This page will talk about offshore trusts and inheritance tax, as well as some of the changes made to offshore trust protections in the UK particularly for non-domiciled persons.
Even with heightened regulatory scrutiny, offshore trusts are still useful for legal reasons including protection of assets and succession planning.
Since offshore trusts are governed by UK tax laws, which restrict the benefits of employing offshore structures, they often do not offer substantial advantages to individuals who are both UK residents and UK domiciled. Nonetheless, offshore trusts can still currently provide tax benefits to non dom individuals.
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Note that the tax discussions here should not be construed as formal advice as the facts can change any time. Tax matters are naturally complicated so securing the appropriate advice matters.
Offshore Trusts and Inheritance Tax
Offshore trust meaning
It functions similarly to an onshore trust in that a settlor transfers assets to a trustee for management for the benefit of beneficiaries or an arbitrary purpose. However, offshore trusts allow for more confidentiality and protection for assets.
Inheritance tax meaning
The tax levied on those who inherit assets from an estate is known as inheritance tax. The beneficiary of the estate usually pays inheritance tax, which is determined by how much the passed-down assets are worth.
Non dom offshore trust
Once a trust is created while the person who created it, the settlor, does not have a UK residence, any foreign assets held within the trust are deemed “excluded property.” This means that even if the settlor later moves to the UK, the UK inheritance tax will not apply to these assets.
For all intents and purposes, the assets remain excluded property, exempt from UK IHT obligations, as long as they are held within the trust.
Even with many anti-tax avoidance laws, a UK resident who is not UK domiciled may still benefit tax-wise from owning assets in an offshore trust, albeit the exact tax ramifications would vary depending on several circumstances.
Foreign assets placed into trust while the settlor was not domiciled will stay outside the UK IHT net, and capital gains and income from overseas sources may occasionally be rolled over tax-free.
More concerns arise and UK tax may be owed owing to the application of anti-avoidance laws if the settlor (or members of his close family) can profit from the trust or if distributions are paid to a beneficiary who is resident in the UK.
The inheritance tax regulations governing offshore trusts established by individuals with UK domicile, however, are the same as those governing UK discretionary trusts. This means that departure fees and tax charges for a decade apply to trust distributions.
Offshore trust IHT protection
Inheritance tax is typically not applied to assets funded by a non-domestic individual and originating from outside the UK that are placed in a discretionary trust.
These assets are regarded separately from the creator’s personal estate for tax reasons upon their passing, thereby avoiding a 40% IHT levy, even though the creator of the trust can still benefit from them.
For trusts established by non-UK domiciled individuals before April 6, 2025, this protection is still in effect.
It’s crucial to remember that UK residential property interests held through offshore corporations or inside an offshore trust are liable to inheritance tax. This also holds true for collateral and loans used to buy residential real estate in the UK.
Offshore Trusts and Inheritance Tax Changes
Measures to counter alleged abuses of offshore trusts were unveiled in the Spring Budget 2024.
These offshore trust changes included stricter regulations regarding tax residence and more stringent disclosure requirements. The budget also suggests subjecting a number of long-term, non-domiciled UK residents to the country’s tax framework.
Protections for newly acquired foreign income and earnings on offshore trusts will end on April 6, 2025. This implies that, unless they are in their first four years of UK residency, non-domiciled settlors who are UK residents will be subject to income tax and capital gains tax on foreign income and gains received by the trust.
A draft law and policy consultation will be released later in 2024 as part of the UK government’s announcement to switch to a residence-based inheritance tax system. Trusts’ future IHT treatment is unclear, and if the settlor lives in the UK for more than a decade, it’s probable that non-UK trust assets will be liable to inheritance tax.
The government’s attempts to improve openness and discourage tax evasion using offshore structures are reflected in these offshore trusts and inheritance tax modifications.
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