Changes to the taxation of offshore trusts

Current rules for offshore trusts

At present, the settlor of a settlor-interested offshore trust who is not UK domiciled can benefit from a series of protections in respect of the income and gains within the trust structure, providing certain conditions are met. This is known as Protected Trust Status. 

This protection allows the income and gains to ‘roll up’ within the trust structure and are only subject to UK income and Capital Gains Tax when a distribution is made to a UK resident beneficiary (including the settlor).  If the beneficiary is also non-UK domiciled, it is possible to shelter the distribution from UK taxation through a claim for the remittance basis, provided the funds are not brought to the UK.

Proposed changes

Under the changes proposed in the 2024 Spring Budget, the Protected Trust Status of offshore trusts will no longer be available to individuals who cannot benefit from the new four-year foreign income and gains (‘FIG’) regime.  Mainly those who are non-domiciled and have been a UK resident for more than 4 years or who are deemed domiciled.

As a result, income and gains of the offshore trust structure from a non-UK source will be taxable on the UK resident settlor (not within the new four-year regime) after 6 April 2025 as it arises.  This aligns the tax position with trusts that have UK domiciled settlors and also the rules that were in place before April 2017, when the previous non-dom changes were enacted.

Any income and gains between 6 April 2017 and 5 April 2025, will continue to be ‘matched’ with distributions to UK resident beneficiaries after 6 April 2025 and taxed in the UK in the year of distribution.  It is worth noting that the ability to claim the remittance basis would no longer be an option for non-domiciled beneficiaries.

What does this mean for those who can benefit from the FIG regime?

The proposed changes to offshore trust taxation are likely to significantly increase the annual tax liability for these structures although consideration is needed for settlors and beneficiaries who may be able to take advantage of the FIG regime. 

Where foreign income and gains arise during a period in which the settlor can benefit from the FIG regime (i.e. they are ‘new’ residents to the UK), then the FIG of the trust will be exempt from UK taxation.

However, this leaves pre-6 April 2025 trust income and gains within the structure and we will need to await further detail on how these rules fit together before we can determine the appropriate course of action.

Potential areas of planning

Trustees will, however, want to consider the application of these proposed changes to the trust and any underlying structures. Unfortunately, the draft 2024 Finance (No2) Bill has been released without any legislation for these changes included, and so trustees will need to rely on the current guidance published by the Treasury to consider the position of the trust in the interim. 

Several potential planning opportunities may be worthwhile considering in advance of 6 April 2025 including:

• Maximise the income and gains within the trust structure – Depending on the circumstances of the trust, it may be worthwhile considering accelerating the crystallisation of capital gains or generating income (such as a dividend from an underlying company) which can be covered by the current trust protections in advance of 6 April 2025.  This might be particularly beneficial to settlors who will not benefit from the four year FIG regime. 
• Consider making distributions to beneficiaries before 6 April 2025 – For those beneficiaries who can make a claim for the remittance basis, a distribution could be made before 6 April 2025 with a view to remitting the funds between 6 April 2025 and 5 April 2027.  Subject to any anti-avoidance rules, this may enable the beneficiary to benefit from the Temporary Repatriation Facility at the reduced tax rate of 12% (as opposed to up to 45%). 
• Segregation of income and gains – Consider whether it is possible to segregate pre-April 2025 income and gains to allow distributions to be made to the settlor (who does not benefit from the FIG regime exemption) of taxed post-April 2025 income/gains without a further tax charge.
• Amend the terms of the trust to exclude the settlor and spouse/civil partner – By excluding the settlor and their spouse/civil partner as beneficiaries, this would take the trust outside the scope of the settlor interested provisions for income tax and so the settlor would not be liable to UK tax on the trust income as it arises.  However, this would not necessarily be effective for trust gains.  Instead, it may be worthwhile considering the investment policy of the trust either moving to an income strategy or a long term capital growth policy to reduce the level of annual chargeable gains.
• Review the availability of the motive defence for Transfer of Assets Abroad for income tax and the attribution of corporate gains to participators for capital gains tax (known ‘Section 3’)‘ – Where the motive defence is likely to apply, it would be important to review this in conjunction with any proposed changes to ensure that it does not jeopardise the availability of the defence claim.
• Consider the tax residence status of an underlying company of the Trust – By moving the tax residence of a company to the UK, this would bring the company itself within the scope of UK corporation tax thereby removing the arising exposure of such income on the settlor.  This could prevent income received by the underlying company from being automatically attributed to the settlor, potentially reducing or deferring the tax liability.
• Consider making the trust UK tax resident – This could be achieved by appointing UK trustees.  Whilst the UK tax exposure would likely remain similar to an offshore trust, it would simplify the administration and potentially reduce the running costs of the trust.  However, if the longer term plan is for the settlor to leave the UK, then this may not be feasible as an exit charge can arise if new non-UK trustees are appointed to replace the UK trustees. 

The above are just a handful of potential planning opportunities but each trust structure, and the needs of the beneficiaries, will be different so there is no one-size fits all answer. 

In addition, the trustees will want to see the detail of the legislation enacting the changes so they have certainty on the consequences before making any changes.  We would, however, recommend that any offshore trust structure is reviewed as soon as possible to understand both the current and the likely exposure to UK taxation from 6 April 2025.  This would then form the foundation of any planning to be considered.

Whilst the income and Capital Gains Tax position for offshore trusts is likely to change significantly, it seems that existing trusts will retain their protection for IHT purposes.  Indeed, the Government advised that new trusts established by non-doms before April 2025 will also qualify as Excluded Property Trusts so there is a final opportunity for some to protect their overseas assets from being exposed to inheritance tax in the UK.

Get in touch

As a fully integrated international firm, we work as a global team to advise individuals with multijurisdictional issues, ensuring their affairs are both structured in a tax-efficient manner and are compliant, wherever they are based.

If you are a settlor or a trustee of an offshore trust affected by these proposed changes and are looking for some advice, please do not hesitate to get in touch.

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