Trusts: How to get the jurisdiction right
By Kirsten Hastings, 5 Dec 17
Trusts form an important part of UK tax planning and can offer a wide range of opportunities. To advise a client correctly regarding the setting up and maintenance of a trust, it is important to establish if the trust itself is treated as a UK resident trust or a non-UK resident trust, says Canada Life.
As people become more internationally mobile, it is not unusual for trustees to move in or out of the UK and this can have an effect on the tax treatment of a trust. It is therefore important for professional advisers to be aware of the rules so that they can advise and identify when a trustee move may affect the tax treatment of a trust.
As part of the then-government’s trust modernisation programme, the Finance Act 2006 introduced a common residency test for both income and capital gains tax. Prior to this, the rules for income tax and capital gains tax had been developed separately and there was a lack of consistency. The modernisation programme sought to remove such inconsistencies.
Changes were implemented on 6 April 2007 and, from that date, the trustees of a settlement were collectively treated as a single entity when establishing the residency of a trust. The trustees of a UK resident trust pay UK income and capital gains taxes on the other income and gains in the trust, irrespective of where in the world they arise.
Trustees of a non-UK resident trust only pay UK income and capital gains taxes on the income and capital gains arising in the UK – the tax liability can therefore be significantly lower, or completely mitigated if they don’t hold UK assets. This is separate from gains under investment bonds which are taxed under the chargeable events legislation and a UK-based settlor could be taxed even if the trustees are non-UK resident.
While the residency of a trust can be deliberately changed, it is possible for the tax residency of a trust to change inadvertently. This may be costly to rectify.
The rules around exporting, importing and re-exporting a trust can be complicated and can lead to unintended consequences, as well as unwanted tax liabilities.
The following examples highlight the potential pitfalls that trustees could experience when one or more of them change their country of residence. This could generate a tax liability or expose the trust to more UK tax. The trustees and their advisers should maintain records of the residency status of all the trustees involved and, if any changes are planned, the implications should be fully assessed to ensure that action can be taken to minimise the effect on the trust.
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Tags: Canada Life | Residency | UK Adviser | Wills And Trusts
