Offshore

Keeping British Virgin Islands Competitive In Wealth Planning

Henry Mander and Matthew Howson, 29 July 2021

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An offshore law firm examines recent developments in the British Virgin Islands and what is being done to keep the jurisdiction on the front foot.

The following article comes from partner Henry Mander and senior associate Matthew Howson of Harneys, the offshore law firm. They write about what’s being done to ensure that the British Virgin Islands, a British Overseas Territory, remains competitive. With so much global pressure on firms to comply with disclosure of beneficial ownership and the move by the Group of 20 nations to set a floor for corporation tax, the role of offshore centres remains under focus. (This news service talked in December 2020 to BVI Finance about the beneficial ownership issue.)

The editors of this news service are pleased to share these views; the usual editorial disclaimers apply on views of guest contributors. To comment, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Many readers will already be familiar with the “BVI co,” a company formed under the British Virgin Islands Business Companies Act 2004. These have been the mainstay of the BVI’s success as an international finance centre, used around the world and, in some regions, ubiquitous. Flexible and easily comprehensible, they are used for corporate and private wealth purposes alike.

However, the BVI company is not the BVI’s only contribution to the private wealth space. In particular, the BVI’s trust regime is both innovative and within the mainstream of trust jurisdictions. Most BVI trusts are used in conjunction with BVI companies: this allows the client to liaise with only one set of lawyers and ensures that there will be no conflict between BVI corporate law and another jurisdiction’s trust law. Yet, because of this advantageous trust regime, BVI trusts are increasingly requested even where no BVI company is involved; at the time of writing, the authors are drafting two such trusts.  

Now, new legislation has been developed in concert with London counsel and academics to ensure that the BVI trust offering remains at the top of its game. The changes are technical, but cutting through the legalese, what are the essentials for you and your client?

Firewalls
“My son is a beneficiary but his marriage is in trouble – could his spouse attack the trust?” We are commonly asked about the jurisdiction’s trust “firewall legislation.” This has historically defended BVI trusts against attacks over succession and forced heirship, and also from creditors, but increasingly attention has turned to attacks during beneficiaries’ divorce proceedings. The firewall has therefore been greatly strengthened and modernised. Now, “claims and interests” (including beneficial interests) are protected, and the defeated attacker may have a personal relationship with a beneficiary instead of the settlor. The definition of ‘personal relationship’ itself has been expanded to include step-relationships and children born of surrogacy or artificial fertilisation.

As well as that, the questions that should be decided under BVI law (rather than some foreign law more advantageous to the attacker) have been confirmed to be virtually every question applicable to a trust. 

Reserved powers
The BVI is already famous for its VISTA legislation which essentially delegates the trustee’s powers and duties over the investment of the trust fund to the directors of an underlying BVI company within the trust (which can then hold other assets underneath); such directors are often the client and their advisors. Although most offshore jurisdictions permit reserved powers through bespoke drafting, only the BVI’s VISTA grants the reassurance of statutory backing via a standalone piece of legislation. Thus an offshore trustee can hold potentially problematic assets such as cryptocurrency, industrial assets in difficult regions, and so on, with minimised risk, via a BVI company within a VISTA trust. 

Although reserved power trusts, outside the VISTA regime, have long been popular in the BVI, they have historically relied on a relatively narrow section in the legislation. The more extensive statutory backing, long applicable to VISTA trusts, on the other hand has now been granted to reserved powers over other areas of the trust, such as distributions to beneficiaries. The new expanded legislation concerning reserved powers trust vigorously restates the powers that may be reserved to protectors, settlors or other persons, without questioning the validity of the trust. A person may have the power to:

1, Revoke a trust; 
2, Change its terms or governing law;
3, Add or remove beneficiaries or trustees; or
4, Require trustee powers in general, including in order to implement a specific investment decision, to be exercisable only with the consent of, or at the direction of, of that person. 

Rule in Hastings Bass - aka undoing a mistake
This rule originally derived from a 1975 English case and has a long and controversial history around the trust world. Fortunately for non-trust lawyers, this history need not be discussed here. Essentially, the rule has now been enshrined in BVI statute. It allows the BVI Court to wholly or partially set aside an exercise of a fiduciary power, which will often mean in practice a trustee’s distribution to a beneficiary. The requirements are essentially that the power-holder, when exercising the power in question: 

-- took into account an irrelevant consideration (whether of fact, law or both) or did not take into account a relevant consideration;
-- when if they had (not) done so, they would not have exercised the power or would have exercised it on a different occasion or in a different manner. 

It can be seen that this rule is very useful for salvaging distributions or transactions which were poorly discussed or investigated beforehand, and which turned out to have disastrous tax or other consequences. Without such statute, the common law remedy as it presently stands is that the beneficiary should sue the trustee or advisor for negligence. Clearly this is not an attractive course for any party.

Resealing
Not all shares in BVI companies are held in well-drafted and considered BVI trusts. In fact, many shareholders simply hold the shares in their own name. This requires their families to obtain a BVI grant of probate or letters of administration on their death in order to be able to transfer the shares or to be able to exercise their voting rights. This can cause a period of limbo while the grant is obtained. However, the BVI Registry has greatly speeded up their procedures, and we have various methods available to further expedite the process. One of these is to “reseal” a foreign grant which requires a shorter process than where one is obtaining one from scratch. Now, grants from the Commonwealth, the US and Hong Kong can be resealed in the BVI. 

Summary: horizon scanning
With the increased focus that many high net worth families have had on their structures since the outbreak of last year’s global pandemic, many clients have taken the opportunity to look behind the simple BVI company and have become more aware of the sophisticated and bespoke structuring options available, which are being implemented regularly to assist from a succession planning and asset protection perspective. 

With the changing landscapes of economic substance and beneficial ownership reporting, amongst other things, regular reviews of private wealth structures are taking place (or certainly should be if not) and such reviews allow for opportunities for restructurings to modernise matters, either to implement new BVI trusts or update existing BVI trusts to take advantage of the cutting-edge nature of the offerings in the jurisdiction’s private wealth space.

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