Offshore trusts – do they still have a purpose?

Whilst many of the tax advantages often associated with offshore trusts have been eroded over the past few years, they can still offer tax benefits to international families and companies alongside the other non-tax reasons for choosing to hold assets in a non-UK resident trust.

Trusts have primarily been used for three purposes:

  • tax mitigation,
  • succession planning, and
  • wealth protection.

Trusts provide you with the opportunity to give assets away to trustees without giving control to vulnerable or spendthrift family members, or giving up the ability to receive income or a return on the capital, if needed.

Using an offshore jurisdiction for your trust can also provide you with an additional layer of privacy or protect your assets from creditors or former spouses, in some circumstances. Most offshore centres are well regulated and an offshore trust company can provide you with highly experienced and knowledgeable individuals to manage the trust and its assets.

The UK’s highly complex anti-avoidance legislation has developed over many years to reduce many of the tax advantages available over the last century to UK resident settlors and beneficiaries. Nevertheless, for individuals domiciled outside the UK there remain a number of offshore trust strategies, which can help you defer or reduce UK taxation.

An offshore trust is one resident for tax purposes outside the UK. A trust will be non-UK resident if:

  • All of the trustees are non-UK resident, or
  • Where there are both UK resident and non-UK resident trustees, the settlor (i.e. the person providing the funds) was not resident or domiciled in the UK when the trust was settled.

Offshore trusts are not subject to UK tax on their income and gains, except for on income from UK sources and capital gains on interests in UK real estate, companies deriving their value from UK land, and UK businesses.

From an inheritance tax perspective, if you are a non-UK domiciled settlor, placing foreign assets into an offshore trust structure in advance of becoming deemed UK domiciled will continue to provide you with protection from inheritance tax, without the need for you to give up any interest in the trust assets.

As a non-UK domiciled settlor, it is possible to settle foreign assets in an offshore trust so that those assets remain outside the scope of inheritance tax even after you become deemed UK domiciled. In addition, income and capital gains can be accumulated tax-free in an offshore trust, where you as the settlor are either non-UK domiciled or non-UK resident, with income tax and capital gains tax only payable on amounts distributed to UK resident beneficiaries.

While the tax legislation applying to offshore trusts is highly complex, with the help of the right advisors, an offshore trust can still deliver tax savings, particularly if you are a non-UK domiciled settlor or beneficiary.

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