Lessons to be learned

Des Peelo explains why a trust or an overseas holding company is rarely a good idea.

The ownership of wealth and related capital taxes go together, and there are lessons to be learned in trying to distance one from the other. Nothing stands still over time, except the Great Pyramid and similar edifices. This simple fact can escape legal and financial advisors when it comes to wealth and capital taxes.

First, let us consider the history of capital taxes briefly. The 1970s brought a slew of capital taxes, much of it modelled on UK precedents. The government of the day introduced capital gains tax, capital acquisitions tax replaced estate duties, and there was a short-lived wealth tax. A wide range of tax measures involving the relationships between companies and the individuals who owned them also came along in successive Finance Acts, while 1988 saw the introduction of self-assessment on income and capital taxes.

There was relatively little personal wealth in Ireland at that time, and it was the mid-1980s before the capital taxes realised much revenue, with the result that planned tax avoidance (and illegal tax evasion) became an unstated industry in itself. Schemes were thought up by legal and tax advisors until a Finance Act caught up with them. Even so, on occasion, the combatting legislation itself created another loophole, and so on.

The use of trusts (usually through what is known as a discretionary trust) and overseas holding companies became fairly widespread, the repercussions of which were not always wisely thought through – a resonance that is still valid today. The ownership of businesses, properties and investments were held in companies and trusts in places like Jersey and the Isle of Man. Others were based further afield in Bermuda, Cyprus and the Cayman Islands. It was not unusual to have pyramids of ownership across several jurisdictions. Revenue probes, the Ansbacher Enquiry, tribunals, several tax amnesties and the Panama Papers subsequently revealed the widespread use of overseas structures.

Fast forward from those earlier years and the anxiety to avoid capital taxes, or to keep control after the demise of the founder or owner of a business, overwhelmed common sense as to what was likely to happen in the long run. Subsequent legislative and practice changes, in Ireland and overseas, were not always known or understood. The rigidities in the original tax schemes, over time, frequently created obstacles to addressing subsequent tax challenges and change.

As to the designated beneficiaries of the underlying wealth, the elapse of time created its own dysfunctions. Sibling rivalry and inter-generational fighting continue to be common outcomes; not to mention the complications of divorce and remarriage, poor behaviour within a family and possible inadequate management performance as to the underlying business or assets. Trustees also pass on in time, being usually older than the intended beneficiaries, and replacement trustees may have different attitudes. Indeed, some were not replaced in a timely or legally permitted manner.

As stated at the outset of this article, nothing stands still and what started as a tax-planning decision is now a tangled legal, financial and tax imbroglio. There are instances of ‘orphan assets’, which arise from the failure to address legislative or practice changes over time. This failure can lead to paralysis or an inability to access the underlying assets. A particular problem with trusts – as identified in several UK court cases – was the continuity of trustees, meaning that overseas trustee companies went out of business without any succession or replacement structures in place. Similarly, individuals acting as directors of holding companies in foreign jurisdictions became incapacitated or died.

What is not always readily understood is that if something goes wrong, such as an unexpected event or a dispute of some kind, the Irish courts are unlikely to have any jurisdiction. Trust and/or company law can be opaque or vague in foreign jurisdictions. For example, it may be the case that the shareholders in an overseas holding company have not been filed in the local equivalent of the Irish Companies Registration Office, or indeed disclosed or accessed in any other way. This failure may lead to uncertainty as to actual ownership, and the articles or constitution are likely to diverge from what is set out in Irish company law.

In any event, the point is that the use of trusts and overseas companies will often fall foul – and usually do – in the long run. This reality keeps accountants and lawyers busy all over again in trying to sort it out; usually with significant legal and tax bills to follow. In summary, a trust or an overseas holding company is rarely a good idea.

Des Peelo FCA is the author of The Valuation of Businesses and Shares, which is published by Chartered Accountants Ireland and now in its second edition.