The Pre-Budget Report (PBR), given on 9 October 2007 and the subsequent Consultation Paper introduced potential changes to the tax treatment of offshore trust structures holding UK commercial or residential property (whether for occupation or investment). Draft legislation has not yet been published, but if the rules are changed as the proposals would suggest this could have adverse tax implications for UK resident settlors and beneficiaries or other private investors.
In a typical property holding structure, an offshore trust owns a UK property through an offshore company. The property is either occupied by the settlor or another beneficiary of the trust or is let out at a market rent.
This structure is beneficial from a UK tax perspective as it protects the UK property from exposure to an inheritance tax charge.
What are the changes proposed by the PBR and how will they impact upon the structure?
Many of the people who established a structure similar to that described above or who benefit from such a structure are not domiciled in the UK. Apart from the inheritance tax benefits of such a structure, those people also took advantage of the fact that trust gains would not be taxed in the UK. UK property held within the structure could be sold without any UK tax liability arising which may not have been the case if the property had been held directly by the settlor or beneficiary.
If the new rules are introduced as proposed, this capital gains tax benefit will be lost. What are the implications for settlors and beneficiaries?
If the property is sold and the company realises a gain (or the company is liquidated the trust realises a gain), this gain may be taxed in the hands of the settlor or a beneficiary who receives a benefit from the trust. This will be the case if the settlor or beneficiary is resident in the UK (whether or not he is UK domiciled). The settlor may be able to recover any UK tax paid from the trust but a beneficiary taxed under these provisions will not.
The gain for these purposes is likely to be calculated by reference to the base cost which will probably be the initial purchase price. Use of a company in these structures can also have the effect of increasing the gain.
What should settlors and beneficiaries do now?
It is anticipated that the new rules will apply to gains realised after 6 April 2008. Individuals who have established structures holding UK property or who can benefit from trusts holding UK property should investigate as soon as possible whether the trust should be restructured.