20 March 2018
The Pre-Budget Report (PBR) published on 9 October 2007 and the subsequent Consultation Paper proposed changes to the tax treatment of offshore trust structures. Draft legislation has not yet been published, but if the rules are changed as the proposals suggest there could be adverse tax implications for non-domiciled UK resident settlors and beneficiaries. Although uncertainty remains, there is value in considering whether steps need to be taken in advance of 6 April 2008 to improve the position.
What are the key changes affecting trusts proposed by the PBR?
HMRC have promised to correct certain ‘flaws and anomalies’ in the current rules applicable to non-UK domiciliaries who are resident in the UK. The emphasis will be on ensuring that income and gains brought into the UK are taxed by shutting down a number of widely used ‘loopholes’. We cannot be confident about how these changes might be implemented until we see the draft legislation but it seems clear that the beneficial way in which capital gains realised by offshore trusts are currently treated in the hands of non-UK domiciled beneficiaries and settlors is to be reformed.
As the rules stand, the capital gains of an offshore trust are not taxable in the hands of non-UK domiciled beneficiaries even if they are resident here and receive distributions or benefits in the UK.
Equally, a non-UK domiciled settlor who retains an interest in an offshore trust will have no UK tax liability in respect of trust gains, even if he is UK resident.
This is all set to change.
It seems more than likely that from 6 April 2008 any trust distribution received by a UK resident beneficiary in the UK will trigger a charge to capital gains tax by reference to gains realised by the trustees even if the beneficiary is not UK domiciled. What is not clear is whether gains realised prior to 6 April 2008 will be brought into charge or whether any such gains will be ‘grandfathered’ under the new provisions.
Equally, it seems likely that a UK resident but non-UK domiciled settlor of an offshore trust will be taxable on UK source gains realised by the trust as they arise and on gains made abroad when the proceeds of sale of the assets disposed of are brought into the UK.
Overlaying these changes is the proposed reduction of the rate of capital gains tax to 18%.
What should settlors and beneficiaries do now?
Whilst final decisions should be deferred until the draft legislation is available, preliminary consideration should be given to possible planning opportunities and defensive strategies. Of course every situation will depend on its own facts and there is no one size fits all solution, but thought might be given to the following:
- identifying UK situs trust investments and considering alternative non-UK investments
- identifying the base cost of trust investments
- taking steps to secure an increase in the base cost of trust investments to minimise potentially chargeable post 5 April 2008 gains (where a multi-tiered structure is involved, it will be important to increase the base cost of the underlying assets as well as those of the intermediate holding companies)
- considering the continued efficacy of structures that utilise a trust and company structure to hold UK situs assets, in particular real estate – bearing in mind that there may be other tax implications of any reorganisation
- considering the profile of investment portfolios – in the advent of the new rules will a capital return give a better overall result than an income return?
- considering making distributions before 6 April 2008 to reduce the ‘pool’ of potentially taxable gains within an offshore trust
These are just some of the issues that well prepared settlors, beneficiaries and trustees should be turning their minds to.
The continued uncertainty leaves settlors, beneficiaries and trustees in a precarious position. However, by giving thought to defensive planning techniques you can be ready to move quickly once the detail of proposed changes has been made public.