UK situs trust assets – offshore trustees caught in UK tax net!

The UK tax net may be wider than perhaps thought, catching out unsuspecting offshore trustees holding UK situs assets. What are the main traps to be aware of?

Trustees liability to income tax

HMRC, with the trustees being liable to UK income tax on all UK source income arising at trust level. Where a managed investment portfolio is held at trust level it is not uncommon for the trustees to discover, often after the event, that they have held UK source investments within the portfolio. In many cases, as a non-UK resident entity, the trustees have the option of claiming excluded income treatment in respect of their UK source income. This effectively removes the UK source investment income (eg dividends and interest) from the charge to tax. However, it does not remove UK source trading income or rental income which will always be taxable in the UK. A key point to also note is that, where the trust has any UK resident beneficiaries at any point during the tax year, the excluded income treatment will not be available – even if the UK resident beneficiary has not benefited from the trust in the year. Care therefore needs to be taken where the trust has a particularly broad class of beneficiaries.

Capital gains tax bites residential property

Generally, offshore trusts are not subject to UK capital gains tax (CGT) on their disposals even of UK situs assets. However, from April 2015, non-residents will potentially be subject to UK CGT on disposals of UK residential property. It is proposed that this will include offshore trusts as outlined in HMRC’s consultation – Implementing a capital gains tax charge on non-residents, issued recently. RSM is responding to the consultation and will issue further comment in due course.

Inheritance tax charges

The final key UK tax consideration for offshore trustees is in relation to UK inheritance tax (IHT). Offshore trusts which contain no UK situs assets at trust level contain no relevant property and are therefore completely outside the scope of UK IHT. However, where the trust holds UK situs assets at trust level it will fall within the relevant property regime and will potentially be subject to periodic IHT charges on each 10 year anniversary of the trust, or exit charges when UK situs assets leave the trust. These charges can be at a rate of up to 6 per cent on the value of the UK situs assets. In addition, an extensive UK IHT return will require filing.

Summary

Where an offshore trust has any connection to the UK (be that UK situs assets, an investment portfolio with a UK element, UK resident beneficiaries or settlor), we would recommend a thorough review of the UK tax position. It is not unusual for UK situs assets to be discovered as offshore trustees grapple with their extending responsibilities and the wide UK tax net.