Top tax planning uses for Offshore Trusts

In this article we’ll provide a summary of some of the top tax planning opportunities for offshore trusts.

There are now numerous anti avoidance provisions that can apply, however for the well advised there are still options available to use these tax efficiently.

The big advantage of an offshore trust is that, just like all non residents it is exempt from UK tax on foreign income, and exempt from UK capital gains tax (unless the assets sold are UK business assets).  This could lead to massive tax planning advantages. The difficulties come in side stepping the anti avoidance rules that can tax UK settlors and beneficiaries on the trust income and capital gains.

Here’s the top uses for offshore trusts:

When the settlors/beneficiaries are non UK domiciliaries and claiming the remittance basis.

They’ll then be taxed on the income and (for beneficiaries) the capital gains of the trust on the remittance basis. Therefore income and gains can be retained overseas to avoid UK tax.

When the settlor is non domiciled but doesn’t claim the remittance basis.

Here the offshore trust can be attractive in terms of avoiding capital gains tax as the rule that attributes gains of offshore trusts to their UK settlors doesn’t apply to non UK domiciliaries.

Therefore the trust can be used as a capital gain shelter.

As a shelter for overseas income where the motive exemption applies.

Where there is a sound commercial reason for the use of the trust the anti avoidance rules that attribute income to UK settlors doesn’t apply.

Where the settlor is dead.

The anti avoidance rules that attribute capital gains to the settlor won’t apply if the settlor is dead. If the transfer to the trust is made on death an ancillary benefit to this is that any capital gain to the date of death is eliminated.
Any gains that arise in future to the trust would not then be attributed to the settlor. It would just be any beneficiaries that could be taxed.
The main problem with leaving assets to an offshore trust in a will is that it will form part of the settlor estate for inheritance tax purposes. You may therefore be looking for transfer of assets that qualify for business property relief to eliminate inheritance tax (eg shares in unquoted trading companies).

As a capital gains tax shelter where family are excluded

As we’ve seen above the anti avoidance rules attribute capital gains to the settlor where beneficiaries include:

  • the settlor
  • his spouse
  • their children and their spouses
  • their grandchildren and their spouses

Therefore if an offshore trust was made by remote relations or friends of the beneficiaries they could be effective in avoiding capital gains tax being attributed to the settlor.

A good option for this is to hold shares in newly formed trading companies.

The initial set up cost would be low and you could always ask a remote relation to set up the trust. You could also take advantage of the current low property prices and purchase bargain basement property via an offshore trust. Provided the set up was by remote relations any subsequent increase in value could be free of capital gains tax if retained overseas.

You’d need to be careful to ensure that you weren’t classed as the settlor if you were actually contributing to the trust in some way. If you could therefore get the friend / relation to settle funds on the trust out of their own funds this would avoid the problem. If there is some kind of reciprocal arrangement with you routing cash back to the friend to compensate them for the cost they incurred this could well be treated as you being the settlor.

As a foreign income shelter where you and your spouse are excluded from benefiting (eg a Children’s or Grandchildren’s settlement).

The anti avoidance rules that applies for income are much less stringent than capital gains. Therefore you could shelter foreign investment income in a trust for the benefit of your children.

Where beneficiaries are or will be non resident.

This then allows income and gains to be extracted free of UK tax.