Will offshore trusts still provide tax advantages for non-doms post April 2017?
HMRC published a further consultation document on the proposed reforms to taxing non-UK domiciled individuals (“non-doms”) in August. This consultation document provided further insight and guidance on what the new regime will look like, in particular how non-doms will be taxed in relation to offshore trusts they have settled. There are still a number of uncertainties and unanswered questions, nevertheless if a non-dom is to be well prepared for the changes, they should be considering what action they can take now. After all, the 6 April 2017 is not far away which leaves only a short window for undertaking tax planning.
What have HMRC said about offshore trusts?
HMRC have reiterated their position that trusts created before an individual becomes deemed UK domiciled will continue to have protected status from a UK tax perspective. This is positive news generally; however for individuals who are due to become deemed UK domiciled on 6 April 2017 under the new 15 out of 20 deeming rule, time is running out to create an offshore trust and to benefit from this “protected” status.
It is important to note, for the purposes of this article we are only considering non-doms who were not born in the UK with a UK domicile of origin. We are solely concerned with individuals who will become deemed UK domiciled on 6 April 2017 under the new 15 out of 20 deeming rule.
How will offshore trusts be taxed post April 2017?
Currently, one of the main tax advantages of an offshore trust settled by a non-dom is that trust assets can remain outside the scope of UK inheritance tax (even if the settlor subsequently becomes deemed UK domiciled). This position will remain unchanged which means an offshore trust will continue to offer significant inheritance tax savings for non-doms. The one exception here is in relation to UK residential property; however, other UK asset classes can potentially be sheltered from UK inheritance tax by holding them via an offshore trust structure.
Any UK income within an offshore trust will be taxable on the settlor (which is no different than the current position). Foreign income, ie non-UK source income, will be pooled and matched to distributions to a “relevant person”. Where such a distribution is made, the pooled income will be taxable on the settlor. In tax years where no such distributions are made, the trust acts as a potential shelter from UK income tax.
Distributions to non-relevant persons (eg an adult child) will potentially be taxed with reference to trust income depending on the beneficiary’s personal tax status. The tax position of beneficiaries in this regard appears to be largely unchanged from the existing rules.
Capital gains tax
In short, the settlor will not be taxed on capital gains within the trust structure unless they, their spouse or their minor children receive a benefit from the trust or the settlor adds further assets to the trust after they have become deemed UK domiciled. If either of these scenarios occurs in the future, the “protected status” of the trust is lost forever (ie, the settlor will be taxable on any trust gains personally in the future).
This means that offshore structures can potentially continue to offer a shelter from UK capital gains tax for non-doms. In order to preserve this tax “protected” status, it is essential that distributions are not made to a relevant person. This potentially presents an issue if the non-dom were to require distributions in the future. This potential issue could, for example, be addressed by the non-dom settling more than one offshore trust. One trust could be used to benefit the settlor and his family (this trust would not provide a shelter for UK capital gains tax but it should continue to offer protection from inheritance tax). The second trust would remain untouched, allowing capital gains to be realised free from UK capital gains tax (with the exception of UK residential property).
It may be difficult to draw definitive conclusions from the information available. However, from what we know already, it seems clear that non-doms will continue to be able to benefit from settling an offshore trust. Yes, there are complications which need to be addressed, but these complications can potentially be addressed if a non-dom acts promptly and allows their tax advisor time to consider their position and how best to proceed.
It would appear, with the right planning and circumstances, an offshore trust should provide protection from UK inheritance tax and the settlor should not be taxed on foreign income and capital gains within the trust structure. This is excellent news and surely should provide an incentive for non-doms to consider their position now rather than waiting until closer to the 6 April 2017 deadline.
Written by Kevin Loundes, Associate Director at Abacus Trust Company Limited