A Sunny Place for Shady People
Somerset Maugham's description of Monaco has more recently been appropriated by Vince Cable.
The recent Panorama programme about Bernie and Slavica Ecclestone has highlighted the attractions of non-UK resident trusts in appropriate circumstances.
Capital Gains Tax
Non-UK resident trustees are themselves outside the scope of capital gains tax (CGT) and the anti-avoidance legislation in TCGA 1992 first of all attributes trustees' gains to settlors of "qualifying" trusts (nowadays almost all such trusts are qualifying) who are both resident and domiciled within the UK. The section 86 charge does not apply in the tax year of the settlor's death and if the settlor is elderly or in poor health there may be an advantage in deferring the realisation of trust gains.
Where the settlor charge does not apply, e.g. because the settlor is non-UK domiciled or resident or has died, trustees' gains "stock pile" potentially to be matched with "capital payments" (broadly speaking any benefits) received by UK resident tax payers. As well as the receipt of assets or money from the trust the term can cover e.g. the occupation of a property for less than full consideration or the benefit of an interest-free loan.
Prior to 6 April 2008 non-UK domiciled beneficiaries were not liable to CGT on such payments. Following the 2008 changes non-UK domiciles are potentially liable but, for non-domiciles, pre-6 April 2008 gains are not matched with post-5 April 2008 capital payments and vice versa. In addition, in certain circumstances a rebasing election may be made by trustees so that, for non-domiciles, only post-5 April 2008 gains are brought into account.
Gains realised by non-UK companies owned by the trustees are attributed to them under section 13 (10) but Indexation relief applies in calculating the gains in view of s 13 (11A).
Where there is a mix of UK-resident and non-UK resident beneficiaries trustees' gains can be "washed" by making capital payments to the non-residents in the tax year before such payments are made to UK residents.
From the inheritance tax (IHT) standpoint, non-UK situs assets, qualifying unit trusts and open ended investment companies (OEICS) are "excluded property" and outside the scope of IHT provided the settlor was not domiciled or deemed domiciled within the UK when the settlement was made or valuable property added. The residence of the trust is irrelevant for IHT purposes but is usually non-UK resident because of the potential CGT advantages outlined above.
Where clients have become absolutely entitled under the will of a deceased non-UK domicile it is sometimes possible by a qualifying Instrument of Variation within IHTA 1984 s142 to create an "excluded property" trust as the deceased is regarded as the IHT settlor so the original beneficiary can benefit without the IHT gifts with reservation of benefit or the relevant property provisions being in point.
However, in such circumstances the original beneficiary would be the CGT settlor in view of the provisions of s 68C TCGA 1992 and so potentially liable for trustees' gains under s 86 if both resident and domiciled in the UK.
Terry Jordan is the Capital Taxes Consultant with BKLTax, a UK200Group tax panel member firm and Chairman of the City of London Branch of the Society of Trust and Estate Practitioners (STEP)