Offshore trusts – UK tax liability of beneficiaries
UK resident beneficiaries are often unaware that distributions to them from offshore trusts are usually taxable in their hands in the UK, even if the trustees have paid tax on their income and gains in their home jurisdiction.
Any ‘distribution’ from an offshore trust to a UK individual is potentially chargeable to tax here. That would include on notional interest on interest-free loans and on the value of any trust assets a beneficiary is able to use free of charge, such as the rent-free occupation of trust property.
Establishing whether a payment is taxed on the UK beneficiary as income or capital gains is an extremely complex process, particularly if the trust has an interest in an underlying offshore company. In addition, if you have added funds to an offshore trust at any point, its income and gains could be assessable on you in the UK, even if you haven’t benefited from the assets yourself.
Generally, unless a taxpayer can prove otherwise, HMRC will tax distributions from offshore trusts as income of a UK beneficiary because that gives the best result for them in terms of tax take. Income distributions from offshore trusts to UK beneficiaries will be treated as gross income with no credit for any tax paid overseas. However, it may be possible to agree that payments are taxed as capital gains and, in a small number of cases, that no tax is due at all.
The penalties for failing to report offshore income and gains are now extremely high, so it’s worth taking advice if you’ve formed or have an interest in an offshore trust. Professional opinion should also be sought by anyone looking to form an overseas trust where UK resident individuals are likely to benefit. Similarly, advice in advance of any payments to beneficiaries is also recommended because it can be possible to mitigate your tax exposure by structuring the distributions correctly.
If you’re a trustee of an offshore trust with a UK settlor or beneficiaries, or you’re the settlor or beneficiary of an offshore trust and want to make sure you’re fully UK tax compliant, get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email firstname.lastname@example.org.
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