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The current tax rules relating to offshore trusts are very beneficial to non-UK domiciled individuals. We have received a number of enquiries regarding the potential advantages of setting up a structure prior to a potential change in government.
The Spring Budget on 6 March 2024 included significant changes to the taxation of Non-Doms and offshore trusts from 6 April 2025. This provides a window of time for Non-Doms to consider the merits of structuring prior to 6 April next year.
Asset protection
Aside from tax, asset protection is a key driver for many individuals wanting to establish structures for themselves or family members. The current divorce rate in the UK is estimated at 42% but relationship breakdowns unfortunately happen worldwide, and not just in the context of marital relationships.
A common scenario is for a structure to be funded by the parents of adult children. The parents want to make wealth available to the next generation but still have access to it. They are also very aware (either through personal experience or others close to them) of the potential for wealth to be dissipated due to divorce.
An offshore trust from which spouses/civil partners of children are excluded is ,therefore, an attractive way of ring-fencing assets. The trust terms can also stipulate a requirement for beneficiaries to enter into a pre-nuptial or post-nuptial agreement, to further strengthen the protection of the trust. This requires careful drafting and consideration but can result in very effective asset protection.
It is interesting to note that these considerations do not only come up just before an adult child is about to get married. Often parents wish to put in place a structure in advance, and there are good reasons for doing so. It is often easier to explain to someone joining the family by marriage/civil partnership that a nuptial agreement is a requirement of an existing family trust, and that this requirement applies to all the children in the same way.
Protection from Inheritance Tax
Provided a discretionary trust is funded with non-UK assets and by a non-UK domiciled individual, in broad terms those assets remain outside the scope of Inheritance Tax. Furthermore, the person who settled the trust can still benefit from those assets despite them being treated as excluded from his/her personal estate on death.
Being able to protect assets from a 40% Inheritance Tax charge on death (and any ongoing Inheritance Tax charges that UK trusts are often subject to) remains a very attractive proposition and assists in preserving wealth for the next generation. The Spring Budget confirmed that this extremely valuable IHT protection will remain for trusts settled by non-UK domiciled individuals prior to 6 April 2025.
It should be noted that closely held UK residential property interests do fall within the scope of Inheritance Tax if held within an offshore trust, even if held through an offshore company. This also includes loans and collateral used to acquire UK residential property.
Mitigation of Income Tax and Capital Gains Tax
An offshore trust funded by a non-UK domiciled individual (the Settlor) can currently offer attractive tax “roll up” tax treatment, where investments can grow without being subject to an immediate tax charge. There are some investments that do not benefit from this treatment, and any benefits or payments provided to a UK resident (or close family member of the Settlor) potentially fall within the scope of UK taxation. A trust structure often makes sense where there are funds that the individual and their family do not need regular access to.
In the Spring Budget, the Chancellor announced they are removing protections on offshore trusts for all new foreign income and gains that arise within them after 6 April 2025. However foreign income and gains that arose in offshore trusts that benefitted from the “roll up” treatment before 6 April 2025 will not be taxed unless distributions or benefits are paid to UK residents who have been here for more than 4 years.
Conclusion
In conclusion, there are a number of reasons (from both a tax and wealth preservation perspective) for Non-Doms to consider establishing an offshore trust. The changes announced in the Spring Budget 2024 have accelerated the need to make the decision (if a trust is to be settled prior to 6 April 2025).
We have summarised these concepts at a high level for the purposes of this briefing note, and none of the comments are intended to constitute formal legal advice.
If you are interested in establishing an offshore structure or would like to discuss any of the ideas referred to in this briefing note, please get in touch.
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