Planning for UK resident/non domiciliaries (RND) can with the appropriate tax advice and offshore structure achieve significant tax savings. For PE principals in particular planning is possible in relation to their carried interest, as this is ordinarily subject to capital gains tax rather than income tax.
Generically, an offshore trust can shelter assets from UK capital gains tax (CGT). As an offshore trust is a not a UK trust, capital gains are not taxable in the UK until capital is distributed out of the trust. There is no CGT in offshore jurisdictions, so capital kept offshore is not taxed. If a RND is claiming the remittance basis, UK CGT will only be paid when and if capital is remitted to the UK. There is a tax charge when a non-UK trust is created, but if the carry is settled into trust during a fund launch or at any other time when the carry has little or no value, the tax charge when the trust is established is negligible.
Whilst CGT mitigation is the primary driver for the establishment of an offshore trust, there are also benefits in terms of UK inheritance tax (IHT). The value of the carry can be removed from the IHT net altogether, for example by gifting the carry into a trust. It will be exempt from IHT provided the donor survives the gift by 7 years.
As far as income tax is concerned, the structure is tax neutral as the settlor will be treated as owning the income arising within the structure.
An offshore trust can also have the following non fiscal advantages:
- Wealth preservation and asset protection - this is particularly important where individuals may be exposed to unlimited liability if acting as a director of the General Partner.
- Succession planning - this could be in the form of managing the timing and frequency of an inheritance, to ensure spendthrift dependants are protected, or to carry out specific family, philanthropic or charitable goals.
- Avoidance of the administrative burden and publicity of probate formalities.
Individuals have different circumstances and care needs to be taken to get specific advice on the benefits of this planning