Offshore Trusts - The Tax Position (2023)

How do offshore trusts work?

A trust or settlement is a legal relationship between three parties; the trustor, the trustee and the beneficiary. The settlor transfers funds or assets to the trustees, who manage those assets (known as the “trust corpus”) for the present or future benefit of the beneficiaries.

Today, trusts are liquidated for a number of reasons including wealth protection, flexibility, confidentiality and tax planning reasons.

But what makes a trust offshore?

An offshore trust is a trust where the trustees are non-UK residents for tax purposes. The residency of the Trustees as a corporation may differ from their own tax residency status.

Unsurprisingly, if all the trustees are resident in the UK, the trustees as a body are resident in the UK for tax purposes.

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Unless all of the Trustees are resident in the UK, the Trustees are not resident in the UK as a body for tax purposes.

If at any time at least one trustee is resident in the UK and at least one is not, the body of trustees will only be resident in the UK if a settlor of the trust (there may be several) was resident, ordinarily resident or resident in the UK at any time, if he or she contributed property to the trust.

Most modern offshore trusts have a single non-resident corporate trustee, so these rules are relatively rare in practice.

Offshore Trusts: The role of protector

The vast majority of offshore trusts are formed under foreign law. These laws may require that a protector be appointed to oversee the exercise of certain powers vested in trustees. The Protector's role is not to act as trustee and his or her principal powers normally consist of a veto over the trustee's power to make distributions to trust beneficiaries and a power to remove current trustees and appoint new trustees .

Difficulties can arise when the settlor or protector is reserved certain rights over the administration and disposal of trust assets. If the nature and extent of these reserved rights mean that the settlor or other party is effectively acting as a trustee, the non-resident status of the trust may be affected.

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What is an appropriate jurisdiction for an offshore trust?

The obvious first point is that a trust should be incorporated in a jurisdiction where little or no tax is levied on its income and assets. Additional considerations pertain to the legal system in the chosen jurisdiction, such as local laws affecting trusts, which may affect matters such as confidentiality and protecting assets from creditors. Factors such as the physical location of the underlying assets, time zone, language and of course the reputation and safety of the jurisdiction are relevant factors. Similar considerations are required when selecting professional trustees. The competency of the trustees, the strength of the regulatory framework in the jurisdiction, practical communication issues and the likely fees of the trustee all need to be considered.

What Are the Potential Tax Benefits of Using Offshore Trusts?

Offshore trusts can be effective tax planning tools for people who are resident in the UK for tax purposes but are not resident in the UK (so-called resident non-doms).

Capital Gains Tax

If the settlor of an offshore trust is a resident non-dom, capital gains arising within the trust are generally not taxable for him, even though he or his family may benefit from the trust. However, capital gains tax may be payable by a UK resident beneficial owner if the profits realized within the trust are offset against capital payments made to or benefits received from that beneficial owner.

However, if that UK resident beneficial owner is also a non-UK resident, they may be able to elect to be taxed on a remittance basis. In this case, fiduciary gains linked to a lump sum or benefit will only be taxable in the UK if they are imported into or enjoyed in the UK.

Until April 5, 2017, it was possible to “launder” profits within an offshore trust by distributing them to non-resident beneficiaries. This would mean that any pool of undistributed gains which could be matched with capital payments to or from UK resident beneficial owners would be reduced without any UK resident beneficial owner being subject to a UK tax charge. As of April 6, 2017, it is no longer possible to launder profits in this way.

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Foreign Income

Offshore trusts can also be an effective way to defer tax on foreign source income when the settlor is a UK resident non-dom. Where the settlor is a resident non-dom and he and/or his spouse or domestic partner are unable to benefit from the trust, the settlor will only be taxed on foreign source income actually remitted into the UK provided he claims the remittance basis. Even where a resident non-dom settlor, his or her spouse or domestic partner may benefit from a discretionary trust, it may still be possible in certain circumstances for tax to be deferred on foreign source income provided that the income is not contributed or otherwise enjoyed In the United Kingdom.

inheritance tax

Offshore trusts can be useful planning tools to avoid UK inheritance tax. Non-doms are not liable to UK IHT in relation to their overseas assets. However, once an individual has been resident in the UK for a specified period – prior to 5 April 2017 this was seventeen years, from 6 April 2017 the period has been reduced to 15 years – they are regarded as resident in the UK (see below).

Foreign assets contained in a trust that were wound up while the settlor was resident outside the UK remain “excluded property” for inheritance tax purposes and are not subject to IHT – even if the settlor subsequently becomes UK resident or is deemed to be resident there. This makes such trusts extremely useful and attractive to long-term UK residents with significant overseas assets.

Offshore Trusts: Are They Suitable for UK Residents?

The answer is rare, as the opportunities for UK residents to use offshore trusts in a tax efficient manner are much more limited than for resident non-Doms.

Where a UK resident and resident settlor, their spouse, children, grandchildren and spouse are able to benefit from an offshore trust, the settlor will be taxed on any gains as they arise.

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It is rare for the group of beneficiaries of an offshore trust to exclude such a large group of individuals. However, if either the settlor is deceased or there are no close family members who can benefit from the trust, no UK tax will arise on gains from the trust until the distributions are reconciled with distributions to UK resident beneficial owners.

Tax on the overseas income of a discretionary trust formed by a UK resident and resident is deferred where the settlor and his or her spouse or domestic partner are excluded from the benefit, for example in the case of a trust for the benefit of the settlor's children or grandchildren.

Where a UK resident settlor is barred from all the benefits of a trust, whether or not it is an offshore trust, the assets contained in the trust are outside the estate of the settlor for IHT purposes, although for the Trust may incur deferred and exit charges and a charge may be made on the value of assets or monies donated to the Trust. Further IHT may be payable if the Settlor fails to survive 7 years from the date of the donation or donations to the Trust or the point at which he becomes ineligible, whichever is later.

Offshore Trusts: The Changes of 2017

Recent changes in the taxation of non-doms have necessitated consistent changes in the taxation of offshore trusts. Most of these have been considered in the previous paragraphs. However, there are specific provisions concerning "protected settlements".

These provisions apply where an individual who has formed an offshore trust, although not resident in the UK, is resident in the UK for UK tax purposes under the 15 year regime applicable from 6 April 2017. They shall ensure that such an individual does not receive any income or profits from their offshore trust until they receive a distribution. However, this protection is lost if the trust is 'tainted' by an allocation to the trust fund after it has been deemed domicile.

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ETC Tax can assist with advice on offshore trusts

We are experienced advisors on all aspects of offshore trusts. Our services include:

  • Offshore Trust Advice
  • International tax advice
  • Expansion abroad
  • corporate tax
  • Expat tax advice

For more information please contact one of ourlicensed tax advisors.


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