Offshore trusts—taxation

This Overview focuses on the taxation of the trustees, settlor and beneficiaries of offshore trusts and covers the income tax and capital gains tax (CGT) anti-avoidance legislation concerning settlements contained in Chapter 5 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005, Pt 5) and Chapter 2 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992, Pt III), as well as the inheritance tax (IHT) treatment of offshore trusts.

There is a wide range of structures that can be used to hold wealth; many use vehicles established outside the UK. The Overseas entity classification—trusts, usufructs and foundations Practice Note discusses how the UK tax system treats foreign entities. Each tax must be considered separately. An entity may be considered a settlement for IHT purposes, but may not be settled property for CGT purposes. UK tax law categorises foreign entities as companies, trusts or partnerships. Companies are opaque, while partnerships are transparent. Trusts are subject to a separate regime.

For general guidance on offshore trusts, see: Offshore trusts—general principles—overview.

Domicile of settlor

The domicile status of a UK-resident settlor

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All in? Court confirms when a settlement is 'made' for the purposes of excluded property (Accuro Trust (Switzerland) SA v The Commissioners for HMRC)

Private Client analysis: This case considered the meaning of 'relevant property' under the settlements regime of the Inheritance Tax Act 1984 (IHTA 1984) and, in particular, the time at which this definition is to be tested. The question arose as to whether the trustees of an offshore trust established by a non-UK domiciled settlor were subject to the UK settlements regime in respect of property added to the trust after the settlor became deemed domiciled in the UK, or whether they were exempt from such charges as the trust consisted solely of excluded property. The First-tier Tribunal (FTT) held that whether trust property is excluded property is based on the status of the trust at the time that it was established, not at the time that the property in question was added to the settlement. As a result, the trust in this case did consist solely of excluded property and no inheritance tax (IHT) charges arose as a result of either the ten-year anniversary or capital distributions. The FTT was also asked to consider whether their jurisdiction was appellate, or supervisory only. The FTT held that, while their jurisdiction was supervisory, the questions raised by the trustees were relevant in establishing whether HMRC had acted reasonably and that the outcome (ie that the paid IHT should be refunded and that no further IHT was due) would be the same in either case. Written by Katherine Willmott, senior associate solicitor at Foot Anstey LLP.

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