AABA How Jersey shot itself in the foot: an analysis of the implications of the Trusts (35 pages)

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15

It would, however, be surprising if this precluded an attack on the evasion
that was occurring and it would seem that there are several ways in which
this attack could be mounted. One way in which this could happen would be
for tax authorities outside Jersey to simply now assume that all Jersey trusts
are bare trusts. Appendix 1 to this report shows that this would be justified
because all Jersey trusts are now revocable. They would then cease to have
any taxation effect in most cases, so entirely eliminating their usefulness for
most existing users of them. Settlors would be taxed on the incomes and
gains of those trusts as if they had never been created.

There is another alternative. The assumption underpinning this option is
simple. Jersey trusts are not usually created for the benefit of Jersey
resident people; indeed, Jersey’s anti-avoidance tax legislation does now,
and will increasingly in the future make it hard for them to benefit from
such a structure. Jersey trusts are designed to be used by ‘international
clients’. Some of those international clients will use a trust without ever
advising their country of residence of the fact. Almost invariably that will be
an act of tax evasion and it is to be hoped that professional people are not
party to that.

There will, however, be many occasions when the settlor will have reason to
disclose the existence of the trust to the tax authorities in the country in
which they are resident. In that case it is likely that a professional person
(be it a lawyer or accountant) will be involved in preparing the settlors’ tax
return. In that case the accountant or lawyer will have to think what the
new trust legislation means.

It is important to stress that no comment here can be emphatic; Jersey is
but one of more than 200 tax administrations in the world, each with its
own law. However, many assume that trusts (when they recognise their
existence) are modelled on UK law, which as is noted above is now very
different from Jersey law; so different in fact that a Jersey trust will in
future bear almost no relationship to a UK trust. This is important. For
example, when a UK accountant prepares a tax return for a UK resident
(and, possibly domiciled) taxpayer they rely on the statement that the trust
precludes the settlor from benefit from the trust when preparing that
return. If the settlor can secure a benefit from the trust then they remain
taxable in full upon all income and gains arising within it. So, the exclusion
of income from the return requires this statement to be both true, and most
importantly, irrevocable.

But this statement is no longer the case. The statement is not true because:

1.

A Jersey trust is now revocable, in which case the settlor can reclaim

all the trust property, including accumulated income and gains at any
time, meaning that no settlor can now say they do not have an
interest in the trust; Jersey statute has given them that interest;

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