Last week, I looked at some of the anti-avoidance provisions announced in
this year's Budget. I will now continue the theme by considering some more
proposals which are directed at the use of non-resident trusts to avoid or
defer UK taxation.
The first proposal which I will review is that relating to beneficial
interests in trusts moving abroad.
Special capital gains tax rules apply to UK-resident trusts which become
non-UK-resident trusts. At the time of emigration, there is:
A tax charge on unreali sed gains.
An uplift to the market value of beneficiaries' interests in the trust.
The purpose of the uplift is to prevent a potential double charge on any
increase in value prior to the trustees' migration of the trust property
(which is charged on exit) and of a beneficiary's interest in that property
(which is charged if the beneficiary later sells the interest).
However, this rule does give opportunities for tax avoidance.
Having realised gains which have not been charged to tax on either the
settlor or beneficiaries of the trust – stockpiled gains – the trusts are
brought onshore and then taken offshore again.
The gains on the trust property escape a tax charge because they were
realised while the trust was offshore. The beneficiary pays little or no
tax on the sale of an interest in the trust because of the rule providing
for its value to be uplifted on the trust's exit from the UK.
To prevent this abuse, there will be no uplift in the value of any
beneficial interest in a trust where, on or after March 21, 2000, the
trustees become non-resident at a time when there are stockpiled gains in
Having looked at this aspect of emigrating trusts, I would like now to
look at the position where trustees (usually offshore trustees) participate
in offshore companies as an investment of the trust.
Special tax rules exist to combat tax avoidance where a UK-resident person is a shareholder in an offshore company which is a close company, that is a company under the control of five or fewer participators.
Broadly speaking, where such a company sells an asset (which is not
tangible property used in a trade) at a gain, the gain is attributed to
participators in proportion to their interest in the company.
These rules are being avoided where assets are held in an offshore company
that is owned by a trust – usually an offshore trust – rather than held
directly by the trust. Where the company is resident in a country with
which the UK has a tax treaty and the treaty provides for gains arising to
residents of the other country to be exempt from UK tax, the UK resident
settlor or beneficiaries (or trustees if resident) of the trust cannot,
under present rules, be charged on the gains of the offshore company.
Legislation will be introduced to prevent this avoidance by ensuring that
tax treaties do not prevent gains of offshore companies being attributed to
resident or non-resident trustees as participators of those companies. The
new rules will apply to gains accruing on or after March 21, 2000.
Next week, I will consider what these proposals mean for trusts.