Guernsey Royal Court blesses decision to onshore trusts to pay more tax

Can a fiduciary onshore a trust for the express purpose of paying more tax to align with the beneficiaries' values? Ogier was recently involved in a case where the Guernsey Royal Court was asked to provide its blessing to do just that, by moving an offshore trust onshore.

In circumstances like this, it’s crucial that the correct steps are followed and the appropriate advice is sought to fulfil your client’s wishes – and prevent challenges to the decision in the future. 

In this briefing, we explore how “benefit” doesn’t necessarily mean financial, and how a case like this is indicative of growing trends seen under the great wealth transfer, including in relation to shifting values towards wealth inequality. 

Background 

Ogier acted for the corporate protector of three large trusts whose beneficiaries had asked it to exercise its powers to replace the offshore trustees with a UK-based trustee, so that the trusts would be subject to UK taxation going forward. 

The circumstances were unusual in that the beneficiaries had worked with the protector and trustees to devise a distribution strategy that aligned with the family's needs and values and was extremely modest in relation to the size of the trusts. 

As a result of this distribution policy, actuarial calculations indicated that if left offshore, where taxation of non-UK source income and capital gains would be deferred to receipt by UK beneficiaries, the fund would grow to £82 billion by 2134.  If onshored, the impact of income and gains being taxed on an arising basis directly in the hands of the UK trustee would cause the trusts to dwindle to nothing in that same period. 

Despite this, the adult beneficiaries unanimously favoured onshoring the trusts, for moral, social and ethical reasons. They felt the connection to the offshore structure was a source of embarrassment and distress, and it was a barrier in their social and professional relationships. By onshoring the trusts, they hoped to take pride in their family wealth and contribute to the society in which they live. 

The decision to onshore was momentous given the sums involved and the impact on the trusts. Ogier advised the protector to apply for a blessing from the Royal Court, which would protect it from future challenge to its decision by anyone interested in the trust. 

In addition to the general principles that apply to blessing applications, there were a number of unusual points for the court to consider: 

1. could the protector apply for a blessing under a jurisdiction which is generally reserved to the trustee? 
2. is paying more tax a benefit to the beneficiaries? 
3. can it be assumed that the views of the adult beneficiaries will be shared by their children and future generations of beneficiaries? 
4. how should the Court approach conflicts of interest? 

Can a protector apply for a blessing?

The blessing application was made under the category two Public Trustee v Cooper jurisdiction. The Royal Court had previously confirmed that the principles derived from Public Trustee v Cooper can be applied to fiduciaries other than trustees and had done so in an application by joint liquidators of a Guernsey company. The applicant in this case was the sole protector. 

The Court accepted that because the powers the protector was being asked to exercise – to appoint and remove trustees – are fiduciary in nature, it was entitled to seek approval for momentous decisions in the same manner as a trustee.  

What do fiduciaries need to know about blessing applications?

When a Court considers a blessing application, it is mainly scrutinising the decision-making process, not whether it would have arrived at the same answer. As long as the process was thorough and the decision is reasonable, then the Court should approve it. There were a number of central questions the Court had to consider. 

1. Does the protector have the power to make this “momentous” decision? This concerns the construction of the trust instrument and, significantly, there were no restrictions that required trustees to be resident in a low-tax jurisdiction. 
2. Did the protector make a good-faith decision for a proper purpose? 
3. Would another reasonable protector in the same position arrive at the same decision? 
4. Are there conflicts of interest that have interfered with or influenced the decision? 

The Court was satisfied that the protector reached its decision in good faith and for a proper purpose. If you are a fiduciary faced with a momentous decision like this, the key takeaways are: 

• involve all interested parties at an early stage: the protector consulted both the trustees and the advocate it would later work with on behalf of the minors and unborns 
• consult the adult beneficiaries separately: to ensure that their support is genuine 
• answer questions raised by interested parties: for example, the protector sought advice on whether there were any alternative options available to it and commissioned additional actuarial calculations, in response to questions raised 
• seek expert opinion where needed: the protector got specific legal advice on whether the decision was for a proper purpose and how to deal with potential conflicts of interest 

Is paying more tax a benefit to beneficiaries? 

The Guernsey Courts accept that "benefit" does not mean only financial and can include moral and social benefit. However, previous "moral benefit" cases tended to involve some financial benefit to the beneficiary as they concern distributions that the beneficiary might otherwise have made from their own assets, for example, a payment to a charity. 

Here, the court was being asked to accept that it is not necessary to find any financial benefit at all to justify an appointment. In doing so, the court followed the Jersey decision of In the Matter of the May Trust [2021] JRC 137, and it cited a particularly vivid paragraph from that decision: 

“Let us suppose a trust fund is held on discretionary trusts for the benefit of A during his lifetime and thereafter for the benefit of B absolutely. A, in adulthood, has made a good enough living that he does not require all the income from the trust. However, A is obsessively concerned about the welfare of mules in Somalia. It has reached the point where, if he does not feel he has done everything he can to alleviate their hardship, he is likely to suffer mental health difficulties. In our judgment, a trustee could perfectly legitimately reach the conclusion that a payment to a charity for the protection of mules in Somalia was a payment for A's benefit. Given A's subjective views, objectively, such a payment can be justified.”    

The court said it was relevant here that: 

• there are other trusts available to the beneficiaries that would serve as a "lifeboat" should circumstances change  
• while there is no question that the decision to onshore is momentous, the size of the funds means the practical effects of the decision would not be felt for more than 100 years or more, based on current projections 

Can it be assumed that future generations will share their ancestor's views? 

Following the May Trust decision, the court accepted that: 

"when the Court is assessing whether the decision is of benefit to them, it would not be irrational to take the view that the adults will bring their children and grandchildren up with the same ethics and approach to society so that the minors are likely to have the same view."   

The further into the future, however, the more difficult it would be to predict what attitude the beneficiaries would take. The question for the Court was whether the decision of the protector is rational. Ultimately, the Court was satisfied that it was: 

"The Decision will not have any material impact on the interests of the minors and unborns for the next 100 years. With their interests secured for the next 100 years, and suitable alternatives having been considered and discounted, the benefits to the adult beneficiaries of having the Trusts onshored in alignment with their firmly-held convictions lends considerably towards the granting of the application before the Court".  

How did the Court approach the conflict of interests at board level? 

A conflict of interest arose because a majority of the directors of the corporate protecter were either themselves beneficiaries or the partners of beneficiaries who made the request. A conflict of interest is not a bar to a blessing, but the conflict needs to be identified and managed. The Court was satisfied that the conflict had been adequately managed because:  

• the protector had sought leading counsel's views on the potential conflict, and was advised that: 
  • the trust terms permitted the protector to exercise any power vested in it notwithstanding any conflicts of duty and interests at board level 
  • it would be open to the court to authorise the protector to proceed notwithstanding the conflict of duty and interest, on the basis that the court has been satisfied that due process has been gone through 
• the protector had acknowledged the conflict, each director recognised the conflict and the two independent directors were tasked at the decision meeting with specifically probing the relevant issues and the decision was unanimous 
• an independent advocate for the minors and unborns was involved in the decision-making process from the outset 

Final thoughts 

For many decades, families who wanted to mitigate their tax exposure have settled wealth into non-UK resident structures which benefitted from more favourable tax treatment. As expressed by Sir Philip Bailhache, Commissioner in Re the S Trust (2011) 14 ITELR 663 at [39], referring to a Jersey trust, but whose words could equally apply to Guernsey:  

"The preference accorded to the interests of the tax authority in the UK is not one, however, with which we are sympathetic. In our view, Leviathan can look after itself… in Jersey it is still open to citizens so to arrange their affairs, so long as the arrangement is transparent and within the law, as to involve the lowest possible payment to the tax authority. We see no vice in this approach. We accordingly see no reason for adopting a judicial policy in this country which favours the position of the tax authority to the prejudice of the individual citizen..."   

In contrast to that sentiment, the beneficiaries in this case challenged the assumption that wealth structuring and management should have tax mitigation at its core. One of the questions put to them as part of the decision-taking process was: why did they not consider it socially or morally acceptable to maintain Guernsey trusts which are in fact taxed under a regime that is considered appropriate in the view of the UK government? 

Their answer was clear: there is a difference between what is legally possible and what, from their perspective, is morally permissible. They did not want to continue to avail themselves of the current regime just because they could.   

A lot has been written about the so-called "great wealth transfer" and with it a likely change in attitude to wealth holding.  We are increasingly seeing clients who want to mobilise their wealth to align with their personal values, whether through philanthropic gifting or impact investing, or even, as here, by rejecting the tax advantages that offshore structuring has historically provided. 

It will be interesting to see how that trend continues to develop as part of the great wealth transfer and as attitudes to the purpose behind a family's wealth continue to evolve. 

How Ogier can help 

Ogier’s Private Wealth experts in our Trusts Advisory Group are equipped to advise on the most complex matters regarding trusts and succession planning.

We are on hand to support trustees and protectors to meet their clients’ evolving and often cross-border objectives. Reach out to a member of our team today to learn more. 

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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