The UK beneficiaries of an Offshore Trust

Our client is an offshore trust which holds a 100% shareholding in an offshore investment company, which held reserves of income and capital gains accumulated over many years.

The trustees were intending to make significant distributions to the UK resident and domiciled beneficiaries and needed advice regarding the most tax-efficient method of making these to them.

The trust was affected by the “transfer of assets abroad” anti-avoidance provisions, the effect of which is to match any income distributions and other benefits provided to the beneficiaries with income (net of expenses) which had accumulated in the trust or underlying company. A similar situation arises with any capital payments made to the beneficiaries, which would be matched against the net accumulated income of the trust or company in the first instance and then with any capital gains which had been realised. The top rate of capital gains tax in the UK is 28% but the charge matched with the gains could be up to 44.8% for the beneficiaries due to a supplementary charge applied to capital gains made in offshore trusts which have been stockpiled over time.

We were able to advise the trustees on an alternative approach to making outright distributions to the beneficiaries, allowing them to mitigate and manage the beneficiaries’ exposure to the punitive 44.8% tax charges we had identified.

The taxation of offshore trusts and UK resident beneficiaries is a very complex piece of tax law and specialist advice should always be sought.