Often misunderstood, and frequently overlooked, Manx LLCs are have some serious advantages as Investment holding companies for Isle of Man residents.
This is why…
The main driver is the recent change in policy by the Isle of Man Income tax department when it comes to the use of limited companies as investment vehicles. The main changes of this are detailed in Treasury Practice note PN 174/12.
Those of you lucky enough to have read it will know that it is complex and taxpayers will have to rely on concessions for favourable treatment of ‘capital profits’ rather than the law. There are some ordering rules that mean that income will always be taxed first; however capital gains realised, but not distributed will be treated as income if distributed in future periods. The intention is to discourage people rolling using the 0% corporate rate to roll up their investment income but gains are also caught.
At best, the rules are ambiguous – some have called it an introduction of a capital gains tax by the back door, at worst, there is a real possibility that capital profits will end up being taxed (although not immediately) and even that the entire investment capital could be subject to Isle of Man income tax at 20% at some point in the future when eventually distributed; this is not good.
On the positive side, the Government has clearly stated its intention not to introduce capital gains tax – see here; this of course is good news.
The simplest mechanism, on the face of it, is for us Island residents to own investment assets personally. If we do this, we can be pretty confident that capital gains will not be taxed and our income (i.e. dividends and coupons) will be taxed at usual 20% rate.
However, the problem is inheritance tax, not in the Isle of Man but elsewhere. If a Manx resident, even an Isle of Man domiciled one, owns assets for example in the UK (e.g. a share portfolio or UK real estate) then on the death of that person those assets (subject to some exemptions and the nil rate band GBP325K) will be subject to UK IHT at a rate of 40%. This sometimes comes a nasty surprise when it happens. The way to avoid it is to hold the investments in an investment company rather than personally, but for the reasons outlined above this creates its own issues.
A Manx LLC can offer a straightforward solution. As it is transparent for Isle of Man tax purposes, we should be able to be confident that the tax treatment is the same as it would be if you held the assets personally. This means you will not be taxed on capital gains but will pay tax on the income on an arising basis. However, importantly, an LLC is a legal person in its own right so no UK IHT charge will be triggered on the death of the beneficial owner.
Administratively, they are quite simple to operate – arguably more straightforward than a traditional company as there are no proscriptive accounting requirements or administrative complexities such as Annual General Meetings to consider. So far, so good, but the story doesn’t end there; there is another advantage which is sometimes forgotten.
A Manx LLC is also an excellent asset protection vehicle which if properly structured can be resistant to attack to creditors in the event that one of the beneficial owners is unfortunate enough to suffer a third party claim. This can be useful in instances where the beneficial owners are engaged in high risk professions – entrepreneurs, lawyers, tax and financial advisors and company directors spring to mind. Feel free to drop me a line if you would like to know more about this aspect.
If you would like to discuss the use of Isle of Man LLCs specifically or Isle of Man tax matters in general with us; please contact Martin Katz on 01624 648500.
photo credit: sirqitous via photopin cc