Using offshore trusts and companies after April 2008

There have been a number of tax changes -- particularly to non UK domiciliaries that apply from April 2008. As such this article in intended as a summary of how UK residents will be taxed in relation to any offshore trusts or companies that they set up or are beneficiaries/shareholders of.

The trust itself

Providing the trust is established as a non resident trust it will be exempt from UK capital gains tax and also Uk income tax on overseas income. This therefore makes an offshore trust potentially very attractive in terms of avoiding UK tax. As such there are pretty comprehensive anti avoidance rules that apply to tax settlors of such trusts or beneficiaries.

If you're setting up an offshore trust

You will be classed as a 'settlor' of the trust. This has a number of implications.

Firstly if you're a UK domiciliary you will be taxed on any gains that the trust realises if you or your close family can benefit. So if the trust sells a property at a gain of £1,000,000, although the trust itself will be exempt from tax on the gain, you would be taxed on the gain arising.

This doesn't apply though if you're a non UK domiciliary as the 2008 Finance Bill preserved the exception for non UK domiciliaries.

Secondly there are the transfer of asset rules to consider. The legislation imposes an income tax on individuals ordinarily resident in the UK in three broad circumstances:-

• under section 720 ITA, where they have power to enjoy income which arises to an offshore trust where the income arises as a result of a transfer of assets and/or associated operations;
• under section 727, where they receive or are entitled to receive capital sums as a result of a transfer of assets and/or associated operations, which have resulted in income arising to an offshore trust
• under section 731, where they receive a benefit provided out of assets available for the purpose as a result of a transfer of assets and/or associated operations, which have resulted in income arising to an offshore trust

Therefore anyone who established an offshore trust and transferred assets to it could easily find themselves taxed on any income arising if they can derive a benefit from the trust.

There is though a key exception to this if the trust was established without a tax avoidance motive.

These transfer of asset provisions also apply to non UK domiciliaries albeit in an amended form. The broad aim is to tax them on the same basis as if they'd owned the assets personally and therefore if they are entitled to use the remittance basis of tax (in other words if they either make a claim or are entitled due to the £2,000 de minimis limit for unremitted overseas income and gains) they are subject to the remittance basis on the offshore trust income.

Essentially therefore if the offshore trust income is non UK income it would be subject to the remittance basis and provided it was not remitted by the settlor (or any benefits etc weren't received in the UK) there should be no UK tax on the settlor.

If though the asset owned by the offshore trust was a UK asset the remittance basis wouldn't apply and the non dom would be taxed on the trust income whether retained overseas or not.

If you're a beneficiary

If you're a beneficiary of an offshore trust (which can also apply to settlors) not only can you be taxed on any benefits that you derive from the trust under the above anti avoidance rules but you will also be taxed on any capital gains of the trust if you receive capital payments from the trust.

This is an area that has been subject to a lot of discussion over the past few months however in essence it's pretty straightforward.

Any UK resident and domiciled beneficiaries of offshore trusts are taxed on any capital gains of the trust if they receive capital payments from the trust. The trustees need to keep a track of capital payments and gains to ensure that they are accurately matched and gains can for example be carried forward if current capital payments are not high enough which will then allocate the gains to future capital payments.

Non UK domiciliaries who are beneficiaries of offshore trusts are now also within the scope of these provisions. This means that gains of the offshore trust can be charged on UK beneficiaries when they receive capital payments.

Note that this applies whether the trust has UK or overseas assets.

However as for the transfer of asset provisions above there are specific exemptions for non UK domiciliaries entitled to use the remittance basis. In particular the remittance basis will apply to the capital gains of the trust again irrespective of whether the gains arise from overseas or UK assets. As such provided the capital payments are retained outside the UK, tax could be avoided.

The controversy over the introduction of this provision arose from the fact that it applies to gains and capital payments after April 2008. Therefore the legislation includes numerous provisions that apply to existing trusts to ring fence pre April 2008 gains to prevent them being attributed to beneficiaries after April 2008.

Offshore companies

If you're establishing an offshore company (non UK resident) there is an overlap with some of the above provisions that apply to offshore trusts. In particular the transfer of asset provisions can apply to deem any income of the offshore company to be yours where you can derive a benefit from the company - unless you can show that the motive defence applies. As above for non UK domiciliaries looking to establish an offshore company they can take advantage of the remittance basis if they are otherwise claiming it or are entitled to use it, providing the income that arises in the company is overseas income.

There is an additional provision that can apply to offshore company to deal with capital gains of the company (which would otherwise be free from UK tax in most cases).

There are provisions to deem gains that the trust realises to UK shareholders where they own more than 10% of the shares. Therefore a 50% shareholder would be attributed 50% of the shares.

For non UK domiciliaries again the remittance basis can apply however only if the company owns overseas assets. If it owns UK assets the gain would be attributed to the non doms as it arose irrespective of the disposal proceeds.

It'll be seen that there are therefore numerous ways that the Revenue can tax you on income and gains of offshore trusts and companies. What opportunities still remain? Well we'll look at these in a separate article.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.

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