Could your clients benefit by migrating their offshore trusts to the UK?

Before the introduction of anti-avoidance legislation in the early 1990s, there could be significant benefits in setting up an offshore trust, or taking an existing UK trust offshore, not least being the ability to realise assets without payment of UK capital gains tax (CGT) which was levied at a top rate of 40% at the time.

Exporting trusts was made less attractive by legislation which meant that a trust would make a deemed disposal of all the trust assets, crystallising a charge to CGT, when it became non-resident. In addition, legislation was introduced to attribute trust gains to the person who had created the trust in various circumstances, who would therefore have to pay tax in the trust’s place. Gains can also be assessed on UK-resident beneficiaries who receive a benefit from the trust. Finally, rules introduced in 2015 levy a charge to CGT on UK property regardless of the residence status of the trust.

Some trusts could find themselves providing little in the way of ongoing tax mitigation to their beneficiaries. It might not be possible for the trust to be wound up without incurring a hefty tax charge, but during the life of the trust it could be incurring substantial annual administration fees in the ‘tax haven’ in which the trust is resident.

Coming home sweet home

A trust can be brought ‘onshore’ by appointing UK resident trustees in place of the offshore trustees. Some trustees and beneficiaries wrongly believe that the trust must remain ‘offshore’ or else face a huge tax bill on immigration back to the UK, but this is not correct. There may well be a tax charge if funds are paid to beneficiaries who are UK resident, but this does not apply just because there is a change of trustees. Most trust deeds allow for the appointment of trustees worldwide, so it is a relatively straightforward exercise to ‘repatriate’ a trust by appointing UK resident trustees in place of the foreign resident trustees. It should first be checked that this will not crystallise a tax charge in the offshore jurisdiction.

Future capital gains tax and mitigation

The disadvantage of ‘importing’ the trust is that on a subsequent disposal of trust assets the full amount of the gains arising will be brought into charge, including pre-immigration gains. However, with judicious planning, future tax on pre-immigration gains could be avoided by ensuring the gains are crystallised prior to immigration. Furthermore, the trustees control when disposals take place and how the trust assets are invested, so gains can possibly be avoided during the life of the trust if no disposals are made, with just the income being distributed to the beneficiaries.

If the trust is a pre-2006 life interest trust the eventual death of the life tenant will lead to a ‘rebasing’ of the CGT acquisition costs of the trust’s assets to the value at the life tenant’s death thus eliminating any gains. Other trusts may be able to claim CGT ‘holdover’ relief on a capital distribution to beneficiaries thus postponing the CGT bill until the asset is realised.

The trust may have a history of ‘stockpiled’ income and gains that will cause a tax charge if trust capital is paid to beneficiaries. Over time however, the effect of inflation will reduce the impact of this on the eventual dissolution of the trust. Judicious payments to young beneficiaries, within their tax free allowances, can possibly be made in the meantime without triggering tax.

When undertaking pre-immigration asset re-structuring the trustees should consider whether any CGT would be triggered in another jurisdiction. Action should be taken in the tax year prior to immigration as the trustees will be liable to UK CGT if they are UK resident during any part of the tax year when disposal takes place, there is no necessity for residence throughout the entire tax year.

Trust Registration

Bringing your trust to the UK will mean that it is liable to register with the Trust Registration Service (TRS). Offshore trusts only have to register with the TRS in limited circumstances, although other registration requirements may be in force in the offshore jurisdiction. If the trust is receiving income or making capital gains it will also have to file an annual self assessment tax return.

Inheritance tax (IHT)

The inheritance tax treatment of the trust is unaffected by the trust’s immigration. Liability to IHT is determined by the domicile of the person (or persons) who provided the assets to the trust, and the location of the trust assets.