UK Tax Changes to Foreigner’s Trusts
By David J. Kidd, Citroen Wells Chartered Accountants
Never-ending change: The UK Treasury cannot keep from changing the UK tax rules affecting foreigners, often referred to technically as ‘foreign domiciliaries’. At the time of the last major upheaval in 2008, there was a Treasury promise that there would be no further changes. In fact, there have been changes every year following 2008.
One major professional accountancy body has stated that ‘the UK tax system is caught in a culture of neverending change’.
Until 6 April 2017, the lynch-pin of foreign domiciliary taxation for income tax and capital gains remained untouched, i.e. there was no statutory time limit for claiming such status for these taxes. This meant that overseas income and capital gains were outside UK taxation, provided they were not enjoyed in the UK, being the so-called ‘remittance basis’. From that date, broadly, fifteen years UK residence automatically ends this specially valuable income tax and capital gains tax advantage. This fifteen year rule means foreigners become subject to a statutory fiction, in which they are deemed to be domiciled in the UK. A foreigner will then be treated in the same way for tax purposes as his or her English counterpart and taxed on a world-wide basis.
Effects on trusts
One might think this deeming provision would mean a ‘look-through’ of all long-stay foreigners’ trusts and compa- nies, as this is the basis on which UK settlors are taxed. Think again! The Treasury aims to collect more from those who choose to be long stayers, but still allow ‘deemed domiciliaries’ to have special reliefs so far as income/gains arise in trusts, provided the trusts were established before the fifteen year deadline. This has been done in a technically complex manner.
Protected trust reliefs
In essence, it means there are protected trust reliefs which prevent capital gains tax and income tax in the protected trust being attributed to the settlor, as they normally would be for an English citizen. These reliefs also extend to companies beneath the trust, provided the settlor can only enjoy the income and gains of the company through the trust’s participation in the company. If the settlor, for example, made a loan to the underly- ing company, the relief would not apply to company income/gains.
Avoiding trust tainting
These reliefs apply only to trusts established prior to ‘deemed domicile’. If any property or value is added to the trust thereafter by the settlor or another trust of the settlor, the trust ceases to be protected, and this loss of protection cannot be reversed. The legislation makes an exception for property provided under a transaction at arm’s length, and in the case of loans to or from trusts that specify the rate of interest. Great care is needed to avoid trust tainting, which will be a problem in practice.
Tax on distributions
Thus, the income/gains within the trust /underlying company can enjoy exemption from the usual rules. This is not a permanent exemption from tax – they come into charge on distribution under general rules or under special provisions applicable to protected trusts. But that is a whole new topic…
Expect more change!
The current rules are opposed by those who believe there should be no distinction between ‘deemed foreign domiciliaries’ and UK domiciliaries. They consider that no exemption should be built into the new measures for offshore trusts established prior to the fifteen-year rule; historical experience suggests their view may ultimately prevail.
Published: July 2018 l Photo: Jaroslav Moravcik - Fotolia.com