Offshore Trusts - time for a CGT review?

The Office of Tax Simplification (“OTS”) recently conducted a review of Capital Gains Tax (“CGT”) (see our recent article in this respect). It was specifically noted in the first report issued by the OTS (with another expected to follow in the early part of 2021) that their review would not cover trusts or the attribution of offshore gains to UK resident beneficiaries. Ominously, this suggests it may be a focus in their second report...

Currently, the rates of CGT applied to trusts are in line with the higher rates applied for individuals, i.e. 28% in respect of gains made on UK residential property and 20% in respect of gains on other assets.

When it comes to an offshore structure, there are also supplementary charges applied where a distribution is not made within two years of a gain arising. These charges are intended to encourage trustees to make distributions to beneficiaries (which would then become chargeable to UK tax where the beneficiary is UK resident), rather than accumulating funds within the trust.

Where a supplementary charge applies, the rate increases year-on-year, with the maximum rate of tax that can be applied to the gain equating to 32% (assuming the beneficiary is a higher or additional rate tax payer).

So, what happens if CGT rates are aligned with the highest rate of income tax, which is currently 45%?

Assuming there are no changes to how trusts, including offshore trusts, are taxed then the maximum rate applicable to gains attributed to UK resident beneficiaries could be set to rise to an eye-watering 72% where there are historic gains.

At this point, it is not clear whether the government will take the advice of the OTS in aligning the rates but, given recent government spend in dealing with the current pandemic, it is no secret that tax increases will likely be implemented in the not-too-distant future...

HOW CAN HAMILTON ROSE HELP?

We would recommend that trustees and beneficiaries alike undertake a review of the current position with regards to gains and distributions so that, where required, planning can be implemented to secure a lower rate of CGT.

We are well-placed to assist with this.

If a review is undertaken prior to a rate increase, it may be possible to secure a rate of 20% for UK resident beneficiaries of an offshore settlement. For reviews undertaken after a rate increase, we may still be able to secure a rate of 45% (v.s 72%), assuming it is brought in line with the current highest rate of income tax.

Given that plans may have to move forward quickly, it is important to start initial conversations now so please contact us if you would like assistance with your review and plans at info@hamiltonrose.tax.