Offshore trusts have long been a tool for wealth management and asset protection. However, for UK residents and domiciled individuals benefiting from such trusts, the tax implications can be complex. So here’s a quickfire review of what to expect:
The allure of offshore trusts, established in jurisdictions outside the UK, lies in the number of advantages they can offer:
- Asset Protection: Assets held within the trust may be shielded from creditors and future claims.
- Tax Efficiency: Depending on the trust structure and location, assets may be subject to lower tax rates compared to the UK.
- Succession Planning: Trusts can be used to distribute wealth to beneficiaries in a controlled manner.
But although there’s the potential benefits, UK beneficiaries of offshore trusts are not exempt from taxation. There’s some key considerations:
- Residence vs. Domicile: Your tax treatment depends on whether you’re resident and domiciled in the UK. Domicile refers to your permanent home, while residence is your current place of living.
- Income Tax:
- UK Residents: As a UK resident beneficiary, you’ll likely be taxed on the trust’s worldwide income, even if not directly distributed to you. This is due to the UK’s “matching rules.”
- Non-Residents: For non-resident beneficiaries who are not domiciled in the UK, the tax treatment becomes more nuanced. You may only be taxed on income arising from UK sources and any income actually remitted to the UK.
- Capital Gains Tax (CGT):
- UK Assets: Capital gains on disposals of UK land or property held by the trust, even indirectly, may be subject to CGT.
- Other Assets: Generally, CGT applies only to disposals of assets physically located in the UK.
- Inheritance Tax (IHT):
- Settlor Domiciled in UK: If the person who established the trust (settlor) was domiciled in the UK at the time of creation or at any point in the previous seven years, the trust assets may be subject to IHT.
- Gifts into Trust: Gifts made to the trust within seven years of the settlor’s death may also be liable for IHT.
You’ll be starting to understand that the tax landscape for offshore trusts can be intricate. Talk to us before making any decisions and we can advise on your specific circumstances and on the particular structure and tax implications of a trust. Record keeping and transparency with UK tax authorities is paramount. Failure to disclose relevant information can lead to penalties. And the tax regime is always changing (and will be being looked at by the new government) and we can help you keep up to date with any changes.
So get in touch, let’s see what will work for you.
