A non-UK domiciled individual is a beneficiary (not settlor, nor a trustee) of a discretionary trust located in Quebec. The trustees are all Quebec resident. The beneficiary is considering taking up UK residence.
It appears that the assets of the Quebec trust were resettled on the present trust in 2019 from a trust which was previously set up in 2013 (with the same settlor, trustees and same beneficiaries). I am not sure why this was done.
I am concerned as to whether the resettlement of assets in 2019 could be seen as a disposal at market value and thus creation of a pool of stockpiled gains for the purposes of determining whether the beneficiary would be subject to s87 charges if he subsequently takes up UK residence and receives capital payments from the trust.
As far as I am aware, the trustees of the 2013 settlement have not crystallised capital gains historically, but if they had, my understanding is that these stockpiled gains would transfer to the 2019 settlement.
I would be interested to hear people’s thoughts as to whether the resettlement in 2019 is likely to be treated as giving rise to stockpiled gains in the 2019 settlement equal to the latent gains that would have been present at that time, or if I am simply overthinking this.
My initial thoughts are that I can see no reason why the resettlement in 2019 would not precipitate chargeable gains in the transferor trust (assuming assets transferred are of course chargeable assets) which would become part of the gains of the transferee trust (post resettlement) and available for offset against capital payments under s87 [see s90].
This illustrates the gross inequity of FA 2008 in replacing s87(1) so that the tax status of the settlor became irrelevant and repealing s87(7) so a non-domiciled resident beneficiary could be charged. Subject to the rebasing election, the result was a de facto extra-territorial tax raid on the assets of many settlors who had no connection whatever with the UK and so no possible intention of avoiding its taxes by settling them. So you are not overthinking and s 90 TCGA 1992 could be an issue.
The question is whether what happened in 2019 was a resettlement and a deemed disposal following Roome v Edwards etc and SP7/84. The trustees’ intentions and the nature of the power exercised are highly relevant but the focus of this case law and HMRC practice is on a UK context. UK trustees have a degree of certainty as to how to avoid a deemed disposal or deliberately trigger it but it is a racing certainty that the non-resident trustees will have paid no heed to such subtleties.
It is not clear whether, even if the deemed disposal not happening can be relied upon, the beneficiary needs the money and actual disposals while resident will have to fund that. The ideal capital payment would be one made before residence attaches and so non-taxable, although after FA 2018 it won’t wash any gains. (Assumes beneficiary is not a close family member or the settlor is non resident). Otherwise you may be stuck with the remittance basis or trying to get round that.
My response assumed a “resettlement” had occurred. However, as Jack points out, a determination as whether this is the case or not may not be entirely straight forward. There is no shortage of case law (and HMRC’s SP7/84) on the matter but the matter seems to me to still remain contentious.
I wouldn’t bank on arguing that no CGT charge arose on the funds transfer.
In the late 70s I acted for 3 young UK residents whose Canadian Aunt had made a Bermudian settlement on them. Rather than liquidate the underlying investment company and make tax free distributions the trustees had caused it to pay a dividend up to the them which was taxable Case V on the arising basis. The Tax Silk advising on this (to cover my backside as my analysis was not popular) could not suppress his laughter and expressed the hope that some procedural lacuna could be found. When the trustee could be tracked down, at Elbow Beach, he was able to opine that the dividend had indeed been improperly declared and was invalid. The company was then liquidated. All UK tax free, as it should have been and should be now.