Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about capital distributions from an offshore trust.
‘I have recently been appointed to act for a client who, along with his father, is the beneficiary of what I understand is a discretionary trust based in the Isle of Man. The trust was set up by my client’s grandfather who is resident and domiciled in South Africa. My client and his father are UK residents and are both domiciled here.
Income from the trust has been declared on my client’s self-assessment tax return, but I understand that a substantial capital distribution has been made in 2020-21. The client wants to use this to buy a new house in the UK and has asked for advice on how much he should put aside from this distribution on account of any eventual tax liability in respect of it. I do not know the exact source of the capital paid to my client from the trust, but suspect that it is from the sale of investments which probably includes shares and perhaps overseas property.
I should be grateful for advice from Taxation readers as to the general principles in play here. Does my client have a potential tax liability, or would this be the trust’s liability in the Isle of Man, with my client simply receiving a cash distribution? Alternatively, must one look through the trust so that my client may then have a UK capital gains tax liability? I have not previously dealt with such a scenario and would like to know whether this is something for which I will have to prepare calculations or is there simply an offshore liability (if at all) in the Isle of Man, with my client only receiving cash that is UK tax free in his hands?’ Query 19,681 – Adviser.
Terry Jordan’s reply: Anti-avoidance rules can apply to UK-resident beneficiaries.
‘As a general proposition, ‘offshore’ trusts are outside the scope of UK capital gains tax because the trustees are not UK resident. That said, and for completeness, there have been changes over recent years which can render them liable in some circumstances, for example on the disposal of UK residential property. Such trusts are usually resident in ‘tax havens’ and not usually subject to domestic taxation.
Over the years, UK anti-avoidance rules have been developed that operate to impose UK capital gains tax on settlors of ‘qualifying trusts’ as defined in TCGA 1992, Sch 5 and, if the settlor is not available to charge, on UK-resident beneficiaries. In the present case, the settlor is domiciled and resident in South Africa and therefore outside the scope of TCGA 1992, s 86.
Because the settlor’s grandson is both resident and domiciled within the UK, he is potentially liable under TCGA 1992, s 87 having received a ‘capital payment’ from the trust which will be matched with gains realised by the trustees. Had he been resident but not domiciled within the UK the charge could have been on the remittance (broadly speaking brought into the UK) basis. He will need to know when the trustees’ gains were realised as he may be liable to a supplementary charge under TCGA 1992, s 91 if the gains are old.
Because the settlor is non-UK resident and domiciled it is not necessary to avoid ‘tainting’ the trust by additions after 5 April 2017 as is the case with a number of offshore trusts which would otherwise lose their protected status.
If the trust fund comprises non-UK situs assets or authorised unit trusts and open ended investment company shares it will be ‘excluded property’ and outside the scope of UK inheritance tax by virtue of IHTA 1984, s 48(3) and (3A).’
The article is also available on the Taxation website.
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