Briefing Note: Offshore Trusts And UK Resident Foreign Domiciliaries

Background

Offshore trusts can be highly tax efficient for UK resident foreign domiciliaries. There are, however, pitfalls as the legislation is complex.

Over the long-term trusts can shelter from UK inheritance tax (IHT) the foreign situs assets of a foreign domiciled settlor provided:

the settlor was not 'deemed' domiciled at the time that the property was settled; and at the time an IHT charging event occurs the property on which the charge arises is foreign situs. This will be the case regardless of whether any changes occur with respect to the domicile of the settlor (that is, regardless of whether an actual or deemed UK domicile is acquired).

Where a foreign domiciliary (who is not deemed domiciled) settles foreign situs assets into trust there is no IHT charge on this event. This is not generally the case with UK situs assets (there are special rules for certain investments) and accordingly:

UK situs chattels should be exported prior to the settlement (thereby turning them into foreign situs assets); and cash transfers into trust should not be made from a UK account. UK situs assets within trust structures settled by foreign domiciliaries are generally subject to IHT (with normal reliefs and exemptions being due). Where the trust is to hold UK land or other UK situs property interposing a foreign company between the trustees and the property will mean that the trustees have foreign situs shares rather than UK situs property for IHT purposes. There may, however, be other tax reasons why this is not always desirable, including the Annual Tax on Enveloped Dwellings (ATED). This is explained below.

Whilst it may be possible to achieve the same IHT advantages with a UK trust settled by a foreign domiciliary, a UK trust would not give the same income tax and capital gains tax benefits as an offshore trust which are outlined below.

Remittance basis issues

It is important that any strategy that the trustees pursue is compatible with the individual strategies of the settlor and beneficiaries. Specialist advice and good communication is essential.

Actions by the trustees could result in an inadvertent taxable remittance by the settlor where:

the settlor is alive and UK resident; the trustees are 'relevant persons' in connection with the settlor (as will often be the case as most trusts are established to benefit the settlor and/or immediate family members such as spouse/civil partner, minor children and minor grandchildren); and the trustees remit tainted property to the UK and no exemption or transitional provision switches off the remittance charging provision. There can be an issue where the trustees have control over remittance basis foreign income or gains/deemed gains of the settlor. This will be the case in each of the following

situations:

property representing or derived from...