Yesterday further draft legislation was published in connection with distributions from offshore trusts. These rules were originally announced in December 2016 but were then put on hold. They were not included in the Finance Bill 2017 (published on 8 September) but will now be included in the following Finance Bill and are scheduled to take effect from 6 April 2018.
Capital distributions to non-UK tax residents
Under current rules it is possible to deplete the capital gains tax pool of an offshore trust by making capital payments to non-UK tax residents. However, for payments made on or after 6 April 2018 only payments made to UK tax residents will be matched with and reduce the pool of trust gains.
Distributions to close family members
With effect from 6 April 2018 where a capital distribution is made to a close family member (i.e. a spouse, civil partner, cohabitee or minor child) of a UK resident settlor, the payment will be taxed on the settlor instead of the recipient.
The draft legislation indicates that the settlor should be able to recover the tax from the individual who received the payment. However, this is significantly more onerous that the original proposals which were that the settlor would be taxed on the distribution only if the recipient was not.
Similar provisions will apply to distributions of trust income from 6 April 2018 where the trust is a 'protected settlement' as defined in Finance Bill 2017.
Onward gifts of trust distributions
New provisions are being introduced with effect from 6 April 2018 that apply where an onward gift is made by a beneficiary who has received a distribution from an offshore trust and neither that beneficiary, or the settlor of the trust, pays tax on that distribution (due to their residency or domicile position). In this situation, if, when the distribution is received, there was the intention to pass the distribution (or anything derived from it) to another person, then the ultimate recipient would be treated as having received the payment from the trust directly and would be taxed on it accordingly (if UK resident).
The original proposals published in December 2016 did not include the requirement for there to be the intention to make the onward gift at the time of the distribution, but they did contain a three year time limit on the application of this rule which has now been removed.
It should be noted that the rules will also apply where there are a chain of gifts and if the ultimate recipient is a close family member of a UK resident settlor then the settlor will be taxed under these rules.
Importantly these rules will only apply where the onward payment is made on or after 6 April 2018, even if the original distribution from the trust was before that date.
For more information, please contact Caroline Le Jeune.