Inland Revenue 39
17 March 1998
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CAPITAL GAINS TAX: OFFSHORE TRUSTS
The Chancellor announced today changes to the taxation of
gains made by offshore trusts which will result in a fairer,
more comprehensive and more effective regime for taxing those
setting up, or benefiting from, such trusts.
The main proposal brings into line the treatment of trusts set
up before March 1991 with those set up subsequently. Further
changes will affect those who set up trusts for
grandchildren, and beneficiaries of trusts set up by
individuals who are not domiciled or resident in the United
Kingdom.
A measure aimed at blocking a particular avoidance technique
involving offshore trusts has already been announced on 6
March.
The estimated yield from these measures is 50 million pounds
in a full year.
DETAILS
1. At present, the settlor of an offshore trust (broadly, the
person who provides funds for the trust) is charged to tax in
respect of gains made by the trust, if the settlor, the
settlor's spouse, their children or companies they control,
can benefit from the trust. This regime was introduced in
1991 and did not apply to trusts created before 19 March 1991
unless, broadly, funds were added or the trust migrated.
Trusts created before 19 March 1991
2. The first change will extend this charge to those who set
up trusts before 19 March 1991. This will, generally, apply
to disposals on or after 6 April 1999 to allow those affected
to re-organise their affairs, if they so wish. For example:
for the settlor, his family and companies they control to
exclude themselves as beneficiaries; for the trust to be
wound up; or for the trust to become resident in the UK.
3. As children under the age of 18 cannot exclude themselves
as beneficiaries without the Court's consent, the charge on
the settlor will not apply where the only members of the
settlor's immediate family who can benefit are children under
the age of 18 at 5 April 1999. There will also be exclusions
from the charge where only unborn children, or future spouses
of the settlor or of his children, can benefit.
4. Rules to prevent exploitation of the transitional period
will apply in respect of gains made in the period 17 March
1998 to 5 April 1999 inclusive. These rules will treat such
gains as accruing to the settlor, in appropriate
circumstances, on 6 April 1999.
Trusts set up for grandchildren
5. The second change will extend the settlor charge to trusts
from which the grandchildren of the settlor, or of the
settlor's spouse, or the spouses of grandchildren, or
companies they control, can benefit. This will apply to all
trusts created on or after today.
6. This change will also apply to existing trusts if, on or
after today:
- property or income is provided directly or indirectly to
the trustees, unless it is provided by way of a bargain
at arm's length or in pursuance of a liability incurred
prior to today (there will be exceptions for funds added
to meet the trust's expenses of administration and
taxation to the extent that these expenses exceed trust
income);
- a resident trust becomes an offshore trust;
- the terms of the trust are varied so that one or more of
the persons referred to in paragraph 5 becomes for the
first time a person who can benefit from the trust;
- or a person referred to in paragraph 5 benefits from the
trust for the first time, but is not a beneficiary under
the terms of the trust.
Information provisions
7. The provisions requiring information about offshore trusts
will be extended to require anyone who transfers property on
or after today (otherwise than at arm's length) to an
offshore trust created before today to provide information
about the trust and the property transferred.
Charge on beneficiaries
8. Where the gains of an offshore trust are not within the
charge on the settlor (for example, because the settlor and
his immediate family cannot benefit from the trust),
beneficiaries of the trust who are domiciled and resident or
ordinarily resident in the UK are, generally, taxable in
respect of gains made when, and to the extent that, they
receive a capital payment, or a benefit in some other form,
from the trust.
9. The third change extends the charge on such beneficiaries
regardless of whether the settlor of the trust is domiciled
or resident in the UK at the time the trust is set up or when
capital payments are made. This will apply in respect of
gains realised, and capital payments made to beneficiaries, on
or after today.
Disposal of an interest in a trust
10. The final element of the package removes the exemption
from gains realised on the disposal by a beneficiary of their
interest in a trust which is in, or arose from, a trust which
has ever been an offshore trust. As already announced, this
change will apply to any disposal of such an interest made on
or after 6 March.
NOTES FOR EDITORS
1. The term "offshore trust" includes trusts where the
trustees are not resident and not ordinarily resident in the
UK and those where the trustees are dual resident and
regarded under the relevant double taxation agreement as
resident in a territory outside the UK.
2. The announcement by the Financial Secretary to the
Treasury, in the form of a written Parliamentary Answer, that
the Finance Bill would include measures to prevent avoidance
of tax by those who dispose of an interest in, or originating
from, a trust which has ever been an offshore trust, was set
out in an Inland Revenue press release issued on 6 March
1998.
3. Following changes introduced in the Finance Act 1991, a UK
resident setting up an offshore trust (the settlor) after 19
March 1991 from which they, their immediate family, or
companies they control, can benefit, is liable to tax on all
the gains of the trust. These provisions apply to trusts
which were set up before that date to which, broadly, funds
are added or where the trust moves offshore. Where there is
not a charge on the settlor, UK resident and domiciled
beneficiaries are liable to tax in respect of trust gains to
the extent that they receive capital payments from the trust.
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