Posted on 26 Apr 2019
Trustees beware - offshore income gains fall outside the protected trusts rules
In 2017 the government confirmed that income and gains from overseas assets owned by trusts established by non-domiciled settlors before they became deemed domiciled in the UK would not be subject to an immediate tax charge. Tax would only arise when benefits were received from the trust.
However following the publication of the legislation it became clear that offshore income gains (i.e. gains arising from the disposal of offshore funds which do not have reporting status) do not fall within the trust protection rules. This means that any offshore income gains realised within an otherwise protected trust or underlying company will be attributed to the settlor where the settlor or their spouse is a beneficiary of the trust.
HMRC has confirmed that it will not amend the legislation to protect offshore income gains in the same way as other gains and income arising to so-called protected trusts and has rejected arguments that offshore income gains should receive the same sort of protection.
Therefore under the new rules where a settlor claims the remittance basis, offshore income gains will not be taxable if the gains are received offshore. They would however be subject to tax if they are remitted to the UK.
Trustees should therefore consider avoiding using the sale proceeds from offshore funds in the UK as both the trustees (and any underlying companies) can accidentally trigger a remittance of any offshore income gains, thereby triggering a tax liability for the settlor.
Settlors who are deemed domiciled will have an immediate tax liability in respect of offshore income gains realised by their trust or an underlying company held within the trust. It is not yet clear whether HMRC will agree that offshore income gains which have been taxed are then able to be distributed without any further tax liability in order to allow the settlor to pay the tax.
Against this background trustees may wish to consider their investment guidelines with a view to avoiding offshore non-reporting funds. It remains arguable that offshore income gains should receive the same protection as protected foreign source income and so taxpayers who take this view and do not report offshore income gains should include reference to this in the additional information section of their tax return.
Trustees should therefore review the investments within their trusts (particularly where the settlor is now deemed domiciled) and look to avoid such investments.
For more information, please contact James Frampton.