Significant changes to the UK’s offshore trust and ‘non-dom’ tax rules will be introduced in April 2017. Professional trustees must anticipate those changes and review their structures if there are UK links (such as settlors, beneficiaries or assets – particularly residential property). However, with 6 April 2017 looming and a huge amount to do in the meantime, trustees cannot afford to forget their own risk and liability positions and must make sure that planning takes this into account.
Trustees’ duties in the context of the upcoming changes
Professional trustees will already know that - within the parameters of the exercise of their proper care and skill - they should maximise the trust fund with their beneficiaries’ best interests in mind. As Megarry V-C said in Cowan v Scargill , “the paramount duty of the trustees” is generally “to provide the greatest financial benefits for the present and future beneficiaries”.
Many trustees may consider this only to require monitoring the selected investment managers. However, the impact of tax regimes is also an important part of maximising the trust fund. With this in mind, tax-mitigation needs to form a part of a trustee's investment and management strategies: understanding the tax position is an essential part of every trustee’s ongoing management process. Adverse tax charges, whether anticipated or not, put trustees in a vulnerable position with their beneficiaries and settlors.
What should trustees not be doing?
Trustees do come under pressure to take strategic decisions based on their settlors’/beneficiaries’ preferences. However, they may find themselves at risk if those preferences do not align with fundamental investment principles. Trustees may be used to obtaining indemnities to protect themselves if strategies turn out to be flawed, but indemnities are only good if the individuals have the funds to meet them. Where tax planning is concerned, the use of indemnities is not so common, but trustees still need to be conscious of the risks they may be under. Acceding to other parties’ requests – for example, where settlors/beneficiaries ask that trustees do not ‘bother’ to take independent tax advice or tax planning, usually for costs reasons – is particularly dangerous.
Trustees should always protect themselves by taking their own advice, no matter how persuasive the assurances from settlors/beneficiaries may be. Although the context was slightly different, Walker v Stones  makes for sobering reading and highlights the risks in following beneficiaries’ wishes without due consideration.
The changing UK tax scenery: what should trustees now be doing?
Case law shows that courts look more favourably on trustees who have taken professional advice and relied on it properly: trustees failing to take appropriate advice have been more quickly criticised. In Nestle v National Westminster Bank Plc , Staughton LJ made the observation that “Trustees are not allowed to make mistakes in law; they should take legal advice”.
Trustees must assess their structures’ current and possible future UK links. Where these links are identified, trustees must plan proactively bearing in mind the UK tax implications. Such planning may not be possible for long. In particular, onward planning may not be possible after 5 April 2017 where there are:
- non-domiciled settlors with an interest in the trust and who have previously relied upon the remittance basis of tax
- trust gains within the structure, which the trustees may want to 'wash out' through distributions to non-UK taxpayers
- trust structures holding UK-situs real estate through underlying offshore companies.
In addition, trustees may be able to identify new business opportunities where their existing relationships will be affected by the changes (e.g. long-term remittance basis taxpayers) and may benefit from planning for the changes using new structures.
Direct UK tax action against offshore trustees
Until now enforcement against non-UK trustees has been difficult for HMRC. However, the August 2016 consultation document on IHT for UK residential real estate stated that new rules will prevent trust property from being sold until changes of ultimate ownership through the period are accounted for and any outstanding IHT charges are paid. Trustees who are taken unawares by these rules in the future may find themselves in difficult positions with their beneficiaries, whose asset will essentially be 'frozen'. The August 2016 consultation document also proposed personal liability for directors of offshore companies.