OFFSHORE TRUSTS

The treatment of offshore trusts and foundations is a highly complex area of UK tax legislation that requires advice on creation, but also continued specialist advice to ensure that they remain UK tax compliant throughout their operation.

Between April 2017 and September 2018, the “Requirement to Correct” (RTC) legislation dictated that any entity, no matter where in the world, had an obligation to identify and rectify any historic non-disclosure.  Failure to correct  give rises to:

  • Penalties of up to 300% of the potential lost revenue (typically the additional taxes payable). The new standard minimum is 100%.
  • A potential 10% asset-value based penalty too, and
  • Potential “naming and shaming”, whereby your name, address and details of tax underpaid are published by HMRC. This can be accessed by anyone online, and is now far easier for HMRC to trigger.

Historic UK Non-Compliance

Offshore trusts have been a common planning tool for the UK tax adviser for many years. However, the UK tax treatment of these trusts is highly complex, with many anti-avoidance rules, which target the settlor, beneficiary and trustee. Given the complexity of the UK tax legislation, it is vital that trustees ensure that any arrangement that has a UK connection (either through settlor, beneficiary, trustee or asset situs) is reviewed regularly to remain UK tax compliant.

Failure to correct any historic risks means financial penalties of up to 300%.  Even historic errors could be viewed as deliberate through the deliberate action of not reviewing the structure in line with the RTC guidelines and advice.

Historically, HMRC had received little information with regards to offshore trusts and their operation. However, this is changing with the global drive towards transparency where non – UK “financial accounts” and “controlling persons” are regularly identified and flagged annually.

The UK has pledged, along with France, Germany, Italy and Spain, to implement a beneficial ownership register of trusts and information will be automatically exchanged between them. Over 40 more countries have pledged their support and future adoption of this initiative. This will mean that in the future, HMRC will have access to information that identifies the beneficial owners of trusts and foundations that are situated around the world.

In addition, over 100 countries are automatically exchanging financial account information with each other annually, under the Common Reporting Standard (CRS).  HMRC have already received voluminous information from most countries and will continue to obtain more as well as the quality of the information improving all the time.

What are the potential issues?

  • UK Situs Income
  • Settlement Legislation
  • Transfer of Assets Abroad Legislation
  • IHT on creation/entry and principal and exit charges

What do I need to know?

  • All trusts need to be reviewed to ensure that they are UK tax compliant
  • Failure to correct an error will lead to penalties of up to 300%
  • Trustees are liable for IHT on creation as well as principal and exit charges
  • HMRC are receiving significant amounts of information


Inheritance Tax

UK Inheritance Tax (IHT) has often been a significant reason for structuring assets and investments using offshore trusts. However, the IHT legislation is extremely complex and care is needed on creation but, more importantly, through the lifetime of the trust.

IHT, in relation to trusts, has four possible charge points that could result in a reporting obligation for the trustee:

  1. Creation of the trust
  2. Capital distributions
  3. 10 year charges from settlement of assets into trust, and
  4. Death of the settlor (and, in some cases, beneficiary)

Given the complexity of the UK tax legislation, it is vital that trustees ensure that any arrangement which has a UK connection (either through settlor, beneficiary, trustee or asset situs) is reviewed regularly.

Importantly, a trust with a non-UK resident settlor, non-UK resident beneficiaries and non-UK resident trustees can still be within the UK IHT legislation.

Failure to correct means penalties of up to 300%.

Historic errors could be viewed as deliberate through the inaction of not reviewing the structure in line with the RTC guidelines and advice.

IHT is an asset-value based tax and therefore any error, with a subsequent penalty, can have significant consequences for the asset base of the trust.  IHT at 40% and a penalty at 200% of the tax is over 100% of the asset base!

Historically, HMRC had received little information with regards to offshore trusts and their operation.  However, this is changing with the global drive towards transparency where non- UK “financial accounts” and “controlling persons” are regularly identified and flagged annually.

When does IHT need to be considered in respect of a trust?

  • Creation
  • Capital distributions
  • Principal Charge
  • Death
  • Additional Settlements

What do I need to know?

  • Some IHT errors do not have assessing time limits and can be recovered over 20 years later.
  • Trustees could be liable for the IHT charges.
  • IHT is an asset-value based tax, making any penalty an asset value based penalty.
  • HMRC are receiving significant amounts of information from other countries with regard to offshore trusts and persons linked to them.
  • Seek specialist advice, ideally independent, and review all Trust and Foundation structures as soon as possible.

HOW CAN LANCASTER KNOX HELP?

At Lancaster Knox our Tax Investigation specialists are industry recognised and have undertaken numerous trust and structure reviews for clients over the years, dealing with hundreds of potentially contentious situations with HMRC.

We are adept at managing interactions with the tax authorities to ensure that the process runs smoothly and that your interests are best protected.

Lancaster Knox will work with you (and your current adviser, if applicable) to:

  • Undertake a review of the structures,
  • Quantify the tax risk (if any),
  • Arrange a UK tax disclosure (if necessary) to secure penalty mitigation, and
  • Ensure that HMRC do not seek to obtain any further information they are not entitled to.

We appreciate that, often, this is the first tax disclosure that the client has ever made and voluntarily approaching HMRC can be a nerve-wracking experience.

Lancaster Knox will ensure that, if a disclosure is required, you are fully supported and we will make certain that HMRC do not seek to obtain information they are not entitled to, that the process is as unobtrusive as possible and give you peace of mind that any historical tax inaccuracies are resolved as soon as possible.

Email Lancaster Knox