Offshore Trusts And UK Resident Foreign Domiciliaries

Offshore Trusts Can Be Highly Tax Efficient For UK Resident Foreign Domiciliaries. There Are, However, Pitfalls As The Legislation Is Complex.

An offshore trust can provide a permanent shelter from inheritance tax (IHT) for the foreign situs assets of a foreign domiciliary provided the settlement into trust occurs at a time when he or she is not deemed domiciled in the UK (beware of a trap if an initial beneficial interest in possession for the settlor or his/her spouse/civil partner is established). Where a foreign domiciliary (who is not deemed domiciled) settles foreign situs assets into trust there can be no IHT charge (provided he or she is not deemed UK domiciled). 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); cash gifts should not be made from a UK account. Long-term trusts will shelter from 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).

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 situated property for IHT purposes. There may, however, be other tax reasons why this is not desirable.

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)...