Last week, I considered some proposals directed at the use of non-resident
trusts to avoid or defer UK taxation.
So what are the implications for trusts?
Well, most of the provisions deal with avoidance of capital gains tax
using overseas structures, whether they are trusts or companies.
For those investors who wish to achieve legitimate long-term tax
mitigation on both income and capital growth, a pooled offshore investment
such as an offshore roll-up fund or an offshore life insurance bond will
look very attractive.
For example, a long-term investment in a pooled offshore life insurance
bond will provide the investor with:
Potential capital appreciation with no UK taxation on investment growth as
The ability to control the eventual time of the tax liability depending on
when encashment arises.
Access to the investment with no immediate tax liability via the 5 per
cent withdrawal facility.
The ability to switch between different investment funds with no immediate
Minimal tax administration in terms of tax returns because the bond is a
non-income and non-capital gains producing asset.
Of course, special tax rules apply to personal portfolio bonds.
One can see an overall strategy on capital gains tax emerge that is not
unlike that which has been adopted for corporation tax and income tax with
a reduction in rates and a clampdown on avoidance.
This year's Budget included the much discussed relaxation of taper relief
which, if enacted, will reduce the effective rate of capital gains tax for
Broadly speaking, a rate of 10 per cent could be secured for disposals of
qualifying assets that have been owned for a period of four years from
April 6, 1998 or the date of acquisition if later. If the 10 per cent rate
were payable on disposal, one has to consider how many people would be
motivated to enter into complex avoidance schemes or even emigrate to
favourable jurisdictions where double tax treaties can be used to ensure
capital gains tax freedom for relatively short (one-year) periods of non-UK
Regardless of this, the Government's anti-avoidance provisions have closed
down a number of the more popular avoidance mechanisms founded on the use
of offshore trusts, thus giving a kind of “carrot and stick” incentive to
would-be capital gains tax avoiders.