Trust planning for UK res non doms still offers value

• Planning through trusts remains the most flexible solution from a UK tax perspective for res non-doms (i.e., foreigners who live in the UK).

• Such trusts, created before the individual becomes UK deemed domiciled (i.e. before year 16 of UK tax residence) and funded with non-UK situs assets, offer potentially significant UK tax benefits, including full protection from UK inheritance tax, from UK income tax on non-UK source income and from UK capital gains tax, subject to certain conditions being met.

• However, res non-doms thinking of planning through trusts should be alive to common traps. While a highly effective planning tool, they require careful legal and tax consideration in order to ensure they are suitable and appropriate in the circumstances.

The UK represents an interesting proposition for foreigners, although Brexit has inevitably made relocation more arduous compared to before when it was sufficient to jump on a plane and exercise treaty rights on landing on UK soil. 

The famous ‘res non dom’ regime has attracted (and continues to attract) people from other countries who can – now for a limited amount of time – benefit from a preferential tax regime on a remittance basis: for the first 15 years of UK tax residence (assessed over the previous 20 years), non dom individuals (broadly speaking foreigners born to a non-Brit father) can shelter their non UK income and gains from UK taxation and are not liable to UK IHT on their non-UK situs assets (UK source income and gains remain subject to tax in the UK on an arising basis and UK assets are subject to UK inheritance tax (‘IHT‘)).

But, as people say, time flies when you are having fun! And long term residents approaching the final stopping point of 15 years of UK tax residence (upon which they will be treated as deemed domiciled in the UK and treated as a Brit for all tax purposes) with substantial assets outside the UK will need to consider viable alternatives to shelter these assets from UK taxation (particularly IHT) going forward. 

Planning using trusts is still the most flexible solution from a UK tax perspective when it comes to res non doms.  If created before becoming deemed domiciled and funded with assets situated outside the UK, the trust provides full protection from IHT which, otherwise, would apply on a worldwide basis at a rate of 40% (unless an exemption, such as spousal exemption, or a relief such as business property relief, applies). An add-on benefit is that non-resident trusts created by a UK resident non domiciled settlor before he or she becomes deemed domiciled will also achieve protection from UK income tax on non-UK source income and from UK capital gains tax, provided that the trust remains untainted (broadly speaking provided that no addition of property or value to the trust is made after the settlor becomes UK deemed domiciled).  

UK taxation may become relevant only to the extent of benefits or distributions received by UK resident beneficiaries from the trust. There are, however, traps to watch out, for instance where there are UK situs assets and, in particular, UK residential properties, which are not suitable for settling into the trust in light of the negative UK tax implications: namely a 20% IHT entry charge on the transfer of the UK assets into the trust, 6% IHT charge every 10 years from the creation of the trust and an IHT exit charge up to 6% calculated on the value of the UK assets leaving the trust (often referred to as ‘relevant property charges’). 

With effect from 6 April 2017, such relevant property charges apply where the trust holds a non-UK company and the value is attributable to UK residential property. Recent legislation has been introduced to counteract previous planning methods of purchasing UK residential properties though non-UK vehicles as a means of avoiding an IHT charge. In the same vein, in 2019 the disposal of a company whose value is attributable (for at least 75%) to UK residential property will be within the scope of UK Capital Gains Tax – so, if a non-UK resident trust disposed of a non-UK company which qualifies as a property rich company for UK tax purposes, it would be subject to UK capital gains tax at 28% on the gain. If the disposal is as a result of an appointment to one of the beneficiaries, hold over relief may be available to hold over the gain. 

The message is: trust planning is a highly effective way of achieving succession planning in a very tax efficient environment from a UK tax perspective, where there are non-UK assets and a non-UK domiciled settlor. UK situs assets are not always suitable for this type of planning. Where the UK asset is a UK holding company with no UK residential properties, there is still merit in considering trust planning, but this will require a further non-UK company to be created between the UK company and the non-UK Trust. Where there are trust structures in place which, indirectly hold UK residential properties (these were very common pre-2017), these should be reviewed and restructured, if possible.