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For more information please contact:

Liz Palmer
Liz Palmer
Partner, Head of Private Client
T: +44(0)20 7344 7678
E: liz.palmer@fsilaw.com

 
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Liz Palmer, Head of the Private Client Department at Finers Stephens Innocent, explains why trustees of offshore trusts will need to review their administration, and tax and investment strategies, as a result of the Finance Act 2008.  

You are a professional advising the settlor and beneficiary of an offshore trust.  The settlor is a long term non-domiciliary, and has just about got over the debacle and anxiety of deciding (in a rush before 5 April 2008) whether to ask the trustees to make a big distribution.  Now you and the trustees have got to get your head around what happens from here on.

Well, thanks to the Finance Act 2008 and new rules relating to the taxation of non domiciliaries, you’re not alone …Whether you are a professional adviser or the beneficiary or a trustee of an offshore trust, there are some things to be aware of if you want to ensure the trust (and the client’s ability to benefit from it tax efficiently!) stays in healthy shape.  The trustees should:

1    CLASSIFICATION

Continue to classify pure income, income and capital gains.  This has always been advisable and the new legislation does not alter the position.

2    RECORD KEEPING

Ensure trust record keeping is thorough.  Until now, where the settlor and beneficiaries of an offshore trust were all non UK domiciled, it was less important to maintain detailed capital gains tax (CGT) records.  This is because there was no way to attribute capital gains realised by the trustees to the non-domiciled beneficiaries.  Sadly this luxurious position has come to an end.

Trustees should keep records of all pure capital, income and the proceeds of capital gains disposals so that this information can be passed on to beneficiaries who receive trust distributions.

Historic CGT record-keeping is more complex.  In most instances the records will only be relevant back to March 1998.  If the trustees decide to make a rebasing election (more on this below), trustees will not need to ascertain the base cost (acquisition price) of assets owned on 6 April 2008.  For trusts owning significant investment portfolios this will be very helpful.

Thankfully capital gains realised by trustees before April 2008 (if all beneficiaries are non domiciled) will not be taxed when distributions are made to beneficiaries after 6 April 2008.  However the historic position will still be relevant going forward.  In many circumstances trustees still need to trawl through their pre April 2008 ledgers and put CGT records together.

3    REBASING

Consider making a Rebasing Election - a helpful concept which has made the tax changes introduced by the government a little more palatable.  Trustees can elect to rebase all the trust assets so that they are deemed to have a base value (acquisition cost) equivalent to their market value on 6 April 2008.  This means that any accrued gain in the assets will be wiped out forever without being taxed.  But, making the election will mean:

  • All trust assets will need to be re-valued as at 6 April 2008.  There is no scope to pick and choose which assets the election applies to.  An easy task for investment portfolios but not so easy for real estate or shares in private companies.

  • Assets of underlying companies owned by offshore trusts will also be rebased.

  • Making the election ensures the trust will be “visible” to the UK tax authorities.

4    TAX RATES

There is now a real disparity in tax rates between:

  • trust income which may be taxed at 40% if distributed; and

  •  trust capital gains which may be taxed at 18% in the hands of a beneficiary. 

This begs the question whether the trustees should be reviewing their investment objectives to take advantage of the lower CGT rates.  In many instances altering the investment mandate will not be advisable for lots of non tax related reasons.  But if trustees regularly distribute to UK resident beneficiaries, who bring the funds to the UK, it may be sensible to realise more capital gain than income.

5    STOCKPILED GAINS

The new 18% CGT rate may provide an incentive for offshore trustees who have significant stockpiled gains, and now only UK domiciled beneficiaries to distribute to, who want to take advantage of the rate before it moves in an upward direction.  Where gains have been retained by the trustees untaxed for up to six years, the 18% rate can  increase to a rate of 28.8%, but this is still so much better than the maximum 64% rate that applied before 5 April 2008.

So, it’s not all bad news.