Where does the use of offshore trusts sit on the tax risk spectrum?

There is sometimes a fine line between legitimate strategic tax planning and the creation of artificial tax schemes which HMRC may characterise as tax avoidance. Tax avoidance is generally defined as using legal means to pay the least possible amount of tax (as opposed to tax evasion, which involves using illegal methods). However, HMRC are taking an increasingly strong line to challenge schemes or arrangements which may break no laws at the time they are undertaken, but use those laws to produce outcomes which the legislators never intended. Bearing this in mind, would establishing an offshore trust be considered tax avoidance or legitimate tax planning?

The key point to consider in answering that question is what were HMRC’s intentions when drafting the legislation in question. If we take a common scenario of a non-UK domiciled individual who is considering establishing an offshore trust, HMRC have introduced new legislation which potentially provides tax advantages to the settlor of the trust. HMRC drafted the new rules specifically to provide tax savings to such individuals. Consequently, in this scenario we can confidently affirm the use of an offshore trust is definitely not tax avoidance but legitimate tax planning. If a non-UK domiciled individual establishes an offshore trust, they would simply be taking advantage of UK tax rules which HMRC acknowledge provide tax advantages. HMRC have even given such trusts established by a non-domiciliary a specific name, “protected overseas trusts”.

As with any tax legislation, the rules which need to be considered are complex and it is essential that an individual ensures they meet the specific criteria to be able to benefit from a protected settlement. However, assuming they do satisfy the criteria, the individual should be able to benefit from tax savings which include the following:

  • no UK income tax on foreign income within the trust (HMRC refer to such income as “protected foreign source income”);
  • no capital gains tax on the disposal of assets held within the trust (other than disposals of UK residential property); and
  • no UK inheritance tax to pay on assets held within the trust on death of the settlor provided the assets are “excluded property”.

At Abacus we specialise in establishing and administrating offshore trusts for non-UK domiciliaries, we understand the complexities of UK tax legislation and we can help you establish whether you can take advantage of tax savings offered by creating a protected settlement.

If you are interested in learning more or have any questions, please feel free to contact me at kevin.loundes@abacusiom.com or call on +44 1624 689608.


Written by Kevin Loundes, Associate Director