Hot Topic: Trust

I found the last couple of weeks on LinkedIn very enjoyable. There were several high level discussions and responses on the contemporary use of International Trusts and their taxation in the UK. The underlying question is whether the use of trust by international clients is dead?

The purpose of this blog post is to address the fine line between the use of international trust by international clients and UK tax implications that need to be addressed. I am particularly grateful to Robert Anthony for facilitating this important discussion and inspiring this blog post.

UK Tax and Trust

It is very easy to blend important matters together and draw quick and not necessarily consistent conclusions. Therefore, it is important to look at trust legal concept and UK tax implications both separately and together.

The Importance of Trust

It is important to discuss the legal concept of trust separately from UK tax implications and define the importance of problems that it may potentially solve and the different applications of it.

Trust is a very useful concept in English law. It helps to solve a number of family wealth and commercial matters as well environmental preservation examples.  

The concept was successfully adopted in numerous offshore jurisdictions. The primary use of offshore international trust is to bridge the gap between different legal jurisdictions, address family succession issues and protect important assets.

These considerations alone are important and valuable in their own right before we even start to approach tax issues.

International Recognition of Trust

Internationally, the legal concept is usually recognised through the Hague Convention on Trusts.

Perhaps, the most important application of the Hague Convention on Trusts can be witnessed in Swiss courts.

The Swiss legal system does not contain the legal concept of trust. However, Swiss Courts successfully applied this legal concept in its case-law.

This is especially highlighted in 2008 challenges of Trust funds contained with Credit Suisse for the benefit of US based families. 

Swiss courts exhibited their willingness to recognise foreign trusts and protect their assets if these Trusts were properly constituted.

Sham trusts are trusts that are not properly constituted. Some trusts may be vulnerable to legal attack of sham trusts if they are not properly constituted. This is usually exhibited by the fact that the Settlor retains substantial control over the Trust’s assets after the Trust is formed.

UK and Taxation of Trust

English trusts lost a number of UK tax advantages decades ago. Continuous efforts were made to bring English trusts to unfavourable UK tax brackets. However, this long-tested estate planning solution remained the relevant vehicle notwithstanding increasing UK tax liability.

UK Property Investments

Offshore international trusts can be brought into the UK tax bracket if certain assets are based in the UK. A good example is investments and family ownership of UK based property. 

Sometimes estate planning and asset protection considerations will rank higher with certain families while possible tax implications may be the underlying consideration in the decision-making process for other families.

The ultimate decisive factor is the value of the asset itself, if the asset is significant in value, there may be no better solution than preserving the asset’s value in a trust structure. Usually, UK tax implications are only secondary considerations.

UK IHT and New Residents

Offshore international trust is still the primary vehicle to protect overseas assets from UK’s taxation for new residents.

New residents are the new arrivals from overseas who do not necessarily have any previous significant ties to the UK. However, they wish either to spend some time or remain indefinitely in the UK.

The correct first step for such new residents is to form an offshore international trust to protect assets that remain overseas before acquiring UK tax residence.

UK tax residence is a sticky concept. Once you acquire your UK tax residence status, it is hard to shake it off. There may be lasting implications for the status of overseas previously earned assets if not careful.

Trust remains an important solution when planning your long term residence in the UK. You also need to note that you may become a UK tax resident even if you do not plan to be. 

There is a statutory UK tax residence test, which may make you a tax resident even when you have no intention of becoming one.

Therefore, an offshore international trust that does not hold UK based assets is still the right solution for a number of individuals and families relocating to the UK.

At the moment, UK Inheritance Tax (IHT) does not apply to overseas assets protected under offshore international trusts.

Is the Trust Dead?

Primary assertions when considering whether a trust solution is dead are the foreseeable or unforeseeable UK tax implications.

English trust is still a viable construct for a number of UK domiciled families. The nature and the value of assets protected by the trust is the underlying reason why a family trust may be still relevant.

Offshore international trust is relevant for new tax residents in the UK as it helps to protect overseas assets from UK taxation and namely, IHT.

Recent UK tax legislation was brought in to level the playing field for investments in UK property made by overseas investors. 

You need to apply for your own individual UK tax advice and monitor changes in UK tax legislation, so that you could always plan one step ahead.

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Saule Voluckyte, M.A.E.S, LL.B, FAIA

I have been working exclusively with UHNWI in Mayfair, London since January 2008. I built specialist knowledge and expertise required to serve ultra high net worth individuals investing, operating and relocating to the UK or Switzerland.

Within the industry, I am the single adviser who is able to traverse the different areas of expertise and bring a comprehensive approach across: global structuring, UK immigration, international taxation and FOREX to develop their global wealth strategy, while they build, grow and expand their wealth worldwide.

Previous experience as one of the senior advisors for the government, made me a go-to person when delicate and uncomfortable scenarios involving heads of state need to be handled with care and preserve privacy.