Trusts still have an important role to play in onshore tax planning, as acknowledged by the British government recently.
Advisers based in the UK were recently shocked by the government's announcement of far-reaching changes to the way in which non-domiciled individuals resident in the UK will be taxed.
However, the UK Government confirmed in connection with the planned changes that any non-UK assets placed into trust before April 6, 2025 by non-UK domiciled settlors will remain outside of the scope of the UK inheritance tax regime.
That is significant, as the standard inheritance tax rate in the UK, subject to various exclusions, is 40 per cent.
Announcements such as these highlight how useful Bermuda trusts can be as part of legitimate estate planning, with the use of the trust vehicle as a planning tool being contemplated by the UK government itself in this case, and assets in such vehicles being protected from certain tax exposures.
Affected individuals, potentially including those based in Bermuda, with a non-UK domicile, who may later move to the UK, should seek UK tax advice as soon as possible, as such advice in relevant taxing jurisdictions is always critical to worldwide estate planning.
However, when the advice is that an overseas trust may be advantageous, Bermuda is a first-choice jurisdiction for many. There are various reasons for this.
The island has world-class trusts legislation that is based on the English model. However, Bermuda's trust practitioners, often in conjunction with eminent English barristers, have advised its government on enacting optimal trust legislation which improves on the offering of many other jurisdictions.
Bermuda was the first jurisdiction to permit the establishment of purpose trusts, which are an important part of many commercial structures, particularly in the insurance industry, for which Bermuda is famed.
The island was also one of the first jurisdictions to disapply the rule against perpetuities, which means that family trusts in Bermuda can (generally) endure indefinitely.
Bermuda law also contains provisions protecting trusts based here from foreign-law attacks based on overseas forced heirship laws, bankruptcy/insolvency provisions or divorce laws, offering asset protection opportunities.
Additionally, Bermuda law permits reserved powers trusts, meaning that settlors can reserve certain key powers to themselves or grant them to trusted third parties without causing the trust assets to form part of the settlor's estate or invalidating the trust.
Section 47 of the Trustee Act 1975 is a world-leading provision which permits the Bermuda court to confer on trustees the power to effect “expedient” transactions, which they would not otherwise have the power to effect, which can include the variation of beneficial interests.
That section and the wealth of case law on its application provide enormous flexibility for trusts to be restructured in ways that would not be possible elsewhere.
Bermuda judges are incredibly experienced in such applications, which can, in certain cases, go ahead without beneficiary consent – which is advantageous as giving such consent could have negative onshore tax consequences.
By way of illustration of how flexible the Bermuda trust offering is, when “the rule in Hastings Bass” was overturned in England to the dismay of many advisers there, Bermuda acted quickly to enshrine a similar rule in legislation.
That gave the island's courts the discretion to set aside certain mistakes made by trustees, including in circumstances where they make decisions in ignorance of negative onshore tax implications. Actions implementing such decisions can be unwound, in certain cases, as if they never happened.
Further, Bermuda has an established regime for the operation of private trust companies and is an attractive jurisdiction in which to base a family office. Bermuda's professional trustees are highly experienced in complex international structures and have excellent relationships with onshore advisers.
Onshore tax laws by their nature are in a constant state of flux, amended frequently in line with changing policies and changes of government – rendering any long-term wealth planning in those jurisdictions notoriously difficult.
Bermuda, on the other hand, offers a stable environment where trust assets may, depending on the circumstances, be protected from some of the flux inherent in certain onshore tax laws.
This is especially the case as new onshore tax laws often contain special provisions which exempt existing structures from their scope, as envisaged by the UK government in the context of the non-dom reforms.
This kind of planning, carried out responsibly in conjunction with onshore advisers, is acknowledged as a legitimate part of estate planning by onshore governments.
Against this background, Bermuda trusts remain a world-leading option for certain individuals wishing to have an efficient worldwide estate plan in place.
First Published in The Royal Gazette, Legally Speaking column, March 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
