Regime change

It is not just offshore trustees and their beneficiaries who need to consider making changes to their usual practices as a result of the new Finance Act 2008 regime. Professionals advising offshore trustees also need to look closely at how the new regime could impact on their own businesses.

Remittance on payment of professional fees

The new broader definition of remittance contained in s.809L of the Income Tax Act 2007 (ITA) includes services in certain circumstances. An individual's income (or chargeable gains) is remitted to the UK if a service is provided from the UK to, or for, the benefit of a 'relevant person' and the consideration for the service is that income or chargeable gains.

A 'relevant person' is defined in s.809M of the ITA 2007 to include the trustees of a trust which includes any 'relevant person' as a beneficiary '“ this includes the individual, his spouse or minor children.

So, for trusts where income and capital are not kept separate, a payment by the offshore trustees in settlement of an invoice for the professional fees of UK advisers could constitute a remittance by the settlor.

The exemption in s.809W of the ITA 2007 could possibly help prevent a remittance in these circumstances. A remittance is not treated as arising provided:

a) the relevant service relates wholly or mainly to property situated outside the UK; and

b) the payments are made to bank accounts held outside the UK by or on behalf of the person who provides the relevant UK service.

Therefore, UK advisers to offshore trusts with UK resident but non-UK domiciled settlors, who are claiming the remittance basis, should consider setting up an offshore account to receive fee payments. In light of the tax saving available to the client, it is surely in the client's best interests to do so.

Advisers will need to consider whether the advice given relates 'wholly or mainly' to property structured outside the UK. If less than half the trust assets, including those of underlying companies, are situated in the UK, does this satisfy the test? Note also that this exemption does not apply to the extent that the services relate to benefits from a trust which are treated as arising from income by virtue of s.735 of the ITA 2007 or from chargeable gains by virtue of s.87 of the Taxation of Chargeable Gains Act 1992 (TCGA). Any advice relating to these aspects would be better invoiced separately.

Now we turn to the considerations for the offshore trustees themselves and looking at two areas of interest that arise from the FA regime. First, the use of 6 April 2008 'Uplift Election' for existing offshore trusts, and second the use of 'protected cell companies' to shelter capital gains when structuring the ownership of trust assets.

Uplift Election '“ is there any downside?

The Uplift Election was introduced by the FA 2008. It allows offshore trustees to prevent non-UK domiciled beneficiaries from being taxed on a capital payment received after 6 April 2008 in respect of a trust gain which has accrued on an asset after 6 April 2008 but has not been realised before that date.

The Uplift Election may only be made before 31 January following the end of the first tax year within which either:

1. a UK resident beneficiary receives a capital payment from the trust; or

2. the trustees transfer trust assets to the trustees of another settlement and s.90 of the TCGA applies to the transfer.

Trustees need to consider carefully whether any event has occurred in 2008/9 that triggers the requirement to make the Uplift Election before 31 January 2010. This is a one-off opportunity only.

The effect of the Uplift Election only applies to beneficiaries who are non-UK domiciled in the year they receive a capital payment from the trust.

How does the Uplift Election work?

The consequence of the Uplift Election is that a beneficiary is not charged tax on so much of the chargeable gains as exceeds the 'relevant proportion' of those gains.

Paraphrasing FA Schedule 7 para.126(9), the 'relevant proportion' is A/B, where:

A is the trust gain for the year on the sale of an asset calculated as if its base cost were the value immediately before 6 April 2008; and

B is the actual trust gain for the year of the sale of the asset calculated in the usual way.

Note that the effect of the Uplift Election is not to alter the usual method of calculating the trust gains and losses. Rather it alters how a non-UK domiciled beneficiary is taxed in respect of trust gains when he receives a capital payment. This has two important consequences:

1. The Uplift Election limits the proportion of a trust gain that can be assessed on the non-UK domiciled individual. It does not crystallise the figure at 6 April 2008 that a beneficiary can be taxed on. He cannot be taxed in respect of more than the actual trust gain ultimately realised.

2. A trust loss cannot be wasted by an inappropriately made Uplift Election.

So, if any asset held by the trustees or an underlying company were standing at a gain on 5 April 2008, the trustees should consider making an Uplift Election. This is the case even if the trust assets as a whole were standing at a net loss on 5 April 2008.

If there is any doubt as to the value of these trust assets and so whether any are standing at a gain, the trustees should consider making the Uplift Election even if subsequently it turns out to be unnecessary.

There are of course issues other than tax that the trustees may wish to consider when reaching the decision to make the Uplift Election. The trustees may not wish to make disclosure to HMRC about the trust.

Protected cell companies (PCCs)

Now that non-UK domiciled beneficiaries can be taxed in respect of trust gains realised after 6 April 2008, when structuring the ownership of trust assets trustees may wish to consider holding assets through PCCs.

A PCC is a corporate vehicle found only in certain jurisdictions (including Jersey, Guernsey and the Isle of Man) within which separate parts or 'cells' can be created. The assets and liabilities of each cell are entirely separate. Each cell can set its own investment objectives. There would usually be numerous cells within each PCC.

Why use a PCC?

Section 13 of the TCGA apportions capital gains made by non-UK resident companies to UK resident individuals who hold more than a ten per cent interest in a company that would be considered a 'close company' were it UK resident '“ i.e. one that is controlled by five or fewer persons or those connected with them.

Under s.87 of the TCGA, offshore trustees are treated as UK resident and so s.13 applies and gains realised on assets held within trustee owned holding companies, which are common in offshore structures, constitute trust gains. Consequently, such company gains can now be attributed to non-UK domiciled beneficiaries who receive capital payments from the trust even though the proceeds of those gains have not been distributed from the company to the trustees.

It is considered that whether the PCC is a 'close company' and whether a shareholder owns ten per cent in respect of the PCC is not calculated on a cell-by-cell basis. Rather it is calculated in respect of the whole company. Provided there are sufficient other cells within the PCC under separate ownership, chargeable gains realised within their cell should not be attributed to the trustees under s.13.

A PCC could also be an attractive alternative to offshore bonds as a way to hold assets for non-UK domiciled individuals who wish to own assets outside of a trust but do not wish to pay the £30,000 remittance basis user charge or, indeed, UK-domiciled individuals seeking to defer tax on capital gains.

Where to from here?

These are just three areas for professional advisers to be mindful of. There are likely to be more changes as the UK government seeks the increasing transparency of offshore jurisdictions. As we adjust to the new FA regime, advisers need to consider new possibilities.

Adam Herbert is a partner in the offshore tax and trusts team at Wilsons (www.wilsonslaw.com). Contact: adam.herbert@wilsonslaw.com