Budget planning for non-UK resident Trustees

Where capital distributions are made to UK resident beneficiaries by non-UK resident Trustees these distributions are matched:

• Firstly, to accumulated Trust income (although there may be a ‘motive defence’ against income attributions).
• Secondly, to any realised offshore income gains within the Trust.
• Thirdly, to any realised capital gains within the Trust.
• Fourthly, unmatched distributions are carried forwards and matched/taxed as future realised gains arise.

To the extent that a Trust has historic realised capital gains (which are not offshore income gains) to be matched to UK beneficiary distributions if the UK Capital Gains Tax rate goes up, so will the future tax for beneficiaries.

Additionally, there is a ‘supplemental charge’ for distributions which are matched to Trust gains realised more than two UK tax years prior. On a current Capital Gains Tax rate of 20% the effective rate of tax for distributions matched to gains realised six years or more (which is the top rate) is 32%. If Capital Gains Tax rises to 30% this top effective rate of tax will rise to 48%. If Capital Gains Tax is pegged to the higher Income Tax rate of 40% (which were the UK rules prior to 2008, so there is precedent for this) then the top effective rate of tax rises to 64%.

Non-UK resident trustees with historic realised capital gains with UK resident beneficiaries should therefore consider whether they wish to make distributions prior to the 30 October in order to mitigate taxes.

How can you prepare?

As with all trust-related planning there will be individual circumstances to consider, including whether a particular trust has realised offshore income gains (which would not require pre-Budget planning) rather than capital gains.

Would you like to know more?

If you have any questions about the above, please get it touch with your usual Blick Rothenberg contact or John Bull using the form on this page.