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