Trusts can change tax residency – in some circumstances unknowingly. If you are a trustee or settlor of a non-UK trust, we recommend that you continually review the residence of the trustees (and their residency intentions) to avoid the trust accidentally becoming a UK resident trust.
When is a trust a UK tax resident?
For UK tax purposes, a trust's residence is largely dependent on the residence of its trustees. Where there are a mixture of UK resident and non-UK resident trustees the position is a little more complex.
Importantly, depending on the circumstances, a non-UK tax resident trust can become UK tax resident as a result of just one trustee relocating to the UK, even where there are several other trustees outside the UK.
A trust's UK tax residency is determined by reference to UK tax years which run from 6 April in one year to 5 April in the following year. If a trust is UK tax resident for any period of time during a UK tax year (even just one day) it will be UK tax resident for the whole of that tax year.
Consequences of being a UK tax resident trust
Tax
The trustees will be liable to file UK self-assessment tax returns and to pay UK income tax and capital gains tax on worldwide income and gains received by the trust. The tax residency of the trustees does not in itself affect a trust's status for UK inheritance tax purposes.
Tax returns are due on the 31 January following the end of the tax year to which the return relates and any income tax and most capital gains tax must also be paid at this stage.
Disclosure
A UK resident trust is required to register on the UK's trust registration service (the 'TRS'). You can find more details on the TRS in our previous article here. Even if a trust has inadvertently become UK tax resident, and steps are quickly taken to rectify the position, there is still an obligation to register.
As part of the registration, trustees are required to provide and keep up-to-date details relating to the trust, including the identity of the trustees, beneficial owners and trust assets.
Tax implications if a trust ceases to be UK tax resident
If a trust has become UK tax resident you can take steps to change its trustees to make the trust non-tax resident again with effect from the following 6 April.
If a trust ceases to be a UK tax resident, it will cease to be within the scope of UK income tax (except in relation to most UK source income) and UK capital gains tax (except in relation to gains on UK land and certain UK property rich assets) and the associated reporting requirements. It can also be de-registered from the TRS.
However, on the trust ceasing to be UK tax resident, the trustees are deemed to have disposed of and immediately re-acquired all of the trust assets at their market value immediately before the date that the trustees cease to be resident in the UK. This results in a capital gains tax 'exit charge'. Depending on the base costs of the trust assets (generally their market value on the date the assets were acquired, not the date that the trust became UK tax resident) compared to their market value on the trust ceasing to be UK tax resident, the exit charge can result in a significant charge to CGT. So, it can be costly if a trust accidently becomes UK tax resident and the position needs to be rectified to avoid ongoing exposure to UK tax and reporting.
Action to take before moving to the UK
As mentioned, if a trust is UK tax resident for just one day, it will be UK tax resident for the whole of that tax year. Therefore, if you are a trustee of a trust and are planning to relocate to the UK or if you know that a trustee of a trust you settled or that you are a co-trustee with is intending to become UK tax resident, you should take advice prior to you or that other person becoming UK tax resident to take steps to ensure that the trust does not also become UK tax resident.
Such action may involve that individual retiring as a trustee of the trust and/or appointing additional non-UK tax resident trustee(s) to act with the existing trustees.
If a trust has accidentally become UK tax resident, you should take advice as to the tax and reporting obligations that may need to be regularised, and the likely tax consequences of the trust subsequently ceasing to be UK tax resident.
If you have any queries arising out of this article or would like to know more about our firm and our areas of expertise, please speak to your usual Withers contact or any of the authors of this article.
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.
