Offshore discretionary trust set up for person with UK domicile


(patrick moroney) #1

Five years ago H and W were advised by private bank on IHT planning and we’re recommended to set up a discretionary trust For each of them in the Isle of Man in which they, their children And is you were the discretionary beneficiaries who could benefit. They and their children are the trustees. They each gifted 250k into their Respective trusts and the investment portfolios are now each worth over 350k. The private bank has now accepted that this was bad advice as they had made gifts with reservation. I would be interested to know what members views are regarding how this can now be addressed and how the clients should be compensated. They were charged a five figure fee for the advice.

My view is that the Trusts should be wound up And the funds repatriated so that they may start over again, this time excluding themselves from benefiting. The private bank should pay the capital gains tax and either undertake to pay any additional IHT which may arise should either of them fail to survive seven years from setting up of the new trusts or alternatively fund the cost of reducing term insurance policy Which would cover against death within seven years.

Patrick Moroney
BWL solicitors


(patrick moroney) #2

Having thought about this again, it occurs to me that unless the appointment by the trustees back to the settlors has the effect of allowing the original gifts to the settlements to be negated as far as use of their Nil Rate Bands is concerned, gifting into new settlements would result in them having to pay the lifetime rate on the excess over £325,000. Indeed even if the original gifts could be disregarded following return of the funds, if they were to gift these amounts to the new settlements, that in itself would give rise to an IHT charge as the values currently exceed 325,000 per settlor.

Patrick Moroney

Bwl solicitors


(andrew.goodman) #3

Can they exclude themselves from each trust (thus creating a deemed PET) and then get the bank to cover a 7 year insurance policy? (Plus repay fees ). That would presumably get the clients into the position they would have been in if the advice had been correct.

Incidentally, if they are also the trustees, where is the trust resident? How is it Isle of Man (Just in case that was another mistake).

I assume parents were always going to be liable for the CGT on gains under s.86 if the trust is non-resident.

Andrew Goodman
Osborne Clarke LLP


(patrick moroney) #4

Andrew I’m not sure if that would work as IHTMO4058, which deals with deemed transfers, states that for post 22 March 2006 transfers, only gifts by one individual to another or to a disabled trust qualify as PETs.

I will check the position regarding trustees.

Patrick Moroney

BWL Solicitors


(nigel.tps) #5

Andrew Goodman is no doubt relying on Section 102(4) FA 1986.

Nigel Hollinshead

TPS


(andrew.goodman) #6

I was thinking of a deemed PET under s.102(4) FA86 because the reservation of benefit has ceased. I think that page of the manual is dealing with actual transfers and deemed transfers on the end of an interest in possession (specifically IPDI’s) and does not apply as the trust here is discretionary. s.102(4) is covered at IHTM04064.

Andrew Goodman
Osborne Clarke LLP


(nigel.tps) #7

Andrew Goodman is no doubt relying on Section 102(4) FA 1986.

Nigel Hollinshead
TPS


(patrick) #8

I have now seen in the trust deeds and the 50 odd pages of advice given to H & W by the private bank. Each trust deed is headed up “Discretionary Trust deed ( Manx Law - Settlor included)” and the only trustees are H&W and H and W are included among the beneficiaries. The investment made in each trust comprises an offshore investment bond and in the advice given by the private bank, there is a statement that UK tax is not chargeable on gains or income as they arise on the underlying investments and funds within the offshore contract. On the other hand, they state that with an onshore investment bond, tax is chargeable on gains and income on the underlying investments and funds as they arise within the bond. As H&W are both UK residents, am I correct in thinking that the tax advantage in the offshore bond does not apply to them?

The notes in the deed advise the settlor to speak with their financial adviser or legal adviser to confirm if the deed is suitable for their needs. Obviously the adviser from the private bank considered it was and consequently H&W, unfortunately, did not consult their legal advisers who would hopefully have identified that they were making gifts with reservation by being included as beneficiaries of the trusts.

Patrick Moroney


(jonzigmond) #9

Andrew Goodman’s advice and suggestion seem spot on to me.

Giving up the reservation is a deemed PET (section 102(4) FA 1984)

Jon Zigmond


(malcfinney1) #10

Assuming H and W are domiciled and resident and whether they are the only trustees or not, the trust is UK resident.

There is therefore a UK resident trust owning an “offshore” bond (i.e. one issued by a non-UK life office) with a UK resident settlor.

This structure seems to me to have no UK tax advantages for the settlor. On a chargeable event (e.g. maturity, surrender) arising the UK resident trustees will be exposed to any UK income tax charge unless at that time the settlor is alive, in which case the income tax charge falls on the settlor.

The reference to tax chargeable on the income of gains arising on the policy’s underlying investments is a reference to the tax liability of the life office not the settlor. As is well know the bond/policy effectively acts as a tax wrapper (whether an offshore or onshore bond) and thus no tax charge arises on the trustees, settlor or beneficiaries with respect to income/gains of the underlying investment fund. A UK life office would itself have an exposure to tax on such income/gains but an offshore life office would not (albeit any charge to income tax

This means that the trustees, settlor and beneficiaries benefit from the tax-free roll-up of any such income/gains where the bond is an offshore bond.

A 20% tax credit is available to trustees/settlor where a tax charge arises and the bond is an onshore bond (not applicable re an offshore bond).

Malcolm Finney


(patrick moroney) #11

Thank you everyone for your contributions, particularly you Andrew for your suggestion as to how the settlors May remove themselves as beneficiaries and you Malcolm for the clear explanation as to how the taxation aspects work. Hopefully H & W will survive seven years from the date when they remove themselves as beneficiaries, Although of course the private bank will have to insure against this happening.

Patrick Moroney


(patrick moroney) #12

One point which has not been mentioned in this exchange is the question of whether the pre-owned assets rules will apply (see FA 2004 & HMRC IHTM44000) with the result that H&W have conceivably made incorrect tax Decorations to HMRC and will be liable for income tax as well as interest and penalties. I would be interested in others views on this.

Patrick Moroney


(andrew.goodman) #13

I’ve never had to think about POAT and intangibles but I would imagine they are covered by the exemption for property subject to a reservation of benefit and then (when the reservation ceases) they are no longer capable of benefitting so not caught at all.
Andrew Goodman
Osborne Clarke LLP


(malcfinney1) #14

Where the GWR provisions apply the PoA provisions are inapplicable.

Should the GWR provision not apply (i.e. exclusion of benefit by settlor) then consideration to the PoA provisions (re intangible property) need to be given. I assume the loan granted is interest free in which case the trust is deemed to be settlor interested for income tax (ITTOIA 2005 s.624); albeit in practice with a bond there is no income.

However, the grounds upon which s.624 applies is the fact of the interest free loan and as a consequence FA 2004 Sch 15 para 8 (which levies the POA charge on intangible property) does not apply.

Malcolm Finney