As the reader may be aware, in April 2017 there were significant changes to the way in which UK resident but non-UK domiciled individuals are taxed in the UK.
These changes introduced rules for “protected settlements” which are very important in relation to settlor interested trusts with UK resident, but non-dom settlors.
Where the conditions are met, these protections prevent foreign sourced income and all gains of the trust from being immediately taxable on the settlor. Instead the foreign sourced income and the gains become taxable when matched to benefits provided.
However, the legislation failed to account for Offshore Income Gains (OIGs). This was generally agreed to be an error in the legislation rather than an intentional government policy.
To provide some context, offshore funds need to determine if they are “reporting” or “non-reporting” and this has a material impact on how gains on those funds are taxed in the UK. A reporting fund will normally distribute all income and will normally appear on HMRC’s list of approved offshore reporting funds, meaning they qualify for capital gain tax treatment, instead of the punitive OIGs regime.
OIGs are gains on the disposal of offshore funds which do not have “reporting fund” status for UK tax purposes, OIGs and are charged to income tax rather than capital gains tax and are subject to a special tax regime.
It had been expected by the industry that the legislation would be amended to provide protection for OIGs arising within protected settlements. However, the government has now announced that no legislative amendments will be made. HMRC’s statement cited the “current demands on parliamentary resource” making it not worthwhile (in their opinion) spending parliamentary time re-visiting these rules.
This is a disappointing development and one which trustees should be very mindful of. Trustees of all settlements with protected status should check their investment portfolios to ensure that they do not hold non-reporting funds, or, that if they do, the settlor is aware of, and in agreement with, the personal tax implications to them of the trust making Offshore Income Gains.
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