The 2017 (no 2) Finance Bill published on 8 September 2017 sweeps up the reforms to the taxation of non-doms which were dropped prior to the snap election but which nonetheless took effect retrospectively from 6 April 2017. Hot on its heels, some draft clauses for inclusion in the next (2018) Finance Bill were published a few days later, containing further anti-avoidance measures concerning offshore trusts. These measures will take effect from 6 April 2018.
The measures due to take effect from 6 April 2018 are:
- Capital payments to non-resident beneficiaries will no longer be matched with trust gains so that trustees will no longer be able to "wash out" trust gains to non-residents. This is already the case when capital payments are matched to income tax.
- The settlor will be subject to CGT where benefits are received by close family members (spouse/civil partner/co-habitee/minor child) and matched to trust gains. Similar provisions took effect where benefits matched to certain trust income from 6 April 2017.
- Onward gifts of capital payments/benefits from an offshore trust originally to individuals who don’t pay tax on the distribution (because they are either non-resident or are non-domiciled remittance basis users who do not remit the payment) which are ultimately received by a UK resident will be treated as if they were received by the ultimate UK resident recipient. Therefore if the benefit is matched to trust income or gains, it will be taxable on the UK resident. These provisions are very broad and will apply where there is an arrangement or intention at the time of the original payment to make the onward gift. They will apply to any onward gifts (whether made directly or indirectly) made after 6 April 2018, even when the initial payment out of trust took place before that date.
- Trust level foreign income will be capable of being matched to benefits paid out even if the motive defence applies (or the transfer of assets abroad code doesn't otherwise apply). At the moment this is a bit of a gap in the legislation.
These new rules, taken together with those that took effect from 6 April, will therefore broadly align the taxation of trust income and gains. However, there may be a window of opportunity between now and 5 April 2018 for trustees to take advantage of the current rules for washing out stockpiled trust gains with payments to non-resident beneficiaries.