The Isle of Man is seeing a significant shift in corporate client business compared with five years ago, when the balance would have been more like 85:15 in favour of private clients - five years on, it could be 50:50
Private client business may have been the mainstay of the Isle of Man's trust industry throughout the past two decades but that is beginning to change. Already, the focus for fiduciary service providers is shifting away from wealthy individuals towards the corporate sector and this trend is set to continue.
There is already a significant shift in corporate client activity compared with five years ago, when the balance would have been more like 85:15 in favour of private clients. In another five years, this could be an even 50:50.
The truth is the real heyday for private client business has been and gone. Since 1991, there has been a gradual erosion of the tax advantages offshore trusts have traditionally provided through successive changes in UK legislation.
So far, companies have adapted well to this by remaining one step ahead of the UK Exchequer. For instance, when the loopholes in capital gains tax (CGT) began to be closed, the primary focus in the Isle of Man shifted from this to inheritance tax (IHT) planning and restructuring of existing trusts. However, this game of catch-up is now reaching its natural conclusion.
a shift in focus
Probably the final nail was the recent introduction of a benefits charge on continuing occupation of property held in trust. Virtually every option and avenue for UK nationals to avoid tax, short of leaving the country, is now closed.
There are still areas where traditional wealth management will continue to provide opportunity, and corporate client business can come onto that. However, it would be optimistic to believe that the trust business can return to the levels of the 1980s and 1990s. The way forward for the local trust industry now is to attract more corporate service provider (CSP) business.
What the island has now is a mature trust industry, strengthened by regulation. This may be burdensome and costly to administer but, ultimately, it provides the community with its greatest asset going forward. The reassurance this provides clients, in an environment of increasing corporate governance, is now probably the most effective marketing tool.
Like any mature industry, the Isle of Man trust sector has to look to increase its market share. In this respect, there has already been a flight to quality that did not exist before offshore finance centres began attracting the attentions of international bodies such as the OECD.
What was perceived as a challenge has in fact provided an opportunity. Before the OECD blacklist, there was little to differentiate the offshore jurisdictions other than their climate - which in Isle of Man's case was hardly an advantage. UK-based intermediaries were happy to deal with islands further afield, but the success of the British Isles Crown Dependencies in avoiding a vote of no confidence from the OECD has strengthened their position enormously. As a result, UK intermediaries are increasingly looking closer to home and there has been an increase in business coming to the island. This is at considerable cost to other jurisdictions, but for the local industry it is a reason for optimism.
In CSP terms, not all activity is necessarily tax-driven, so an offshore structure may have few benefits which an onshore trust cannot provide. But whereas traditionally the Isle of Man's key selling points were tax, tax and tax, good regulation and a concentration of trust expertise in this area.
This critical mass of trust expertise is something the UK cannot offer and therefore can become a prime factor in deciding where to place business.
A lot of this CSP work is currently employee remuneration- and retention-based, which has parallels with the island's more traditional private client business. The ultimate beneficiary of this type of performance-based remuneration package is the individual. The structure itself may not be primarily concerned with the preservation of wealth, but the rationale is not too dissimilar to the trust work with which the industry has grown up.
Where there may be more of a shift is in terms of the services CSPs can provide to businesses that are attracted by the tax changes the Isle of Man has made - notably, the move to zero rate corporate tax.
This has put the island on the tax planners' radar across the globe and, already, there has been interest from companies looking to move their entire operations here.
The obvious attraction of zero corporate tax will appeal to a lot of low infrastructure, non-labour intensive companies anywhere in the world.
Clearly, this is a huge market, and a lot of high value activity is likely to move here as a result of the change. Having grown up on setting up and managing offshore companies, CSPs have a lot to offer and can expect to see new business from such relocations. Their attraction will be strengthened as the requirements on business increase, not least through the stream of directives emanating from Brussels. As running a company becomes ever more onerous, the benefits of using specialists with the required expertise and experience, not to mention a critical mass of clients, will increase.
By the same token, the increased burden CSPs themselves now face following the introduction of regulation is likely to drive further consolidation within the offshore trust sector. If you look at the British Isles Crown dependencies together - which is important because of the natural synergies between the different jurisdictions - then there are currently about 450 licensed players.
In five years' time, this number could be closer to 300, as the increasing cost of doing business continues to drive the industry towards fewer, stronger and larger firms. That process may have already begun, but there is still some way to go.
One development that should not be ignored is the new trust service provider (TSP) legislation, which now looks likely to be introduced this autumn.
Ordinarily, this would be hugely significant, but having already borne the pain of the introduction of similar legislation for CSPs in 2002, it is unlikely to have a major impact on the local industry. There will be some administrative differences, but, generally, all the procedures and operations are in place.
The timing of the TSP legislation, relating, as it does, to private client activity, may seem somewhat ironic following the decline in this particular sector. But that is not the case.
While there might be less emphasis on this traditional private client work in the future, it will remain a source of business for the Isle of Man.
Geographically, there is also scope for attracting new business, not least in the new EU nations. As these economies begin to develop, wealth will be created, which is a key ingredient for any industry. The tax rules in these countries are not yet as sophisticated as the UK, so there are not the same barriers to private individuals moving their assets offshore.
The same is equally true of other fast growing economies, such as China or Taiwan.
The ability to offer a first-rate service, with the benefit of regulation, means the Isle of Man is well-placed to attract clients from these areas.
All the tax changes that have affected its traditional markets have not removed all the benefits of offshore trusts. For anyone based outside the main metropolitan jurisdictions looking to invest in areas such as the UK, the advantages of keeping the assets offshore largely remain the same. The privacy this provides is another important factor.
Ironically, one of the best examples of this would be Irish racehorse owners John Magnier and JP McManus, with their investments in Manchester United through Cubic Expression.
The ability to invest with anonymity using an offshore entity is appealing to many people and becoming increasingly so with an ever-invasive media.
The fact that in this particular case it did not remain private is probably more a reflection of the investment than the investors.
The emphasis on private client work is changing rapidly with trustees finding themselves increasingly in demand by companies looking for trust-based solutions to their financial problems.
Meanwhile, the increased regulation on this area of business has created further burdens for trustees to bear.
Hires Wellington Management
Introduces 'The Long Dog'
Continuing Square Mile’s series of informal interviews
Happy GDPR day