Frequently Asked Questions
I will become deemed domiciled for all tax purposes from 6 April 2017, and I set up an offshore trust when I was not UK domiciled. How will the new income tax rules affect me?
Long term residents in the UK will have to pay tax on their worldwide income from 6 April 2017 for the first time. If you have been in the UK for 15 of the last 20 tax years you will not have the choice of using the remittance basis. If you settled a trust which has overseas income and you retain an interest in the trust, then without additional rules you would be charged to the income in the trust as it arises.
Finance Bill 2017 introduces the concept of a ‘protected settlement’. This is a trust where nothing has been contributed to the trust after 5 April 2017 (other than a transaction at arm’s length). If the trust has ‘protected foreign income’, then this income is not charged on the settlor even if they file UK tax returns reporting worldwide income provided that the trust is not added to after 5 April 2017. If funds are contributed to the settlement, the protected status of the trust is lost and income is taxed on the settlor on the arising basis. There is no way to regain ‘protected’ status after it has been lost
For trusts set up after 5 April 2017, care must be taken in setting the trust up, as creating a trust with a nominal amount (say £100) and adding significant property at a later date (which commonly happens at the moment) could compromise the status of the trust.
I will become deemed domiciled for all tax purposes from 6 April 2017, and I set up a non-UK trust when I was not UK domiciled. How will the new capital gains tax rules affect me?
The new capital gains tax rules mirror the income tax rules above. If an individual becomes UK domiciled by being a long term resident in the UK (15 out of 20 years in the UK) then if they are a settlor of a trust and retain an interest in the trust, they could be charged to tax on trust gains as they arise. A settlor will be regarded as retaining an interest in a trust for capital gains purposes unless they and their immediate family (including adult children) no longer have an interest in the trust.
If the settlement is a ‘protected settlement’ then the rule that attributes capital gains to the settlor does not apply. However, the settlement will lose its protected status if there is any property added to the trust. See also the questions below, and also the planning points for what you can do in advance to ensure you are in the best possible position when 6 April arrives.
I have capital gains in a trust I set up. Can the trust make distributions to non-UK resident beneficiaries to use up the gains?
From 6 April 2017, distributions to non-UK resident beneficiaries will not use up the capital gains pool within the trust. Currently, it is possible to distribute capital out to a non-UK resident beneficiary to use up any undistributed gains in the trust so that distributions to UK resident beneficiaries are non-taxable ‘clean capital’. However, this is changing so that after 5 April 2017 capital distributions to non-UK beneficiaries will not use up the gains pool and it remains available for distributions to UK beneficiaries.
The only planning here seems to be to ensure that any capital distributions to non-UK beneficiaries are made before 6 April 2017 so the gains can be ‘washed out’. Note that distributions in excess of the gains pool do not carry forward for non-UK beneficiaries, so it is not possible to use post 5 April 2017 gains against a pre 6 April 2017 distribution to a non-UK beneficiary.
What will happen if a trust of which I am the settlor makes a distribution to my family who are overseas?
From 6 April, a settlor will be liable to capital gains tax if the Trustees make a capital distribution to a non-UK resident beneficiary who is closely related to the settlor and the settlor is UK resident. A close relative is the settlor’s spouse (or co-habiting partner) or minor child. It is therefore worth considering how and to whom distributions are made, as you could be taxed at your marginal rate of tax for distributions after 5 April 2017.
Can we get around the rules by the trust making a distribution to a non-resident beneficiary and then they pass on some or all of that distribution to a UK resident beneficiary?
This idea does not work, as ‘onward gifts’ are caught by a new rule to take effect from 6 April 2017. Where a non-resident receives a distribution and within three years of the original receipt makes a payment to another individual who is UK tax resident, then tax is charged on the second individual as if they were the original recipient from the trust.
The aim of the rule is to catch artificial arrangements designed to flout the new rules, but there appear to be innocent situations that could be caught, particularly since under the rule there does not need to be a causal link between the original distribution and the subsequent onward gift.
For example, a father (working overseas so not UK resident) receives a distribution from a non-UK trust. He also pays his son’s university fees in the UK from a different account where his salary is paid. This second gift could be caught by the new rule because the father made a gift for the benefit of his son within three years of the distribution (even though it came from a different account).
We have alerted HMRC to this problem and hope to see the point resolved when the revised draft legislation is released on 20 March 2017.
What planning can individuals / trustees do before the new rules take effect after 5 April 2017?
Individuals and trustees should review any loans to and from trusts from the settlor to ensure that they comply with the new rules. The individual and trustees need to make sure there is no deemed addition as a result of the loan which would compromise the ‘protected’ status of the trust if this applies.
Trustees should consider distributing assets to non-UK resident beneficiaries before 6 April 2017 if there are any capital gains in the trust. Capital distributions before 6 April can use up the gains pool in the trust, but after 5 April 2017 this will not be possible. The Trustees should also consider distributing to any non-resident close relatives of the settlor before the tax year end, as after this point, such distributions would be taxed on the UK resident settlor.
For further advice and planning with regard to offshore trusts and the new rules in Finance Bill 2017, please contact us using the details below:
Janet Paterson: janet.paterson@charter-tax.com
Jane Hodge: jane.hodge@charter-tax.com
Tom Barker: thomas.barker@charter-tax.com
Disclaimer
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 16 March 2017.
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.
