UK: Offshore Trustees: Have You Made Your Rebasing Election For UK Beneficiaries?

Last Updated: 9 August 2012

Article by Verfides.

Finance Act 2008 introduced a new capital gains tax regime for UK resident but non-domiciled beneficiaries of non-UK resident trusts. Previously, such non-domiciled beneficiaries had been outside the scope of UK capital gains tax in respect of offshore trust gains.

In order to compensate for this, trustees were given the opportunity to rebase their assets for capital gains purposes as at the date the legislation was brought in. As an immediate election was not required, some have delayed and should now consider carefully whether they are still in time.

Non-Resident Trusts: General Scope of UK Capital Gains Tax

Non-resident trusts are not generally within the scheme of UK capital gains tax by virtue of the fact that the trustees as a body of persons are not resident or ordinarily resident in the UK for tax purposes. Consequently, to prevent widespread tax avoidance, three main pieces of legislation were enacted to bring certain gains of offshore trusts into charge:

  • Exit tax on emigration of settlement (s. 83 TCGA 1992). Applies when a trust is exported from the UK by means of its trustees becoming non-resident: a capital gains tax charge is levied on unrealised assets according to their market value on emigration.
  • Tax on trust capital gains on an arising basis where a UK-resident and domiciled settlor or "defined person" retains an interest in the settlement (s. 86 TCGA 1992). The section is widely drawn: a defined person includes spouse, civil partner, children, grandchildren and connected companies. Note this section is not applicable to non-domiciled settlors.
  • Tax on capital payments made to UK-resident beneficiaries (s. 87 TCGA 1992). Where a capital payment is made to a UK-resident beneficiary that can be "matched" with gains made by an offshore trust, the matched gain will be taxable on the beneficiary when the capital payment is received. The matching rules are complex. A surcharge may apply to gains which are not immediately distributed. It is this charge which has only become applicable to non-domiciled beneficiaries since 5 April 2008, although such gains may qualify for the remittance basis of taxation.

Rebasing Election

In order that the s. 87 charge for non-domiciliaries did not have retrospective effect, provision was made in Finance Act 2008 for offshore trustees to elect for their assets to be "rebased" as at 5 April 2008. The effect of such an election will be that only the proportion of gains accruing since 6 April 2008 will be chargeable under s. 87.

There was no need for an immediate election to be made; however, an election must be made by the 31 January following the end of the first tax year during which:

  • A capital payment is received by a UK-resident beneficiary of the settlement; or
  • The trustees transfer all of part of the settled property to another settlement

As a result, some trustees, particularly where the trust is relatively inactive (for instance a "dry" asset holding trust) have not yet made such election. Others are being forced to consider it for the first time as a result of proposed changes to the taxation of UK residential property, whereby the trust structure may need to be collapsed by way of capital payments of property in specie being made to UK beneficiaries.

In almost all cases it is advisable to get an election submitted as soon as possible to reduce the risk of missing the deadline. This is because it is very easy for trustees to make an inadvertent capital payment in the ordinary administration of a trust without it being immediately obvious. This would then trigger an election deadline in the following tax year and it would be disastrous if this was then missed.

Why is it easy for such a capital payment to be overlooked? Largely because the definition of a capital payment is very wide: it covers "any payment which is not chargeable to income tax on the recipient" and includes "the transfer of an asset" and "the conferring of any other benefit". It is the latter which is frequently overlooked: the most common benefits provided to beneficiaries which rank as capital payments are interest-free loans and the provision of rent-free accommodation in the form of trust property. It can be seen from this that a capital payment can arise in many cases where no actual "payment" is ever made to a beneficiary.

Non-UK trustees with UK resident non-domiciled beneficiaries are therefore urged to consider whether an election should be made and to take advice at the earliest opportunity.

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.

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