Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about bringing trusts onshore.
‘A, who was domiciled and resident in South America, settled funds in 1990 on discretionary trusts appointing Guernsey resident trustees. There is also a UK professional protector. A has since died. The primary beneficiary is A’s daughter, B, who has been settled in the UK for the last 40 years or so and is now deemed UK domiciled.
The trust’s assets now comprise cash of £200,000 in an overseas bank account and shares in a Moroccan company whose sole asset is a residential property in that country. The property is not let, but under a licence, B and her family or friends occupy it occasionally. Any deficiency of licence fee income over running expenses is made good by B. The property is now probably worth more than its book cost. The aim is to sell the property and wind up the trust. This is likely to be achieved by a sale by the company rather than a sale of the company shares.
Due to spiralling costs, consideration is being given to appointing B and her son C (also UK resident) as trustees instead of the Guernsey trustees. B and C would also become shareholders in the Moroccan company.
Do readers: (a) agree that the situs of the shares and therefore the excluded property status would be preserved; and (b) foresee any possible disadvantages in the proposal?’ Query 20,227 – Seeker.
Terry Jordan’s reply: Beware of a ‘water’s edge’ charge.
‘For IHT purposes what matters is the domicile of the settlor when the trust was created and when any additions were made. Provided the settlor was domiciled outside the UK, non-UK situs assets (and since 16 October 2002 authorised unit trusts and open-ended investment companies (OEICS)) will be excluded property outside the scope of IHT even if the settlor later acquires a domicile in the UK at general law or under the deeming provisions (IHTA 1984, s 48(3) & (3A)). That treatment does not apply if the settlor is a ‘returner’ – UK born with a UK domicile of origin when UK resident: s 48 (3F).
Accordingly, appointing UK trustees will not affect the IHT treatment of the trust. But, if the trust is ‘broken’ (B and C becoming absolutely entitled to the shares in the Moroccan company) the shares will not be excluded property in their hands and will be exposed to IHT.
Historically, non-UK trustees were outside the scope of CGT and the legislation attributes gains to settlors under TCGA 1992, s 86 if living and UK domiciled and resident and otherwise trustees’ gains ‘stockpile’ potentially to be matched with capital payments received by UK resident beneficiaries. Non-UK trustees are now within the scope of non-resident CGT in respect of certain UK property related gains.
Gains can be matched forwards and backwards and the occupation of the Morocco property may have constituted capital payments under s 87 if a gain arises on the property sale. If the shares are appointed to B and C they will constitute capital payments and may trigger gains if their value when appointed exceeds the base value in the trustees’ hands.
Finally, importing a trust is a one-way trip, as if non-UK trustees are later appointed a ‘water’s-edge’ charge could arise under s 83.’
The full article is also available on the Taxation website.
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