For many years there have been anti-avoidance provisions in the UK which seek to tax UK resident settlors on the income realised within an offshore trust (and in some cases an underlying company) where the settlor or the spouse/civil partner can benefit from the offshore trust.
There are similar provisions which seek to attribute and tax capital gains realised within an offshore trust as they arise where a wider class of persons can benefit, including the settlor, their spouse/civil partner and minor children. In some cases, capital gains of an underlying company may also be taxed on the settlor.
When the Government introduced the concept of ‘deemed domicile’ from 6 April 2017 they recognised that many non-UK domiciled individuals living in the UK hold their wealth in offshore trusts, and in an effort to soften the blow and encourage long term residents to remain in the UK introduced various ‘Trust Protections’ (Protection for settlors of overseas trusts | Mercer & Hole (mercerhole.co.uk). Under current rules, where the conditions are met a UK resident settlor is not automatically taxed on the non-UK income and gains arising even after becoming deemed domiciled in the UK. The trust protections apply if the following conditions are satisfied:
- The settlor retains a foreign domicile under general law;
- The settlor was not born in the UK with a UK domicile of origin;
- The trust was created while the settlor was not domiciled (or deemed domiciled) in the UK;
- The trust is non-UK resident; and
- No property or income is provided by the settlor, or the trustees of another trust of which the settlor is the settlor or a beneficiary (‘associated trust’), whilst the settlor is deemed domiciled.
Changes to the Trust Protections and the new Foreign Income and Gains (FIG) regime
From 6 April 2025, the 2017 trust protections will no longer apply to deemed domiciled settlors.
From 6 April 2025 non-domiciled or deemed domiciled settlors will be taxed on foreign income and capital gains of an offshore trust (which they continue to benefit from) on an arising basis, unless they qualify for the new FIG regime. This applies whenever the trust is established. To the extent that the benefits received by settlors exceed the foreign income and gains of the trust on an arising basis, benefits will continue to match to pre-6 April 2025 income and capital gains of the trust structure under existing rules and taxed in the UK wherever they are received. It should also be noted that the reduced remittance rate under new Temporary Repatriation Facility (TRF) will not apply to pre-6 April 2025 income and gains generated within trust structures.
In contrast to the above, beneficiaries and settlors who are within the new four year FIG regime will be able to receive benefits from 6 April 2025 free from any UK tax charges whether or not the benefits are received in the UK. These benefits will not be matched to trust income and gains however will be subject to a modified onwards gift rule, details of which are currently unavailable and subject to further consultation.
Action points
While the proposed new rules do not come into effect until 6 April 2025, settlors who currently benefit from the 2017 trust protections should use the next 13 months to review trust structures in conjunction with the trustees and consider appropriate steps that can be taken to minimise the impact of the new rules. If you would like to discuss this further please do not hesitate to get in touch with William Welch or your usual contact at Mercer & Hole.
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