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Trustees of offshore Trusts will need to carefully consider the impact of the upcoming changes in April 2025 on the tax treatment of the Trusts over which they exercise their role. These may apply where the Settlor (the person who funded the Trust) is living in the UK, or has previously lived in the UK.
Subject to potential changes in the draft legislation, here are the main points Trustees should know for now.
1. The Income Tax and Capital Gains tax treatment of the Trust may change where the Settlor is UK resident. Where that is the case, typically the Trust income and gains will then become taxable directly on the Settlor (they will themselves typically be exempt from the tax in the four years after they first move to the UK). This should prove simpler for the Trustees, but may require more co-operation with the Settlor’s own tax reporting.
2. Trustees will still need to keep a record of all income and gains that have not been taxed on the Settlor, as these may still become subject to tax under the existing rules. However, beneficiaries will also receive a period of tax free benefit from the Trust during the four years after they first move to the UK.
3. Trustees with UK resident beneficiaries and/or Settlors may wish to consider options for making a distribution and reporting under the Temporary Repatriation Facility. Tax may potentially be reduced from rates as high as 45% for income tax and 38.4% for CGT down to a flat 12%.
4. The test for whether IHT applies to a Trust are also changing, and this will impact different Trusts in different ways.
5. If the Settlor is a long-term UK resident (broadly if they have lived in the UK for 10 of the prior 20 years) then the Trust will become subject the ‘relevant property regime’, a charge of up to 6% every 10th anniversary of the Trust. This did not apply previously unless the Settlor was UK domiciled when the Trust was funded, and didn’t change over time.
6. A Settlor who becomes UK long-term resident will not be subject to IHT on the Trust assets on death even if they are a beneficiary themselves, provided the Trust had been funded prior to the Budget. Anyone seeking to put this type of Trust in place now will need to consider alternative options.
7. Once a Trust is in the relevant property regime, Trustees will need to keep check of whether the Settlor ceases to be long-term resident in the UK. If that happens, the Trust will leave the regime (avoiding future anniversary charges) but will immediately be subject to a proportionate ‘exit’ charge for leaving the regime. The charge will be a proportion of the full 6% applicable after 10 years, based on how long the Trust was in the regime. This may come as a shock, but is preferable to being in the regime.
Offshore Trusts will continue to be a critical planning tool for international families connected to the UK, and existing Trusts receive beneficial tax treatment compared to new Trusts. There are likely to be changes to how people set up Trusts like these going forwards, and the new rules may pressure some families into moving to having UK based Trustees.
With changes in the tax treatment there are opportunities and potential pitfalls. Taking advice early will help make sure that the Trustees are meeting their obligations, and that the families can get the most out of these valuable structures.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at November 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.
Date published
01 November 2024
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