Offshore trusts and UK property ownership

The tax benefits of owning UK property via offshore trusts may have been eroded but they still remain useful vehicles for succession planning, management, control, and protection of assets.

Recent changes to the tax treatment of UK residential property held by offshore trusts mean that many offshore trusts that were not exposed to UK inheritance tax will now fall within the UK IHT regime. This regime has been effective since 6 April 2017. Prior to this date, it was common for non-UK domiciled settlors to hold UK residential property through an offshore company and trust structure and not be subject to UK IHT.

The rules have changed so that IHT does now apply to trusts holding UK residential property directly or indirectly, in the form of entry charges, 10-year anniversary charges and exit charges on outright distributions to beneficiaries. Additionally, depending on the values, there may be reporting requirements even if there is no IHT to pay.

The rules have also changed in relation to loans made to allow trusts beneficiaries to purchase, maintain or improve UK residential property which may bring the benefit of such loans within the UK IHT net. Furthermore, loans to UK resident beneficiaries are UK situs assets for the purposes of UK IHT.

Offshore trustees therefore need to be aware of the complexities involved in determining the UK IHT obligations and ensuring the required reporting has been done.

Furthermore, the UK is expanding its requirement for trusts to register under its Trust Registration Service (TRS) as a result of the transposition in the UK law of the EU’s Fifth Money Laundering Directive (5MLD). Up Until recently, the requirement to register had been limited to trusts who have an imminent UK tax liability only. However, with effect from 10 March 2020, it was proposed that newly created trusts will need to register within 30 days of creation, irrespective of whether or not they have a UK tax liability.

Additionally, all trusts currently not registered under the TRS will need to register by 10 March 2022, again regardless of whether or not they need to pay UK tax.

The government has now issued the final regulations which were laid before Parliament on 15 September and has taken effect from 6 October. These regulations clarify some of the uncertainties raised by the previous draft regulations.

The most significant uncertainty was whether a non-UK trust, which has no UK tax liabilities would be required to appear on the UK Trust Register simply because it engages a UK services provider (such as a lawyer, accountant, banker, investment manager etc.) The regulations confirm that this will not be the case and 5MLD only requires a trust to be registered if it has some other connection with the UK for example a UK resident trustee.

The good news is that although there will still be a large number of trusts which will be required to register for the first time, the scope of the exemptions have been significantly expanded. How that fits with the register of beneficial owners of land in the UK is yet to be seen.

If you would like more information on offshore trusts and UK property ownership, speak to our International Tax team today.