7 June 2022
In the previous part in our Offshore Trusts series we considered the UK income tax and capital gains tax treatment of settlor-interested offshore trusts. In this fourth part of our series we consider the income tax treatment of non-settlor interested, or beneficiary-taxed, offshore trusts.
This is part 4 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’ Read part three here: ‘Settlor-Interested Offshore Trusts’
UK income received by a beneficiary-taxed offshore trust is initially taxable on the trustees at a rate depending on the type of trust and income source. As noted in the first of our series, trusts can either be on a discretionary or life interest basis. The initial rate of income tax for each type is:
Discretionary: up to 45% depending on the income source
Life interest: up to 20% depending on the income source
Unlike UK income, non-UK income received by a beneficiary-taxed offshore trust is not taxable on the trustees.
How a beneficiary of a beneficiary-taxed offshore trust is taxed depends on the type of trust and their residence.
A beneficiary of a discretionary offshore trust is taxed in the UK according to income distributions received; with the situs of the income being non-UK.
If the beneficiary is non-UK resident they are not taxable in the UK on income distributions received. But may be able to claim repayment of any UK income tax paid by the trustees.
A UK resident beneficiary, on the other hand, is taxed at up to 45% depending on their income levels. With credit given for the UK tax paid by the trustees (provided the trustees are fully UK tax compliant). As well as income distributions; it is possible for payments which are capital in nature to be matched to foreign source income where broadly there was a UK tax avoidance motive in setting up the trust. Capital payments for this purpose include notional payments. Such as low or interest-free loans or low or rent-free use of assets.
As noted in the last part of series, there can be occasions where a settlor is assessable on discretionary distributions of trust income received by their minor children including on all distributions relating to UK source income.
A beneficiary of a life interest trust is taxed in the UK according to their share of trust income for each tax year – with the situs of the income being based on the underlying sources. The income assessed on them can include income from underlying offshore companies. Where broadly there was a UK tax avoidance motive in setting up the trust structure.
If the beneficiary is non-UK resident they are only taxable in the UK at up to 45% on UK income sources.
A UK resident beneficiary is taxed on all sources at up to 45% depending on the underlying sources and income levels.
For both non-UK and UK resident beneficiaries a credit is given for the UK tax paid by trustees.
As with discretionary trusts, a settlor will be assessable on UK trust income attributed to their minor children and possibly non-UK income.
A beneficiary tax charge for a UK resident but non-UK domiciled beneficiary is subject to a remittance basis claim for where the distribution is not remitted to the UK. This could be for the entire distribution in the case of a discretionary trust. Or the underlying non-UK sources in the case of a life interest trust.
Written by Lawrence Adair
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