UK Income Tax and
Capital Gains Tax Basics
for Offshore Trustees
By Natalie Dimond
BPP
EDUCATION
BPP
PROFESSIONAL
EDUCATION
BPP PROFESSIONAL
PROFESSIONAL
EDUCATION
CONTENTS
•
Residence and Domicile
•
Liability to tax- Settlors
•
Liability to Tax – Trusts
•
Liability to Tax – Beneficiary
•
Reporting Requirements for IT
•
Occasions of Charge for CGT
•
The Settlor Charge
•
The Charge on the Beneficiary
•
Rebasing elections
•
Underlying Companies
•
Planning Ideas
•
Reporting Requirements for IT
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Implications of residence and domicile on UK tax exposure
(cont’d)
Resident
Non resident
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Domicile
Non domicile
IT-worldwide
IT-UK and foreign remitted
CGT-worldwide
CGT-UK and foreign remitted
*(depending on whether
remittance user)
IHT-worldwide
IHT-UK only
IT-UK only
IT-UK only
CGT-None
CGT-None
IHT-worldwide
IHT-UK only
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Offshore Trusteesliability to Income
Tax
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The Settlor
— The settlor is the person who provides the economic benefit to the
settlement
— If one person settles the initial settled funds of, say, £100 and then
another person provides additional assets of £10,000, the second
individual providing the £10,000 will be a second settlor, even though he
may not be named on the deed.
— It is therefore important to be able to identify who is the real ‘economic’
settlor and any individuals who may have added to the settlement.
— A settlor will be deemed to have an interest in the trust whether or not he
can or does benefit from it, unless he has been irrevocably excluded from
benefit (from this and any other trust derived from it).
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Liability to tax -Settlors
— A UK resident settlor will be liable to tax on the trust income if he has retained
an interest in the trust.
— This may occur if he (or his spouse) is a named beneficiary, or if he (or his
spouse) has not been excluded from benefit.
— If so, the settlor is chargeable on all of the trust income with no deduction for
trust expenses, in the tax year in which the income arises.
— A settlor will also be liable to tax on trust income if he has created a trust in
favour of a minor child, and the trust has distributed income.
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Residence
— Corporate trustees are resident where the company is incorporated and where
the central management and control resides.
— Non resident trustees pay UK tax on UK income only.
— The rate of tax is determined by the type of trust and the type of interest in the
trust.
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Rental Income and the Non-Resident Landlord Scheme
— Non-residents have to pay a 20% withholding tax on any rental arising on UK
property or land
— The letting agents are responsible for paying this over to HMRC( or tenant if
no agent)
— Where the rent is less than £100 a week there is no requirement to do this.
— The tax withheld will be treated as a credit on your final tax liability.
— Providing your tax affairs are up to date, a non-resident landlord can apply to
have rents received gross. (Form NRL1)
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Rental Income and the Non-Resident Landlord Scheme
— The tax on the rental is then calculated and paid alongside the self
assessment return on the 31st Jan following the tax year
— It is possible to get a deduction for loan interest and expenses as long as it
is wholly and exclusively in relation to the rental income.
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Exempt Trusts
— A trust will not have a liability to tax if it is:
— A bare trust - as the liability to income tax is borne solely by the beneficiary.
— A charitable trust – as the income is exempt provided that it is used for
charitable purposes.
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Sham Trusts
— The offshore trustees must ensure that although they must carry out the
wishes of the settlor, they are genuinely managing the trust and therefore
it is not regarded as a sham for tax purposes.
— If it is, the assets are not seen to be being held on trust, but by the
trustees as a nominee of the settlor.
— In these circumstances, the settlor will be taxed as though he is still the
owner of the assets.
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Liability to tax
— The rate of tax which the trust will suffer is determined by the type of trust.
— Discretionary trusts are taxed at the rate applicable to trusts (‘RATT’) which is
currently 37.5% for dividends and 45% for all other income. (new rates from 6
April 2013)
— Interest in Possession (‘IIP’) trusts are taxable at the basic rates of tax, which
are 10% on dividends and 20% on all other income.
— Accumulation and maintenance (‘A&M’) trusts are taxable according to whether
the beneficiary has attained an interest in possession.
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Liability to Tax – Interest In Possession Trusts
— IP and A&M trusts where beneficiary has attained a life interest
— Certain types of UK income will have had tax deduced at source which will
satisfy the trustees liability.
— These include:
— Dividends – with the notional 10% tax credit attached.
— Interest – In some cases 20% tax will have been deducted at source.
— Rental income – where NRL status has not been applied for and 20% tax has
been deducted by the tenant or letting agent.
— Where all the trust income has suffered basic rate tax at source, the trustees
will have no further liability to tax.
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Liability to tax - Life Tenants (Not Settlors)
— Where the life tenant is not the settlor he is liable to tax on the income of the
trust, net of trust expenses, i.e. on the amount he physically receives.
— Where income has suffered tax at source or the trustees have paid tax, the life
tenant will be able to claim a deduction against his liability for the tax so paid.
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Liability to Tax – Discretionary Trusts
— Discretionary and A&M Trusts in their discretionary phase.
— These trusts are subject to RATT (Rate Applicable to trustees).
— The first £1,000 is charged at the basic or dividend rate depending on the
income received.
— If there is more than one trust in existence with the same settlor the £1,000
‘standard rate band’ is shared between the trusts, with a minimum of £200.
— RATT also applies to settlor interested discretionary trusts.
— Non resident trusts are exempt from RATT on interest and dividends where there
are no UK beneficiaries, although RATT still applies to trading and rental income
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Liability to Tax – Discretionary Trusts
— Allowable trust management expenses (‘TMEs’) are available to reduce the
trustees liability to RATT.
— The allowable TMEs are restricted to those relating to the chargeable income
only. For example, if the trust is non UK-resident, the expenses must be
apportioned between UK and non-UK income.
— The portion relating to UK income is applied against UK dividends first.
— Relief is given by way of a reduction in the tax charged, as income used to pay
for TMEs is taxable at the basic rate of tax, not RATT.
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Discretionary Beneficiaries
Extra Statutory Concession B18
— A discretionary beneficiary is liable to tax only on distributions received by
him.
— The distribution is taxed on a UK resident beneficiary as non-savings income
at the individuals relevant rate.
— Under Extra Statutory Concession B18 a beneficiary may claim a credit for UK
tax paid or suffered by the trustees, provided:
— The trustees have submitted tax returns and paid the trustees’ tax liability.
— The distribution was not made out of income arising more than six years ago.
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Discretionary Beneficiaries
Extra Statutory Concession B18
— UK tax suffered in an underlying company is not available as a credit against
the beneficiary’s liability to tax.
— Distributions from a non-UK resident Trust will be made proportionately from
UK and non-UK source income.
— Where ESC B18 does not apply the distribution is treated as being paid gross.
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Liability to tax - UK Resident, Non-domiciled
Beneficiary
— IIP Trusts
— A UK resident, non-UK domiciled beneficiary will be liable to tax on UK source
income and may be liable on foreign income depending on whether it is remitted to
the UK or whether he is taxed on an arising basis.
— Discretionary and A&M Trusts
— A UK resident, non-UK domiciled beneficiary may be liable to tax on discretionary
payments depending on whether they are remitted to the UK or whether he is
taxed on an arising basis.
— Their exposure will depend on whether the beneficiary has claimed the remittance
basis of taxation
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Reporting requirements
— Trustees must report any taxable income annually on form SA900 (subject to a
few exceptions).
— Trustees of a bare trust are not required to complete a tax return.
— If the trustees are chargeable to income tax and have not received a notice to file
or a tax return they must inform HM Revenue & Customs within 6 months of end
of tax year i.e., by 5 October.
— Paper returns are required to be filed by the 31 October following the tax year
end.
— This deadline is extended to 31 January following the tax year end for returns filed
online.
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Offshore Trusteesliability to Capital
Gains Tax
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Occasions of charge
— Upon creation of the settlement
— There is a disposal made by the settlor upon creating or adding assets
to the trust
— The settlor is deemed to have made a disposal to the trustees at
market value. He will therefore incur a gain or loss calculated by taking
the market value of the asset gifted over original cost (but holdover
relief may be available).
— Pre 2006-If the transfer was made into a life interest or accumulation
and maintenance trust then it was only possible to defer a gain if the
asset being transferred was a business asset
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Occasions of charge
— If the transfer was made into a discretionary trust, then the gain on any
asset could be transferred.
— Post 2006- All transfers into an Offshore trust could apply for the gain
to be deferred.
— Trust created by will/intestacy:
— The trustees take the assets passing to the trust at probate value and
are deemed to have acquired those assets at date of death
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Occasions of charge
— If the settlor is resident and domiciled in the UK at the time of the transfer,
then they will be chargeable to CGT on worldwide assets
— If the settlor is resident and non-domiciled, then it is possible only the
transfer of UK assets will be considered depending on whether he is a
remittance basis user.
— CGT into trust is mostly avoided by gifting cash and getting the trustees to
purchase the asset from a third party, or by gifting assets with a low value
but high potential growth
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Occasions of charge
— Disposals by trustees
— Disposal of trust assets
— Not just the sale of trust assets, but also occasions which may be
deemed disposals, such as granting of certain leases, extraction of
minerals from land, etc.
— Distributions to beneficiaries
— Where capital payments are made in the form of the transfer of trust
assets, or where the trust is terminated and assets are passed out as
part of the termination, the assets are deemed to be disposed of at
market value.
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Non-UK Resident Trusts
— How does CGT affect offshore trustees?
— Despite not having a liability to CGT (if the trustees are not engaged in a UK
trade), offshore trustees should be mindful of the imposition of CGT on the
UK resident settlors and beneficiaries of their trusts as a result of their
actions.
— Trustees will also be required to keep full and accurate records of the
purchase and disposal of assets to ensure gains can be reported by the
settlor or beneficiary.
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The charge on the settlor
(s86 TCGA 1992)
— A UK resident and domiciled settlor of an offshore trust
will be charged to CGT where:
— The trustees have made a gain, and
— The possible beneficiaries of the trust include any person out of the
following:
— The settlor
— The settlor’s spouse
— Children of the settlor, or his spouse, over the age of majority
— Spouses of those children
— Any company controlled by any of the above
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The charge on the settlor
(s86 TCGA 1992)
— If a gain is made in the circumstances set out above it is treated as though
it were made by the settlor himself.
— Note: In order to avoid this charge it may be necessary to include a
provision within the trust deed excluding the persons listed above from
benefiting.
— Settlements that can benefit grandchildren are subject to the provisions of
s86 if created after 17 March 1998 or become ‘tainted’ after this date. A
trust is ‘tainted’ if:
— Property or income is provided for the purposes of the settlement
— Trustees become neither UK resident or ordinarily resident, or dual
resident
— The terms of the settlement are altered so that there is a chance of a
grandchild (or grandchild's spouse/controlled company) benefiting
— Any grandchild (or grandchild's spouse/controlled company) benefits from
the settlement but is not a named beneficiary.
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The charge on the beneficiary
(s87 TCGA 1992)
— CGT will be charged on a capital distribution to a
beneficiary if:
— The beneficiary is UK resident
— and the trust contains stockpiled gains
— and those gains have not been assessed on the settlor or allocated
to a capital payment previously
— Bear in mind that the capital payment itself may trigger a gain if an
asset is distributed.
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The charge on the beneficiary
(s87 TCGA 1992)
A capital payment can be:
— a cash payment:
— A payment that is not received as income by the beneficiary
— A payment to settle the debt of a beneficiary
— a distribution of assets
— The transfer of an asset from the trust
— A beneficiary becoming absolutely entitled against the trustees
— or a benefit
— The conferring of any benefit (e.g. beneficial loan, use of property owned
by the trust at a rent less than market value.)
— But not a payment on arms length terms.
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The charge on the beneficiary
(s731 ITA 2007)
— The trustees will also need to consider the impact of relevant income,
which may be matched to capital payments in priority to gains where the
trust was created with a tax avoidance motive .
— Relevant income (under section 731 ITA 2007) is the undistributed,
accumulated income within the trust and any underlying company.
— It is calculated by taking the gross income received, less any expenses
and income distributions, and then added to any amount of relevant
income that remained unmatched in previous years.
— The total relevant income is then matched to the capital payments arising
in the year, before the capital payments are matched to gains.
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The charge on the beneficiary
(s87 TCGA 1992)
— The capital payment is matched against trust gains made by the
offshore trustees on a ‘Last In Last Out’ basis.
— Where payments are made and no gains exist the payments are
carried forward until the trust makes gains.
— The beneficiary is treated as though he had made the gain himself. He
may set his personal annual exemption against the deemed gain.
— If the gain was matched to gains that the trustees had realised more
than a year before, the beneficiary is charged an additional amount
(the supplementary charge) based on the number of years that the
gains had been ‘stockpiled’ in the trust.
— The supplementary charge is calculated as 10% of the CGT charge for
each year that the gains were retained over one year, up to a
maximum of 6 years. The effective rate of tax payable by the
beneficiary can reach up to 44.8% (28% + (6x 2.8%)).
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The charge on the beneficiary
(s87 TCGA 1992)
— Note that capital payments are matched to trust gains within a given
tax year on a pro rata basis, not on a daily basis.
— If capital payments in the year exceed gains under s.2(2), then the
gains must be matched with the capital payments in the relevant
proportion of each of those capital payments.
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The charge on the beneficiary
(s87 TCGA 1992)
— UK resident, non-domiciled beneficiaries
— A non-domiciled beneficiary may be taxed on capital payments in the year in
which they are matched to gains, or on the remittance basis, in the year in
which the capital payment is received in or remitted into the UK. This
depends on whether they claim the remittance basis.
— For non-domiciled beneficiaries, it is important that the trustees are mindful
of where the payment is to be made, in order to avoid an unnecessary
remittance.
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The charge on the beneficiary
(s87 TCGA 1992)
— A capital payment under the remittance basis still reduces the s.2(2) amount
even where the payment may be (un)taxed under the remittance basis. i.e
where the capital payment may be made into the beneficiaries foreign bank
account.
— It does not make any difference whether the gain is from a UK or foreign
situs asset, a gain is still calculated.
— A capital payment may be remitted to the UK in a year before the s.87
deemed gains accrue.
— A capital payment to a non-UK resident beneficiary will also be matched
against the 2(2) gains of the trust (but will not be liable to UK tax).
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Rebasing Elections
— UK resident, non-domiciled beneficiaries
— UK resident, non-domiciled beneficiaries were brought into the stockpiled
gains regime from 5 April 2008.
— Trustees may make an election in order that any non-domiciled beneficiary
in receipt of a capital payment will only be charged to CGT on gains realised
and accruing after 5 April 2008.
— The rebasing election applies to all assets of the trust and its underlying
companies.
— A rebasing election needs to be made by 31 January in the year following
the end of the tax year in which a capital payment is made to any UK
resident beneficiary (it does not matter where they are domiciled), or at any
time before a capital payment has been made.
— If a rebasing election is not made the capital payment made to the non-UK
domiciled beneficiary can be matched to gains accruing before 5 April 2008.
— The election does not affect UK resident and domiciled beneficiaries
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Underlying companies
— The income of an underlying company can also form part of the relevant
income pool under section 731 ITA 2007.
— Gains (other than some from high value residential property see next slide)
made by an underlying company are included within sections 86 and 87, as
these are attributed to the trust under section 13, whether or not funds are
transferred to the trustees by way of a distribution.
— For this to apply:
— The company must be non-UK resident,
— The trust must be a participator (i.e., either fully own or jointly own more
than 10% of the company with 4 or fewer other persons).
— In calculating these company gains, indexation allowance is still available.
— Losses are not attributed to the trust and cannot be carried forward, and
therefore if they are not utilised against company gains in the year they are
extinguished.
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Annual Residential Property Tax-Related Chargeable Gain (ARPT)
•
CGT will be extended to include gains on the disposal of UK
residential property by non-resident, non-natural persons, where
the consideration on the disposal is more than £2m.
•
Note that trusts holding UK residential property are not included in
the CGT charge. The criteria will be the same as the annual
charge ie companies, partnerships with corporate members and
collective investment schemes.
•
CGT will be on all gains made from 6 April 2013. There will not be
a charge on historical gains from the date of purchase.
•
Exclusions for property held for the purpose of some type of
business, including rental businesses.
•
CGT rate of 28% even when the gain accrues to a UK company
•
The portion of the gain which is not ARPT related will remain
available to be apportioned to UK resident participators or to
offshore trustees.
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Transfers out of an Offshore Trust for CGT purposes
— Any transfers out of an Offshore settlement and the termination of a
settlement constitutes a capital payment.
— Unless gains within the settlement have been charged under the settlor
charge, or previously distributed, if applicable, they will be matched to the
capital payment and taxed in the year of transfer or termination.
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Planning ideas
— Washing out gains
— Capital payments made to non-resident beneficiaries will be matched to the
stockpiled gains pool, however the beneficiary will not be charged CGT on
the distribution.
— Capital payments made to UK resident beneficiaries up the level of their
unused annual exemption (provided there is no relevant income) will wash
out stockpiled gains without incurring a CGT charge.
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Reporting requirements
— Trustees
— Trustees of a UK trust must declare gains on their tax return.
— Offshore trustees may receive a Form 50(FS) from HMRC requesting them
to report:
— Gains of the trust and also of companies underlying the trust
— Capital payments and to whom they have been made
— Details of stockpiled gains or unmatched payments carried forward
— Details of accumulated undistributed income which can be matched to
capital payments
— This form is not statutory, but HMRC may seek the information requested
directly from the known settlors or beneficiaries
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Reporting requirements
— Settlors and Beneficiaries
— Where either:
— A settlor is liable to CGT on gains under s86 or
— A beneficiary is liable to CGT on gains under s87
— They must enter the gains in the CGT supplementary pages of their tax
return.
— Additional CGT liability arising from a supplementary charge must be
calculated and entered on the return
— It is important that trustees keep records of any trust gains to enable UK
settlors or beneficiaries to calculate their tax liability.
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Disclaimer
The information contained in this handout is intended to provide general
guidance. It is not intended to replace the specific advice which should be sought
from an appropriate professional adviser before taking any particular course of
action.
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Contact
Natalie Dimond
BPP Professional Education
nataliedimond@bpp.com
01534 711837
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