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What is an offshore trust?
From the UK perspective, an offshore trust is really another name for a trust that is non-UK resident for tax purposes. Gennerally speaking all the trustees will be not resident in the UK and the administration of the trust will be conducted overseas. It is important to note, though, that the 2006 Finance Act is due to introduce changes to the definition of an offshore trust, so that, broadly, if someone that is resident, ordinarily resident or domiciled in the UK at the time they place funds into trust then unless all the trustees are non-UK resident, the trust could be regarded as UK resident; it will be important to check the position, therefore, if there are intended to be any UK trustees, or indeed any trustees that operate from a UK branch.
Assuming then that we have a non-UK resident trust, we will want to consider where the trust should indeed be regarded as resident. In order to maximise the tax planning opportunities, the trustees will normally be resident in a low tax jurisdiction. Non-UK domiciliaries resident in the UK tend to favour such jurisdictions nearest the UK, such as Jersey, because of its geographical proximity and ease of communication.
Tax advantages of offshore trusts
Offshore trusts are commonly used in the tax planning for non-UK domiciliaries resident in the UK. Their advantages can be summarised as follows:-
Income tax
The remittance rules whereby a liability arises only when certain non UK income is received in the UK apply to trust income payable to non-UK domiciliaries so that the offshore trust provides a means of avoidance and deferral of income tax liabilities. There is complex anti-avoidance legislation under which beneficiaries ordinarily resident in the UK can be liable to income tax on any benefit received from a non-resident trust. Specialist advice is needed as regards the minimizing the impact of these provisions.
Capital gains tax
Where a trust is established by a non-UK domiciliary, then for as long as that individual remains non-UK domiciled in the UK no CGT charge can arise on a disposal of assets made by the trustees. This is the case even if the gains are subsequently remitted to the settlor or other UK resident individuals (provided such individuals are also non-UK domiciled).
Should the settlor subsequently become UK domiciled (under general law) the liability to capital gains tax should only arise on capital payments (this term is widely defined to cover all form of benefits) being conferred on UK domiciled and resident beneficiaries of the trust, unless the settlor is a beneficiary or the beneficiaries include the spouse, children or grandchildren of the settlor. If the settlor is a beneficiary or the beneficiaries include his/her spouse/children/grandchildren the trust gains would be charged to tax in the hands of the settlor regardless as to whether or not any payments are made by the trustees to any of the beneficiaries.
The domicile status should be reviewed from time to time to ensure that if there is any likelihood of the settlor becoming UK domiciled steps can be taken to mitigate the exposure to capital gains tax.
Inheritance tax
If a trust is established by a non-UK domiciled settlor and the trust assets are sited outside the UK, the trust is what is known as an "excluded property" trust. This means that the assets, provided they are situated outside the UK, will remain outside the scope of inheritance tax even if the settlor subsequently becomes UK domiciled or deemed domiciled. The offshore trust can therefore offer total protec
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