Still in business

  • Author : Alison Vine
  • Date : January 2009
ABOUT THE AUTHORAlison Vine is Tax Director at Ernst & Young LLP

T here were times in the run up to the granting of Royal Assent when the offshore trust industry may have thought that the few remaining sources of UK clients were about to be pulled from them. As the Finance Bill changed shape between 18 March and 21 July, the future looked bleak. Time-conscious clients asked for trustees to sell assets in advance of taper relief and indexation relief being abolished, and panicking UK resident non-domiciles collapsed trusts and looked to sell up in the UK and move abroad.

After many mutations what we are left with, when the Finance Act was published, is a new set of rules that is complex, in some cases nearly unworkable, but which is not, unless you are faint hearted or poorly advised, sufficient to herald the end of business.

Not all bad

Perversely, the stockpiled gains regime whereby, before 6 April 2008, gains realised many years ago and stored up in an offshore trust and then paid into the UK could carry with them a punitive charge of up to 64 per cent has now been softened. Stockpiled gains extracted from trusts after 5 April 2008 will be subject to a maximum charge of 28.8 per cent. Furthermore, gains now extracted will be taken out on a ‘last in, first out’ basis, so it takes longer to reach the most punitive rate.

These changes may herald wholesale extraction of funds from some trusts. Those assets sold in the run up to 5 April 2008 to make the maximum use of the old calculation regime will, if well advised, have waited to extract funds until after 5 April. The fact that proceeds of sale can still be rolled-up tax free in certain circumstances is still a great advantage.

UK resident non-domiciliaries who rushed to shut down structures before 5 April 2008 may well be considering whether that was the right thing to do, and while stock prices are tumbling this might be the right time to consider resettling. There is still a lot of merit in offshore trusts for UK resident non domiciles, although ensuring trustees do not fall foul of the various new pitfalls is not a matter for the fainthearted.

No longer is it sufficient to retain good accounting records. Trustees must now ensure that income and gains are maintained not just in two separate bank accounts, but a variety of accounts by nature and year of receipt. Furthermore special care, and recording, needs to be in place to judge whether it is sensible to, and to monitor, the purchase of assets in the UK and what funds these were purchased with. Consideration also needs to be given to the purchase of services in the UK, or connected with the UK and what these are for.

It is hoped that some of the, apparent, inconsistencies and odd consequences of the new legislation will be reconsidered when it becomes more clear how impracticable the record keeping will be. But in the meantime trustees will have to ensure that they are vigilant.

So what other good news was there?

For a start, the threat of the extension of s86 Taxation of Chargeable Gains Act (TCGA) 1992 did not materialise on the statute books. Gains realised by offshore trusts made by UK resident non-domiciles will not be visited upon the settlor for the year in which the gain is realised. Such gains may, since 6 April 2008, be matched to capital payments made, but capital payments are easier to manage.

Furthermore a number of provisions were put in place to ring fence the gains made by a non-domiciliary’s trust in the years up to 5 April 2008. And, in fact, in a generous moment the legislators extended the ring fencing (and not just for offshore trusts created by or for non-domiciles) by allowing trustees to rebase all assets at 5 April 2008 for subsequent disposals. This irrevocable election serves to uplift the base cost of all of the trust’s (and its underlying entity’s) assets, which, given the removal of indexation relief and taper relief, may be of particular interest to long-standing freezer trusts.

And we must not forget that possibly the most persuasive of the old reasons to create a structure for a UK resident non-domicile has not changed. With inheritance tax (IHT) rates remaining at 40 per cent, while capital gains tax is now only 18 per cent, putting UK assets in offshore structures to help mitigate IHT still constitutes sound tax planning. Changes were made in the last Finance Act, which have negated the efficacy of the simple structure, where an offshore company held UK assets (gains made on the sale of a UK asset by an offshore company can now be visited upon the UK resident non-domiciled beneficial owner of the company). However, as the same look-through has not been extended to trusts, putting a trust over an existing offshore company holding UK assets might be advantageous.

As indicated above, watch out where there are purchases of new UK assets by trustees after 5 April 2008.


Other considerations which arose in the passage of the Finance Bill, which initially caused terror and eventually irritation, included the amendments to the residence rules for those visiting the UK. The extent of the irritation is mild in some cases and severe in others.

Whereas before 6 April visitors could, by concession, ignore their days of arrival in and departure from the UK, from 6 April an individual will be regarded as present in the UK for a day if he is there at midnight. Anxious appeals from those who pass through the UK, as part of a journey, obtained an exemption from this treatment, such that a person who is in transit through the UK, but who is there at midnight, can ignore that day, provided in the period in the UK he does nothing that is unrelated to his passage through the UK. According to the newly issued IR20 ‘This would include, for example, attending a business meeting, visiting friends or visiting a property which you own in the UK’.

For trustees in offshore jurisdictions travelling through the UK, the new approach may necessitate a change of behaviour and, in some cases, of accommodation en-route. However, given that services for trusts for UK resident non-domiciles should not be provided in the UK, it provides an extra incentive to leave the BlackBerry at home. Indeed, there has been an increased emphasis on trustees not doing business (having meetings) in the UK, for some time now. It is unfortunate that the government did not take this opportunity to codify the concessional treatment and it will be interesting watching the queries and cases that arise as a result of these amendments.

Still in business

The offshore trust still has its uses and in some cases is more attractive now than it was before the Finance Act. The new rules have mutated some trusts into rather demanding and troublesome creatures and it is clear that a lot more work will be involved in the safe management of the non-domicile’s trusts, but the non-domicile will be faced with this increased burden whether his assets are settled or not.

Having spent the last few years facing increasing burdens of regulation and regulatory compliance, the new burden for trustees with UK resident non-domicile’s trusts will involve record keeping over and beyond that required by good accounting and book keeping practices, to a level never previously encountered or required. More than ever, a trustee will need to be proactive, not reactive. But the need for offshore trusts is still there. It is not quite business as usual, but it is still business.

For trustees in offshore jurisdictions travelling through the UK, the new approach may necessitate a change of behaviour and, in some cases, of accommodation en-route. However, given that services for trusts for UK resident non-domiciles should not be provided in the UK, it provides an extra incentive to leave the BlackBerry at home


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