What are the tax advantages for the settlor of a trust?

A foreign domiciliary or “non-dom” resident in the United Kingdom can enjoy considerable tax advantages as the settlor of a trust.

There are capital gains tax and inheritance tax benefits.

Capital gains tax

Firstly, all capital gains, including gains on UK assets, made by the trustees are not taxable on the settlor providing he or she is a non-dom. Whereas foreign assets held by the settlor personally and sold at a gain are potentially taxable on the settlor unless the settlor retains the sales proceeds abroad and claims the remittance basis and if appropriate pays the remittance basis charge. UK assets held by the settlor personally are taxable on the settlor on the arising basis and cannot be sheltered by claiming the remittance basis. However, with a trust in place the settlor can shelter the foreign and UK gains from UK capital gains tax providing that the gains are retained in the offshore trust.

Capital gains made by the trustees are taxable only on the beneficiaries upon distribution of the trust. This means that tax can be deferred indefinitely if the gains are retained in the trust. In addition foreign domiciled beneficiaries have the option to retain the distribution abroad and to claim the remittance basis and if appropriate pay the remittance basis charge.

Inheritance tax

Foreign domiciled taxpayers resident in the UK will become “deemed domiciled” in the UK for inheritance tax only once they have been resident in the UK in 17 out of the previous 20 tax years. Effective from 6 April 2015 onwards, the “17 out of 20” rule will be redefined and brought into line with income tax and capital gains tax principles. This shall mean that non-doms will be deemed domiciled in the UK once they have been resident for 15 out of the previous 20 tax years.

Foreign domiciliaries are able to avoid the exposure to inheritance tax by transferring foreign assets on trust in the tax year prior to becoming deemed domiciled. Foreign assets settled on trust by a non-dom settlor are defined as “excluded property” and are not subject to UK inheritance tax. Excluded property retains this feature even after the domicile of the settlor subsequently changes.

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