The following Private Client guidance note Produced in partnership with Tolley and Milestone International Tax Partners LLP provides comprehensive and up to date legal information covering:
STOP PRESS: This Practice Note is being reviewed in light of the changes introduced by section 35 and Schedule 10 to the Finance Act 2018. For further guidance, see Practice Notes: Finance Act 2018—progress through Parliament and Changes to the taxation of offshore trusts from 6 April 2017.
The trustee borrowing rules were introduced in 2000 to counter a specific planning scheme known as a 'flip-flop'. The scheme allowed the settlor of an offshore trust to avoid a charge to tax under section 86 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) and the beneficiaries of such a trust to avoid a tax charge on capital payments received under TCGA 1992, s 87.
The scheme (of which there were later incarnations) worked along the following lines:
the trustees of the original trust (the flip trust) borrow funds secured against trust assets
the flip trustees advance the borrowed funds on to a new trust (the flop trust)
the settlor and all defined persons are excluded from benefiting from the flip trust
in the following year the flip trustees realise a capital gain on the assets they hold, and
distributions are subsequently made to the beneficiaries of the flop trust
TCGA 1992, s 86 was considered not to apply on the basis that the settlor and all defined persons (including spouse, children and
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