HMRC have published draft guidance on the application of the new residence test for trustees, which was introduced on 6 April 2007. The residence rules for income tax and capital gains tax were harmonised, but the position is far from simple.
A trust will be UK resident if all the trustees are UK resident, and it will be nonresident if all the trustees are nonresident. No problem there. The complications come when some of the trustees are UK resident and some are not. In that case, the residence of the trust will depend on the residence and domicile of the settlor at the time any property is introduced to the trust. If the settlor is not resident, not ordinarily resident and not domiciled in the United Kingdom, the existence of one nonresident trustee will be enough to make the trust nonresident. If, however, the settlor is UK resident or ordinarily resident or UK domiciled, one UK resident trustee will be enough to make the trust resident.
The guidance concentrates heavily on the terms of Section 69(2D) TCGA 1992, which provides that a trustee will be treated as UK resident if he or she acts as a trustee in the course of a business carried on by a branch, agency or permanent establishment in the United Kingdom.
HMRC take the view that a trustee is carrying on business in the United Kingdom if he or she is in the business of providing professional trustee services in the United Kingdom for a fee. This does not necessarily relate to the business of a particular trust that might be conducted by the trustee. “Carrying on business” in this context means activities that are the core activities of a trustee and not those that are preparatory, and HMRC will look at where the core activities are physically carried out. If there is evidence of considerable administrative work, such as meetings with investment managers or beneficiaries, being carried on in the United Kingdom through a permanent establishment, the trustee is obviously in trouble.
The guidance note includes numerous examples that are helpful, but they are likely to be a real headache to foreign trust companies having any kind of presence in the United Kingdom – or, perhaps, are owned by a UK parent.
I cannot imagine that any trustee company in its right mind is going to risk the complete destruction of its professional relationship with its clients by inadvertently finding itself resident in the United Kingdom, so it will make sure that it has nothing to do with the United Kingdom at all. All the business that might otherwise have been undertaken in the United Kingdom – creating jobs, etc. – will be lost. This will be a welcome boost to the offshore centres. The Treasury probably want to make up for being so horrid to them lately.