by Peter Pexton
Until 1991 offshore trusts provided a ready made route for residents of the United Kingdom to defer capital gains tax.
However, for trusts made after 19 March 1991 the tax regime has been become altogether harsher. The current situation is that where the UK settlor, spouse or their children of any age are capable of benefiting from the trust, then gains made by the offshore trustees will be taxable on the UK resident and domiciled settlor.
Trusts which start resident in the United Kingdom, and are then "exported" by appointing non-resident trustees, are subject to a capital gains tax charge on migration, effectively taxing any unrealised capital gains within the settlement. The exported trust is then taxable under the more onerous post 1991 regime, even if the trust were in fact created before 19 March 1991.
On the death of a UK domiciled resident individual his world wide estate is liable to inheritance tax. There is no charge to capital gains tax but the base cost of the estate assets is re-valued to market value.
A frequent dilemma facing clients is whether they should reduce their estates for inheritance tax by making life time gifts, thereby incurring capital gains tax on the disposal of any assets, or to retain their estate intact to obtain the capital gains tax uplift on death. The availability of inheritance tax reliefs for business property and agricultural property, coupled with a general inertia in planning for their own demise, has probably tilted their thoughts away from making lifetime gifts. This should lead to greater reliance on tax and estate planning at the will drafting stage.
An option which gives flexibility and scope for capital gains tax planning is to make a will which includes an offshore trust.
Typically the executors would be the testator's UK legal adviser, who will carry out the normal executor's duties, and the residue of the estate will then be passed to non-resident trustees. The trust and the trustees are defined in the will.
The type of trust, discretionary, accumulation and maintenance or life interest, will depend on family circumstances. Normally the trust would be drawn up under English law, but with powers to have trustees who are not resident in the United Kingdom, or for a foreign trustee company to act as trustee.
Following the death of the testator the offshore trust will come into existence, and will enjoy the deferral regime for capital gains tax as if it had been created before 1991. It is not possible for gains to be apportioned to the settlor on an arising basis as the settlor is dead. There is no migration charge to capital gains tax as the trust is non-resident from inception.
Future gains made by the non-resident trustees would be stockpiled, and no capital gains tax payable until benefits are made available to UK resident and domiciled beneficiaries.
Professional fees are incurred for drafting the will and the associated trust deed. There are generally no trustee or administration fees until such time as the trust becomes active. The client making the will has the comfort that his estate will be administered by an executor he knows and trusts. It will also be possible for the client to become acquainted with the individuals who will become the family trustees before the will trust comes into being.
Further comfort can be given to the family by giving the surviving spouse powers to appoint new or additional trustees and the trust can be altered by a codicil.
The UK will incorporating an offshore trust clearly offers flexibility and tax-mitigation opportunities.
Peter Pexton B.Sc., F.C.A., T.E.P., is a partner in the Jersey practice of Ernst & Young, where he specialises in trust and estate planning.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.