The draft guidance, published Wednesday, will hit settlors and beneficiaries of offshore trusts where a UK resident receives an indirect payment or benefit.
It “stops payments being made from an offshore trust, with a UK resident settlor, to an overseas beneficiary, free of tax”, Old Mutual Wealth financial planning expert Rachael Griffin explains.
“Instead, payments made to overseas beneficiaries will be subject to tax, as if the settlor had received the payment.”
Administrative headaches
Harper, head of technical services, Friends Provident International, told International Adviser that the change will make offshore trusts less attractive.
“This announcement comes hot on the heels of wider changes impacting non-UK domiciled individuals, that have been reinstated in the second Finance Bill 2017, published recently.
“[Section 87 of the Taxation of Chargeable Gains Act (TCGA)], in its current form, has been in force for decades and allows certain capital payments from offshore trusts created by non-UK domiciled individuals to escape UK capital gains tax.
“The extension of s87 brings more payments into the tax net, in particular where a payment is made to a close family member of the settlor resident overseas, or where an overseas resident receives a capital payment and later makes a gift to a UK resident beneficiary.”
The change will “create administrative headaches for offshore trustees and recipients of capital payments will need to keep more detailed records of those payments”, Harper says.
“This will make offshore trusts with UK connected parties less attractive, but there could be opportunities to rearrange a trust’s investment holdings, so the new CGT treatment is minimised.”
Despite bringing more payments into the tax net, the Treasury’s guidance note indicates that the measure is not expected to add any revenue to the government’s coffers.
Non-dom uncertainty
The decision to delay the implementation of changes to non-dom rules until next year has been heavily criticised by Rupert Clarey, partner at law firm Maitland.
“It only provides further unease for non-doms who have been crying out for certainty since the changes to the non-dom regime were originally announced over two years ago.
“The haphazard, and retrospective, manner in which the non-dom proposals are being passed into law is making it close to impossible for non-doms to plan ahead, and is being taken as an indication by many that their position is not being taken seriously and their contribution is no longer valued,” Clarey said.
Delayed change
The change was first announced in December 2016 but were put on hold in March over concerns that the non-dom changes would force out Britain’s wealthiest foreigners.
It was not included in Finance Bill 2.0 but will form part of Finance Bill 3.0, which will be confirmed at the Autumn Budget and come into effect from 6 April 2018.
A consultation on the draft legislation closes on 25 October 2017.
