Proposed Changes for Non-UK Trusts
Story added: 25/02/2008
Changes are proposed to take effect on 6 April 2008 that will affect the UK tax position of both settlors and beneficiaries of offshore trusts.
Settlors
Currently UK residents who are not domiciled in the UK are explicitly excluded from the anti-avoidance provisions that apply to tax gains of UK domiciled settlors and beneficiaries of foreign trusts. The proposed legislation will change this, undoing a good deal of tax planning with one stroke and requiring much painstaking review and analysis in a very short timescale.
From 6 April 2008, any capital gains realised in a foreign trust will be attributed to the UK resident non-domiciled settlor if that settlor retains an interest in the trust. Interest is broadly defined in this context. - Gains realised on UK assets will be taxed on an arising basis.
- Gains on non-UK assets will be taxable on a remittance basis if such basis has been elected.
- If the gains are not remitted then they will be attributed to capital payments made to beneficiaries.
Beneficiaries
Under current rules, the trustees of a non-UK trust can appoint capital to beneficiaries who are resident but not domiciled in the UK without any UK tax consequences. This is regardless of what capital gains might have been realised within the trust, even if these gains relate to UK assets.
The draft legislation proposes that non-domiciled beneficiaries will be treated in the same way as UK domiciled beneficiaries. Capital gains realised by the trustees of a non-UK trust will be attributed to capital payments made to the beneficiaries and subjected to UK capital gains tax. - It is important to note the remittance basis does not apply in making these proposed changes to the taxation of these beneficiaries. The attribution rules dictate that the charge to tax applies when the capital appointment is made. This is regardless of the situs of the asset upon which the gain is realised by the trust.
- Additionally, the need to match capital gains to capital payments and the absence of any transitional provisions from the draft legislation mean, although effective 6 April 2008, the legislation may very well have retrospective implications.
- If capital payments made to a non-domiciled beneficiary prior to 6 April 2008 (when such payments were beyond the scope of UK tax) have not been matched by capital gains realised by the trustees in the same period, then the beneficiary will be subject to capital gains tax as soon as the trust realises gains after 6 April 2008.
- If there are undistributed capital gains in the trust and a capital payment is made to the beneficiary after 6 April 2008, then the gains realised by the trustees before the legislation was in effect will be matched against the capital payment. These gains become chargeable to capital gains tax on the beneficiary at the time of the capital payment.
- To the extent that capital gains arising to the trustees prior to 6 April 2008 can be matched against capital payments made to beneficiaries prior to 6 April 2008 (which in many cases is no small task), then the settlement can enter the new regime clean.
Draft legislation published 24 January confirms the intended introduction of an 18% flat rate for capital gains tax effective 6 April 2008. To the extent old gains are matched against capital payments made to a non-domiciled but UK resident beneficiary there is an additional charge of 10% per year over a maximum of six years. This gives a potential effective rate of 28.8% on gains within offshore trusts that have not been distributed prior to April 2008.
Please contact us if you are concerned you may be affected by the proposed changes.
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