Offshore Trusts Print
UK source income of an offshore trust is liable to tax in the UK if a beneficiary or potential beneficiary is resident here. Any income distributions to a UK resident beneficiary will be taxable on the beneficiary, but if the income distributed arises from a UK source it will normally be taxed in the first instance at the trust level, so the beneficiary will be able to claim credit for the UK tax paid by the Trust.
Where a UK non-domiciled resident beneficiary receives a distribution of overseas income or gains from an offshore trust he will be taxed on the income or gains, subject to his entitlement to claim the remittance basis, and provided he pays the remittance basis tax charge, if relevant. It should be noted that even if the offshore trust has suffered foreign tax on its income, the beneficiary receiving the distribution from the trust will not be entitled to claim tax credit relief for any of the tax paid by the trust.
Where the offshore trust is a settlor-interested settlement, the income of the trust is automatically taxable on the settlor even where no such income has been distributed to him. If the income is foreign source then the settlor can avoid paying tax on this income by claiming the remittance basis, and paying the remittance basis tax charge if relevant. He will not be able to avoid a tax liability on any trust income which has a UK source.
The main difference between the tax treatment of the settlor and a beneficiary is that the beneficiary is only taxable if a distribution is made to him by the trustees, whereas the settlor is automatically taxable on the trust income.
Up to 5 April 2008 capital gains of an offshore trust were not taxable on a non-domiciled UK resident individual, even where the gain was remitted to the UK. From 6 April 2008, the capital gains of an offshore trust are taxed on the remittance basis whether the assets are UK situs, or offshore.
Trustees of offshore trusts can make an irrevocable election to rebase all the trust assets at their value as at 6 April 2008, so that the assets are deemed to have been acquired at their market value on 6 April 2008. Accordingly, where the election is made, any gains taxable on a non-domiciled beneficiary will be limited to the growth in value from 6 April 2008 up to the date of disposal.
This election must be made no later than 31 January following the end of the tax year during which the first capital distribution is made to a UK resident beneficiary after 5 April 2008. It should be noted that for these purposes either the provision of living accommodation or the granting of a loan are treated as capital distributions.
Capital distributions made to beneficiaries will be matched to gains, but these are limited to gains made after 6 April 2008, so there is no retrospective taxation of gains made by an offshore trust before 6th April 2008 which are distributed to beneficiaries after that date. The matching is first made against gains arising in the year, or prior years. If there are no such gains then the distribution is matched with gains of subsequent years.
The rules regarding trust income and gains are being relaxed where the individual is the settlor, and he does not take benefits from the trust or its underlying companies. The draft Finance Bill 2017 contains the clauses affecting CGT, but the draft legislation regarding income tax has not been released at the time of writing. The following paragraphs cover what is understood to be the changes to the income tax rules as well as a summary of the draft Finance Bill 2017 changes for CGT.
Under the proposed new rules from 6 April 2017 the settlor of a trust created before he becomes deemed domiciled in the UK will be protected from the normal attribution of income or gains rules provided he does not receive any benefits from the trust.
Foreign source income of a trust will only be taxed on the settlor to the extent that it can be matched with a benefit received by the settlor, his spouse etc.
As foreign source income will in future be matched to benefits received by the settlor, from 6 April 2017 overseas trusts may be able to invest in UK situs assets without triggering a remittance charge on the settlor provided the settlor, his spouse, minor children and grandchildren do not benefit from the investment. Under the present rules applying up to 5 April 2017 the settlor is taxed on any income or gains the trust, as a relevant person to the settlor, remits to the UK.
Underlying companies of a trust will not be required to pay up their foreign source income to the trust, and whilst the income remains within the company it will not be matched with any benefits paid.
CGT will not be attributed to the settlor under Section 86 TCGA 1992 unless the settlor is actually domiciled in the UK, or the trust is tainted by further additions by the settlor. Instead, the settlor will be taxed on the benefits he receives from the trust – in the same way as any other beneficiary.
Currently capital gains of a trust are matched to all capital distributions made to beneficiaries, wherever they are resident. From April 2017 trust gains will no longer be matched to benefits paid to non-resident beneficiaries. This will also apply to unmatched benefits made before 6 April 2017 which are subsequently matched to trust gains arising after 5 April 2017. There is one exception to this rule, and that is for the year the trust is terminated when gains will be apportioned across resident, and non-resident beneficiaries.
New rules are also being introduced to prevent onward gifting of capital distributions. Where a capital payment is made to a non-UK resident beneficiary, or a beneficiary who is a remittance basis user who does not remit the distribution to the UK, and within 3 years the beneficiary gives the distribution to a UK resident beneficiary, then the UK beneficiary will be taxed on the gain as if the trust had made the distribution to him at the time the onward distribution is made. Where the distribution is transferred between a number of beneficiaries who are not taxable on the gain, then the 3-year time limit applies between each transfer up to the time the benefit is received by the UK resident non-remittance basis user.
The onward gifting rules apply to all such gifts made after 5 April 2017 even where the original distribution from the trust is made before 6 April 2017. Accordingly, any onward gifts should be made before 6 April 2017.
A further provision prevents circumvention of these new rules by a beneficiary making the onward transfer before the capital payment is made from the trust.