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The Benefit of Offshore Trusts

by James Green on 08/05/09 at 2:09 pm

For many years UK taxpayers benefitted greatly by transferring (settling) their assets in offshore trusts, but increasing ant-avoidance legislation has led people to believe that there is no point in using an offshore trust any more.

Whilst it is true that the tax advantages are no longer as good and they once were the fact is that there are non-tax advantages which are well worth thinking about and there still are some tax planning opportunities. Note that the term “settler” refers to the person transferring the assets; the term “beneficiary” means someone who may at some future point in time benefit from the trust; and “trustee” means a person or professional fiduciary who manages the assets of the trust and to whom the assets legally belong.

Here is a brief general outline of the tax and non-tax advantages of an offshore trust.

Tax Advantages

UK Inheritance Tax (IHT)

A UK resident but non-domiciled person can settle (transfer) assets into an offshore trust with no IHT charge providing the transfer is of non-UK assets. Depending on the type of trust that is established, the trust assets can be outside a charge to UK IHT for the entire lifetime of the trust. An offshore trust can hold UK assets via an offshore company owned by the trustees.

UK Capital Gains Tax (CGT)

If non-UK assets are settled in an offshore trust it is still possible to avoid UK CGT completely. This is because gains realised by offshore trustees will only be liable to UK CGT if paid out to a UK resident beneficiary.

UK Income Tax

Although there are no significant UK income tax advantages in holding assets through an
offshore trust it is possible to use a trust to defer UK income tax by allowing income to remain in the trust – and grow without any tax leakage – until some future point. The final tax bill will be greater but there will be more to tax because the income grows without tax deductions and so there will be more available for distribution to the beneficiaries.

Non-Tax Advantages

The use of a trust can provide:

• Asset protection for the settler and beneficiaries in case of economic, political, family or business uncertainty e.g. divorce or bankruptcy.
• Succession planning allowing for the transfer of wealth in a tax efficient and timely manner.
• Consolidation and administration of family wealth.
• Overcoming problems of obtaining probate (or its equivalent) in several jurisdictions.
• Bypassing the forced heirship rules of countries such as France or Spain, under which children or other family members have an automatic right to inheritance irrespective of the terms of the Will and whether there is a surviving spouse. For example in France it is not uncommon for a surviving spouse to have to sell their home in order to meet the forced heirship rules.
• Professional management of assets for the benefit of vulnerable beneficiaries who cannot manage or be trusted to manage their own assets. This could include disabled children, addicts, or persons who might be pressured by third parties.
• The trust deed is not a public document and provides confidentiality for both settler and beneficiary.

In summary trusts are a useful means of safeguarding wealth in a tax efficient and protective manner. If you would like to find out more about the potential use of an offshore trust please send an email to info@jamesgreenandco.co.uk with your contact details.