ARE YOU A UK EXPAT BUT STILL A BRITISH CITIZEN? DO YOU HOLD ASSETS IN AN OFFSHORE TRUST?
If so, read on …
The British government is constantly chipping away at the effectiveness of offshore trust structures in inheritance tax planning strategies for British citizens, and their latest changes to the way trusts are taxed have further reduced the usefulness of these tools for many.
HMRC has recently announced a swoop on trusts that are being used to hide income and wealth overseas by those domiciled and non domiciled in the UK. From May 2013, HMRC will be focussing on those who are deliberately evading tax through trusts that are formed under the laws of an offshore jurisdiction and those with overseas trusts who have not been keeping up with the changes in tax rules may also face penalties or even a jail sentence.
Let’s first consider domicile and residence – it’s important to remember that there is a difference between them. This is a complex area because according to the Revenue’s own guidelines, “It is not possible to list all the factors that affect your domicile”. But basically, there are two concepts: Residency is where you spend your time for tax purposes whilst alive. Whereas Domicile becomes crucial on your death.
RESIDENCE Tax residence of convenience DOES NOT work. If you become a tax resident in a tax haven (such as Gibraltar, Channel Islands or Malta) or even still consider yourself a UK tax resident and spend a short time there each year, it will not protect you, allowing you to spend as much time in any other country as you want. Simply saying “I am a resident of…” when you are spending a lot more time in Spain, for example, IS NOT a defence against being classed as a Spanish tax resident. The double-tax treaty, if one exists, will offer little protection. It’s difficult to hide, and is that really what you want? If your tax planning relies on your new country’s tax authorities not realising you are there, think again. We all leave a trail revealing our whereabouts – utility bills, mobile phone records, credit card and bank statements, as well as possible witness evidence from gardeners, cleaners, neighbours etc. Surely it is better to have a solid tax plan where all the facts are known and you are safe – and avoid the sleepless nights!
DOMICILE Your ‘domicile of origin’ is where your father’s permanent home was. So, you could have been born in France, but if your father was English, your domicile of origin is Britain. You can change your domicile once you reach age 16, but you have to convince HMRC that you really have left the UK for foreign shores permanently. Just living abroad for a long time is not enough. Even considerations like where your driving licence was issued, whether you have become a citizen of your new country, and whether you have made funeral arrangements in your new country may form part of the decision making process by HMRC. Ultimately, it is your nation of domicile that determines whether the British tax authorities can tax your estate upon death.
Prior to 1991, it was possible for domicile and non-domicile UK residents to use offshore trusts and not pay capital gains tax, and for individuals of a certain wealth it was standard planning. In 1991 those rules changed to stop UK domiciles using offshore trusts and in 1998 these rules were extended to non-domiciles.
Since 2008 the laws tightened further, demanding UK non doms pay a fee of between £30,000 and £50,000 a year for the privilege of an offshore trust and as soon as the money comes into the UK it becomes subject to capital gains tax.
So the question is, are offshore trusts still suitable for expat IHT planning? After all, Britons living abroad who are non UK tax resident often have no liability to the likes of income or capital gains tax in the UK.
Many in the financial services industry, including prominent offshore trust companies, say NOT – the latest government changes to the tax treatment of offshore trusts make them unsuitable for most British domiciled individuals – no matter where in the world you live.
IS MY TRUST AFFECTED?
In short, it depends how your trust was set up:
Trusts avoid the need for probate, ensuring that assets pass to beneficiaries without delay. Trusts can be used for different purposes but here I will focus on 2 family succession planning trusts. A typical trust used by expats giving discretionary powers to trustees is a discretionary trust. This means that the trustees can manage when it is appropriate and decide for what purpose money is distributed to the beneficiaries.
Discretionary trusts can be set up that continue to benefit their creator (settlor) – A Succession Trust – this is often used to pass on the proceeds of a Life Assurance Bond to a class of potential beneficiaries created by the Settlor when creating the trust . During their lifetime, the settlor can still benefit from the trust funds, making this an ideal arrangement for expats with investment plans. However, as the settlor (creator) can still benefit during their lifetime, this trust IS NOT appropriate and does nothing for inheritance tax mitigation.
Alternatively, discretionary trusts can be created specifically excluding the creator (settlor) from benefiting – A Flexible Gift Trust. This trust is used to pass on wealth to future generations with various classes of potential beneficiaries. By excluding the settlor this trust IS suitable for inheritance tax mitigation.
Trusts are not universally recognised in every jurisdiction, so it is important that you take advice before implementing any arrangement. If you’re an expat and you’re concerned about the fact that your estate may be liable for IHT duties after you’re gone, you have a real obligation to your heirs to look into how best to structure your affairs to legitimately reduce their inheritance tax burden in the future.
Speak to Speed Financial Solutions today – and remember that legislation changes all the time, so have regular reviews of how your affairs are structured to ensure they remain compliant and best suited to the task in hand – i.e., offsetting IHT liability.
Andrea J Speed Principal 6 May 2013