Trust me, it's complicated

Trust me, it's complicated

Few would disagree that the UK taxation of settlors and beneficiaries of offshore trusts became a lot more complicated on 6 April 2017 - as if the rules weren’t already complicated enough!


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Few would disagree that the UK taxation of settlors and beneficiaries of offshore trusts became a lot more complicated on 6 April 2017 - as if the rules weren’t already complicated enough!

In the 20 years that I have been a tax adviser, I’ve seen tax legislation change, evolve and grow, but I have never come across such a complex set of rules that can ultimately produce such very different results depending on to whom and how they are applied.  The conclusion I’ve reached? If there was ever a time to get tax advice then it is now, as getting it wrong can prove to be an expensive affair.

So how have we ended up with such complex rules?

HMRC’s Guidance states “It was recognised that many non-domiciliaries living in the UK hold their wealth in non-resident trusts (often in underlying companies).”  This perhaps explains why the UK Government decided that it was the right time to remove the remittance basis of assessment for long-term UK resident domiciliaries, resulting in more tax for the Exchequer.  However, in order to encourage wealthy non-UK domiciliaries (who were not born in the UK with a UK domicile of origin) to stay in the UK once they became deemed domiciled under the new 15 out of 20 year rule, certain trust protections were introduced.  These protections effectively allow income and trust gains to continue to roll-up tax-free in trusts until the non-UK domiciliary receives benefits from those trusts.

Notwithstanding this, given the complexity of the new rules and general uncertainty as to what other changes may be brought in by the UK Government in the future, it is understandable that a number of non-domiciliaries are considering whether it is worth retaining their offshore trust structure at all.

If a decision is made to wind up a trust structure, then there are many issues to be considered including the settlor’s intentions, what assets are held within the trust structure and how to tax efficiently make distributions from the trust to beneficiaries (particularly where some or all are UK resident and/or the structure includes an offshore company).  In many cases, there may be significant benefits in doing this before the non-domiciliary becomes UK resident and/or before becoming deemed domiciled under the new rules.

This is not to say that trusts can’t still be useful structures for asset protection and succession planning, but such structures now more than ever require constant review and transactions need to be closely monitored to ensure that tax liabilities are not inadvertently triggered or missed.  Key points to consider in this regard include:

  • To avoid “tainting” a protected trust, no property or income should be added to the trust at any time after 6 April 2017 by the settlor at a time when the settlor is deemed domiciled in the UK under the new 15 out of 20 year rule. There are many ways that a protected trust can be tainted, including by way of loans between the settlor and the trust/underlying companies and between trusts created by the same settlor.  These must therefore be kept under continual review to prevent tainting.
  • Where the trust is in receipt of offshore income gains from non-reporting funds, such income gains may be taxable on an arising basis (and not just when benefits are received) on a settlor who is deemed domiciled under the new rules.
  • Distributions to close member families need to be monitored. This may involve trustees not only keeping detailed records but also notifying the settlor when such payments are made to enable a settlor to include these on his/her personal tax returns.
  • Whether the onward gifts rule applies where distributions are made to a non-resident or remittance basis user which is later gifted to UK residents.
  • Whether more frequent distributions should be made to beneficiaries on an annual basis in order to allow them to utilise allowances and lower rate bands and whether there may be advantages in accelerating or delaying distributions depending on the circumstances.

The bottom line is that the new trust rules are complicated and unfortunately there is no one-size fits all solution.  Settlors and beneficiaries of offshore trusts should therefore take advice as soon as possible to understand and identify future tax exposures before it is too late and costly mistakes are made.

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