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Trust, caution

Since the pre-Budget report and the ensuing Budget and Finance Bill, the taxation of UK resident non-domiciliaries has attracted much attention.

Understandably, the majority of this has been connected with the application or otherwise of the £30,000 annual charge to access the remittance basis. As I have made clear in past articles, this only becomes relevant once you have been resident in the UK for seven out of the last nine tax years (10 including the year in question), you are 18 or over and have unremitted foreign income or gains of £2,000 or more.

There is growing discussion and enthusiasm for the role that offshore bonds could play in tax planning and increasing realisation of the relatively benign tax position of offshore trusts for non-domiciliaries.

Aside from the non-application of the arising basis to trust income (even where the non-domiciled settlor and his or her family can benefit under the trust) without the need to pay the £30,000 charge, there is the opportunity for the trustees to rebase assets held at April 6, 2008 at their value at that date so that past unrealised gains will avoid charge altogether and the accompanying provision allowing all gains realised up to and including April 5, 2008 to escape charge too, so that tax-free remittance of these amounts can be made by UK resident non-domiciled settlors.

Of course, there is the important fact that the inheritance tax position of UK resident non-domiciliaries remains unchanged.

Broadly speaking, only the UK situs assets of these individuals could be subject to IHT and even this is subject to the terms of any double tax treaty that might be relevant. It has to be said in this context that the UK’s treaty network in connection with IHT is less extensive than those that apply to capital gains tax and income tax. So, holding offshore assets such as offshore bonds, funds and properties should all cause no IHT problems. However, IHT has its own special provision in respect of UKresident non-domiciliaries in the shape of the deemed domicile provisions.

These provisions do not apply for the purposes of income tax and capital gains tax. Broadly speaking they apply to deem a long-term UK resident as a UK domiciliary once that person has been resident in the UK for 17 out of the last 20 tax years. There is also a provision which preserves UK domicile status for IHT for three years following one’s departure from the UK and assumption of a new domicile of choice under the general law.

The relative difficulty in acquiring a new domicile of choice is in stark contrast to the deemed domicile rules – this deemed status for IHT can just creep up on you. This is especially so with the introduction of the new, tougher day counting provisions introduced in this year’s Finance Bill. Over the years that these deeming rules have been in force, serious consideration has been given to set up trusts to avoid the consequences of the deemed domicile rules applying to the assets made subject to the trust.

Provided that a trust, onshore or offshore, holds non-UK sited investments or UK gilts or investments in authorised unit trusts or Oeics and the settlor is non-UK-domiciled for IHT purposes when he creates the trust, under current legislation, the value of the investment held subject to the trust will not be included in the taxable estate of the settlor for IHT purposes, even though he may later become UKdomiciled for IHT purposes.

Under the gift with reservation of benefit rules, by virtue of section 102(3) Finance Act 1986, if a settlor retains an interest under a trust he has created, then that interest is subject to the gift with reservation of benefit rules. On the other hand, under section 48(3) Inheritance Act 1984, non-UK situs property held in a settlement is excluded property and so exempt from IHT.

It is this apparent conflict that has been the subject of debate recently. Technical Connection has had some correspondence with HM Revenue & Customs on this issue recently and I will look at this – and its favourable outcome – next week.

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