FAQ: Residence and domicile - non-resident trusts
28th May 2008
HMRC provide a series of answers to frequently asked questions about the proposed changes to the residence and domicile tax rules relating to Trusts and alienation.
They are:
Will a deemed chargeable gain that arose when I gifted foreign assets to the trustees of a non UK resident settlement before 6 April 2008 become taxable if the trustees remit the property to the UK on or after 6 April 2008?
No, a deemed chargeable gain accruing on the gift of property to a non resident trust before 6 April 2008 will not become chargeable if the trustees remit the property or anything derived from it to the UK on or after 6 April 2008.
However where there was no real alienation of the income or gains by the individual, as for example in the case of Harmel v Wright, because the settlor retained effective control over them, then the position after 5 April has not changed. In such a case the income or gains could be taxed on the settlor.
Gains of offshore trustees that are realised before 6 April 2008 will not be taxed on non-domiciled beneficiaries. So does that mean that gains realised prior to 6 April 2008 will not produce a tax charge under section 87 TCGA if matched to capital payments made to a non domiciled beneficiary after 5 April 2008?
Yes, so long as the beneficiary remains domiciled outside the UK it does not matter that he/she has not made a claim for the remittance basis to apply at the time of the capital payment, provided that such payment is matched to pre 6 April 2008 gains. By pre 6 April 2008 gains we mean gains that were actually realised before 6 April 2008 or, if a rebasing election has been made, those gains which represent the pre 6 April 2008 element. However, if the capital payment made on or after 6 April 2008 is matched under Last In First Out rules (LIFO) to gains realised on or after 6 April 2008 (or the post 5 April element of such gains where a rebasing election has been made), then the payment will be taxable (on a remittance basis if the beneficiary is a remittance basis user and otherwise on an arising basis).
Capital payments made to non domiciled beneficiaries before 6 April 2008 will not be taxed. So does this mean that capital payments made to the UK before 6 April 2008 will not produce a tax charge under section 87 TCGA when matched to gains realised by the offshore trustees after 5 April 2008?
Yes so long as the non domicile is still not domiciled in the UK under general law in the year of charge. It will not be necessary for the beneficiary to be a remittance basis user if post 5 April gains are matched to capital payments made prior to 6 April 2008. There are however special rules to deal with matching of post 5 April 2008 trust gains to capital payments made between 12 March and 5 April 2008 inclusive.
Can you confirm that any accrued but unrealised trust gain which relates to a period prior to 6 April 2008 will not be taxed under the new rules on a non domiciled beneficiary? Will that be delivered by some form of rebasing?
It will be possible for trustees of any non-UK resident trust to elect that trust assets are deemed to have been rebased at market value on 6 April 2008. The election once made will be irrevocable. The rebasing will be in respect of both assets at the trust level and assets owned by companies whose gains are apportionable to the trust under section 13 TCGA 1992. Any gains representing the pre 6 April 2008 element will not be taxed if matched to a capital payment made before or after 6 April 2008 irrespective of whether the non domiciled beneficiary is a remittance basis user in the year of charge. However, if a rebasing election is not made, then any gains realised on or after 6 April 2008 will be taxed if matched to a capital payment made on or after 6 April 2008 even if part of that gain accrued prior to 6 April 2008. The remittance basis would apply if the capital payment was made offshore to a remittance basis user.
Will the remittance basis be extended to section 87 TCGA 1992?
Yes.
Will Capital Gains accruing but unrealised in a period before 6 April 2008 on assets held by companies which are wholly owned by foreign trusts be taxed on non domiciled settlors or beneficiaries?
No, not if the non-resident trust elects to rebase its assets and the gains are matched to a capital payment made before or after 6 April 2008 to a non domiciled beneficiary.
Will Offshore Income Gains (OIGs) realised by foreign trusts and taxed under sections 720-730 ITA 2007 by virtue of section 762(5) ICTA 1988 be taxed on a UK resident but non domiciled settlor on the arising basis if the settlor is a remittance basis user?
No, the legislation will be amended so that the remittance basis applies to settlors who are remittance basis users. However, there are some changes made to the way in which OIGs which are unmatched to capital payments at the end of the tax year in which they are realised will be taxed. They will generally be taken out of the section 87 OIG pool and go into the transfer of assets pool.
Will a settlor of a non-resident trust who is a remittance basis user be subject to tax on gains realised by the trust after 5 April 2008?
Non domiciled settlors, whether or not they are remittance basis users, will not be subject to tax under section 86 TCGA 1992. They will be taxed on benefits or capital payments from the trust. The remittance basis will apply where the settlor is a remittance basis user.
Does it make any difference if the assets in the non-resident trust or underlying non-resident company owned by the trust are UK situated?
There is no difference in the Capital Gains Tax treatment of UK situated vs foreign situated assets when these are owned by a non-resident trust or underlying non-resident company. However, as under current law, any UK source income produced by the trust or company will be taxed on the UK resident settlor or transferor on an arising basis irrespective of whether he has received any benefit if he has power to enjoy such income at the date it arises.
Different rules will apply to gains realised by a non-resident company owned by the remittance basis user directly rather than in a trust.
When is an election for rebasing likely to be advantageous for me?
The decision as to whether to opt for rebasing can only be made by the trustees of a trust which is non-UK resident at 6 April 2008, and will depend on a number of different factors such as the level of unrealised gains within the structure and the tax status of those who receive capital payments. It is not up to the beneficiary or settlor. The decision will have no impact on UK domiciled beneficiaries or settlors, because the date of actual disposal of the asset and the method of computing the gains remains the same. The rebasing simply means that trustees will need to keep a record of the pre 6 April 2008 element of any gain realised on a disposal to work out whether a capital payment made to a non domiciled beneficiary on or after 6 April 2008 is taxable. To the extent that pre 6 April 2008 gains are matched to post 5 April capital payments they are not taxable.
The time limits for making an election do not start to run until the trust makes a capital payment to a UK resident beneficiary or it transfers property to another trust on or after 6 April 2008, whichever is the earlier date.
How will rebasing operate when property is appointed from one non-UK resident trust to another?
In applying the allocation rules to transfers between settlements, the transferor trust gains carried across will be treated as having accrued to the transferee trust in the year in which they in fact accrued to the transferor trust. Those gains that have been matched with capital payments out of the transferor trust in the year of transfer or previous years will be left out of account. Gains carried across will be allocated to a capital payment from the transferee trust on a LIFO basis. Gains on such assets will be governed by whether or not the transferor trust has made a rebasing election.
If the transferor settlement has made a rebasing election by the time of the transfer to the transferee settlement, then pre and post April 2008 gains which are deemed to have accrued on the actual disposal of an asset go across pro rata.
If the transferor settlement has not made a rebasing election by the 31 January following the year of the transfer, then even if no capital payment has yet been made, the right to rebase is lost in relation to the transferred assets and any assets retained in the transferor trust.
However, note that any transfers between settlements made prior to 6 April 2008 will not trigger a time limit on rebasing and any assets moving over to the transferee settlement as a result of a transfer made prior to 6 April 2008 will not be affected by any subsequent election for rebasing made by the transferor trust. If the asset appointed over to the transferee settlement before 6 April 2008 includes shares in a company within section 13 TCGA 1992, then the transferee settlement may wish to elect for rebasing in its own right. Transferee settlements which receive property on or after 6 April 2008 cannot elect for rebasing in relation to the transferred assets - the decision is solely that of the transferor settlement.
Example
Trust 1 - £300,000 gains made
Capital payment made of £10,000 to a remittance basis user.
Election for rebasing made: 90 per cent (£270,000) of gains relate to the period pre 6 April 2008 and 10 per cent (£30,000) post 5 April 2008.
The capital payment is matched only to post 5 April 2008 gains and taxed on remittance basis. £290,000 gain carried forward (£270,000 pre 6 April and £20,000 post 5 April 2008). So now 6.90 per cent is post 5 April 2008 gain and 93.10 per cent is pre 6 April 2008 gain.
Trust 1 appoints cash to Trust 2 of £2.5m at a time when Trust 1 is worth £20m (ie 12.5 per cent of fund). £36,250 gains are transferred to Trust 2 (12.5 per cent of £290,000). 93.1 per cent of these are relate to the period pre 6 April 2008 and 6.9 per cent after.
Trust pool in Trust 1 reduced to £253,750 (93.1 per cent pre 6 April and 6.9 per cent post 5 April 2008).
What if a trust is UK resident on 6 April 2008 but then emigrates?
A rebasing election cannot be made in these circumstances. It must be non-UK resident at 6 April 2008 even if it is UK resident by the time any election is made.
Example 4 in the supplementary document (Residence and domicile: aligning the Capital Gains Tax treatment for non-UK resident trusts) published at 2008 Budget doesn’t seem to work
There was an error in example 4 of the supplementary document (Residence and domicile: aligning the Capital Gains Tax treatment for non-UK resident trusts) published at 2008. The correct example demonstrating how the new allocation rules is set out below.
Example 4 – allocation rules - LIFO - rebasing election made
Three beneficiaries:
A: remittance basis user
B: non-UK resident (domicile irrelevant)
C: UK resident and UK domiciled.Trust gains carried forward as at 5 April 2008 - £2.5m
2008-09 Gains £2m (£1.9m pre 2008 element and £100,000 post 6 April 2008 element).
Gains pool now £4.5m of which £4.4m relates to pre 6 April 2008.
2009-10 Capital payment to A of £50,000
£50,000 of post 5 April gains are attributed to A and taxed on a remittance basis. (LIFO)
Pool is £4.45m (£4.4 pre April 2008 and £50,000 post April 2008)2010-11 Capital payment to B of £5m
Gains of £4.45m attributed to B and not taxed. Unmatched capital payment to B of £0.55m to carry forward2011-12 Gains £1.1m realised (£1m pre 6 April 2008 element and £100,000 post 5 April 2008 element).
Capital payments of £1m (£500,000 to each of A and C). Under LIFO rules these are matched with 2011-12 trust gains before the unmatched capital payment to B from the previous year.
Post 5 April 2008 gains attributed first pro rata. C pays tax at 18 per cent on £50,000; A pays tax on £50,000 on remittance basis.
£900,000 pre April 2008 gains attributed pro rata to A and C. A not taxed on remaining £450,000. C pays tax on £450,000 gain at 18 per cent
The remaining £100,000 trust gains (all post 5 April 2008) are then matched with £100,000 of the unmatched capital payments from 2010-11 to B. The £100,000 gains attributed to B are not taxed.
There are unmatched capital payments to B of £0.45m to carry forward.
As a non-UK domiciled settlor of a non-UK resident trust, will I have to pay any tax on income arising to the trustees of the trust?
The rules on taxing income arising to the trustees of a trust are not being changed. Where income arises to the trustees of a non-UK resident trust then, if the settlor is resident in the UK, the settlor will be chargeable to tax on the income. If the settlor claims, or is entitled to, the remittance basis, then the income will not be chargeable to tax unless it is remitted to the UK. Otherwise, the income will be taxable on the settlor on the arising basis in the tax year in which it arises to the trustees.
The FAQs can be found here.
