Killing zombies: Saving costs by simplifying structures

02 November 2020

The days are getting shorter, nights are drawing in, and Halloween has just passed: the perfect time of year to think about gothic houses full of cobwebs, and killing zombies. As tax advisers we’re not necessarily the first people you would turn to destroy the walking dead, but not all zombies eat brains…

The right structure 

One of the side effects of the coronavirus pandemic has been to increase the desire of  trustees  to cut costs as their incomes fall and the value of their assets drops.. As part of this focus, we have seen a rise in settlors and beneficiaries of offshore trusts questioning the annual cost of maintaining their investment ownership structures, prompting trustees to review whether these can be simplified. 

A regular review of complex structures is desirable for many reasons. In recent years, structure reviews have focussed on compliance matters such as the requirement to correct undeclared UK tax liabilities, but it is equally important to think about whether the structure remains appropriate in its current form to meet the needs of the beneficiaries. 

Simplification is likely to be an issue mainly for trust structures which were established some time ago and have become unwieldy, but it can be relevant wherever circumstances have changed – for example, in structures holding UK real estate where previous tax advantages have been lost.  

Dealing with the living dead

In many cases, the structure was simple when initially established, but over time new companies may have been added and complex webs of ownership and debt build up, turning a structure chart into a horror story. As time passes and the original purpose of these arrangements falls away, we are left with zombie companies lurching forward from year to year with no one knowing what they are for or how to kill them off, with a permeating fear that liquidating them could unleash a dire curse, or worse – crystallise a tax charge! Any tax advice taken originally has been lost, destroyed or is hopelessly out of date, and making sense of the situation is a truly scary prospect. 

But fear not – there are ways to exorcise these demons. The first step is to review the existing structure to confirm its current implications, identify what needs to be eliminated and establish whether there is any disadvantage to liquidating those zombies. This analysis can often be straightforward, although one issue that comes up regularly is where a company has been maintained because it stands at a significant capital gain and its liquidation will result in an increase in the pool of gains to be attributed to beneficiaries receiving capital payments. Even here simplification may be possible by merging multiple companies into one.

Resuscitation where appropriate

In more complex cases, we can try to bring back to life the advice that was given in the past, in order to identify the original purpose of the company. This is potentially far more complicated,  but can be the right approach where significant sums are at stake before the decision can be taken to liquidate. 

A ‘fit for purpose’ review can eliminate the risks inherent in maintaining entities nobody understands and can slash costs by allowing the safe removal of zombies. Getting to grips with these monster structures now will let everyone sleep safely in their beds. 

For more information please contact Rachel de Souza.