Using an Isle of Man Foundation for Succession Planning: A Sharia-Compliant Approach

In the realm of wealth management and succession planning, the Isle of Man Foundation (IOM Foundation) is emerging as an increasingly attractive option. Unlike traditional trusts, an IOM Foundation is an incorporated vehicle with a distinct legal personality.

This unique structure gives the IOM Foundation the capacity to enter into contracts, own property, and take legal actions in its own right. If you’re looking for a robust and versatile solution for succession planning, especially one that aligns with Sharia principles, the IOM Foundation may be your answer.

The Tax Advantages of an IOM Foundation

One of the most compelling reasons to consider an IOM Foundation for succession planning is its favourable tax regime. Being an Isle of Man corporate vehicle, the IOM Foundation enjoys the status of a ‘Corporate Taxpayer’ under s120(ba) of the Income Tax Act 1970. This translates into a range of tax benefits, including:

• 0% Corporate Tax: The IOM Foundation is exempt from corporate taxes, making it an attractive option for preserving wealth.
• 0% Capital Gains Tax: Any capital gains realised by the foundation are not subject to tax, providing a substantial advantage when managing investments.
• 0% Inheritance Tax: Assets held within the IOM Foundation are not subject to inheritance tax, ensuring your wealth is passed on efficiently to the next generation.
• 0% Withholding Tax: Distributions made by the foundation to beneficiaries are not subject to withholding tax, allowing for smooth wealth transfer.

These tax advantages make the IOM Foundation an appealing choice for those who wish to optimise their succession planning strategy while maintaining compliance with Sharia principles.

Perpetuity and Independence

One of the key strengths of the IOM Foundation is its perpetual existence. Unlike trusts with finite lifespans, an IOM Foundation can continue to pursue its Founder’s intended objectives for as long as specified in its Foundation Rules. This feature provides a strong sense of continuity, making it an excellent choice for preserving your life’s work, whether it involves a successful business or charitable endeavours.

Moreover, the IOM Foundation is not beholden to shareholders, allowing for more flexibility in decision-making and asset management. This independence enables it to retain profits for future growth or distribute them to designated beneficiaries, all while adhering to the guidelines set forth in its Instrument and Rules.

Versatility in Ownership

The flexibility of an IOM Foundation extends to its ability to purchase and own shares in a company. This strategic manoeuvre can serve various purposes, including retaining profits within the foundation for future expansion or distributing wealth to specific classes of beneficiaries. This adaptability makes it a powerful tool for those with diverse assets and complex succession planning needs.

Evidence of Existence

Another notable advantage of establishing an IOM Foundation is the issuance of a certificate of incorporation upon registration. This certificate can be invaluable when dealing with institutional lenders, third parties, or other entities that require evidence of the foundation’s existence. In essence, an IOM Foundation can double as a Special Purpose Vehicle (SPV), with one of its primary objectives being to secure capital for the business through loans that do not appear on the company’s balance sheet.

Sharia-Compliant Succession Planning

For individuals and families who prioritise Sharia compliance in their wealth management and succession planning, the IOM Foundation can be structured to adhere to Islamic principles. Sharia-compliant foundations can allocate funds in a manner consistent with Islamic finance, ensuring that wealth is managed in accordance with religious guidelines.

Key Safeguards for Sharia-Compliant Foundations

1. Clear Documentation and Purpose: The first step towards ensuring Sharia compliance in foundations or trusts is to establish clear and comprehensive documentation. This includes a well-defined purpose and objectives that align with Islamic principles.
2. Sharia Board Oversight: To ensure the highest level of Sharia compliance, it is crucial to establish a Sharia board or council composed of qualified Islamic scholars and experts.
3. Screening Investments: Investment screening is a vital aspect of Sharia compliance. The foundation or trust must adopt a rigorous process for selecting investments that are permissible (halal) according to Islamic law.
4. Ethical Investment Management: Once investments are selected, it is important to ensure that they are managed ethically and in accordance with Sharia principles.
5. Zakat and Charitable Giving: Charitable giving is a fundamental pillar of Islamic finance, and foundations or trusts should incorporate provisions for zakat and other forms of charitable contributions.
6. Regular Compliance Audits: To maintain Sharia compliance over time, it is essential to conduct regular compliance audits.

Safeguarding foundations or trusts to ensure Sharia compliance requires a holistic approach. By implementing safeguards, foundations or trusts can build trust and credibility among stakeholders while contributing to the growth of Islamic finance.

Ensuring Sharia compliance not only aligns with the values of individuals and organisations seeking Islamic financial solutions but also paves the way for sustainable and ethical wealth management in accordance with Islamic principles.

Whether you’re seeking a tax-efficient solution or a Sharia-compliant approach to succession planning, the IOM Foundation, with the right safeguards in place, offers a level of assurance and control that can make it an ideal vehicle for your needs. Consider consulting with financial and legal experts to explore the full potential of the IOM Foundation in your succession planning strategy.

At Baker Tilly Isle of Man, we bring decades of experience and strong partnerships with experts in the yachting industry, including tax and legal advisors, yacht builders, managers, and crewing specialists. Our expertise in corporate entity management, registration, and administration positions us well to assist owners of superyachts of all sizes and purposes in achieving their goals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.