Former Offshore Trust

Trusts Discussion
1

Hello

My client is a trust that was formerly offshore, and I am not experienced in this area, so am looking for any guidance or help that you might be able to offer.

The deceased died non UK domiciled non UK resident, leaving his estate to a UK resident beneficiary, Bob. A variation of the estate was made, to establish a discretionary trust to receive the inheritance. The trust had non UK Resident trustees. Bob is treated as settlor of the trust.

Several months after the variation, the non-resident trustees are replaced with UK Trustees, making the trust resident for UK tax purposes.

The estate comprised an offshore investment portfolio. Some shareholdings were sold, and some have been transferred in specie across to the trustees after the trust became UK resident.

The administration of the estate has been concluded, and various cash payments have been made from the executors to the trustees during the admin period, some before and some after the trust became UK resident.

The trustees made a capital appointment of cash from the trust to Bob, dated before the trust became UK resident.

I think that s733 ITA 2007 applies to this situation, and that the capital appointment will be treated as being income for Bob to the extent that the trust had received income up to the date of the appointment.

The amounts received by the trustees from the executors have not been described as being specifically income or capital, and the estate accounts provided do not show separate income and capital accounts, just a list of income and a list of expenses.

I do not have a definitive split of these receipts between income and capital, but I assume that the income received by the executors will retain its nature if it forms part of a payment to the trustees. How do I determine how much of the payments made from the executors to the trustees is income, and how much is capital? Is there any hierarchy or order to how this is treated?

Many thanks

Neil.

2

It is not entirely straightforward to explain all the detail, but I can say the following (also, I assume the beneficiary UK domiciled, as well as UK resident):

  1. There is a distinction between income/gains arising to the executors and those arising to the trustees. You therefore need to determine what income and gains arose to the trustees during the period that the trust was non-UK resident. Most likely, all of that is attributable directly to the settlor under s624 ITTOIA (would be a similar outcome under s720 ITA, but ITTOIA would come first) or s86 TCGA.
  2. Once UK resident, gains are taxed in the ordinary way on the trustees, but it will be a settlor-interested trust, so the settlor will be taxed on the trust’s income as it arises.
  3. Income distributions will be income on receipt by the beneficiary, but the trustees can only distribute income if they have income to distribute. As the beneficiary (as settlor) will already have paid income tax on the income as it arose in the trust, there will be no further income tax on distribution of that income. Distributions beyond the available income will be capital distributions. However, I would say that there is an obligation on the executors to provide accounts that are sufficiently clear for the trustees to be able to determine whether they are receiving income or capital gains. Usually there will be some income paid to a residuary beneficiary at some point (incl. if that “beneficiary” is a trust). Also, I would likewise say that there is an obligation on the trustees to ensure that they have been given sufficient information so that they and their beneficiaries are able to carry out the appropriate reporting to HMRC.
  4. As an aside, it sounds like it is an excluded property trust, irrespective of its residence, so you need to keep an eye on whether the trust is appointing UK or non-UK assets to beneficiaries, although s144 may be in point for some of the capital distributions.

Paul Davidoff
New Quadrant

1 Like
3

Hi Neil,

Fortunately the trustees have consulted an accountant, and HE is the one who will conduct/has conducted an analysis of money in and out, tax etc etc so that you can receive proper estate accounts that will show you how much of the money received was income and how much capital.

Julian Cohen

Simons Rodkin

Hello

My client is a trust that was formerly offshore, and I am not experienced in this area, so am looking for any guidance or help that you might be able to offer.

The deceased died non UK domiciled non UK resident, leaving his estate to a UK resident beneficiary, Bob. A variation of the estate was made, to establish a discretionary trust to receive the inheritance. The trust had non UK Resident trustees. Bob is treated as settlor of the trust.

Several months after the variation, the non-resident trustees are replaced with UK Trustees, making the trust resident for UK tax purposes.

The estate comprised an offshore investment portfolio. Some shareholdings were sold, and some have been transferred in specie across to the trustees after the trust became UK resident.

The administration of the estate has been concluded, and various cash payments have been made from the executors to the trustees during the admin period, some before and some after the trust became UK resident.

The trustees made a capital appointment of cash from the trust to Bob, dated before the trust became UK resident.

I think that s733 ITA 2007 applies to this situation, and that the capital appointment will be treated as being income for Bob to the extent that the trust had received income up to the date of the appointment.

The amounts received by the trustees from the executors have not been described as being specifically income or capital, and the estate accounts provided do not show separate income and capital accounts, just a list of income and a list of expenses.

I do not have a definitive split of these receipts between income and capital, but I assume that the income received by the executors will retain its nature if it forms part of a payment to the trustees. How do I determine how much of the payments made from the executors to the trustees is income, and how much is capital? Is there any hierarchy or order to how this is treated?

Many thanks

Neil.