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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 protection against inheritance tax.
It is possible to take advantage of the "excluded property" trust status where the assets are situated in the UK. This may be achieved by means of the trust owning the UK assets through the medium of a non-resident company. The assets of the trust are, in these circumstances, regarded as being the shares in the non-resident company (which are regarded as non-UK situs assets), rather than the underlying assets situated in the UK.
An individual who has been resident in the UK for any part of the last 17 out of 20 tax years may be deemed to be UK domiciled, for IHT purposes only. It is important to consider establishment of an offshore trust before UK domicile is acquired i.e. an individual who arrived in the UK in August 1995 will become deemed domiciled in the UK on 6 April 2011 which is the 17th tax year in which they have been resident in the UK.
Who controls the trust assets?
Trustees
The control of the trust assets rests with the trustees. The powers of the trustees are defined in the trust deed though they will normally have some discretionary powers over the assets.
The choice of trustees rest with the settlor when establishing the trust. Given the degree of responsibility required it is now common practice to appoint professional trustees for most offshore trusts. Jersey is one of the most frequently used jurisdictions for establishment of and of course in Jersey the trustees have legal obligations imposed upon them to ensure that the trustees act in the best interest of the beneficiaries and the trust assets are safeguarded; there is also strong regulation in Jersey on the professionals carrying out such fiduciary duties. The settlor normally provides a non-binding letter of wishes to advise the trustees on how the trust funds are to be administered.
Protectors
The use of trust protectors is now commonplace so as to ensure that the trustees do not have unfettered control over assets and are required to consult regarding disposition of trust assets. This is especially so where the trustees are strangers to the settlor and they have discretionary powers. A degree of control over funds is still desirable.
Protectors can be empowered to perform several functions
- The power to veto decisions of the trustees
- To power to appoint or remove trustees
- The power to negotiate trustees fees
- The power to appoint successors to the role of protector
It is important to ensure that the power of the protectors are limited to ensure that they do not control the trust funds. Provided the powers are limited it would be possible to appoint a UK resident protector without bringing the trust into the UK tax charge.
Glossary of terms used
Residence
An individual will be resident in the UK for tax purposes if he spends 183 days or more in the UK during a particular UK tax year to 5th April. He will also be treated as resident from date of arrival if, for example, he comes here to stay indefinitely and may also become resident in the UK in a variety of other instances such as where there are regular visits exceeding 90 days on average each tax year. Subject to the points made above, a UK resident is liable to UK taxation on their worldwide income and capital gains. If an individual leaves the UK for less than five complete tax years, they generally remain liable to UK capital gains tax on assets held at the time of departure.
Ordinarily resident
This is generally a matter of habit and intention and for example, someone might sometimes be resident in the UK for a couple of UK tax years without becoming ordinarily resident. Inland Revenue practice is a little complicated, but broadly will treat somebody as ordinarily resident from the date of arrival if they intend to live here permanently or to stay here continually for three years or more. Somebody who does not intend to stay for three years will become ordinarily resident from the start of the tax year in which they acquire accommodation in the UK.
Domicile
This is a concept not commonly found in tax legislation of foreign jurisdictions. Broadly an individual will take the domicile of their father at the date of their birth and will retain this domicile unless they make a firm intention to settle permanently in another country.
For more information about this article, please contact Janet Paterson, Professional Trust Company, St Helier, Jersey
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