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Capital Gains Tax and offshore trusts: match fit for April 2018?

The UK’s Autumn Budget contained a welcome lack of new measures affecting the capital gains taxation of offshore (i.e. non-UK) trusts. However, there are Capital Gains Tax changes waiting in the wings, already announced, coming into effect on 6 April 2018. There may be steps that UK resident non-doms and their trustees ought to be taking ahead of these changes if they want to reduce their overall exposure to UK taxes. Three key changes and planning points are summarised below:

It will no longer be possible to ‘wash out’ trust gains from offshore trusts by making payments to non-UK resident beneficiaries first

This change means that, for UK resident beneficiaries, the offshore trust’s pool of untaxed gains realised by the trustees will not be depleted if distributions are made to, or benefits received by, non-UK resident beneficiaries.

The new rules apply both to capital payments (i.e. distributions or benefits) made after 5 April 2018 and pre-6 April 2018 capital payments that have not yet been matched to gains. Therefore, if offshore trusts are likely to be used to benefit UK resident beneficiaries in future, consider taking steps before 5 April 2018 to reduce the gains pool, or realise gains and match them off while it may be more beneficial to do so. Unmatched capital payments to any beneficiary who is, or could be, UK resident should cause alarm bells to ring. There are special rules for beneficiaries who are either only temporarily non-UK resident or UK resident, so watch out for those.

UK resident settlors of offshore trusts may be taxed on capital payments to close family members

From 6 April 2018, offshore trustees must have a commanding knowledge of their clients’ family trees, certainly where there is a UK tax resident settlor. These will demand extra special care because any capital payments to a close family member of the settlor (generally meaning the settlor’s spouse, cohabitee or minor children) will be treated for UK tax purposes as though the capital payment had been made direct to the settlor instead. Unless the settlor can claim the remittance basis of taxation in respect of a capital payment received abroad, income and gains matched to the payment will be taxable on the settlor. Watch out, therefore, for deemed domiciled settlors, who will not be able to claim the remittance basis and will not be best pleased if unexpected capital payments are made to close family members.

Beware onward gifts of capital payments

The draft legislation has turned out to be not as draconian as once feared but these new rules will still need careful watching. Trustees may want to ensure, if a capital payment is made to a non-UK resident beneficiary, or a UK resident beneficiary who is a remittance basis user, and (unless the settlor is not UK resident) who is not a close family member of the settlor (as then the above rules will be engaged), that there are no plans to make an onward gift of that capital payment to a UK resident beneficiary. The onward gift has to be after 5 April 2018 (and there is no time limit to the making of the onward gift) but the receipt of the capital payment can be pre- or post-April 2018. However, at the time of receipt of the capital payment, there has to be an intention, or arrangements, for some or all of the capital payment to be passed to a UK resident recipient, and the recipient does of course have to be UK resident at the time of receipt in order to be taxable to UK tax. Therefore gifts of funds unrelated to the capital payment should still be fine but it may prove difficult to prove a negative, i.e. an absence of intention. It is also not clear from the legislation whose intention is relevant!

If onward gifts of capital payments are in contemplation, both the capital payment and onward gift should be completed before 6 April 2018.

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