Residence Positions and Offshore Trusts

12 October 2021

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

Written by Lawrence Adair