on the settlor (on the assumption they are not excluded from the trust) on an arising basis under s720 but tax credits are available in respect of tax paid by the company.
• ATED and CGTED are not applicable in this case as the property is commercially let (one of the exemptions). The property must not be let to a connected person.
• As for Structure 1 IHT is not applicable as the trustees are
As for Structure 1, IHT is not applicable as the trustees are treated as holding shares in a Jersey company, rather than a UK property.
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UK Residential Property £2m+
Commercially Let
Taxing TimesTypical Structure 3
• The trustees are liable to UK income tax on net rental income at the rate applicable to trusts (45%).
• The trustees may register with the non resident landlord scheme in order to receive rents gross. Trust g
• The property is not ‘enveloped’ e.g. owned through a company therefore ATED and CGTED are not applicable.
• The settlor (assuming he can benefit from the trust) is taxed on UK income arising in the trust (i.e. from rent of property) but tax credits are available in respect of tax paid by the trustees.
• Inheritance Tax is applicable as the trust owns the property directly i.e. ‘relevant property’. A principal charge is due every ten years from the date of creation of the trust on the value of the property (maximum 6%)
the property (maximum 6%)• Section 87 will apply on a distribution from the trust but the
remittance basis will be available even though the trustees will have sold a UK asset.
• CGT not currently applicable for the trustees but may be due under new rules from 6 April 2015.
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UK Residential Property £2m+
Commercially Let
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Taxing TimesTypical Structure 4
• ATED and CGTED are not applicable in this case as the property is not owned by a company
• Inheritance Tax is applicable as the trustees own the property directly i.e. ‘relevant property’. A principal charge is due every Trust y p p y p p g yten years on the value of the property (maximum 6%)
• CGT not currently applicable for offshore trustees; however may be due under new rules from 6 April 2015. PPR relief may be available to exempt the gain provided settlor is allowed to occupy property under the terms of the settlement and it is his/her principal private residence as defined by HMRC.
• As before, s87 TCGA is applicable in respect of rent free occupation. An annual capital payment equal to the annual rental value is deemed to have been paid to the settlor
p(benefit). The capital payments are matched to capital gains as they arise, in this case when the property is sold.
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UK Residential Property £2m+
occupied by Settlor (Rent free)
Taxing TimesTypical Structure 5
• The Trustees will be required to complete a UK trust return and pay tax at the rate applicable to trusts on UK income arising in the portfolio.
• Income may be taxable on the settlor if he is the life tenant of th t t d 624 ITTOIA if it i di ti t t d h
Trustthe trust or under s624 ITTOIA if it is discretionary trust and he can benefit. The remittance basis should apply to non-UK income.
• It is important for the trustees to ensure that the income and gains arising in the portfolio are segregated. Separate accounts should be created, for UK income, for foreign income and for capital and gains. This is important when it comes to paying distributions to the settlor and beneficiaries.
• CGT not applicable as offshore trustees are not liable on i
gains. • However, s87 TCGA is applicable, matching capital payments
to gains – consideration may be given to timing payments to reduce the cost of the remittance basis charge.
• Inheritance tax may be applicable if the trustees own the UK shares directly i.e. ‘relevant property’. A principal charge is due every ten years on the value of the UK property (maximum 6%)
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the
, g y p p y plegal structure of DTTL and its member firms.
Deloitte LLP is the United Kingdom member firm of DTTL.
This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific circumstances. Deloitte LLP accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication.
Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 2 New Street Square, London EC4A 3BZ, United Kingdom. Tel: +44 (0) 20 7936 3000 Fax: +44 (0) 20 7583 1198.
Risk of Stock or Lombard Do you fully understand the implications of leveraged stock? Could you answer the question to a compliance officer?
Returns can be enhanced, but also losses can be greatly magnified.
→ Investment risk profile
→ LTV
→ Margin Call
→ Top Up Level
→ Additional Pledge
→ Tax
→ Forced sale
→ Capital Gains
THE COSTS
CORRECT STRUCTURE
NEGOTIATE
MANAGE RELATIONSHIP
→ Consider all assets
→ AUM→ Cross products→ Margin v Fee
RELATIONSHIP
COST OF GETTING IT WRONG
→ SWAPS→ Forced Changes
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REQUIREMENTSASSETS
CASE STUDIES
Case A – Family TrustREQUIREMENTS→ Additional borrowing of £8m→ Reduction in risk of margin call→ Longer term commitment→ True Private Banking relationship
CHALLENGES→ Inability to pledge further stock→ Low liquidity of single stock
FACILITY SECURED→ 5 year term, margin reduction of 25%→ £20m borrowing facility
Interest only no early redemption penalties
ASSETS→ £80m of single stock→ £20m of mixed property stock→ PG worth in excess of £1bn
• SOW / AML documentation• Account opening process
→ Interest only, no early redemption penalties→ No PG→ Increase in LTV from 35% to 65%
SECURITY→ Limited number of single stock→ Property assets → PG
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Case B – Family Office
CASE STUDIES
REQUIREMENTS→ Borrowing of £50m→ Long term commitment→ True Private Banking relationship
CHALLENGES→ Price volatility→ Custody of asset
FACILITY SECURED→ Top Tier Private Bank→ 5 year term
ASSETS→ £280m of gold bullion→ PG worth in excess of £400m
INCOME→ Business income 80%→ Rental income 20%
PRESENT BORROWING→ Nil
SECURITY y→ Margin above overnight LIBOR with nil custody charges→ Interest only, no early redemption penalties→ No PG or property as security
→ Gold Bullion→ PG
ALC has managed the full process including:-
• Bank negotiations• Secured two offers sub 100 bps margin
• SOW documentation• Account opening process
Case C – Property Portfolio & Trading Business
CASE STUDIES
REQUIREMENTS→ Borrowing of £20m→ Commitment to fund an acquisition→ 16 year amortization profile
CHALLENGES→ Mix of trading and investment assets→ Funding the acquisition of a further trading business→ Complex structure incorporating 13 Ltd Companies
FACILITY SECURED→ 5 year term
ASSETS→ Property assets circa £38m
INCOME→ Rental income→ Trading Income
PRESENT BORROWING→ £16m
SECURITY→ Property 5 year term
→ 16 year amortization profile→ Reduced interest margin
Property→ Debentures
ALC has managed the full process including:-
• Bank negotiations• Managed legal and valuations
• AML and Account opening process
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Case D – Property Portfolio & Cash Deposits
CASE STUDIES
REQUIREMENTS→ Borrowing of £18m→ Commitment to fund further property purchases→ Reduction in net costs
CHALLENGES→ Compliance with the tax structure in place→ Agreement to a property “hunting pot”→ Use of two independent lenders
FACILITY SECURED→ 3 and 5 year term
ASSETS→ Property assets circa £17m→ Cash deposits £10m
INCOME→ Rental income
PRESENT BORROWING→ £13m
SECURITY→ Property 3 and 5 year term
→ Interest only facilities→ Reduced net costs and maximum tax benefits
→ Property→ Cash
ALC has managed the full process including:-
• Bank negotiations• Managed legal and valuations
• AML and Account opening process• Working with the Tax Planner