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HMRC Opens Window Of Opportunity For Offshore Trusts

Wednesday, July 14, 2010

When Chancellor of the Exchequer George Osborne in his emergency budget increased the rate of capital gains tax from midnight on budget day (22 June) concerns were raised as to exactly how this would apply to offshore trusts. The Finance Bill (published on July 1) has now clarified this position and it appears that HMRC have unexpectedly left a window open for trustees to secure a lower rate for their settlors and beneficiaries in certain circumstances.

Jenny Wilson-Smith, a Private Client and Tax solicitor at law firm Boodle Hatfield, says: “UK resident and domiciled settlors of settlor interested offshore trusts are taxed on any gains realised by the trust as they arise. The transitional provisions in the Finance Bill confirm that all gains arising in this current tax year (2010/11) will be taxed at the lower rate of 18%. Offshore trustees of trusts where this settlor charge applies should therefore consider realising gains before April 6, 2011.”

The position is a bit more complicated for UK resident beneficiaries of offshore trusts, as Wilson-Smith explains: “When a beneficiary receives a benefit from an offshore trust, which can include a beneficial loan or the free use of a property as well as money, a charge to CGT may arise when that benefit is ‘matched’ to chargeable gains realised by the trustees. The transitional provisions confirm that if a beneficiary received such a benefit prior to midnight on budget day any consequent gain arising in the current tax year will be charged at the lower rates. Therefore offshore trustees could again consider realising gains before 6 April 2011 to trigger a charge at 18%, where unmatched benefits were received by beneficiaries before 23 June.”

“There is however a downside,” adds Wilson-Smith. “Where a beneficiary receives a benefit from an offshore trust after budget day any gain may be charged at the higher 28% rate regardless of when the gains to which the benefit is matched arose and maybe charged at a rate as high as 44.8% if the gains have been stockpiled for some time.”

One note of caution; the Bill has not yet been enacted and so may be subject to change. Trustees should take advice before taking any action.