Offshore trusts – plus ca change?

18 October 2016

The latest proposals on the taxation of offshore trusts mean offshore trusts may continue to be as attractive as they ever were for many non-domiciliaries (non-doms). 

Where are we now?

After little development for over six months on the proposed changes to the taxation of offshore trusts, the government opened a further consultation on the taxation of non-doms on 19 August 2016. The proposals included in the consultation document on offshore trusts mark a change in course from the direction outlined in the original non-dom reform consultation issued in September 2015.

The new proposals are still subject to consultation and there is a still a great deal of the finer detail yet to be determined, but the indication is that offshore trusts may be just as attractive, if not more so, for many long term resident non-doms who will become deemed UK domiciled (deemed-dom) for income tax and capital gains tax (CGT) purposes under the wider changes to non-dom taxation from 6 April 2017.

What are the new proposals?

The good news is that long term resident non-doms who set up offshore trusts before the deemed-domicile rules apply should be largely protected from the more onerous income and CGT rules, whilst also being able protect their current inheritance tax (IHT) position. It should be noted, however, that the relatively positive position for these long term resident non-doms is in contrast to the position that applies for non-doms with a UK domicile of origin (returning UK doms), who will be taxed on the income and gains of offshore trusts in which they retain an interest as they arise. 

The original proposals to introduce new rules for long term resident non-doms based on the taxable value of benefits received by such deemed-doms, without reference to the income and gains arising in the offshore structure, have been dropped. Instead the proposal is now to alter and extend existing tax anti-avoidance legislation such that:

  • before the settlor becomes deemed–dom, overseas income and gains will be taxable as they arise in the trust unless the remittance basis charge (RBC) is paid;
  • once the settlor becomes deemed-dom, overseas income and gains will not be taxable in the UK unless distributed, and no RBC will be payable;
  • income will be taxed on the settlor when a benefit is received from the trust to the extent it can be matched against relevant foreign income arising in the year;
  • IHT excluded property status will be preserved where relevant;
  • a trust cannot be added to once the settlor is deemed UK-dom, otherwise protection will be lost for all taxes; and
  • protected status will be lost for CGT purposes where capital or income benefits are taken.

The future

The 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 losing the remittance basis. 

The consultation closes on 20 October 2016 and changes will be legislated as part of Finance Act 2017. With the draft Finance Bill 2017 expected to be published late in November, there will only be four months to take action before the rules take effect in April 2017.

Non-doms should therefore plan and prepare for the changes in April 2017, which means taking action now. For non-doms who are not yet deemed-dom, that may mean starting the process of setting up a trust. 

For those with trusts already in place there are a number of planning opportunities to consider, such as advancing benefits or splitting trusts, so these structures should also be reviewed sooner rather than later.

For more information please get in touch with Tim Stringer, or your usual RSM contact.