Non-dom trusts: the changing landscape | KPMG | UK

Non-dom trusts: The changing landscape

Non-dom trusts: the changing landscape

We look at how the latest non-dom rule changes affect the tax status of their offshore trusts.

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The past decade has seen HMRC progressively tightening the rules on non-dom tax arrangements. 

This is the Revenue’s response to a perception that non-doms residents in the UK for long periods are part of UK society and should contribute to the Exchequer accordingly.

Some of the most recent changes affect offshore trusts created by non-doms. They apply to trusts where the settlors (the individuals who created the trusts) can still benefit from them. 

Exemptions and limitations

Historically, offshore trusts created by non-doms have benefitted from a favourable tax regime in the UK. This changed in April 2017, as part of what’s called the ‘deemed domicile’ rule for long-term, UK resident non-doms. More rules for trusts were introduced in April 2018. 

However, HMRC has introduced an exemption from the new rules to protect existing trusts. 

Non-UK income and capital gains generated by these ‘protected trusts’ are exempt from UK tax, until a UK-resident beneficiary receives a benefit or payment from the trust. (UK income from the trust, and from any underlying non-UK companies, can still be taxed on the settlor as it arises).

This protection does not apply to trusts created by people born in the UK and with a UK domicile of origin, or who become UK-domiciled under general law.

There are limitations to the exemption:

  • If a UK-resident beneficiary is a spouse or minor child of the settlor, then from April 2017, the settlor may be liable for income tax on any payments to the beneficiary. The same applies to capital gains tax from April 2018.
  • Historically, payments to beneficiaries who are resident overseas were potentially outside the scope of UK tax, but could affect the tax treatment of payments to UK beneficiaries. From April 2018, such payments to non-UK residents are ignored for UK tax purposes when considering payments to UK beneficiaries.
  • New rules apply if a non-resident beneficiary receives a benefit or payment from an offshore trust, then gifts it to a UK resident within three years. From April 2018, the UK resident is treated as having received the benefit or payment directly from the trust, and is taxed accordingly.    

Tainting

Importantly, the protected trust rules cease to apply if a trust is ‘tainted’ – that is, if it is financially enhanced in any way.  

The rules on tainting are complex and draconian. It is easy to inadvertently taint an offshore trust, leaving it liable for UK tax going forward.

Tainting can be caused by even the smallest financial addition to a trust. And, it is permanent. If you taint a trust, the settlor will be liable for UK tax on its non-UK income and gains for the rest of its existence.

Tainting includes, but is not limited to, actions such as:

  • Transferring money or shares into the trust
  • Working for zero or reduced pay for a company that’s owned by the trust and
  • Loaning the trust money – personally or from another trust – without charging a commercial interest rate. 

Recommendations for trustees

In light of the new rules, trustees should urgently review the offshore trusts they look after, in order to:

  • Confirm they qualify for protected status
  • Check they have accurate valuations on file for any trust assets – particularly if the assets are used by trust beneficiaries; and 
  • Ensure that record-keeping is up to date, and that there is a paper trail for all activity surrounding the trust

Moving forward, trustees will need to exercise caution when considering actions in relation to an offshore trust, to help ensure that protected status is not inadvertently lost. Protected status can save the settlor and beneficiaries a significant amount in tax, so they must be careful not to jeopardise it.   

Non-dom tax rules are highly technical. When reviewing your offshore trusts, or considering any transactions for them, make sure you get expert support.

For more information please contact Rob Luty or Alyson Swinerd.  

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