The tax benefits of offshore trusts for non UK domiciliaries
We’ve looked in ‘Tax for UK domiciliaries with Offshore Trusts’ at how you’re taxed when you set up an offshore trust if you are UK resident and UK domiciled. However, if you’re UK resident but non UK domiciled there are additional benefits available to you. In this article we look at the nature of the benefits available to non domiciliaries if they use offshore trusts.
Non UK domiciliaries can claim the remittance basis of tax. This means that they’re then taxed on overseas income and gains only when the income or proceeds are actually brought into the UK.
In terms of offshore trusts, the income tax and capital gains tax anti avoidance rules (which tax UK residents on trust income and gains) also apply the remittance basis. So any income or gains of the offshore trust could be retained overseas to avoid any UK tax charge.
The main downside to claiming the remittance basis is that once you’ve been UK resident for more than 7 tax years you’ll have to pay a £30,000 tax charge for the privilege. For anyone UK resident for 7 or less years though they can get the benefits of the remittance basis without being subject to the £30,000 tax charge (and they would just lose the UK personal allowance and annual capital gains tax exemption).
What if you’re not claiming the remittance basis?
There are still a number of benefits that non domiciliaries are entitled to – even if they are not claiming the remittance basis. Some of the key ones include:
- The inheritance tax advantages of non dom status if they’ve been resident for less than 17 years
- The ability to retain overseas income or gains of £1,999 per tax year overseas and avoid UK tax on this.
- The flexibility to claim the remittance basis in the future if they wish (eg if there was large overseas income or capital gains
All of these can be useful.
It’s worth remembering though that whilst the provisions relating to the use of offshore trusts and companies by non domiciliaries have been tightened up, there is still one key exemption that allows non domiciliaries to use offshore trusts even where they aren’t claiming the remittance basis.
S86 TCGA is one of the main trust anti avoidance rules and it applies the ‘settlor charge’. This means that the capital gains of an offshore trust are taxed directly on the UK resident trust settlor if the trust settlor or anyone on a list of ‘defined people’ can benefit. The list of defined people is pretty wide and included the settlor, his spouse, their children and grandchildren.
So, anyone who transfers cash or other assets to an offshore trust will be taxed on capital gains of the trust if they or their family can benefit from the trust.
The reason for this is clear — an offshore trust that is non UK resident (ie non resident trustees) will be exempt from UK capital gains tax on most assets. If this provision was not in place it would allow UK residents to buy assets via an offshore trust and avoid capital gains tax on the eventual disposal.
Whilst the recent Budgets have made a lot of changes for non domiciliaries, one thing that they doesn’t really touch is this settlor charge. Before recent Budgets it didn’t apply to non domiciliaries, and after the latest Budget it still doesn’t apply to non domiciliaries.
This isn’t just for non domiciliaries who are claiming the remittance basis — but all non domiciliaries even if subject to the arising basis.
This is unusual as most of the anti avoidance rules now apply to non domiciliaries but in a special way (ie they apply the remittance basis where the non domiciled is subject to the remittance basis).
This means that a non dom could use an offshore trust to hold assets and benefit from the capital gains tax exemption in the trust. Effectively the trust could be a capital gains tax shelter for all non domiciliaries.
You would however need to watch out for the other provisions which aren’t as generous. In particular, there is S87 which applies a ‘beneficiary charge’.
This applies a charge where beneficiaries receive capital payments from the trust. In this case it attributes gains of the trust to those capital payments.
This also applies to non domiciliaries. In particular if the beneficiaries are UK resident non domiciliaries and are subject to the arising basis of tax they’ll be caught within this provision just as for UK domiciliaries.
So a non domiciliary looking to make use of an offshore trust for capital gains tax avoidance would need to ensure that this beneficiaries charge did not apply.
This could be achieved by ensuring that:
- There were no UK resident beneficiaries, or
- There were no capital payments made to UK resident non dom beneficiaries who were subject to the arising basis
- Any capital payments made to UK resident non dom beneficiaries claiming the remittance basis were retained overseas (even if the trust assets sold were UK assets).
Provided this was the case, the gains would be free of tax in the trust (assuming the assets were not UK business assets).