Supreme Court decision could have implications for UK trusts

11 August 2015

Joan Foster 

A recent decision from the Supreme Court regarding the UK income tax treatment of a member of a Delaware LLC could have implications for UK trusts with overseas beneficiaries.

If nothing else the recent Anson case reminds us of the complexities of cross-border investments. Four years after the case was first heard at the First Tier Tribunal the Supreme Court delivered its judgment in favour of the taxpayer.

The case considered the UK income tax treatment of a Delaware LLC and whether Mr Anson, a member of the LLC could claim double tax relief for US taxes. Whilst the LLC was classified as a partnership for US tax purposes with members liable to tax on their share of the profits, HMRC argued that UK tax should be charged on the distribution of profits received in the UK as if from a company. The Supreme Court reversed the decision of the Court of Appeal determining that relief was available as both the US and UK tax had been computed by reference to the same profits.

Taxpayers may think that this case has no relevance for them, with Delaware LLCs not being an investment vehicle of choice for most. However, there are many other examples of such disparities.

Take a UK trust with a US beneficiary. Income and gains of the trust are liable to tax in the UK, a liability of UK trustees. The US beneficiary is taxed in the US as income and ‘deemed capital’ is distributed. With UK trustees liable to tax in the UK and the beneficiary liable to tax in the US there is no double tax relief available on either side to mitigate any double charge!

Such examples are not limited to disparities between the UK and US. Continuing with the trust theme, whilst trusts sit comfortably with many jurisdictions, what of those UK trusts with French resident beneficiaries where France has no recognition of trusts as a separate legal and taxable entity?

What taxpayers need to make tax efficient decisions is certainty; something that has become ever more important as members of UK families increasingly migrate abroad. It is imperative that taxpayers seek advice to ensure that they use the right vehicle that provides a tax efficient result both in the UK and other territories of those who are deemed to benefit from the investment.

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