Offshore trusts—the trustee borrowing rules—Sch 4B and Sch 4C TCGA 1992
Produced in partnership with Tolley and Milestone International Tax Partners LLP
Offshore trusts—the trustee borrowing rules—Sch 4B and Sch 4C TCGA 1992

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:

  • Offshore trusts—the trustee borrowing rules—Sch 4B and Sch 4C TCGA 1992
  • Transfer of value by trustees linked with trustee borrowing
  • Transfer of value
  • Outstanding trustee borrowing
  • Result of Sch 4B
  • Practical tips
  • Avoiding trustee borrowing

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:

  1. the trustees of the original trust (the flip trust) borrow funds secured against trust assets

  2. the flip trustees advance the borrowed funds on to a new trust (the flop trust)

  3. the settlor and all defined persons are excluded from benefiting from the flip trust

  4. in the following year the flip trustees realise a capital gain on the assets they hold, and

  5. 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