The Government continues to restrict the tax advantages of using an offshore trust.
Changes to the non-UK domiciled tax regime in April 2017 were aimed specifically at restricting the use of the offshore trust and other non-UK structures used to hold UK residential property.
In response to the new rules, clients and advisers have been recommended to review their existing tax structures, including offshore trusts, to ensure such non-UK structures remain fit for purpose.
Non-UK domiciled individuals that are resident in the UK are likely to have established non-UK structures as a vehicle for their assets. The status of these structures should also be reviewed.
UK domiciled and resident individuals must continue to ensure that they meet their tax obligations in relation to any offshore assets due to increased HMRC scrutiny and increased international reporting requirements such as the Common Reporting Standard (“CRS”) and FATCA.
However, an offshore trust does remain a legitimate asset protection and tax planning tool in certain circumstances – requiring careful planning, knowledge of the new rules and experience of international tax.
Here to help
ETC are specialist advisers to UK and non-UK domiciled individuals on all aspects of offshore trusts and wider tax structuring issues. We are experienced in reviewing tax structures, ensuring they are fit for purpose.
Despite the changes in rules relating to the taxation of non-UK domiciled individuals, there are still opportunities to establish new structures, depending on the circumstances. For individuals with substantial private wealth, we can devise effective tax strategies based on their particular needs and lifestyle – this might include considering the relevance and impact of an offshore trust and other non-UK structures.
We also advise non-UK residents who have emigrated and those with no connection to the UK other than the fact they might, say, be acquiring property in the UK.
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Are offshore trusts still attractive for tax planning purposes?
There have been many changes to UK tax rules, over a long period of time, that have chipped away at the potential uses for non-UK trusts for UK domiciled individuals. As such, opportunities in this areas may be less relevant to UK domiciled individuals – unless there are sound commercial reasons for establishing such trusts or where structures are set up in particular jurisdictions.
However, for non-UK domiciled individuals who are internationally mobile –from both a personal and business perspective – the offshore trust remains a legitimate and useful tax planning and asset protection tool.
We can advise on the suitability and use of offshore trusts as part of your specific tax planning requirements. As with any tax planning, ascertaining the personal and commercial objectives of an individual or family are fundamental to any planning undertaken.
What is the ‘Common Reporting Standard’?
In September 2017, the Organisation for Economic Co-operation and Development (“OECD”) launches a new standard for the automatic exchange of tax and financial information on a global level.
More than 100 countries have signed up to the initiative.
From a UK perspective, the Common Reporting Standard will require overseas financial institutions to provide details to HMRC about anyone who owns foreign investments and appears to be a UK resident, for example by having a UK postal address.
Those with assets held overseas are advised to review and ensure their assets and associated structures are compliant with the new standard.
The standard also placed a requirement on financial Institutions and certain relevant persons, including professional tax advisers, to notify certain clients about the Common Reporting Standard.
What about the impact of the Finance Act 2017 on offshore trusts?
All clauses referring to non-UK domiciled individuals were temporarily dropped from the Financial Bill 2017 after the General Election was announced – primarily to ensure swift passing of the Finance Act 2017 before the election took place.
The second Finance Bill 2017, announced in July 2017, reinstated provisions that revised the definition of excluded property in relation to non-UK domiciled where the underlying assets in a structure is of UK residential property (and associated loans and collateral).
This means that where a non-UK domiciled individual held UK residential property and relied on the ‘excluded property’ rules (because it was held through a non-UK structure) then that property is brought in to their estate for inheritance tax purposes and subject to tax.
Where one is effected by this structure, or you are non-UK domiciled individual looking to structure such property, then one should look at holding the assets through a different vehicle.
The non-dom rules also introduced other changes for non-UK trusts that were established by persons that are effected by the new deemed domiciled rules – see below.
Protected status for trusts – Finance Bill 2017 changes for non-doms
Protected status is only available for an offshore trust created before a settlor becomes ‘deemed domiciled’.
Under the new Finance Bill provisions, the status of ‘deemed domicile’ is to be applied for tax purposes to individuals who have been resident in the UK for 15 out of the previous 20 years, providing protection from income tax, capital gains tax and inheritance tax for offshore trusts established before deemed domicile, unless those trusts are ‘tainted’ by additions.
‘Tainting’ will occur if an addition is made to the trust after the settlor has become deemed domiciled in the UK with some limited exceptions.
An addition by someone other than the deemed domiciled settlor will not taint the trust, but an addition from another trust (from which the settlor can benefit) will taint the trust.
Care must be taken with regard to making loans or appointments between trusts, as these may taint the trust and cause protected status to be lost. Protected status will be lost permanently where property or income is paid into the trust although property added as part of an arms-length transaction will not cause protected status to be lost.
Protected status only applies to offshore trusts and not to directly held offshore companies or directly held investments. Accordingly, those non-domiciled individuals who hold investments, whether personally or in offshore companies, and who become deemed domiciled on 6 April 2017, should consider whether assets will also form part of their estates for IHT purposes.
These provisions will apply in a number of cases and, in addition to reviewing existing corporate ownership of residential properties, individuals and trustees will also need to consider whether any existing loan arrangements may need to be examined.
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OFFSHORE TRUST ADVICE
Essential information about offshore trusts.
For many years, if you are UK resident and UK domiciled then offshore trusts have provided you with no benefit at all. This is down to the plethora of anti-avoidance rules which exist in this area.
Yet – offshore trusts may still have some benefit for non-doms and for non-resident investors.