The treatment of offshore trusts and foundations is a highly complex area of UK tax legislation that requires advice on creation, but also continued maintenance and specialist advice to ensure that they remain UK tax compliant throughout their operation. Many such trusts develop a weakness, if not at the outset, and thus unfortunately require an offshore trust disclosure to HMRC.
Between April 2017 and September 2018, the “Requirement to Correct” (RTC) legislation dictated that any entity, no matter where in the world, had an obligation to identify and rectify any historic UK non-disclosure. Failure to Correct penalties give rise to:
- Penalties of up to 300% of the potential lost revenue (typically the additional taxes payable). The new standard minimum is 100%.
- A potential 10% asset-value based penalty too, and
- Potential “naming and shaming”, whereby your name, address and details of tax underpaid are published by HMRC. This can be accessed by anyone online, and is now far easier for HMRC to trigger.
Making an offshore trust tax disclosure can be useful to clear up past tax errors.
Historic UK Non-Compliance
Offshore trusts have been a common planning tool for the UK tax adviser for many years. However, the UK tax treatment of these trusts is highly complex, with many anti-avoidance rules, which target the settlor, beneficiary and trustee. Given the complexity of the UK tax legislation, it is vital that trustees ensure that any arrangement that has a UK connection (either through settlor, beneficiary, trustee or asset situs) is reviewed regularly to remain UK tax compliant. Where there is UK tax exposure, making a Offshore Trust Disclosure is the simplest way to regularise the past.
Failure to correct any historic risks means financial penalties of up to 300%. Even historic errors could be viewed as deliberate through the deliberate action of not reviewing the structure in line with the RTC guidelines and advice.
Historically, HMRC had received little information with regards to offshore trusts and their operation. However, this is changing with the global drive towards transparency where non – UK “financial accounts” and “controlling persons” are regularly identified and flagged annually.
The UK had pledged, along with France, Germany, Italy and Spain, to implement a beneficial ownership register of trusts and information will be automatically exchanged between them. Over 40 more countries had pledged their support and future adoption of this initiative. This will mean that in the future, HMRC will have access to information that identifies the beneficial owners of trusts and foundations that are situated around the world. The UK’s own Trusts Register has been live for a few years now; ensuring more and more information is being obtained by HMRC all the time, to identify offshore trust disclosures. It has even been tweaked, to collect even more information where there are no UK tax liabilities!
In addition, over 100 countries are automatically exchanging financial account information with each other annually, under the Common Reporting Standard (CRS). HMRC have already received voluminous information from most countries and will continue to obtain more as well as the quality of the information improving all the time. The statistics to date confirm that ‘offshore trust tax disclosures’ have greatly assisted HMRC, but reducing the need to do one-to-one enquiries.
What are the potential issues?
- UK Situs Income
- Settlement Legislation
- Transfer of Assets Abroad Legislation
- IHT on creation/entry and principal and exit charges
What do I need to know?
- All trusts need to be reviewed to ensure that they are UK tax compliant
- Failure to correct an error will lead to penalties of up to 300%
- Trustees are liable for IHT on creation as well as principal and exit charges
- HMRC are receiving significant amounts of information
Inheritance Tax
UK Inheritance Tax (IHT) has often been a significant reason for structuring assets and investments using offshore trusts. However, the IHT legislation is extremely complex and care is needed on creation but, more importantly, through the lifetime of the trust. It is not uncommon for IHT liabilities to be included / addresses as part of an offshore trust disclosure.
IHT, in relation to trusts, has four possible charge points that could result in a reporting obligation for the trustee:
- Creation of the trust
- Capital distributions
- 10 year charges from settlement of assets into trust, and
- Death of the settlor (and, in some cases, beneficiary)
Given the complexity of the UK tax legislation, it is vital that trustees ensure that any arrangement which has a UK connection (either through settlor, beneficiary, trustee or asset situs) is reviewed regularly. Failures can lead to UK tax exposure, and so making a Offshore Trust Tax Disclosure is the simplest way to regularise the past.
Importantly, a trust with a non-UK resident settlor, non-UK resident beneficiaries and non-UK resident trustees can still be within the UK IHT legislation.
Failure to correct means penalties of up to 300%; and a minimum of 100%, in and offshore trust tax disclosure.
Historic errors with offshore trusts could be viewed as deliberate through the inaction of not reviewing the structure in line with the RTC guidelines and advice. So coming forward voluntarily can really help especially where there is UK tax exposure. Making a Offshore Trust Disclosure is the simplest way to regularise the past.
IHT is an asset-value based tax and therefore any error, with a subsequent penalty, can have significant consequences for the asset base of the trust. IHT at 40% and a penalty at 200% of the tax is over 100% of the asset base!
Historically, HMRC had received little information with regards to offshore trusts and their operation. However, this is changing with the global drive towards transparency where non- UK “financial accounts” and “controlling persons” are regularly identified and flagged annually.
Read HMRC’s page about former and current offshore tax disclosure facilities here.
When does IHT need to be considered in respect of a trust?
- Creation
- Capital distributions
- Principal Charge
- Death
- Additional Settlements
What do I need to know?
- Some IHT errors do not have assessing time limits and can be recovered over 20 years later.
- Trustees could be liable for the IHT charges.
- IHT is an asset-value based tax, making any penalty an asset value based penalty.
- HMRC are receiving significant amounts of information from other countries with regard to offshore trusts and persons linked to them.
How we can help?
We believe it’s in a client’s best interest to discuss these types of matters with an ‘independent specialist’ even if there are no Offshore Trust Disclosure tax discrepancies to disclose. The right help at the right time ensures that HMRC are effectively managed and enquiries and disclosures are concluded expeditiously, including the making of an Offshore Trust Disclosure to regularise the past.
Our team are experts at resolving contentious tax issues accurately and efficiently. We are highly adept at managing our clients’ interactions with HMRC to ensure processes run smoothly and that our clients’ interests are best protected at all times, including making an Offshore Trust Disclosure.
Seek specialist advice, ideally independent, and review all Trust and Foundation structures as soon as possible. We deliver that all-important trusted ‘buffer’ between our client and HMRC during their in-depth and intrusive investigations and in all offshore trust tax disclosures too.
Get in touch to learn more about how Amit and the Tax Investigations and Disclosures team have successfully guided clients through HMRC tax disclosures.
Learn more about how we have helped our clients through their kind testimonials here.
HOW CAN PURE TAX HELP?
At Pure Tax our Tax Investigation & Disclosure specialists are industry recognised and have dealt with hundreds of contentious situations with HMRC over the years. We are adept at managing interactions with the tax authorities to ensure that the investigation and disclosure processes run smoothly and that your interests are best protected.
