The Finance Bill 2017 was severely curtailed due to the general election and many of the provisions were subsequently included in another Finance Bill which is to have effect retrospectively from 6 April 2017.
However, some provisions were not included, but the government has stated that they will re-emerge with effect from 6 April 2018.
These represent an opportunity to ensure that your trust matters are in order, so that the new rules will not catch you out.
At present, the pool of accumulated gains in an offshore trust with both UK resident and non-UK resident beneficiaries is distributed first to non-resident beneficiaries to reduce or eliminate the accrued gains before distributing to a UK resident beneficiary, who would otherwise be taxed on the gain. New rules are to be introduced to prevent the gains being “washed” to non-UK resident beneficiaries before distribution to UK beneficiaries.
Another rule will target UK individuals who receive gifts from non-UK beneficiaries made out of distributions from an offshore trust, originally received by the non-UK resident, non-UK domiciled individuals within three years of the distribution, where the ultimate recipient would have been taxable had they received the distribution directly from the trust instead of via the non-resident person.
A third measure will tax the settlor on gains matched with distributions to close family members who do not pay tax, because they are either non-UK resident or non-UK domiciled. Another provision matches trust income against distributions to the settlor or to a close family member.
New rules affect any offshore structures, deriving their value from:
- UK residential property
- Loans used to acquire, maintain or improve residential property
- Collateral provided for such loans
These structures have been systematically attacked by ATED (Annual Tax on Enveloped Dwellings), new rules for charging Capital Gains Tax on UK residential properties owned by non-UK residents and the new UK beneficial ownership register, thus ensuring lack of confidentiality.
It may be a good idea to dismantle these structures as soon as possible, particularly as the Inheritance Tax cost of doing so will increase with every quarter the property is in a trust. Another tax involved will be Stamp Duty Land Tax on any deemed consideration.
Deemed Domicile and Protected Trusts
A ‘protected trust’ is an offshore trust created by a non-UK domiciled settlor. The benefit of protected trusts is that capital gains are not taxed on the settlor as they arise, but postponed until a distribution is made. For income tax, the situation is more complicated, but foreign income retained in a trust will be available for matching against benefits received by a beneficiary.
Where benefits are received by a close family member of the settlor who is either non-UK domiciled or a remittance basis user, HMRC can recover the tax from the settlor.
These protections can be lost for both income tax and capital gains tax if further property, value or income is added to the trust by the settlor, or by trustees of another trust connected with the settlor, or when the settlor becomes UK domiciled under general law.
There is a period of grace for those settlors who became deemed domiciled under the new rules from 6 April.2017. During this period, any loans need to be reviewed and either put on arm’s length terms or repaid, otherwise the trust will become ‘tainted’.
Make distributions to non-UK domiciled beneficiaries before 6 April 2018, in order to use up any capital gains pool.
Separate mixed accounts
There is a window of opportunity to separate mixed accounts. Where a non-UK domiciled individual elects for the remittance basis, it is necessary to identify the source of the remittance i.e. whether it is capital, gain or income or they may be taxed as income. The latest provisions offer the chance to separate mixed accounts before 5 April 2019.
Business Investment Relief
Take advantage of Business Investment Relief, which is being extended to relax many of the previous requirements.
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