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Offshore trustees - don’t panic – we’ve been there before

Following publication of the Office for Tax Simplification (OTS) report on Capital Gains Tax (CGT), I have had a strange feeling of déjà vu. 

This article is part of our Quarterly Tax Digest for individuals.

Last updated: 2 December 2020

One of the main points of interest in the OTS review has been the suggested alignment of CGT rates with income tax. This takes us back to 1988, when Nigel Lawson did just that.

Much has been said about the effect on entrepreneurs selling their companies. But it also has the potential to hit beneficiaries of offshore trusts particularly hard, with maximum tax rates of 72% or even 80% being bandied around, once the supplementary charge is added to a capital distribution. While the poorly advised may be caught out by this, there is no need for such rates to be suffered.

Many beneficiaries will currently have to include an extra entry on their tax return when they receive a capital payment from an offshore trust. In addition to the capital gains attributed to them from the accumulated gains within the trust, a supplementary charge is added. This acts a bit like an interest charge for deferring the distribution, and thus taxation of the gains. It works by increasing the tax rate by up to 60% of the relevant CGT rate, depending on the age of the gains involved. With CGT rates at 20%, this gives a supplementary charge of 12%, resulting in an overall charge of 32% at most. A CGT rate of 45% becomes an effective rate of 72%, including a maximum supplementary charge of 27%.

Throughout the early 2000s, it was often preferable for an offshore trust beneficiary to receive distributions of income, rather than capital gains. Trustees adjusted their investments to actively invest in offshore funds that would generate offshore income gains (OIGs) and would be subject to income tax, rather than CGT. Additionally, trustees made distributions of income, rather than capital. Perhaps such strategies will be needed again.

While there have been many inflammatory comments on the subject, we have to remember that this is just a suggestion by an advisory body, that has made many suggestions to government in the past for tax changes that have been ignored. Therefore there’s no need to panic.  

About the author

Maggie Gonzalez

+44 (0)20 7556 1370
gonzalezm@buzzacott.co.uk

This article is part of our Quarterly Tax Digest for individuals.

Last updated: 2 December 2020

One of the main points of interest in the OTS review has been the suggested alignment of CGT rates with income tax. This takes us back to 1988, when Nigel Lawson did just that.

Much has been said about the effect on entrepreneurs selling their companies. But it also has the potential to hit beneficiaries of offshore trusts particularly hard, with maximum tax rates of 72% or even 80% being bandied around, once the supplementary charge is added to a capital distribution. While the poorly advised may be caught out by this, there is no need for such rates to be suffered.

Many beneficiaries will currently have to include an extra entry on their tax return when they receive a capital payment from an offshore trust. In addition to the capital gains attributed to them from the accumulated gains within the trust, a supplementary charge is added. This acts a bit like an interest charge for deferring the distribution, and thus taxation of the gains. It works by increasing the tax rate by up to 60% of the relevant CGT rate, depending on the age of the gains involved. With CGT rates at 20%, this gives a supplementary charge of 12%, resulting in an overall charge of 32% at most. A CGT rate of 45% becomes an effective rate of 72%, including a maximum supplementary charge of 27%.

Throughout the early 2000s, it was often preferable for an offshore trust beneficiary to receive distributions of income, rather than capital gains. Trustees adjusted their investments to actively invest in offshore funds that would generate offshore income gains (OIGs) and would be subject to income tax, rather than CGT. Additionally, trustees made distributions of income, rather than capital. Perhaps such strategies will be needed again.

While there have been many inflammatory comments on the subject, we have to remember that this is just a suggestion by an advisory body, that has made many suggestions to government in the past for tax changes that have been ignored. Therefore there’s no need to panic.  

What should you do?

What should you do?

For offshore trustees to be in a position to respond appropriately to any change, the first thing you need to do is ensure you have up to date calculations of your pools of income and capital gains. The well advised will keep track of these balances each year. It is not too late to bring these calculations up to date. 

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We have  experience with preparing historical calculations, even where the records available are patchy. Please get in touch if you would like our help in establishing the pools of income and gains within your trust.

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