Everfair Tax

Specialists in UK, US and Expatriate Tax.

Transatlantic Trust Issues and UK vs US Trusts

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Complications that can arise in UK/US trusts

A family trust remains a popular vehicle for many to allow for the passing of wealth to the next generation. This is because it can provide flexibility, discretion and an element of control which is attractive to many.

For US citizens, residents trusts are often discussed in estate planning. They are an efficient vehicle to deal with often time consuming and costly probate processes in various states.

For transatlantic mobile families, the creator of a trust might be in one country and the beneficiaries in another. It is therefore very important to understand the rules applying to such arrangements.

Residence Position of Trusts – UK vs US

The UK and the US both consider trusts as separate taxable entities from those who create and those who can benefit from them. They therefore have rules which establish the tax residence position of the trust.

In the UK, the residence of the trust is determined by the residence of the Trustees. A situation can arise where some of the Trustees are resident in the UK and some outside the UK. So the residence is determined by the domicile of the settlor.

From a US tax perspective, the residence of a trust is established by the Court and Control Tests. In order for a trust to be considered ‘US resident’, there are some conditions. It must be governed by the law of one of the states of the United States. Also, it must also be under the trusteeship of majority US persons.

Tax Position in UK and US Trusts

First we must establish residency. So, if a trust is ‘resident’ or ‘not resident’ under the rules of the US and/or the UK. Once this is complete, we can begin to establish the tax position of both the trust itself and the beneficiaries. Provided that the Trust is resident in either the US or the UK, we start from the position that the trust is subject to tax. This will be on the income and gains of the trust as it arises and at the highest tax rate in both countries. 

Payments to the beneficiary would then be essentially free from tax albeit that from a UK tax perspective. Distributions from income of the trust would be reported as such on the beneficiary’s tax return. These come with a credit for the 45% tax already paid by the Trustee, with the beneficiary receiving a refund if their personal marginal tax rate is lower than 45%.

UK vs US Differences in Trusts

There are differences to be aware of in the UK. For example, when a trust one whereby the beneficiary is absolutely entitled to the income. In that case, the beneficiaries trust income will be taxable. With potentially lower rates of tax payable by the trust, for which the beneficiary will get a credit. But the capital gains will still be taxable on the trust.

There are also specific rules regarding the treatment, where the person who created the trust is themselves a UK resident and they or their spouse or minor children are also a beneficiary of the trust. This may result in income and potentially gains being taxable on the settlor rather than the Trustees.

In the case of the US, there are also specific rules about the person who funded the trust, known as the Grantor. Particularly is they are a beneficiary of the trust, or retain certain significant powers over the trust assets. This is by way of being a trustee or by the specific wording of the trust document. This can result again in the income and gains of the trust being taxable on the Trustee.

There’s the possibility under US tax rules, where a distribution is made to a beneficiary from trust income. Transferring the tax liability for that income to the beneficiary, rather than it being taxable on the trustees under what is known as a distribution deduction.

Trusts that are considered to be non-tax resident are taxed in both the UK and the US on certain income arising in that country, so may still have a reporting obligation.

Beneficiaries of UK vs US Trusts

Both countries also have their own rules as to how they regard distributions to tax resident beneficiaries from non-resident trusts. In the UK this can result in income and gains received by the trust over time being subject to tax on the beneficiary when they receive a distribution. A more detailed explanation can be found in our specific series of blogs in this area.

From a US perspective, beneficiaries receiving distributions from a non-resident trust are similarly subject to US income and capital gains tax. This is in respect of income and gains received by the trust over time. 

Additionally from a US tax perspective, if the income and gains of a non-resident trust (known as distributable net income or DNI) are not distributed within the calendar year or within 65 days of beginning of the new calendar year, they become undistributed net income (UNI).

When UNI is distributed to a beneficiary, it is taxed as ordinary income. This will be at their highest margin rate. Regardless of whether it is actually qualified dividend income or long term capital gains that are received. An email extra interest charge also arises. This increases with the length of time that passes before the UNI is considered to be distributed.

Without careful planning, it’s very easy for inefficient tax situations to arise. For example, where the income and gains are taxed on the trust in one country. But the beneficiary is potentially being taxed on the income and gains of the trust in the other county. This can cause double taxation issues as it is a situation not well provided for in the double taxation agreement. 

In Summary

Are you a family considering setting up a family trust, where there are people involved both in the UK and US? If so, it is important to carefully consider where the trust should be tax resident. You need to ensure it is set up appropriately. There are a number of factors to consider in this decision. Including the expected level of income and gains and expected distribution policy of the trust. It’s really important to take advice in order to be as tax efficient as possible.

Settlor-Interested Offshore Trusts

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Settlor-taxed non-UK resident trusts – income tax and capital gains tax

In the last part in our series on offshore trusts we considered rules for establishing trust residence.  Once it is established that a trust is non-UK resident, our thought turns to how it will be taxed in the UK.  A key consideration is whether the settlor retains an interest in the trust, i.e. whether it is settlor-interested.   In this article we consider when a trust is settlor-interested for UK income tax and capital gains tax purposes and the tax implications of this.

This is part 3 of our Offshore Trusts blog series, written by our Senior Tax Manager Lawrence Adair. Read part one here: ‘All you need to know about Offshore Trusts’ . Read part two here: ‘Residence Positions and Offshore Trusts’

The definition of settlor-interested for capital gains tax is wider than that for income tax.  Each tax is considered separately below, starting with income tax.

Income tax – definition of settlor-interested

For income tax, a settlor is broadly treated as having an interest in a trust if trust assets are or may become payable to, or applicable for the benefit of, the settlor or his spouse / civil partner.  For clarity on the position, trust deeds often explicitly include or exclude the settlor and their spouse / civil partner. 

Income tax on settlor-interested trusts – UK income

UK income received by a settlor-interested offshore trust is initially taxable on the trust at up to 45%. This is depending on the type of trust and income source.  However, the income is also taxable on the settlor at up to 45% including income from underlying offshore companies, where broadly there was a UK tax avoidance motive in setting up the trust structure.

To avoid double taxation the settlor gets credit for the income tax paid by the trust.  In addition, if the settlor is required to pay additional tax on trust income then the additional liability can be recovered from trust.  Conversely, if the settlor receives a tax refund this must be paid over to the trust.

A settlor can also be assessable on trust income where their minor child can benefit.  This is not a general assessment on them but only where their child receives a distribution from the trust.

Income tax on settlor-interested trusts – non-UK income

Unlike UK income, non-UK income received by a settlor-interested offshore trust is not taxable on the trust. But the default position is that it is still taxable on the settlor at up to 45%.  Again, this includes income from underlying offshore companies. Where, broadly there was a UK tax avoidance motive in setting up the trust.

However, settlor-interested rules are ‘switched off’ for certain trusts created by non-UK domicilairies. If the non-UK income is ‘protected foreign source income’. In which case, the income is only assessable when it is distributed.  Furthermore, the settlor will only be assessable to the extent that they receive a distribution. (Except for exceptions for distributions to a spouse or minor child who are not immediately assessable to UK tax on the distribution.)

Conditions

Several conditions apply for income to be protected foreign source income, mainly focused on the settlor’s domicile.  They must have been non-UK domiciled and not deemed domiciled when the trust was created. And not have become UK domiciled or a ‘formerly domiciled resident’. (Broadly born in the UK with a UK domicile at birth and has returned to the UK.)

Tainting

Also crucial is that the trust must not become ‘tainted’ so care is needed to avoid this.  Tainting occurs when the settlor provides property or income, for the purposes of the trust, at a time when they are UK domiciled or deemed domiciled.  This includes property provided directly or indirectly.  Tainting occurs from the first tax year in which property is provided.  An obvious example of tainting is where further assets are added by the settlor.  Less obvious examples of tainting include settlor loans where the interest charged is less than HMRC’s official interest rate. 

A settlor tax charge is subject to a remittance basis claim where the distribution is not remitted to the UK.

Protected Trust

A protected trust will be particularly useful where a settlor can no longer claim the remittance basis. And trust distributions can be restricted to being made only when required.  They can also allow avoiding the need to pay the remittance basis charge where the settlor’s only non-UK income is protected trust distributions brought to the UK.

As well as income distributions, it is possible for distributions which are capital in nature, to be matched to protected foreign source income. Where, broadly there was a UK tax avoidance motive in setting up the trust.

Capital gains tax – definition of settlor-interested

There is a wider, more complex, definition of settlor-interested for capital gains tax purposes.  As for income tax it includes where the settlor or spouse /civil partner can benefit. It also includes potential or separated spouses, children, grandchildren and companies controlled by any of these individuals.  However, for a trust to be settlor-interested for a particular tax year, a defined person must be able to benefit, and the settlor must be both UK resident and UK domiciled.

For the domicile requirement, there are protections to ignore deemed domiciles. These mirror the income tax protections outlined above for foreign income, including tainting of the trust.  If the protections are met, the trust is not settlor-interested for capital gains tax.

Capital gains tax – assessment of gains on settlor

An offshore trust is not liable to capital gains tax except for gains on UK property interests.  Instead non-UK property gains are either assessable on the settlor or beneficiaries with those realised by a non-protected settlor-interested trust assessable on the settlor at up to 28% depending on the type of gain.  This includes gains from underlying offshore companies, where broadly there was a UK capital gains tax or corporation tax avoidance motive in setting up the trust.

To avoid double taxation the settlor can recover any capital gains tax paid from the trust.

Trust capital losses, however, can only be set against settlor-interested trust gains of the same or future tax year.  They cannot be set against the settlor’s personal gains.

3 most important points to take away

The settlor or his family benefitting from a trust can make it settlor-interested so that the settlor is assessed on trust income and gains as they arise.

Non-UK domiciled settlors can be protected from settlor-interested rules so that foreign income or gains assessed on them are limited to distributions.

For non-UK domiciled settlors to benefit from settlor-interested trust protections it is important that the trust does not become tainted.

Written by Lawrence Adair

UK Spring Budget 2022

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The Chancellor Rishi Sunak delivered todays Spring budget under the backdrop of inflation being revealed to have risen to 6.2%. The highest rate of inflation for 30 years. This had been made worse by rising fuel prices and will result in significant increases to the cost of living. There is also recognition of the situation in the Ukraine. The impact the ongoing conflict may have, as well as the relatively slow growth being seen in our own economy. In addition to the need to reduce the level of debt built up during the last two years to fund COVID measures.

Inflation, Growth and Debt Repayments

To make his point, during his statement the Chancellor referenced these cumbersome estimates from the Office for Budget Responsibility on inflation, growth and debt repayments.

  • Inflation forecast to average 7.4% this year
  • UK growth expectation downgraded to 3.8% this year
  • UK to spend £83bn on debt interest in the next year

In line with the relatively low expectations of change ahead of today’s announcement, there were relatively small immediately effective measures to ease the burden of the cost of living were set out. There was however the promise of a 1% cut in income tax rates before the end of the current parliament in 2024 first cut to the basic rate of income tax in 16 years – from 20% to 19% – by the end of Parliament in 2024

Despite the economic picture painted and other indications given in advance as to the limited ability to make sweeping cuts that would have an immediate impact a shout of ‘is that it?!’ could clearly be heard from the Labour benches and there has been disappointment expressed at the fact that the proposed heath and social care level and subsequent NI rate increase were not scrapped as had been hoped for.

What you need to know

Here therefore are the key take aways from today’s Statement:

  • A cut to the basic rate of income tax. From 20% to 19% – by the end of Parliament in 2024
  • Fuel duty will be cut by 5p a litre from 18:00 GMT until March 2023
  • The National Insurance threshold will be raised by £3,000. Meaning people must earn £12,570 per year before paying income tax or NI. It’s a tax cut for 30 million people worth over £330 a year, says Sunak
  • VAT will be scrapped on home energy-saving measures such as insulation, solar panels and heat pumps
  • The Household Support Fund for local councils to help the most vulnerable will be doubled to £1bn from April
  • Retail hospitality and leisure sectors will have a 50% discount in business rates up to £110,000
  • Employment Allowance will increase to £5,000. Claiming it is a tax cut worth up to £1,000 for half a million small businesses.

Year End Tax Planning 2021/2022

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Tax Planning Opportunities Reminder

As we move towards the end of the tax year it is important to consider whether full advantage has been taken of tax planning opportunities available to individuals. And if there are any actions which it is worth taking before 5th April.

Things to consider:

  • Has full advantage been taken of the pension annual allowance. Is there any carry forward allowance which may be about to expire. This can include for children and non working spouses although limited to £3,200 per annum
  • Has full advantage been taken of ISA allowances
  • Has the capital gains tax annual exemption been fully utilised including both annual exemptions available to a married couple
  • Is it appropriate to realise any capital losses to offset any capital gains which would otherwise be taxable
  • Has full use been made of the savings annual allowance, dividend allowance and lower rate bands. 
  • Has consideration been given to any charitable donations. It may be appropriate to make now if future income levels are likely to be lower than currently
  • Are there any IHT planning steps which should be taken before the end of the tax year. Such as the annual gift allowance and gifts out of surplus income which should be made annually.

Additional points for non UK domiciliaries to consider

Where the individual will reach a residence milestone such as 7 of 9 years and 12 of 14 years and 15 of 20 tax years, there may be transactions that can be undertaken in the current tax year. This may avoid the need for a remittance basis charge to be paid, or ensure that it it benefits from the remittance basis rather than being taxed on the arising basis as a deemed domiciled individual. 

Those who are newer to the UK should also consider whether they wish to make a capital loss election. The deadline for this is four years after the end of the tax year for which the remittance basis was first claimed. 

If you would like any advice on your year end tax planning please don’t hesitate to get in touch.

US Tax Reform Update

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Tax Reform Under The Biden Administration

US tax reform under the Biden administration remains very much a moving target. Therefore, it is something on which we can provide little in the way of definitive guidance.  However, it is perhaps worth a reminder of the current state of affairs, insofar as it might impact US taxpayers living overseas.

It is fair to say that many of the proposals originally put forward have been heavily diluted, or dismissed altogether. There are still some key points worth noting. 

Income Tax Rates

The Biden tax plans proposed an increase in the top rate of Federal income tax from 37% to 39.6%. Reverting to the situation as it was before former President Trump’s tax reforms.  This increase is not included in the bill passed by the House of Representatives.

There were also proposals to increase in the rate of tax applied to long term capital gains, which have not made it into the final bill passed by the House.

For most taxpayers, this means that there will be no significant change to the tax rates applicable to them.

Surtax

Despite the removal of the proposed changes to tax rates, the House bill does contain a provision imposing a 5% surtax levied on an individual’s income in excess of $10m. ($5m for married persons filing separately, $200,000 for an estate or trust.) Plus, an additional 3% on income in excess of $25m. ($12.5m for married persons filing separately, $500,000 for an estate or trust.)

This proposal creates a tax charge, which is unlikely to be offset by credits for foreign taxes paid. Thus, would result in a genuine double-taxation issue.

Foreign Tax Credits

One change included in the House bill, which will be of considerable significance to US taxpayers living overseas, is a proposal to scrap the carryback of excess foreign taxes effective for tax years beginning after December 31, 2022. 

Under current rules, if a taxpayer has paid more foreign tax than they are able to utilise for a tax year, they are able to carry the excess back to the previous year if there is scope to make use of those taxes in that year.

If the bill does pass in a form which contains the withdrawal of the carryback provision, it will mean a renewed focus for US taxpayers overseas to carefully plan the timing of their foreign tax payments to prevent unwanted double taxation problems.

State and Local Tax

The House bill does contain some good news for those subject to State and Local taxes in the US.  Since 2018, the deduction allowed for such taxes for Federal income tax purposes has been limited to $10,000.  The House bill includes an increase in that cap to $80,000 ($40,000 for married persons filing separately).

Net Investment Income Tax

As expected, the 3.8% “Net Investment Income Tax” originally introduced with the Obamacare provisions is to be expanded should the bill get passed in its current state.  The extension of this tax would see it applied to business income for taxpayers whose income exceeds certain thresholds.

Gift and Estate Tax

There had been much talk of changes to the unified credit for gift and estate taxes, which currently stands at $11.7m per person.  It is notable that there is no provision in the House bill which makes any reduction to this amount.

Summary

With the President himself admitting that these tax reforms are unlikely to be passed anytime soon, and with resistance from key Senators, it would be no surprise to see further changes (and, no doubt, delays) to the bill as it makes its way through the Senate and on to Mr Biden’s desk.  This is therefore something to keep an eye on over the coming weeks, and maybe even months.

Written by Matthew Edwards

Trusting a Trustee

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Feature Article by Alex Picot Trust

Establishing trusts has long been a popular wealth structuring tool for high-net-worth families. It involves giving away legal title, ownership and an element of control of family assets to a business based in an overseas jurisdiction. 

A fundamental question for new clients is ‘Can I really trust a Trustee?’

Professional trust companies, operating in reputable and highly regulated jurisdictions have been providing fiduciary services to clients since the middle of the last century.  While the reasons for the use of trusts may have evolved over time the role that professional trustees fulfil remains as current as ever.

This article explores why clients continue to be comfortable creating offshore family trusts.

Why do people use offshore trustees?

UK resident foreign domiciled individuals who have assets held overseas or people locating to the UK who have not yet arrived are able to have their surplus overseas wealth managed and controlled in specialist offshore finance centres.

Trusts can offer benefits in ensuring assets are held in a tax compliant manner for succession purposes, family governance reasons, to avoid future dilution or break up of family businesses or other cherished family assets.

Trustees can hold a wide range of assets from banking and traditional investment portfolios with quoted and unquoted holdings; real estate; family business assets; works of art; and moveables such as yachts and planes.

There continue to be tax advantages for the settlors and the beneficiaries of the trusts if the vehicles are structured correctly at the outset with professional legal and tax advice taken to ensure the arrangements are tailored for the needs of each individual family.

Oversight of the Trustee

Consider the offshore trust as a virtual overseas ‘warehouse’. 

The ‘warehouse’ can hold a wide range of family assets and investments. 

The settlor and beneficiaries of the trust have the rights to inspect the assets at any time and obtain full information on how they are being managed and looked after.

The Trustee has a written document (Trust Deed) which sets out the rules and regulations as to what powers sit with the Trustee and which regulate the actions the trustees are empowered to undertake.  The trustees can only take assets out of the ‘warehouse’ if they are for the benefit of the persons listed in the Trust Deed as beneficiaries. 

The trustees are also accountable to the beneficiaries to demonstrate that the investments have been professionally managed.  These obligations, enshrined in Trust Law, ensure that professional trustees are required to adhere to the highest standards at all times.

Settlors provide further guidance to their trustees through Letters of Wishes (LoW). 

While not legally binding (as if they were there would be a danger that the wide powers issued to the trustees under the terms of the Trust deed could be constrained) a LoW is a useful guiding document that settlors give to their trustees.  It sets out their views on how the trust assets should be managed and their wishes on future distribution policies.

A LoW is particularly important once the settlor is no longer alive or able to communicate with the trustees.  The LoW can be updated at any time and trustees regularly review the contents of these with the Settlor.

What role does a Protector play?

The Trust Deed can contain provisions for certain powers to sit with an independent third-party called a Protector. 

In most instances these powers are limited to the hiring and firing of trustees, but can also be extended wider (subject to tax considerations around the jurisdiction of the Protector) to include protector consent being required for any changes to the beneficiaries, investment strategy or to consent to distributions above a certain threshold.

Having a trusted individual (perhaps a business associate or long-standing family advisor) act as Protector ensures that there remains an independent set of eyes and ears to look out for the beneficiaries and to step in and effect a change of trustee should the need ever arise. This is a further incentive to ensure that trustees live up to the promises around their service levels made to their clients at the outset of the relationship. 

Additional Comfort – the right jurisdiction

Well-run and highly regulated International Financial Centres, such as Jersey, ensure that all businesses that provide trustee services to third parties must be properly licenced and are then routinely supervised by their regulator.  Key personnel in the business are individually assessed as being appropriate to manage the business. 

All employees are required to act with due skill, care and diligence when fulfilling their role and to act in the best interests of the client at all times.

Family Engagement

Trustees are required to keep full books and records of the structures that they administer. 

Face-to-face meetings between trustees and their clients are actively encouraged and regular review meetings with the participation of the legal / tax / investment advisors are an important way of ensuring that the structure remains up to date and continues to fulfil the purpose for which it was established. This also ensures trustees are aware of any changes in family circumstances.

Summary

Offshore trusts continue to play an important and relevant part of the overall design of an international family’s estate and wealth structuring arrangements. 

While the notion of parting with valuable family assets to an unfamiliar company in an overseas jurisdiction may seem alien at first, as can be seen, there are a number of ways of providing the assurance new clients seek when establishing a family trust. 

Each family’s circumstances are different and the solution that works for them will be determined with bespoke arrangements tailored to suit their requirements.

Written by Steve Gully and Hannah Roynon-Jones

About the authors

Steve Gully and Hannah Roynon-Jones, Directors at Alex Picot Trust

Alex Picot Trust is a management owned, private client focused independent trust company based in Jersey and has been providing fiduciary services to private families since 1932.

Alex Picot Trust is a registered business name of Alex Picot Trust Company Ltd which is regulated by the Jersey Financial Services Commission to conduct trust company business.

www.alexpicottrust.com

Additional Offshore Trust Blogs, News & Resources

  • Transatlantic Trust Issues and UK vs US Trusts

    Reading Time: 4 minutes Complications that can arise in UK/US trusts A family trust remains a popular vehicle for many to allow for the passing of wealth to the next generation. This is because it can provide flexibility, discretion and an element of control which is attractive to many. For US citizens, residents trusts are often discussed in estate […]

    READ IN FULL

  • Settlor-Interested Offshore Trusts

    Reading Time: 5 minutes Settlor-taxed non-UK resident trusts – income tax and capital gains tax In the last part in our series on offshore trusts we considered rules for establishing trust residence.  Once it is established that a trust is non-UK resident, our thought turns to how it will be taxed in the UK.  A key consideration is whether […]

    READ IN FULL

  • Trusting a Trustee

    Reading Time: 5 minutes Feature Article by Alex Picot Trust Establishing trusts has long been a popular wealth structuring tool for high-net-worth families. It involves giving away legal title, ownership and an element of control of family assets to a business based in an overseas jurisdiction.  A fundamental question for new clients is ‘Can I really trust a Trustee?’ […]

    READ IN FULL

  • Residence Positions and Offshore Trusts

    Reading Time: 3 minutes

    Before considering the UK tax position for an offshore trust, it is important to first determine that the trust – is in fact – offshore….

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  • What are Offshore Trusts and How Do Offshore Trusts work?

    What are Offshore Trusts and How Do Offshore Trusts work

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    Introduction and background to Offshore Trusts Something we are frequently asked by clients is ‘what are the consequences of being a…

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Managing UK and US Pensions

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Understanding having pension schemes in more than one country.

In recent years, it is increasingly common for executives to have pension schemes in more than one country. Whether that has been from working abroad, or the option to become part of a pension scheme in another country. Therefore, the question often arises when we speak to a client; as to what to do with their pensions from a tax perspective.

Contributions

One of the first questions is often; whether you can get tax relief where you are now resident for contributions into a pension scheme in another country?

Under both the double taxation agreement between the UK and US, and under UK domestic rules, pension contributions to a plan in the other country can qualify for tax relief where you are resident. 

For tax relief to apply, you must have been contributing to the plan prior to becoming resident in the other country. In addition, the plan in question must be a qualifying retirement plan. 

Growth

Under the terms set out in the double taxation agreement between the UK and US, the growth in a qualifying plan in the other country, can’t be taxed where you are resident. Therefore, there is no need to report the annual income and gains received within a pension scheme. Nor the unrealised increase in the value of the assets held in the pension on an annual tax return. The treaty specifically lists IRAs and 401ks as qualifying pension schemes for this purpose.

Withdrawals

As a general rule, under the pensions article of the treaty, withdrawals from a qualifying pension scheme are taxed in the country of residence. This is regardless of where the pension scheme itself is based. However, this rule is subject to the savings clause contained earlier in the treaty. This clause effectively allows the countries to still tax the income on their nationals. Although, they have to provide credit for the tax paid in the country of residence.

It also provides that, where the country in which the pension plan is located would consider something as tax exempt, then it should be considered tax exempt where the person is resident. This would cover situations like the 25% tax free lump sum provided for under UK schemes. As well as the fact that withdrawals from Roth IRAs are tax free in the US. 

This provision is not subject to the savings clause in the treaty mentioned above. It has been the subject of much debate over the years. For example, whether the IRS would allow the 25% lump sum exemption on a distribution from a UK scheme to a US citizen if they are resident outside the US, due to unclear wording of the provision in question. 

Lump Sums

Where a person wants to withdraw their pension as a lump sum, in line with with the double taxation agreement, the pensions article states this is to be taxed where the plan is located. However, it is subject to the savings clause. This allows the country where the person is resident to also tax. This comes with a credit for the tax paid in the country where the plan is located. 

There has been discussion over the years between advisors about the definition of ‘lump sum’ for this purpose. This has included; whether it covers anything but a withdrawal of the whole pot. As well as whether it can still be a lump sum if you have previously drawn on the pension.

Other Charges

As well as the position on distributions, there are additional charges which can arise in respect of a pension. 

In the UK, this includes the lifetime allowance charge. This can apply at certain points when a person has more than their approved lifetime pension fund balance. The fund can vary between just over £1 million and £1.8 million depending on appropriate fixed and individual protections elections which have been made over the years. In the US, there is the 10% early withdrawal penalty if funds are withdrawn from a US pension prior to 59.5%, except in limited qualifying purposes.

The treaty doesn’t specifically provide for what happens with respect to these charges when the person receiving the funds is in the other country. Therefore, that country would normally have a right to tax regular distributions. There is very limited guidance or comment from both the IRS and HMRC. This means that such charges, where applicable, may be in addition to the normal income tax charge arising between the two countries.

Inheritance Tax (IHT) and Estate Tax

From a UK IHT perspective, UK schemes can generally be outside the scope of IHT. However, there is a potential issue with US pension schemes. These may qualify for the same treatment as domestic schemes, if they meet the conditions to be Qualifying Non-UK Pension Scheme (QNUPS) under the relevant regulations. Yet, there is an important difference in the way they are structured when compared to UK schemes.

With UK schemes, there is a non binding letter of wishes. This letter allows the trustees discretion over who they pay the funds to when a pension account holder dies. Although, they are likely to follow the letter of wishes. With the majority of US schemes, there is a binding nomination made as to who will receive the funds. This means the trustees have no discretion at all as to whom they pay the monies to on the account holders death.

This is a crucial difference as it means under UK tax rules, even if the scheme qualifies as a QNUPS, the value of the pension scheme is considered to fall back into the pension account holder’s estate for UK IHT purposes.

If you would like any help with your pension management. Or have any further questions on this topic, please don’t hesitate to contact us.

UK Budget 2021 – The Autumn Spending Review

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Against a backdrop of an increase in the projection for economic growth for next year from 4% to 6.3%, Rishi Sunak delivered today’s Autumn Spending Review.

True to what was previously outlined, it seems the current Government have made a distinct move towards the Spring Budget where tax policy is announced and the Autumn being more an outline of where public funds will be spent.

Many key note items had already been trailed in the previous days and weeks including the health and social care levy and change to the dividend tax rate and the property developer tax along with key spending initiatives on infrastructure and health care and the removal of the wage freeze for public sector workers. To help boost jobs and the recovery of the economy there was a freeze in corporation tax confirmed and business rates relief for the next 12 months for specific industries.

While there was perhaps more to spend than anticipated, there remains a feel of a delay in tax rises rather than a complete reprieve, a when rather than if. There is also a question of why importance is attached to the office for tax simplification if none of its recommendations are to be implemented.

The Finance Bill will be published on 4 November, and there may still be some surprises in the detail there. Otherwise, is it a case of waiting with anticipation until the March 2022 Budget.

Residence Positions and Offshore Trusts

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Before considering the UK tax position for an offshore trust, it is important to first determine that the trust – is in fact – offshore. So in this second part of our series on offshore trusts, we consider the rules for establishing trust residence. If a trust is UK-resident (singular for a reason – read on), then an entirely different set of tax rules apply.

This is part 2 of our Offshore Trusts blog series, written by our Senior Tax Manager Lawrence Adair. Read part one here: ‘all you need to know about Offshore Trusts’

How can a trust be considered as a resident?

For trust residence purposes, the trustees are treated as a single body. Technically, it is the trustees as a body who are the taxable ‘person’, rather than the trust. But for simplicity, we will refer to trusts rather than trustees. We will also use the terms offshore and non-UK resident interchangeably.

For income tax and capital gains tax a trust will be non-UK resident if:

1. All trustees are non-UK resident; or

2. There are a mixture of UK and non-UK resident trustees, and the settlor was both non-UK resident and non-UK domiciled when the trust was created.

For individual trustees, their residence is determined in accordance with the UK statutory residence test. This is a test based on days spent in the UK and connections to the UK such as having verifiable accommodation, or full-time work in the UK.

Splitting tax years with offshore trusts

It is possible under the UK statutory residence test for an individual to have a tax year split into residence and non-residence periods.

An individual trustee having a split year could cause issues with trust residence, unless they were only a trustee during the non-resident part of a split year.

Corporate trustees and offshore trusts

Their residence is determined in accordance with company residence rules. Company residence is usually the place of incorporation or where the central management and control is i.e. where corporate and strategic decision making takes place, rather than day-to-day management.

Care is needed by non-UK resident trustees – whether for individual or corporate trustees – to ensure that in their roles as trustees, they do not carry out trustee business through a fixed place of business in the UK (such as a branch, agency or permanent establishment). Business for this purpose is broadly regarded as providing professional services of acting as a trustee for a fee. It is distinguished from, say, where the trustee may operate a property business in the UK, managing the trust’s UK property portfolio.

To avoid having a permanent establishment or other fixed place of business in the UK requires the core activities of acting as a trustee to be kept outside the UK. This means where the strategic decision making takes place, rather than any auxiliary activities e.g. information gathering for making decisions.

An offshore trust will usually have a single, non-UK corporate trustee, often based in the Channel Islands.

The benefits of having a single, non-UK corporate trustee for offshore trusts:

1. It provides certainty over the corporate residence, since the corporate trustee will ensure its core activities of acting as a trustee are kept outside the UK.

2. It avoids the uncertainty of the mixed trustee rule where the settlor’s residence or domicile position could taint the trust’s residence position. Or perhaps, it could be tainted by a UK resident or domiciled person inadvertently becoming a settlor.

3. It avoids any complications which could arise from the trust having a split tax year due to its residence changing part way through.

Where a trust does have at least one individual trustee, their residence position must be kept under constant review to avoid inadvertent UK trust residence.

Of course, the trustees of a UK trust might want to consider moving the trust offshore. If considering this, the trustees need to be aware of the possibility of a capital gains tax exit charge, whereby all assets deemed to be sold and reacquired at market value.

Finally, residence is not particularly important for Inheritance Tax (IHT) purposes, though it does have a bearing in some fairly benign situations such as foreign currency bank accounts.

Our key take-aways for you from this article:

It is important to determine that a trust is in fact non-UK resident before considering the UK tax treatment

Usually there is a single corporate trustee based in the Channel Islands to ensure clear and consistent non-UK residence treatment

Regardless of where trustees are based, it is important that the core trustee activities are carried on outside the UK

Client Work | Roald Dahl Story Company & Netflix Acquisition Deal, 2021

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You might have heard… Netflix recently acquired the iconic Roald Dahl Story Company (RDSC). This is incredibly exciting news. As part of the tax advisory team for RDSC and the wider Dahl family, the team at Everfair Tax were honoured to help bring about this remarkable partnership deal which will help bring some of the world’s most loved stories to current and future fans in creative new ways.

With family members resident in both the US and the UK – and the wish to devote a significant part of the proceeds of the sale to fund a charitable trust focused on the areas of children’s health, anti-hate and anti-racism – this was a very interesting and exciting project to be a part of.

It was great to be able to help guide on the tax consequences and ensure that everything was dealt with in the most tax efficient manner. We took into account the tax rules of both countries, the individual needs and wishes of different parts and different generations of the family and aiming to maximise the amount available for charitable work.

We look forward to continuing to work with the Dahl family and seeing these fantastic stories take on new life with Netflix.