First it is important to note that the protections for non-domiciled settlors of offshore trusts discussed below will not apply if the settlor has a factual UK domicile or is regarded as a returning UK domiciliary. A ‘returning UK dom’ is a non-dom who was born in the UK with a UK domicile of origin and who is UK resident.
Protection will be lost if further additions are made to the trust by a deemed domiciled/UK domiciled settlor. The legislation sets out certain exceptions e.g. a deemed domiciled settlor providing funds to the trust to enable the trustees to meet certain trust expenses. In particular, it should be noted that loans provided to the trust by a deemed domiciled settlor will be treated as an addition unless the loan is on ‘arms-length’ terms and interest is paid on at least an annual basis. For existing loans provided to the trust, there is a grace period of 12 months to allow the loan to be re-arranged if the settlor becomes deemed domiciled on 6 April 2017.
If the protections are lost, the settlor will be liable to tax on trust income and gains as if they are his or her own, as and when they are received/realised by the trust if any of the following individuals are able to benefit from the trust:
• Income tax – settlor and settlor’s spouse (and distributions made to minor children)
• CGT – settlor, settlor’s spouse, children and grandchildren (regardless of age)
Trust income – settlors not specifically excluded from benefit
Non-domiciled settlors of offshore trusts (who were not deemed domiciled at the time the settlement was set up) will not be assessed to tax on foreign trust income after 5 April 2017 – instead the tax point will occur as and when the trust distributes its income to the settlor. Settlors who are non-domiciled will be able to claim the remittance basis at the time income is received from the trust if it is paid offshore. However, long-term non-doms who are deemed domiciled (due to being resident for at least 15 out of the previous 20 tax years) will not be able to claim the remittance basis. The foreign trust income is referred to as ‘protected foreign-source income’.
UK trust income will continue to be taxed on non-dom settlors under settlor-interested trust anti-avoidance provisions (although non-resident trusts tend not to receive UK source income directly).
This protection effectively provides a ‘remittance basis’ type of assessment for all non-dom settlors without the need to pay the remittance basis charge (RBC) from 6 April 2017. This will mean that existing non-doms who have settlor-interested offshore trusts and don’t pay the RBC will see a reduction in their UK tax liability as they will no longer be assessed on the trust income as it arises (unless they are life tenants).
Transfer of assets abroad legislation
In addition to the protections for income directly received by the trust, the transfer of assets abroad (ToAA) legislation is amended for non-dom settlors such that similar protections apply in respect of foreign source income received by an underlying company of an offshore trust. Again, this treatment applies for any non-domiciled settlor and not just deemed domiciled settlors (except for ‘returning UK domiciled’ settlors who receive none of these reliefs). This means non-dom settlors will no longer be taxed under s.720 ITA 2007 but will instead be assessed under s.731 as and when they actually receive benefits. Non-dom settlors who are not yet UK domiciled may claim the remittance basis if the benefits are provided offshore.
It should be noted that the s.720 legislation is not switched off for non-dom transferors of offshore companies which are not held in trust wrappers or for UK source income received by the underlying company.
Close family members who are non-resident/remittance basis users
If a close family member of a UK resident/non-domiciled individual receives a s.731 benefit from a trust, the non-dom settlor would be taxed under s.731, if the close family member is a non-resident/remittance basis user. A close family member is a spouse/civil partner/people living together as if they were spouses/civil partners and any child of those mentioned under the age of 18.
Again, a non-dom settlor may decide to claim the remittance basis – if the settlor pays UK tax, he or she can claim it back from the non-resident individual. Of course, the non-resident beneficiaries could also be liable to tax in their home countries so may not wish to reimburse UK resident settlors for their personal liabilities!
Trust benefits/capital distributions
Deemed domiciled settlors will continue to be taxed under s.87 TCGA 1992 in respect of offshore trust gains as long as they don’t take a factual UK domicile and do not add funds to the trust after becoming deemed domiciled. This means that trust gains will be matched with capital distributions made to UK resident settlors but the remittance basis will not be available.
If deemed dom settlors add funds to an offshore trust, the s.87 protection is lost and they will be taxed on all trust gains as and when they arise to the trust as if they are the settlors’ personal gains (s.86). Settlors may seek recompense from the trust for any CGT liability thus arising.
The foreign assets of the trust will continue to be regarded as excluded property for IHT purposes if the settlor created the trust and funded it while still non-dom (and not deemed dom). However, see below for UK residential property and loans used to acquire, maintain or improve such property if held directly or indirectly by the trust.
Returning UK domiciled settlors who are UK resident for the tax year and at least one of the two previous tax years will cause the trust to lose its IHT protections. The trust will come within the relevant property regime for IHT and suffer ten year anniversary charges and exit charges if assets are transferred to beneficiaries. In addition, if returning UK domiciled settlors are not excluded from benefitting from the trust, the trust assets will be taken into account with their personal IHT estates in the event of their deaths.
UK residential property
In the past, non-doms and offshore trusts have tended to wrap their UK residential properties in offshore companies to secure IHT protection. From 6 April 2017, the IHT protection will be lost if an interest of 5% or more is held in the foreign close company. The value of the interest is that attributable to the underlying UK residential property held in the company after the liabilities of the company as apportioned across all of its assets.
In addition to UK residential property, a loan provided by an offshore trust or non-dom individual which has been used to finance, directly or indirectly, the acquisition, improvement or maintenance of a UK residential property interest will be regarded as UK sited for IHT purposes to the extent of such application. Assets made available as security, collateral or guarantee for a loan used for that purpose is also regarded as UK sited for IHT purposes.
If the property interest is disposed of or a relevant loan is repaid and replaced by a foreign asset, the replacement foreign asset will continue to be regarded as non-excluded property for IHT purposes for a further two years.