Very significant changes will be made to the draft legislation on the
taxation of non domiciled beneficiaries of offshore trusts published on 18
January. The revised rules are more generous to non domiciled beneficiaries
than the draft legislation, and may have some advantages for UK
There will not be an immediate tax charge on non domiciliaries who have
created an offshore trust, where the trust or a company owned by the
trustees realises a capital gain even if the gain is on an asset in the UK.
The rules which currently apply to UK domiciled beneficiaries of offshore
trusts will be extended to apply to non UK domiciled beneficiaries with
effect from 6 April 2008. The effect of the new rules is that non domiciled
beneficiaries (including non domiciled settlors of trusts who are also
beneficiaries) who are resident in the UK are taxable to the extent that the
trust makes capital gains and the beneficiary receives a benefit from the
trust in the UK. Examples of benefits are a cash payment from the capital of
the trust or occupying a property owned by the trust rent free.
Where an offshore trust makes a capital gain this is matched with benefits
that the beneficiaries have received in that tax year or a previous tax
year. To the extent that gains are not matched in this way, they are carried
forward to be matched with benefits received in subsequent years.
In order to encourage trustees to distribute funds the existing rules
provide that the beneficiary’s tax liability is increased by 10% for each
year between realisation and distribution up to a maximum of 6 years. From
April 2008 this gives a maximum rate of tax of 28.8%. For non- domiciled
beneficiaries the additional tax charge will apply from the making of the
gain to its distribution rather than the time at which the benefit is
received in the UK which may be many years later.
In addition, the current rules which are used to match gains with benefit
for the purpose of calculating the additional tax are to be amended.
Benefits will now be matched with most recently realised gains before gains
realised in earlier years. The current rules match benefits with gains made
in earlier years first. This change will apply to all trust beneficiaries so
that UK domiciled beneficiaries may have lower tax charges in relation to
benefits received after 5 April 2008.
To avoid retrospective taxation in relation to non domiciled beneficiaries
the following provisions will apply:
Gains will not be
attributed to non domiciliaries in relation to gains which have arisen
before 6 April 2008.
Gains will not be
attributed to non domiciliaries in relation to benefits which they have
received before 6 April 2008.
Trustees may make an
irrevocable election to treat assets as disposed of and reacquired at
their market value on 5 April 2008. This will apply to all assets in the
trust and any companies controlled by the trustees. Trustees will be
able to effectively step up the base cost of assets for capital gains
tax without having to arrange actual disposals before 6 April 2008.
Non-domiciled settlors of trusts will not be required to notify HMRC of
existing offshore trusts or on creating new trusts
These changes are a considerable improvement on the draft legislation
issued in January and should allay most of the concerns of non UK
domiciliaries who are resident in the UK and are settlors or
beneficiaries of offshore trusts. Generally they will not be
disadvantaged by holding assets through a trust.