I have an offshore disceretionary trust with a UK domiciled Settlor. The 4 adult children of the Settor are the benefciaries and my understanding is that for CGT purposes, the trust is therefore deemed to be Settlor interested and there will be rebasing on his death.
The assets of the trust are a company holding UK commercial property, which was sold a few months ago. My understanding is the sale of the land by the company causes the CGT liability to fall on the company, not the trustees. However, if the company is subsequently liquidated there should be no CGT charge on the trustees, although what I am not clear on is does the Non resident CGT legislation, applying to commercial property from April 2019, mean that on liquidation of the company while the trust is offshore there should be no CGT unless the liquidation takes place straight after the land disposal, which i take to mean, within a few weeks.
Any thoughts woudl be gratefully received.
The assets of the trust are a company holding UK commercial property -
Do you mean the trust holds shares in the limited company.
The company has set up an offshore trust that holds assets directly in the companies name?
I mean the former viz. the offshore trust holds shares in a UK limited company which owned UK commercial property until the recent sale thereof.
Director & Solicitor
Tricky to give an exact answer,
- The CGT is payable by the company.
However - companies do not pay CGT. The sale of the property would sit on the balance sheet, any profits would be subject to corporation tax.
Do the shares held in the trust have full rights on winding up?
Do the articles of association suggest who benefits if the company is wound up?
We assume the shareholders would receive the assets of the company on winding up?
The question contains some gaps and puzzling comments
1 A UK incorporated company is UK resident. All of its chargeable gains are liable to UK corporation tax. The residence of its directors and shareholders is irrelevant. If a gain arises on the sale of the land, regardless of its location or nature, the gain is taxable only on the company. The reference to 2019 is obscure.
2 The liquidation of the company may well give rise to a further gain. This would arise on the disposal of its shares by the non-resident (“offshore”) trustees. From what we are told such trust seems likely to be one on which the Settlor and not the trustees are liable to CGT under s86. The Settlor is UK domiciled but I infer he is UK resident too. (Not knowing the date of creation of the trust, its possible status as a pre-19 March 1991 protected and untainted trust is moot).
3 s86 makes the Settlor liable to CGT on the gain. It gives him a right to recover the tax from the trustees. If he is excluded as a beneficiary a distribution to him (CGT-free because s87 would not apply) could not be made. The enforcement of the right to recover against non-UK trustees is problematic. The trust deed may permit them to oblige or the proper law may allow them to do so anyway without breach of trust. If the Settlor does not try to recover he might be deliberately omitting to exercise a right within s3(3) IHTA 1984. The obscure ramifications can be avoided if the trustees are asked and bona fide refuse to comply. If they pay up there are no IHT implications for the Settlor and no RPT chargeable event.
4 The reference to “rebasing on death” is mysterious. The Settlor is presumably alive? If not the trust itself apparently still is. Only if it had come to an end on his death and he had then had a qualifying interest in possession would there have been a deemed disposal with tax-free rebasing. The trust is “discretionary”. It seems unlikely he had a QIP at the relevant time or ever. s86 does not apply if the Settlor is dead or dies in the tax year of disposal.
5 “Importing” the trust during the tax year when the gain arises removes the (live) Settlor’s liability (on the arising basis). The trust gains of that year can then only be taxed on the trustees and not on the beneficiaries on a distribution basis. s87 cannot apply to that year or a later one in which the trustees are resident.
The actual tax likely to be payable on each basis would need consideration; Settlor on the one hand or trustees on the other. Although the liquidation is imminent, importing the trust, making it UK resident, before 6 April 2022 will switch the liability from the Settlor under s86 to the trustees as UK resident taxpayers. Distributions to beneficiaries would then dodge s87 altogether and there seem to be no earlier unmatched trust gains within s89 (2) either factually or as these would likely have fallen within s86 in any case. If the trust continued distributions could not be matched under s87 with any gain on which the Settlor has been taxed under s86. The costs and hassle of replacing the non-resident trustees must be evaluated including their inevitable request for an indemnity/retention especially if full distribution is in prospect.
6 The trust is an RPT for IHT so its ultimate chosen fate must beat that in mind.
It is what the CGT position would be on the death of the Settlor on the offshore trust holding UK commercial property, in the event of subsequent disposal, that I am considering. I believe that if the beneficiaries had, themselves, moved offshore to become non UK resident, they would not be caught in the CGT net, which would apply if they remain UK resident.
Guy, I slightly misread your question. The liquidation is not I think necessarily an actual near-term proposal.
If the Settlor dies any trust gains of that same year (even before his date of death) and later years cannot fall within s86 and so can be taxed under s87 by matching with capital payments to UK resident beneficiaries. Such a gain would possibly arise on the liquidation of the UK company that sold the UK commercial property or any disposal by the trustees of any such property held by them directly.
It is feasible for a beneficiary to become non-resident and receive a distribution tax-free. This does not now clean the slate because it is not matched with trust gains. It can be so matched if the distribution is to a close member of the settlor’s family and received in a tax year in which the settlor is UK resident, but only because it is then taxed on the settlor! A settlor can be resident in the year he dies and then is so for the whole year but it is not clear how s87G works (it deems him to receive the original payment at the time the original recipient did) if by that time the settlor is dead. A dead settlor cannot be assessed (yet!) and there is no mechanism for charging his PRs.
Of course if the entire trust fund is distributed to the non-resident beneficiary there will be no possibility of matching the unmatched trust gains with future capital payments. Result!
Trustees have been known to make such distributions if they are content that favouring a single beneficiary is appropriate.
International families may have a beneficiary member who is not resident, never has been, or was once but is not likely to be again. The last is important because of the s87E charge on a temporary non-resident recipient who has been historically resident and later resumes that status. He can be taxed on his return with unmatched gains unless he has been non-resident for at least 5 tax years.
Going non-resident for this purpose is not for everyone even if the tax saving is temptingly large. Tax exposure locally must also be explored. There is a downside to making the distribution only once 5 years are safely clocked up. The trust cannot be wound up till then and offshore trusts are expensive to maintain. The downside to making an early distribution is that unforeseen circumstances will thwart the plan and the gain will be matched and taxed under s87E, possibly at an uplifted rate under s91 if the gain arose some time before the attempt at non-residence commenced.