EVERY CLOUD HAS A SILVER LINING – EXPORTING UK TRUSTS
Contributed by West Corporation Limited
16 August, 2011
There are many reasons why trusts should be exported out of the UK, but the current sad state of the economy highlights opportunities for trustees who are convinced that their asset values will recover.
Many UK resident trusts established by UK resident and domiciled settlors would be more effective if they were resident in an offshore location such as the Isle of Man.
These may include trusts where:
(i) The settlor is dead;
(ii) Capital gains or substantial income may arise following the settlorÂ’s death;
(iii) The trust has, or can have, substantial non-UK income and the beneficiaries are children and grandchildren;
(iv) Close family members are excluded from the class of beneficiaries;
(v) The settlor may cease to be resident or domiciled in the UK;
(vi) The beneficiaries, or some of them are not resident or not domiciled in the UK.
Unfortunately section 80 TCGA means that appointing non-resident trustees may crystallise unacceptable levels of capital gains tax. There are however a surprising number of situations where trust exports may be viable. These include the following.
(a) Dip In Value of Asset
It may be that the trustees are holding assets which are exposed to capital gains tax but the values of those assets have temporarily reduced so that the trust can be exported. With the turmoil in the stock and property markets, there could be quite a number of UK trusts that currently have an opportunity to leave the UK without exposure to taxation. The graph below helps to highlight this current window of opportunity. This shows that in very simple terms with the FTSE 100 share index at 5163 on 11 August 2011, trusts which have invested as long ago as 1998 may be able to move offshore without a tax liability. Of course real investment situations are much more complex than this.
For instance the gain free investment period could be even longer if the true performance is poorer than the FTSE or, if profits have been taken
in the meantime.
(b) No Chargeable Assets
If the trustees are holding assets which will not in any case crystallise a capital gain then the position is simple; non-resident trustees can be safely appointed without exposure to UK capital gains tax. This may be because the trustees only hold sterling deposits, perhaps because they have
recently liquidated their investment positions.
Opportunities could also exist if other tax-free assets are held, such as debts, chattels, Government securities, insurance policies, homes occupied by beneficiaries etc.
(c) New Base Cost for Will Trusts
In the case of trusts which received assets on the death of the settlor, the trustees may be holding very valuable assets such as private company shares, but the capital gains tax cost of those assets will have been stepped up to their value at the date of death. If the settlor died relatively recently, there may be an opportunity to export the trust before substantial increases in the value of the assets.
(d) New Base Cost on Death of Life Tenant
When a life tenant dies there can be a step up of the capital gains tax cost of the assets to their current value, so that it may then be possible to export the trust without exposure to tax.
(e) Discount on Valuation
If a trust holds shares in a UK private company which may be sold, consideration should be given to the export of the trust in a tax year prior to any possible disposal. The export charge may be much lower than the ultimate gain, because the company is actually worth less at that point, or because the valuation of the individual trust holding in isolation is subject to heavy minority discounting.
(f) The Liability is Worth the Future Tax Saving
In certain circumstances, it may in any case be worth accepting a tax liability on the export, to save or defer tax on further increases in the value of the assets.
This is only likely to be attractive if there is some
(i) the assets will actually be disposed of at a value greater than that at export; and
(ii) the chargeable disposal will take place within a reasonable time period after 5 April following export; and
(iii) the gain on disposal will not be taxed on the settlor.
(g) Tax Planning
Even if the situation is such that there is an apparently unacceptable level of capital gains tax on the export of the trust, it may be that specific but sometimes aggressive tax planning can be undertaken to minimise that tax exposure.
(h) No Gain
The UK trustees may hold chargeable assets, but unacceptable levels of capital gains may not yet have accrued. The trust may be an only recently established lifetime planning arrangement or the trustees may have only recently invested in the assets.
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