Offshore Trusts - Capital Gains Tax

Capital gains tax

If you live in the UK but are deemed to be non-UK domiciled (i.e. if your principal place of residence is outside the UK) you can shelter assets from capital gains tax (CGT) in an offshore trust, even if they are UK assets.  Because capital gains made by the trustees are not taxed in the UK, only if a “capital payment” (or distribution) is made to you will a tax liability arise.

This tax liability can be avoided by retaining the distribution outside the UK (on payment of the £30,000 annual remittance charge).  No liability arises unless, and until, a capital payment is made.

Mr Jones is a UK resident non-domicile using a trust to purchase property

• Mr Jones, who is UK resident but non-UK domiciled, is considering purchasing a UK property for £1 million via an offshore trust. The property will be let to third parties.
• Assuming the property is eventually sold for £1.9 million there will be no CGT payable on the gain arising in the offshore trust.  The gain (£900,000) will only become subject to CGT in the UK when a capital payment is made by the trustees to Mr Jones.
• If he receives a capital payment, Mr Jones will pay CGT on the £900,000 payment at a rate of 18 per cent, which equates to tax of £162,000. 
• By retaining the distribution outside the UK, Mr Jones can avoid liability to CGT, subject to the payment of the £30,000 annual remittance charge.
• Alternatively, if Mr Jones is non-UK resident at the time the distribution is made by the trustees then he will have no liability to UK CGT as this tax does not apply to non-UK residents.
• However, income tax will still be payable on rental income derived from UK property even if the property is held by an offshore trust.

If you are UK resident and UK domiciled you can still use an offshore trust to shelter assets from CGT, but you, your spouse, children and grandchildren must all be excluded from benefiting from the trust.  In other words, the trust can only benefit non-lineal relatives, friends and other third parties.  Again, there is no tax payable when trustees make capital gains. Tax is only payable if these gains are distributed to UK resident beneficiaries (who may still avoid being taxed if they themselves are non-UK domiciled and pay the £30,000 annual remittance charge).