Long live the offshore trust

06 January 2017

Where are we now?

More than twelve months after the government released the first consultation on non-dom tax reform in September 2015, draft legislation published on 5 December finally provided much needed detail on the taxation of offshore trusts from 6 April 2017. The government’s response to the further August 2016 consultation on these reforms was released at the same time, providing further clarification on a number of concerns raised by interested stakeholders.

It is good news that the government have taken on board these concerns about the original proposals and has relaxed some of the provisions, in particular in relation to capital gains tax (CGT). As a consequence, offshore trusts are likely to continue to be as attractive as ever for many non-doms. 

What are the new proposals?

The good news is that the rules for CGT have changed from the last set of proposals released by the government in August 2016. The potentially punitive proposal that offshore trusts would lose their ‘protected’ status for CGT purposes if capital payments were made to UK resident beneficiaries has been shelved. Instead, the rules for CGT will be largely the same as for income tax.

The proposals are now that: 

  • foreign income arising in an offshore trust will not taxed on the settlor on an arising basis when the individual becomes deemed UK domiciled;
  • overseas income and gains will be taxable on UK resident beneficiaries if they receive a benefit from a trust that is matched to trust income or gains;
  • if a non-UK resident beneficiary receives a benefit from a trust they will generally not be taxed in the UK. However, if the beneficiary is a ‘close family member’, the settlor will be taxed based on their tax status, to the extent the benefit can be matched with the trust’s foreign income or gains;
  • a ‘close family member’ is defined as a spouse, cohabitee or minor child, but not a minor grandchild;
  • inheritance tax excluded property status will be preserved where relevant; and
  • a trust cannot be added to once the settlor is deemed UK domiciled, otherwise protection will be lost for all UK tax purposes.
  • There are, however, new anti-avoidance provisions which have been announced, such that:
  • capital payments made to non-UK resident beneficiaries will no longer be matched with trust stockpiled gains from 6 April 2017; and
  • from 6 April 2017, it will not be possible to recycle benefits from protected settlements by making a payment to a non-resident who lends, or gives it to a beneficiary in the UK within three years.

The future

These most recent proposals, rather than marking the death of offshore trusts, could make offshore trusts a favourable option for holding overseas assets for those long term resident non-doms who will lose the remittance basis under the new rules.

Whilst this is good news, it is disappointing that the government is pushing ahead with the changes from 6 April 2017 and has not delayed the introduction of the new rules for a year. This now leaves little over three months for non-doms and offshore trustees to review their position and to implement any changes to offshore structures that may be considered necessary.

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