I am drafting a Will and my client wishes to appoint two trustees who are domiciled in Spain.
My concern is that although my client is Spanish, for the moment, she and her husband live in England and have no plans to move back to Spain. My understanding is that if their Trustees are offshore, this could pull the trust offshore.
What would the implications of this be, if any? Am I over complicating this by even considering this to be an issue? I know from STEP it was something to be aware of, but the implications were never laid bare and whether we should be making it imperative that our clients choose at least one UK dom trustee.
The advice should be that they have at least one English dom Trustee as otherwise you are right, the Trust could be deemed non-dom and this could have tax implications. Unless your retainer with your client extends to detailed advice on this point, I think that is sufficient advice. This assumes that the estate will be England domiciled as otherwise of course the point may be moot
To be absolutely sure of the trust being UK resident, all of the trustees should be UK resident. If you appoint a mix of UK and non-UK resident trustees and the named UK resident trustees cannot (or do not want to) act, then you will have a trust with only non-UK resident trustees and the trust will then be non-UK resident. Having said that, the non-UK resident trustees could then appoint UK trustees (in addition or instead) to bring the trust onshore again before anything material happens, but it would be better to avoid that eventuality.
Being non-UK resident changes the way the trust is taxed and, especially if there are UK resident beneficiaries, it becomes much more complicated. If you do not already advise about non-UK resident (“offshore”) trusts, then you should ensure that the trust will be UK resident, unless you have identified some particular advantage in having a non-resident trust (in which case you will need to find someone with experience in that area to advise on the tax consequences).
If you want to ensure that the the trust remains UK resident, it would seem sensible to appoint either only UK resident trustees or, maybe better, a UK trust corporation (some law firms will have one of these).
none of the trustees are resident in the UK for tax purposes
only some of the trustees are resident in the UK and the settlor of the trust was one of the following:
not resident or not normally resident when the trust was set up or funds were added
not domiciled or deemed domicile in the UK when the trust was set up or funds were added
Domicile usually refers to the country or legal jurisdiction where someone intends to make their permanent home (for example, a state). You can only have one place of domicile at any given time."
I agree with this save that the comment on domicile is abbreviated to its barest essentials. The domicile of the trustees is irrelevant. It is the domicile of the settlor that can be relevant. It is the residence of the trustees that always matters. If both trustees are non-resident, so is the trust.
However the rules are different for PRs. TSEM7358 "ITA07/S834 changed the rules for mixed residence personal representatives.
Mixed residence personal representatives are regarded as not resident for income tax purposes if the deceased was
not resident in UK and
not ordinarily resident in the UK and
not domiciled in the UK
at the date of death.
If none of the above applies to the deceased,the personal representatives will be treated as wholly resident in the UK for income tax purposes and the normal rules for assessing apply."
It is the residence and domicile of the deceased that applies to the PRs not that of the particular holders of that office. The CGT rules are slightly different for PRs (CG 30621)
So the position may be different depending on whether you are looking at the admin period or a continuing will trust.
The key advice seems to me to address the current domicile and residence of the clients, the current sources of their income and situs of their assets, and to predict as far as is reasonable any future changes. I would plan things on at least two bases (a) that they died tomorrow; and (b) that they died at a future date or dates, taking into account their ages and the probability of their situations being different then. Long residence in the UK will ultimately risk deemed domicile status for tax, if not an actual change of domicile at general law (including the law of succession). The EU Succession Regulation (Brussels IV) needs to be considered as regards choice of law governing the estate administration. Where clients are possibly domiciled in or nationals of another country some input from a lawyer or lawyers abroad is desirable if not imperative. if just to tick basic boxes to avoid pitfalls, even if at present all their assets are located in the UK but especially if they aren’t.
The trust would definitely be non-resident as they say the only parties they’d appoint as Trustees live in Spain and were born there.
Presumably they should get advice then about what the implications of a non-resident trust would mean for their children if a trust were to arise automatically in the event their children have not reached 18 at the date of the death of the second spouse.
Is it only the status of any ongoing trustees which are to be created under the will which is of interest or is it also the status of the PRs which needs to be considered?
It may be that the clients themselves have acquired UK domiciles of choice.
Presumably the trust will be non-resident as the trustees (if not also the settlors) will be non-resident.
In which case I’ll advise the clients to seek advice and sod some preliminary research myself too for my benefit as to the possible tax implications of a non-resident BMT
Anyone instructed to draw a Will for someone who might be non-domiciled should seek advice from abroad as regards any country which might claim to tax them or, if different, where they have assets which might be taxed there. Some countries like Australia and India no longer have a tax on death but many others do and it or aspects of it can be quite different to IHT (like GST in the US and CAT in Ireland, the latter being levied on a receipts basis). Lifetime gift taxes might also need similar consideration. I was once “sacked” by a US citizen but longtime UK resident client who thought I was barking mad to advise that his ISAs had to be returned on his annual 1040. He got his in before I did. Clients should be warned that this cross-border feature needs to be covered as and when Wills are reviewed over future time for possible changes in the law and personal circumstances.
Nor can you take for granted that there will be a tax-free uplift on death for their CGT or unlimited spouse exemptions and forced heirship rules may interfere with the client’s wishes. A very simple Will of all to the surviving spouse and on the survivor’s death on trust for children at 18, and all the estate in the UK, will not cause too many UK tax issues even if the executors are non-resident. Certainly if the children survive their parents to inherit. But to ignore altogether the foreign tax and PIL potential consequences would be foolhardy. But many of my clients came to me after rushing in where Jack would have feared to tread. It was very lucrative for me but oftenpainful for them and sometimes for their previous advisers.
Another issue that might need to be considered is the position should a non-UK trustee die whilst in office. In some jurisdictions, I understand that they will be treated as the beneficial owner of the trust assets, which can result in not just an increase in the tax/duties payable in their country of residence/domicile/nationality but, if there is forced heirship the value of the trust assets being taken into account in the distribution of the late trustee’s estate.
Perhaps an issue to seek clarification on
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
And the frustrating reality that, Hague Convention notwithstanding, trusts are detested abroad even more than they are here by relevant authorities and courts. On the grounds that they are only created to evade (or aggessively avoid, whatever that means) tax, for money laundering, thwarting spouses and creditors, fraud at large, and supplying inflatables to the French Coast. We are surely close to it becoming a criminal offence to create or use them or aid and abet others. Banks already blacklist and shun them. If you see one send an SAR immediately.
Jack - You mention two different definitions for a “non-resident” trust if a trust has MIXED TRUSTEES (UK and non-UK residents). A trust is “non-resident” if
" only some of the trustees are resident in the UK and ***the settlor of the trust was ONE of the following:
not resident or not normally resident when the trust was set up or funds were added
not domiciled or deemed domicile in the UK when the trust was set up or funds were added"
You state the “domicile of the settlor” can be relevant. In the case above, would the trust be deemed non-resident?
You also give a definition if the settlor is deceased:
Mixed residence personal representatives are regarded as not resident for income tax purposes if the deceased was
not resident in UK AND
not ordinarily resident in the UK AND
not domiciled in the UK
at the date of death.
Settlor can’t be a UK resident, unlike the first test/definition.
I’m a UK resident and a non-dom who is a co-trustee of a US trust which holds only US assets. The other trustee is a trust admin company based in the US with no UK ties.
The trust was funded by my spouse who is also a UK resident and a non-dom. I’ve been told that this US trust is deemed a UK trust and trustees are deemed to UK tax. The test I was given to determine if the trust was a UK resident was the criteria you have given for a deceased settlor of a mixed trustee trust.
Does the criteria of being a “non-resident” trust differ if the settlor is alive or deceased? Can you be the settlor be a UK resident who is a non-dom?
There is a difference between ascertaining the residence status of “trusts” and that of “Personal Representatives (PRs)”. For income tax and CGT the same definition applies when ascertaining trustees’ residence. With respect to PRs different rules apply to each of income tax and CGT.
If your trust was created and funded when your spouse was UK resident but non-UK domiciled all the trustees must be non-UK resident for the trust to be non-UK resident (for both income tax and CGT).
As your spouse “is” UK resident but not-domiciled and has “funded” the trust it is created in lifetime so the first definition applies (the other applies to will and intestacy trusts). So he is the “settlor” for UK tax. As one trustee (yourself) is UK resident and the other is not the trustees will be non-resident if the settlor was either non-resident or non-domiciled when he set up the trust and, if later, when he added funds to it. As Malcolm says, if he was UK resident at either date, even though non-domiciled, the trust will be UK resident. This may be why you were so advised.
The trust admin company has “no UK ties”. I assume that it is not UK tax resident. If a non-resident trustee acts in the UK in the course of business carried on here through a “branch agency or permanent establishment” it is treated as resident. Care needs to be taken about trustee meetings in the UK. Fact-finding and discussion is fine but decision-meeting is not. Avoiding that is not easy as trustees must usually act unanimously. Provided that the US company does not have the use of a UK office or other facility HMRC are unlikely to challenge though as regards offshore companies and partnerships they regularly do if the facts favour them.
A non-resident trust is taxed only on its UK income and gains from UK property. A resident trust is taxed in the UK on its worldwide income and gains. It may be, probably is, taxable in the USA. The UK/US Treaty does not extend the tie-breaker clause to dual resident trusts so the IRS and HMRC have to agree where it is resident which can take months. The UK will give credit unilaterally for any US tax.
Many other areas require UK tax advice as well as the trustees’ residence:
A tax on the Settlor. This is very likely a US grantor trust which would make the settlor UK taxable on its US income and gains (subject to the remittance basis and the Treaty).
B tax on the beneficiaries (subject to the same issues) with methodology depending on the nature of the trust.
C the remittance basis and whether it is worth claiming.
D inheritance tax on the trust and its beneficiaries (subject to the Treaty).
E the effect of future changes in circumstances and tax law. Things to do and avoid.
Cross-border taxation is a highly specialised field of tax practice. I can’t tell from the facts provided whether the trust is resident or not but if your spouse was not UK resident when he created the trust or (if relevant) later added funds to it his continuing non-domicile means that it is non-resident; if he was UK resident on either occasion it is UK resident despite his non-domicile. Even if it is non-resident UK tax may still apply to the settlor and the trust beneficiaries who are UK resident and non-domiciled. This forum is not the place to explore such matters.