Ana-Maria Tomciac
Offshore trusts are trusts which are managed by trustees who are not UK tax residents. Historically, such offshore structures were very popular; however once the money laundering directives were codified into UK law, offshore trusts were brought into the spotlight. As a result, anti-avoidance legislation began to be adopted in the UK, leading to increased transparency and bringing more trusts within the UK tax net.
Offshore trusts still continue to have non-tax advantages however, and one of the prime benefits is asset and wealth protection, providing an additional layer of privacy; and especially since these trusts are not legal entities, this means they cannot own assets, incur liabilities, sue or be sued in the trust’s name.
Secondly, offshore trusts are popular as a succession planning tool. For instance, they can keep the assets for the benefit of certain beneficiaries; these take the form of a living will which dictates how each asset should be allocated during the life or after the death of the settlor.
Finally, offshore trusts may have limited exposure to UK taxes. The trustees of offshore trusts are only subject to UK income tax on UK- source income. With respect to capital gains, only gains arising from direct or indirect disposal of UK property and land are subject to UK capital gains taxes. In addition, so long as the offshore trust does not hold any UK situs assets (including UK land and property held directly or indirectly), and provided the trust was established by a non-UK domiciled individual, it would be outside the scope of UK inheritance tax.
Whilst the tax obligations on offshore trusts may seem straightforward, please note that unfortunately these only represent the tip of the iceberg. The anti-avoidance legislation on offshore trusts is highly complex and ever changing. Hence, only in specific circumstances can an offshore trust provide protection from UK taxation. Finally, it is also worth noting that due to the fifth Money Laundering
Directive, which was recently implemented in the UK, offshore trusts are now required to register with the UK Trust Registration Service by 01 September 2022 if:
- They have a UK tax liability;
- The trustees acquired UK land or property on or after 06 October 2020; or
- They have at least one UK resident trustee and they enter into a business relationship with a UK service provider (i.e. lawyers, accountants, legal professionals, estate agents, etc.).
Trustees therefore need to ensure they have taken the necessary steps to remain compliant in this ever-changing tax landscape.
XLNC MAGAZINE | No. 10 | Autumn 2022