Client Alert March 2020: Offshore Trustees Briefing Note has been saved
Client Alert March 2020: Offshore Trustees Briefing Note
Year-end housekeeping for 5 April 2020
With the end of the UK tax year (5 April 2020) fast approaching, you should review your trusts’ affairs to ensure that they are in good order from a UK tax perspective and that any actions required before the year end to utilise available UK allowances and exemptions have been undertaken. We have outlined below matters that offshore trustees and directors of underlying companies may wish to look at, ahead of the tax year end, as well as some more general ongoing areas to bear in mind:
- Income tax
- Capital Gains Tax (CGT)
- Protected trusts
- Annual Tax on Enveloped Dwellings (ATED)
- Inheritance Tax (IHT)
- Non-Resident Landlords (NRLs)
- The 5th Money Laundering Directive (5MLD) and the HMRC Trust Register
- Offshore tax errors – Failure to Correct
- Maintenance of Records and the GDPR
- Operational and company tax requirements
Distribution of income to life tenants
Trustees should consider distributing income due to life tenants in a timely manner.
Where a UK resident beneficiary has a life interest, he or she is subject to tax on the income under that life interest even if the income is not paid to them by the trustee; by distributing the income to life tenants in a timely manner, trustees can ensure that beneficiaries are not hit with a dry tax charge. A timely distribution will also reduce the risk that HMRC will consider undistributed income subject to an interest in possession to be an addition to the trust by the life tenant (which can have numerous tax ramifications, especially where the life tenant is UK domiciled or deemed domiciled). Where income cannot be distributed trustees could consider holding it on bare trust at the year end.
Care should be taken when an offshore discretionary trust has undistributed income, as capital distributions will be matched with this in preference to stockpiled gains in the trust. Where relevant, consideration should be given to making income distributions of current tax year (and residuary prior tax years’) income to remove any surplus, so that any capital distributions are matched with stockpiled gains in the trust.
Be mindful that capital payments to beneficiaries resident in jurisdictions other than the UK will not be matched to surplus income (and since 6 April 2018 cannot usually be matched to capital gains either). An income distribution made to a non-UK resident beneficiary will, however, reduce pooled income in the trust.
Where UK resident beneficiaries have no other income sources, it is worth considering making income distributions to those beneficiaries to use up their personal allowance for the tax year (£12,500 for 2019/20), as unused personal allowances cannot be carried forward to the following year.
Where offshore trustees have paid UK tax on UK income it may be possible for UK resident beneficiaries to claim a credit for some or all of that tax under ESC B18 against tax charged on income distributions received by them. A claim for ESC B18 can only be made within 5 years and 10 months of the end of the year to which the tax relates, so timely distribution of income can assist with utilisation of tax credits.
CGT annual exemption, rates and losses
All UK resident and domiciled beneficiaries have a CGT annual exemption of £12,000 (for 2019/20). The exemption for 2020/21 is expected to be confirmed in the forthcoming UK budget on 11 March. Spouses and children each have the same exemption. If the CGT annual exemption is not used in a tax year it cannot be carried forward to the next and is lost.
Consider whether capital distributions should be made to utilise unused annual exemptions; however, care should be taken if there is undistributed income which could be matched to the payment, as set out above.
Where losses have been made by an underlying company of a trust within Section 87 TCGA, consider realising gains before the year end or those losses will be lost, as losses made by an underlying company can only be offset against Section 87 gains in the year in which the losses arise.
Capital distributions traced through to UK residents
From 6 April 2018 onwards, where a benefit is received from a non-UK trust, if the individual who received the benefit is not required to pay tax on it and there is an onward gift of the funds to a UK resident within three years of the day on which the benefit was first received, the benefit may be taxable on the UK resident onward recipient, as though he or she were a beneficiary of the trust. This means that income tax or CGT may be payable if the trust has received income or made capital gains that can be attributed to the benefit.
Trustees should consider the impact of distributions that may fall within this provision.
Where offshore trustees have made a loan to a UK resident beneficiary, currently this can result in a benefit taxed as a capital payment if the loan is not at at least the official rate of interest, or the interest is not paid within the tax year. Trustees may wish to remind beneficiaries that interest is due. Note that the interest may be taxable if received at trust level, and consideration should be given to any withholding tax implications.
Tax on disposals of UK land by non-UK residents
ATED CGT was abolished in respect of disposals after 5 April 2019. From 6 April 2019 non-UK residents are now chargeable to tax in respect of disposals of both residential and non-residential UK property and land, including both direct and indirect disposals (for example certain interests in property-rich companies). For trustees holding property directly rebasing will continue to apply to 5 April 2015 in respect of residential property. For commercial property and property held indirectly, rebasing will apply to 5 April 2019.
Where 5 April 2019 valuations have not already been obtained we would recommend that they be obtained, and be kept on file. Obtaining them at a later date may be complicated and expensive.
For direct holdings the reporting obligations will not change on 6 April 2020, but CGT must be paid within 30 days of the completion date of the disposal rather than deferring it to the normal CGT due date for trusts within self-assessment. Where property held in an underlying company is disposed of the gain is now subject to Corporation Tax and a Corporation Tax return must be filed even where the company is not otherwise subject to Corporation Tax. Companies that are not already in the scope of corporation tax will have 3 months to register. Trustees and directors should ensure all tax reporting is made on a timely basis, as penalties for late returns and payments can be charged.
Broadly, where a non-UK domiciled individual who was UK resident in 15 of the 20 tax years from 2000/01 – 2019/20 remains UK resident after 5 April 2020, it is important to consider whether the trust protections will apply to trusts settled by that individual. Where the trust protections apply, as long as no property or income is directly or indirectly provided to the settlement by the settlor, the settlor will be protected from CGT and income tax charges on gains and income arising in the trust.
This means that it is important for any such cases that trustees ensure that no ‘tainting’ of the settlement occurs; no assets should be added to the settlement by the settlor or by any other trusts of which the settlor is either a settlor or a beneficiary. All loans should be reviewed to ensure that they are on an arm’s length basis by 5 April and that interest is paid in the year (see above).
Please note that the one year grace-period for amending the terms of loans and payment of interest only applied where the settlor became deemed domiciled on 6 April 2017; there is no such period where settlors become deemed domiciled on 6 April of any later tax years, so any necessary changes must be in place and any outstanding interest paid by 5 April 2020 to avoid tainting.
These protections do not apply to individuals who are deemed domiciled due to having been born in the UK with a UK domicile of origin and being resident in the UK in the tax year in question
Don’t forget that ATED returns and payments for 2020/21 are due by 30 April 2020. The 2020/21 ATED charges are expected to be announced at the 11 March budget; the ATED charges for 2019/20 ranged from £3,650 to £232,350 and increases are in line with CPI inflation unless otherwise legislated. ATED bands are usually now determined by a property’s value at the later of purchase or 1 April 2017.
Where a property is over the ATED threshold but eligible for a relief from the ATED charge for 2020/21, a Relief Declaration Return must be completed within the same timeframe.
If ATED has been paid in respect of the current year 2019/20 but circumstances changed during the year such that additional ATED is payable or ATED could be reclaimed, ensure the necessary filings are made before the relevant deadline (30 April 2020 for most increases in ATED and otherwise usually 31 March 2021).
For 2018/19, the amended return deadline of 31 March 2020 is imminent.
Reporting may also be required within 30 days of a property becoming available for occupation by an individual in some circumstances.
We recommend making returns and payment early in April where possible and confirming that bank payments have been correctly processed before the end of the month to avoid penalties and interest on late payments.
IHT returns need to be submitted within six months of the end of the month in which the chargeable event occurs. The date for payment of the tax is aligned with the reporting date.
Where the trustees make a distribution to a beneficiary before the tax year end, any element of that distribution that is not treated as income is potentially subject to IHT (depending on whether the assets distributed are relevant property for IHT purposes). Where a distribution has been matched to capital gains and the beneficiary pays CGT, IHT can still be applicable.
Trustees of trusts containing a mixture of excluded and relevant property should, when making distributions (especially where those distributions will be matched to capital gains in the hands of the beneficiaries), consider distributing excluded property rather than relevant property where possible.
Trustees should remember that, broadly, from 6 April 2017 onwards, shares in a non-UK close company or partnership interest which in turn owns UK residential property are considered relevant property for IHT purposes. Loans to facilitate, directly or indirectly, the acquisition, maintenance or enhancement of a UK residential property (or any collateral or guarantee for such a loan) are also now “relevant loans” and thus relevant property for IHT purposes.
Distribution of undistributed income
Income arising in a discretionary trust which remains undistributed and uncapitalised beyond 5 years will be included as part of trust capital when calculating the ten year anniversary charge. Trustees should review the undistributed income of such trusts and ensure that distributions of accumulations related to 2014/15 or earlier are made where appropriate.
From 6 April 2020, the property business income of a non-UK resident company will be subject to corporation tax rather than income tax in the UK. HMRC are currently in the process of issuing Corporate Unique Taxpayer References (CUTRs) to companies that have previously filed Income Tax returns; companies that use a tax agent will need to file new 64-8 forms of authority with HMRC using the CUTR as a reference.
Any tax repayable remaining on a company’s income tax account after the 2019/20 income tax return has been filed will be refunded to the company; it will not be transferred to the company’s new corporation tax account. For the refund to be made electronically, a claim will need to be made on the 2019/20 tax return and bank details provided.
Although corporation tax had been cut to 17% from April 2020, it is now expected that this cut will be reversed in the 11 March budget and the current rate of 19% will continue to apply from April 2020.
We would recommend that trustees, where underlying companies have UK property rental businesses with losses brought forward, undertake a thorough review of the extent to which these losses relate to intra-group loans, to ensure that the loss position going forward is defensible; losses brought forward will, in general, be available for corporation tax loss relief (though ring-fenced to only apply to losses from property rental), but HMRC are able to challenge the basis on which those losses arose in the first place.
We also note that both the tax calculation method and the filing process for corporation tax differ from those for income tax, with key differences including the corporate interest restrictions, loss restrictions and other corporate tax complications such as the hybrid provisions. Corporation tax returns must be filed online, with company accounts attached and generally required to be iXBRL tagged (which requires specialist software), with the filing deadline and tax payment dates determined by the company’s accounting period end and the amount of taxable profit. Trustees should give thought to the corresponding changes that will be required in their processes in order to meet their UK tax obligations for companies held under trust.
HMRC’s Trust Register was set up as a response to the 4th MLD. At present, under 4MLD, all trustees that have a UK tax liability and meet certain requirements are required to register their trusts. The registration deadline is 31 January following the end of the tax year in which a trust first meets the registration requirements, such as incurring a liability to IHT or stamp duty reserve tax where the other relevant conditions are also met. In practice, trusts that need to notify a liability to income tax or CGT are required to register by 5 October in the tax year after the one in which the liability to tax began to arise.
The regulations require that the trustees update the trust register for any changes, and the SA900 trust and estate income tax return now has a box for confirming that the trust register has been updated for the year or that a declaration has been made that no changes are needed. However, it is not yet possible to actually make amendments as there is no mechanism in place to do so. At present, any changes in trustees should be notified to HMRC in writing; other changes should be noted by the trustees with a view to updating the trust register when this becomes possible. No estimate has been provided by HMRC as yet as to when this might be.
Under 4MLD, a trustee of a relevant trust (in the case of offshore trusts, that is trusts which have a liability to income tax, CGT, IHT, stamp duty land tax, land and buildings transaction tax, land transaction tax or stamp duty reserve tax) are required to maintain accurate and up-to-date records in writing of all the beneficial owners of the trust, and of any potential beneficiaries. These records must be maintained for a period of five years after the date on which the final distribution from the trust is made, unless the trustee is required to retain them for the purposes of court proceedings, the trustee has reasonable grounds to believe that the records need to be retained for the purpose of legal proceedings, or any person to whom information in a record relates consents to the retention of that information.
5th Money Laundering Directive Changes
An HMRC consultation has recently closed regarding proposed changes to the Trust Register and the associated draft legislation in line with the 5th Money Laundering Directive which was enacted into UK domestic law on 10 January 2020.
Under the proposals, the number and type of trusts that are required to register will be extended. Significantly for offshore trustees, any express trust that acquires an interest in land in the UK will be required to register even where the trust has no UK tax liability. An interest in land is defined as any freehold interest, or a leasehold interest for a term of more than 7 years.
The wording of the draft legislation to say “acquires” rather than, for example, “holds” indicates in our view that trusts directly holding UK land before 10 March 2020 will not be required to register in respect of that land alone. Land held by companies under a trust will be caught separately by the need to register on the UK’s register of beneficial ownership of overseas companies (from which trusts are expected to be exempt) from 2021 (according to current expectations).
Another factor to be aware of in the draft legislation is that of entering into a new business relationship with a UK “obliged entity”; the definition of “obliged entity” includes auditors, accountants and tax advisors, as well as estate agents and legal professionals acting for and on behalf of their client in any financial or real estate transaction. A trustee entering into a business relationship with a UK obliged entity on or after 10 March 2020 will be required to register the trust even where no other criteria for registration are met.
As is the case where a trust holds an interest in land, the wording of the draft legislation indicates that business relationships existing before that date should not give rise to a reporting requirement, as reference is to trusts that “enter into” such a business relationship, not those that are already in one.
Based on the draft legislation, the timing of registration will change; trusts set up before 9 February 2022 will need to register by 10 March 2022, and thereafter trusts will need to register within 30 days of meeting the criteria for registration (such as starting to have a source of income, a chargeable IHT event, or acquiring an interest in UK land).
As one of the factors determining whether a trust will need to register is the residence of beneficiaries (as a trust receiving UK interest or dividends will need to start paying UK income tax if a beneficiary becomes UK resident). The shortened timeframe for registration will make it increasingly important for trustees to maintain up-to-date records of beneficiaries’ whereabouts, and impress upon beneficiaries the need to inform them promptly of any change in status.
Under the new regime, members of the public will be able to access the Trust Register where they can demonstrate a “legitimate interest”. The draft regulations require that a legitimate interest be related to an investigation into money laundering or terrorist financing. The legislation does not require the person requesting access to information held on the 5MLD register to have a legitimate interest if the trust has a controlling interest in a non-EEA entity. 5MLD does however state that access requests can be refused where granting access is not in line with the objectives of 5MLD. It is impossible to know at this time exactly what the position will be in practice (though it has been confirmed that information about vulnerable beneficiaries such as minors will not be released).
Where privacy is a significant factor for settlors and beneficiaries, therefore, trustees will need to consider carefully whether holding any UK assets, even those which do not give rise to any tax liability, is appropriate going forward.
The deadline for disclosing overseas tax liabilities for periods prior to 6 April 2017 under the old penalty regime ended on 30 September 2018, and the higher penalties for Failure to Correct are now in place. The standard penalty for tax liabilities that should have been disclosed prior to the deadline is now 200% of the tax liability, though this can be reduced based on the quality of any disclosure and the level of co-operation with HMRC (with a minimum penalty of 100% of the tax liability). The penalty can be increased to 300% where there has been a deliberate effort to avoid tax. For offshore tax errors for periods later than those covered by the Requirement to Correct, penalties are determined based on the category of the offshore jurisdiction to which the tax error, with lower penalties for category 1 jurisdictions (including Guernsey) and higher penalties for category 2 (including Jersey) and category 3 jurisdictions. The maximum penalties for categories 1, 2 and 3 are 100%, 150% and 200% respectively of the unpaid tax.
Legislation in the Finance Act 2019 brings in an increased tax assessment window of 12 years for non deliberate, offshore matters within the scope of income tax, CGT or IHT. The increased time limits can apply to the tax year 2013/14 onwards (for careless errors); 1 April 2013 for IHT, and 2015/16 if reasonable care was taken (1 April 2015 for IHT).
Non-deliberate matters covers both situations where taxpayers take reasonable care and situations where taxpayers have been careless in their tax filings. As a result of these changes, HMRC’s assessment windows for offshore matters will increase from 4 to 12 years for reasonable care scenarios, and from 6 years to 12 years for careless errors.
The time limits for enquiring into some matters were already extended by the Requirement to Correct legislation. This extended the time limits for years which HMRC would have been able to assess at 6 April 2017 to 5 April 2021. Effectively therefore the two provisions combine to give time limits for offshore matters relating to income tax and CGT as set out below.
Reasonable care taken
2012/13 and previous tax year
4 years from the end of the tax year
5 April 2021
5 April 2021
2015/16 and later tax years
12 years from the end of the tax year
2010/11 and previous tax years
6 years from the end of the tax year
5 April 2021
5 April 2021
2013/14 and later tax years
12 years from the end of the tax year
We note that in Failure to Correct cases, as in general for tax affairs, HMRC view the trustees to be a continuing body even where there has been a change of trustees, so we are seeing cases where trustees are being penalised for the failures of their predecessors. This clearly demonstrates the importance of undertaking appropriate due diligence, including tax due diligence, when taking over as new trustees on pre-existing trusts.
The implementation of the General Data Protection Regulation (GDPR) in May 2018 has increased general awareness of the amount and type of personal data held by service providers such as professional trustees, as well as the rights of individuals to know what specific information is held about them and to request that personal information be deleted if holding it is no longer necessary. This has led in some quarters to wholesale purging of historical data that is no longer considered necessary.
Trustees should be aware, however, that the maintenance of records is important for tax purposes. It is advisable to keep records of information relevant for UK tax purposes for at least six years from the end of the tax year, and relevant information can include the personal data of the trust’s beneficiaries even where that data is no longer accurate (such as former addresses); see above for the requirements under 4MLD.
Over the past few years there has been a significant increase in the operational tax obligations placed on offshore trustees, including tax information regimes such as FATCA and the Common Reporting Standard.
We have seen heightened concern amongst the beneficial owners of offshore structures in regard to the information being reported under these regimes, in particular as domestic tax authorities begin to process the information received. In addition, the governments of Guernsey and Jersey are in the process of introducing a CRS “audit” requirement giving the local tax authorities the power to undertake onsite visits for the purpose of review compliance with the CRS and related matters. Trustees should ensure that they have documented their CRS processes and are prepared to demonstrate compliance to various stakeholders, including local tax authorities, the tax authorities of any recipient jurisdictions and the underlying beneficial owners being reported on.
For structures involving corporate entities, consideration should be given to the Economic Substance legislation recently introduced in many jurisdictions including the Crown Dependencies and Overseas Territories. This could include associated considerations in regard to tax residence (with the Guernsey company residence test having changed with effect from 1 January 2019 to include a central management and control test of tax residence), as well as changes to the Company tax return requirements.
Specific or periodic reviews
If you are in doubt about any of the issues, planning or changes mentioned above or would like an analysis of a structure from a tax perspective, we would be happy to provide advice.
We note that the large number of changes that have occurred to the UK taxation of offshore trusts over the last few years makes it likely that tax advice held on file may be in need of refreshing, and that HMRC are rarely prepared to reduce penalties for errors where trustees and other taxpayers have relied on out of date advice.
Find out more……
This note reflects the law in force, draft legislation and announcements published at 5 March 2020. In particular it does not include any announcements that may be made in the Budget Statement of 11 March 2020. Please be aware that this note does not cover all aspects of the subjects. To find out more about any aspect of the above, please discuss with your usual Deloitte contact, or one of the contacts below.
Tel: 020 7007 7665
Tel: 01534 824 225
Tel: 01534 824 384
Tel: 01534 824 221
Tel: 01481 703 308
Tel: 01481 703 264
Tel: 01481 703 229
Tel: 01481 703 267
Tel: 01481 703 268