• Offshore trustees have to pay Income Tax (IT) arising on UK source assets; however, when UK bank interests and dividends from UK companies are held by the offshore trustees, they are exempt from IT provided that for that tax year the beneficiaries were not UK residents.
• Offshore trustees are not liable for UK IT foreign income. To avoid settlors taking advantage of this, the income arising in the trust is taxable on UK – resident beneficiaries when they receive a benefit from the trust;
A benefit will include:
a) a distribution from the trust (either cash or a specific asset)
b) an interest-free loan
c) rent-free use of trust property
• Taxation of trust expenses: If the settlor is liable for IT because he or his spouse and/or minor children can benefit out of a discretionary trust then he cannot deduct any trust management expenses. If the settlor is not taxable on income then as a general principle the trust management expenses can be deducted.
• How Capital Gains Tax (CGT) applies to offshore trusts:
– From 6/04/2015 offshore trustees became liable for CGT on gains accruing to them on disposals of UK residential property.
– For any other type of assets held by the offshore trustees, there is no CGT upon disposal as a result of their non-resident status.
– To avoid settlors exploiting this residence requirement by transferring assets to offshore trusts, the legislation attributes capital gains realized by offshore trustees to either:
a) the settlor on an arising basis
b) if the settlor is not chargeable, to the beneficiaries when they receive a capital payment from the trust.
This requirement concerns settlors and beneficiaries whose domicile status is a UK-resident and will not affect or penalize the non-UK settlors or beneficiaries.
• It is noticeable that s.86 of TCGA 1992 attributes trust gains on settlors when:
a. the settlor has an interest in an offshore trust
b. the settlor is domiciled in the UK for some time during that tax year
c. the settlor is resident in the UK for the tax year or at least is an ordinary resident at some time during the tax year
When the above conditions are met, any gains realized by the trustees during the tax year are attributed to the settlor for CGT purposes.
It is significant that s.86 does not apply to non-UK domiciled settlors.
• Inheritance Tax (IHT) aspect for offshore trusts: for IHT purposes only the domicile aspect of the individual of trust is relevant not taking into consideration the residence status. Generally a Trust is subject to IHT unless it is an excluded property trust, meaning a trust that meets the following requirements:
a. when the settlor creates the trust or adds funds to it he is neither domiciled not “deemed domiciled” in the UK for IHT purposes and has not subsequently elected to be treated as a UK domiciled for IHT purposes for a period that includes the date on which he created the trust.
b. the trust does not own UK based assets.
The applicability of IHT therefore will affect non-UK domiciles since as of 06/04/2017 they will be deemed UK domiciles either due to their long term status (residing in the UK 15 out of the last 20 tax years) or due to their domicile of origin while resident the past 2 tax years in the UK regardless of having a different domicile of choice. The affected UK ‘non-doms’ are strongly advised to seek legal and tax assistance for asset planning while the time window remains open in order to retain their benefits and keep enjoying their non-UK tax exempt and protected treatment.
For more information on asset planning via offshore trust schemes such as a Cyprus International Trust (CIT) and asset management via a trust held insurance wrapper please contact Mr. Paris Hadjipanayis at [email protected].