Offshore trusts - window of opportunity

04 April 2018

Finance (No. 2) Act 2017 received royal assent on 16 November 2017 and provided much needed clarity on the shape of the new tax regime for offshore trusts which applies from 6 April 2017. However, the introduction of the related anti-avoidance rules has been delayed. Draft legislation on these anti-avoidance provisions was released as part of the subsequent Finance (No.2) Bill 2017–19 and it is proposed they will apply from 6 April 2018. So what opportunities should trustees be considering and what are the proposed anti-avoidance rules?

Recap on what’s in from 6 April 2017

The main provisions for tax in relation to offshore trusts are as follows:

  • Protection – any trust in place prior to the time when the settlor becomes deemed-domiciled in the UK (other than former UK domiciliaries returning to the UK) for income tax and capital gains tax purposes will be ‘protected’, such that income and gains arising in the trust will not be taxable unless there is a distribution from the trust.

  • Tainting - protection will be lost if an addition is made to such a trust by the settlor whilst domiciled or deemed domiciled in the UK after 5 April 2017.

  • IHT – non-UK situated assets held in trusts in place prior to when the settlor becomes domiciled or deemed-domiciled in the UK will remained excluded for IHT.

What is proposed from 6 April 2018?

The anti-avoidance provisions , which are now proposed to apply from 6 April 2018, include rules that:

  • disregard capital payments to non-residents for stockpiled gains attribution purposes;
  • disregard certain unmatched capital payments to migrating beneficiaries;
  • deem capital payments to close family members to have been received by UK resident settlors; and
  • tax onward gifts made to UK residents by individuals who are not subject to UK tax .

The delay is good news as it means that there is still time to consider planning opportunities such as making capital payments to non-resident beneficiaries before the anti-avoidance rules kick in.

What now?

Although the dust is still settling from the rush to review and restructure offshore trusts by 5 April 2017, there is still plenty for offshore trustees to consider in the short term.

  • Following the deferral of some of the anti-avoidance provisions, what are the planning opportunities?
  • Are there any arrangements in place which may taint a trust’s ‘protected’ status? In relation to non-commercial loans made to the trust, there is a window to 5 April 2018 to restructure the arrangements, either by repayment of the loan or by putting it on an ‘arms-length’ basis.
  • Review the potential benefit charge for structures with loans to beneficiaries, or those which hold land (and buildings) and/or moveable property .
  • Review and update procedures for maintaining records of income and gains arising in trusts.

Whilst it has been a long and winding road, the journey to the new offshore trust rules is finally nearing an end. The good news is that offshore trusts may still offer benefits for many non-doms. The bad news is that, for some existing trusts, the window of opportunity to maximise those benefits is getting smaller and action must be taken now. 

For more information, please get in touch with Tim Stringer.