Certainty About Trustee Residence?

In response to widespread concern among practitioners to the modernised trustee residence rules introduced by the Finance Act 2006, and to HMRC's recent guidance note on the subject, the Society of Trust and Estate Practitioners (STEP), the Institute of Chartered Accountants of England and Wales (ICAEW) and the Chartered Institute of Taxation (CIOT) have jointly released their own guidance note in agreement with HMRC (the STEP guidance).

Although it was hoped that this additional guidance would completely allay concerns in the industry that uncertainty in this area of the law may discourage off shore providers from using UK advisers, there are still a number of matters upon which HMRC seems unwilling, or unable, to provide certainty. UK advisers will therefore continue to have difficulty advising in relation to non-UK trusts in some cases, despite this new guidance.

The legislation

Prior to the introduction of the updated legislation, the definitions of trustee residence for CGT and income tax were sufficiently distinct that trustees could find themselves resident for CGT but not income tax, and vice versa. Trustee residence is not a factor in considering liability for IHT, which is ascertained by reference to the domicile of the settlor and the location of the trust assets.

Section 69 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and ss475-476 of the Income Tax Act 2007 (ITA 2007) set out the rules establishing whether or not the trustees of a settlement are resident, or ordinarily resident, for the purposes of CGT and income tax respectively. The relevant sections came into force on the 6 April 2007 and also include deeming provisions which treat a non-resident trustee as resident if they fulfil, or perhaps fall foul of, various conditions. The relevant sections are set out in full in the boxes on pp8-9.

For the purposes of determining residence, trustees of a settlement shall, unless the context otherwise requires, together be treated as if they were a single person (distinct from the persons who are trustees of the settlement from time to time): see s474(1) ITA 2007 and s69(1)(3) of the TCGA 1992.

The residence rules require that the residence of each individual trustee be considered in order to establish the residence of the notional 'single trustee', and the trustee shall be considered to be resident if:

(a) all of the trustees are UK resident; or

(b) at least one of the trustees is UK resident and the settlor was either UK resident, ordinarily resident or domiciled at the time that the settlement was made.

If all of the trustees are non-UK resident then the trust will be non-UK resident. However, a single UK resident trustee will make the trust resident if the settlor was UK resident or domiciled when the trust was established.

The question of who a settlor is for these purposes follows normal principles, and this includes both a person who has made the settlement or a person whose property has become comprised into a settlement.

A person may also be treated as settlor in other circumstances, such as entering into a reciprocal arrangement with another person. A trust may have more than one settlor and care should be taken not to 'taint' trusts with mixed residence settlors. A settlor may also cease to be a settlor of a particular settlement if, at a given time, there is no longer any property settled by them in the settlement. The updated legislation has introduced a deemed residence provision and, in essence, the rules treat as resident any trustee who:

(a) is carrying on business in the UK through a branch, agency, or permanent establishment; and

(b) acts as trustee of the settlement concerned in the course of that business.

It is these deeming provisions that have caused most concern as, although widely used, the term permanent establishment is not defined, and difficult to apply.

There are two important exceptions provided in s148(3) of the Finance Act 2003, which exclude agents of 'independent status' acting in the ordinary course of business; investment managers are deemed in most circumstances to be independent agents.

The effect of becoming UK resident

The effect of a trustee becoming UK resident could be disastrous from a tax planning perspective.

There are two main consequences of a trust becoming UK resident for CGT purposes:

(a) The trust's worldwide gains would be subject to UK CGT on an arising basis, subject to any treaty relief (no remittance basis being available because this is only available to 'individuals' (s12(1) TCGA) and trustees are not 'individuals' (s65(2) TCGA)).

(b) If the trustee subsequently becomes non-UK resident they will be deemed to have disposed of the trust assets and reacquired them at market value giving rise to tax on any deemed gain (s80 TCGA). This is a particularly important consequence because it means that if a trust has even inadvertently become UK resident, curing the position by becoming non-UK resident will give rise to a deemed disposal and reacquisition of trust assets, and a likely consequent charge to CGT. Before 6 April 2007 the rule was mitigated, because a trust would not become UK resident for CGT if a trustee became resident for one year only. That defence is no longer available, heightening the need to be certain about trustee residence.

For income tax, the effect would be that the worldwide income of the trust would become subject to UK income tax, again, subject to treaty relief being available. However, the remittance basis of taxation has traditionally been available to trustees who are UK resident but non-UK domiciled. Since trustees are, for income tax purposes, treated as a single person, one would have expected the legislation to...