US/UK tax implications
Robert moved to the UK and was then a US citizen, UK resident, non-UK domiciliary, who established a Excluded Property Trust before he became deemed-domiciled. It was now important for him to consider the Income Tax and Capital Gains Tax rules in both the US and the UK to ensure there was no double taxation.
The trust was set up as a Foreign Grantor Trust for US purposes, which meant that Robert was taxable on the assets within the trust as if it was his own, until his death when the trust became a Foreign Non-Grantor trust. At this time, there would either be taxation for the trustee or for the beneficiaries when they benefit from the trust assets.
There are annual reporting requirements for US owners of Foreign Grantor Trusts on Form 3520 and the trustee is responsible for filing Form 3520-A. Penalties for failure to file such forms are high and it is the settlor who is subject to penalties. Therefore, it’s in the interest for the trustees to file Form 3520-A. Robert could submit a substitute form 3520-A if he had adequate information from the trust to do so.
For UK tax purposes, Robert could claim the remittance basis in the period he was non-UK domiciled, because the assets were non-UK situs and therefore could be protected from UK tax for a period of time from the income and gains within the trust. However, based on Robert’s circumstances, having access to the funds in the UK was important to him and the remittance basis was not suitable. Therefore, the UK settlor interested trust rules became important.
If the trust meets the protected settlement rules for settlor interested trusts, this could be problematic for a US person due to the taxation in the UK not occurring until such time that there is a distribution. It might be in the interests of the settlor to taint the trust for these purposes, so that income and gains are taxable to the settlor in line with the US tax treatment. This alignment would help in terms of avoiding double taxation as the timing of UK tax payments could be made so that foreign tax credits could be available to offset against the US tax on the same income/gains.