Offshore Trusts – A Case Study

Ian Taylor, ATII, TEP, Rathbone Bros & Co Limited

(From Issue 8,July 1999)

The 1998 Finance Act introduced legislation intended to stamp out perceived tax avoidance, partly as a result of the Geoffrey Robinson saga. The Association will have members who have thriving non-resident associate and subsidiary companies managing structures created by non-domiciled individuals for the benefit not only of similarly non-domiciled beneficiaries but also for beneficiaries domiciled in the United Kingdom.

At the time of the 1998 Budget and during the course of the 1998 Finance Bill leading to the Act of that year the Association, through the medium of the Taxation Committee, made representations about the practical difficulties created by the draft legislation, albeit with little impact on the course of the Bill. The principal point made was that there are Trusts and, indeed, Estates in administration, based in countries which are not perceived as tax havens, or indeed emanating from such countries, where there were no pre-ordained tax avoidance motives in the creation of the Trust, either in the country of origin or indeed so far as the United Kingdom is concerned.

With the advent of Self-Assessment we are concerned that undue burdens will be placed on tax paying United Kingdom beneficiaries trying to comply with the legislation and trying to establish the quantum of their tax liability who might theoretically be faced with taxation on money they may not have received. Furthermore, they might not also be able to reclaim the tax from the Trustees or take advantage of the benefit of Double Tax Relief.

Recently we came across a particular case raised by a member firm which had such a problem. The facts were broadly as follows:

An overseas Trust corporation, linked to the member firm, acts as the Trustee of a trust fund out of the Estate of a New Zealand domiciliary who died over fifty years ago. Inter-alia, the Testator provided that the residue of the Estate should be divided equally between his children. The shares of his daughters were to be held upon Trust. The Trust of each daughter’s share placed a restraint upon anticipation of income (a ‘quasi’ protective Trust) with remainder on her death to her children over the age of 21. Before 1991 it was agreed by the daughters with the Trustees that residue would be divided into four separate funds, one for each daughter and her issue. Separate Trustees were appointed for the various funds. It is believed there was also no possibility of cross accrual.

Currently it is apparent that there are now two daughters living, one being domiciled in the United Kingdom and the other domiciled elsewhere. On behalf of the member firm therefore the author wrote to FICO Non-Resident Trusts to ascertain whether the Inland Revenue would be prepared to treat the two funds as separate Settlements for the purposes of the new legislation.

This was on the basis that if this was not the case the United Kingdom branch of the family might suffer Capital Gains Tax in respect of gains made in the Trust Fund held for foreign beneficiaries. It was further contended that this could lead to a breach of confidentiality between the beneficiaries and the Trustees in the respective funds and could well present the family in the United Kingdom with practical difficulties in obtaining information from a jurisdiction in respect of a Trust Fund in which they held no interest.

The response from the Inland Revenue has been most helpful. In essence, the response was that often the facts of the case might point to a fund in question being a separate Settlement for the purposes of Capital Gains Tax, although obviously the matter would not be free from doubt and until the case was fully identified and all the relevant facts disclosed we would not receive a formal ruling. The Inspector went on to advise that, where the Trustees are in practical terms treating the fund as completely separate with, for example, investments now being held jointly for the beneficiaries in question apart from the beneficiaries of another fund, with separate accounts being prepared for the individual funds and little practical likelihood of the funds cross accruing then the Inland Revenue would be prepared to treat each as separate Settlement for the purposes of the new legislation. Furthermore, where this is in the context of a fund that has come into the scope of the Settlor charge by virtue of the new legislation (Section 130 FA 1998) the Inland Revenue would very likely be prepared to give the Trustees and Beneficiaries the benefit of the doubt.

This is obviously a practical attitude and one to be welcomed. The author would be interested to hear from other member firms in similar circumstances since clearly as time goes on it is important that as practitioners we are aware of the general approach to be adopted by the Inland Revenue as this particular legislation evolves.

Ian Taylor ATII, TEP

Rathbone Bros & Co Limited

Chairman Tax Committee