'Protected' trusts: potential issues where non-reporting funds are held

12.11.2018

After more than 18 months since the reforms to the taxation of non-UK domiciled individuals and non-UK trusts became effective, HM Revenue & Customs ("HMRC") have announced a sting in the tail which could impact a significant number of 'protected' trusts.

On 6 April 2017, non-UK trusts established by non-UK domiciled individuals became eligible for 'protected status', providing various stringent conditions were met. Holding 'protected status' meant that any underlying gains or non-UK income would not be taxed immediately on the settlor, even if the settlor had become deemed domiciled. Instead liability to UK tax would be deferred until a benefit was received. See our flyer here for more information on the protected status conditions.

When the new rules on 'protected status' were originally announced the Government and HMRC indicated they would provide blanket protection for all non-UK income and gains. However, earlier this year a technical defect was identified in the legislation which potentially exposed offshore income gains ("OIGs") realised on disposals of non-reporting offshore funds, regardless of whether 'protected status' was held. It is thought this defect also applies to accrued income.

Despite strong representations being made through technical bodies this defect has not been corrected. This culminated in a statement from HMRC, made earlier this month, confirming that there is no intention to correct the defect "at this time" due to the "demands placed on Parliamentary resource".

As a result of the announcement made, any OIGs realised by non-UK trusts or underlying companies will potentially be assessed to UK tax immediately on UK resident deemed domiciled settlors. This will leave many individuals and trustees in a difficult situation with a decision to make as to whether to take a robust filing position (accompanied by appropriate disclosure) or potentially review and change the investment policy within the trust.

If you believe any of your structures are impacted you may wish to discuss the position with your usual Blick Rothenberg contact or Caroline Le Jeune on caroline.lejeune@blickrothenberg.com.