Extracting cash from an offshore trust tax efficiently

Broadly speaking there are two options to extract cash from the trust: • Income distribution • Capital distribution Income distributions Distributions of income to a UK beneficiary are subject to UK income tax. Capital distributions Capital distributions from an offshore trust will be taxed under the anti avoidance rules. There are two sets of rules that could apply. Firstly there's the transfer of asset provisions that can apply to tax capital distributions as income where there is accumulated 'relevant' income in the trust. 'Relevant' income for this purpose means income that arises to the offshore trust which can be used to provide a benefit for the beneficiary concerned. Income is only taken into account once for this purpose. Therefore rental income for instance received by the trust and held in the trust would be treated as relevant income for this purposes. If there is any relevant income in the trust and a capital distribution is made the capital distribution could be taxed on the UK resident beneficiary as income to the extent of the relevant income. This is subject to the motive exemption. If there is no relevant income in the trust or if the motive exemption applied there would be no tax charge under this provision. However, in this case the beneficiary would be subject to CGT if there are capital gains in the trust. The capital gains tax charge on the beneficiary effectively looks to tax capital gains that have arisen to the trust (but were exempt as it's non resident) on the beneficiary. There would need to be a separate pool to match the gains with capital payments to beneficiaries. The gains are only allocated to capital payments once. Why make an income distribution? Lots of offshore trusts distribute trust income as income. This has some advantages including: • Withholding tax borne by the income is set against UK tax charged on the beneficiary • The income could be directed at low or nil income beneficiaries (eg children) • UK tax is avoided if the beneficiary is non resident or non domiciled and claims the remittance basis (and retains the income abroad). You can see more on this at: When can UK doms use an offshore trust to reduce taxes