Brendan Harper examines how further changes from the Budget will affect settlors as regards tax and charging provisions on offshore and other assets
What a difference a month makes. Last month I attempted a summary of how the proposals on the taxation of non-domiciled UK residents would significantly affect offshore trusts.
Since the last article, we have now had the Budget, and the Government has pulled back some of the more draconian elements of its proposals. Briefly, the changes are as follows:
- The settlor's charging provisions in s86 TCGA 1986 will not apply to trusts created by UK settlors. Previously, the proposal was to tax the settlor on UK gains on an arising basis, and on non-UK gains on a remittance basis. Now, the settlor will only be charged if he receives a benefit from the trust. The charge will operate on the same basis as the beneficiary charging provisions (see below).
- Non-domiciled beneficiaries of non-resident trusts who claim the remittance basis will, from 6 April 2008, be taxed on the remittance basis on all UK and offshore assets. Previously, the proposal was to charge beneficiaries when they received a benefit, regardless of whether the gain was remitted to the UK or not.
In order to be taxed on the remittance basis, the beneficiary must have elected to be taxed generally on the remittance basis - this means they must have paid the £30,000 'Revenue bung' if they have been in the UK for seven out of the past 10 years.
- Capital payments made to non-domiciled beneficiaries that are matched against pre-April 2008 trust gains are not taxable. Furthermore, any excess capital payments made prior to April 2008 will not be matched against future capital gains. This is a significant relaxation of the original proposals.
- Trustees will be able to make an irrevocable election to re-base assets held as at 6 April 2008 for the purpose of excluding any part of a chargeable gain relating to the period before 6 April 2008 from being taxed on non-domiciled beneficiaries.
- Settlors and beneficiaries of non-resident trusts will not be required to disclose information to HMRC about trust assets in relation to which a remittance arose, or details of the trustees, provided they have made a correct return of their tax liabilities.
- Beneficiaries of non-resident trusts may be required to provide additional information to HMRC where the trustees choose to make an election to rebase trust assets or where HMRC enquires into a beneficiary's tax return.
- Where art works owned by offshore trusts are sold in the UK, tax will only be paid when the trust remits the gain to the UK.
Attractions of altering assets
So, compared with the original proposals, the revised rules look much more generous. The new regime effectively allows non-UK domiciled individuals to defer CGT by holding assets in an offshore trust.
However, if they intend to receive distributions while they are resident in the UK, or distributions are planned for beneficiaries, offshore trusts will not, on their own, be so attractive. This is because CGT, and the supplementary charge where relevant, will apply when a beneficiary receives a benefit. If the beneficiary has been a UK resident for seven years, he will only be able to claim the remittance basis if he also pays the £30,000 tax charge.
If the beneficiary has no other significant income or gains, it may not be worth paying the charge, in which case any trust benefits will be chargeable regardless of whether they are remitted or not.
This means that offshore insurance wrappers will become more attractive as a holding vehicle for trust investments, particularly as the trustees can now make an election to re-base assets as at 5 April 2008. Transferring the assets to the bond would ensure that no future capital gains arise, and beneficiaries can receive benefits in the form of the 5% withdrawal allowance.
- Brendan Harper is technical services manager at Friends Provident International
- The changes to offshore trusts announced in the budget are not as draconian as originally feared.
- Offshore insurance wrappers will become more attractive for holding trust investments.
- Non-UK domiciled individuals can effectively defer CGT by holding assets in an offshore trust.
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