Hidden taxes on offshore trustees acquiring UK property

Now that the dust has settled on the significant changes made to the taxation of non-UK domiciled individuals in 2008 it is useful to review these wide reaching provisions. The rules are particularly complex and offer many traps for the unwary. 

One of the major changes was to extend the definition of a remittance to the UK and now such a remittance can apply even if the individual has no say in the movement of funds.

Eg Offshore trustees acquire a UK property

A particular example of this is where trustees of an offshore trust acquire a UK property as an investment. As this is to be retained by the trustees and rented out to third parties, it would be sensible to assume that there are no remittance issues arising to any of the beneficiaries. Unfortunately the UK resident settlor could be subject to tax on the funds remitted to the UK and used to acquire the property. This tax charge will arise if the beneficiaries of that trust can include any of the following:

  • The settlor
  • His wife, or civil partner
  • His minor children, or
  • His minor grandchildren

If so, the trust is a ‘relevant person’ in relation to the settlor which brings it into the remittance rules.

Either unmatched historical income or gains that have arisen within this trust will be matched to the monies brought into the UK to acquire the UK property. These will then be assessed to tax on the settlor.

Trustees of offshore settlements must be aware of the implications of making such an investment, whether it is made through an offshore trust or its underlying company. Otherwise this could result in unexpected tax charges arising to the settlor.

If the trust excludes the above beneficiaries, the settlor may be able to occupy a UK property purchased by the trustees without a remittance charge, provided he pays a market rent for occupation. The settlor must have sufficient UK source income or clean capital to pay the rent without invoking another remittance charge!

 

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