|
Speaker
|
Transcript
|
|
Tim Williams, Partner
|
[Music] Hello and welcome back to another episode of Death and Taxes - and everything in between, a weekly podcast by the Private Wealth team at Burges Salmon.
I'm Tim Williams, and today I'm joined by my colleague Catherine de Maid, to discuss the key takeaways of the Budget for trustees and trust companies. Hi Cath, thank you for joining us today.
|
|
Catherine de Maid, Partner
|
It's a pleasure to be here, thanks Tim. [Music]
|
|
Tim
|
Today we're going to talk about more of the Budget, but this time we're going to focus our attention on the impact for trusts and trustees.
Now, trustees can be either onshore UK trusts owning UK property, or they can be offshore trusts owning a variety of different assets and obviously all of those are impacted differently by the proposals and changes in the Budget.
So Cath, do you could you talk a little bit about what this means for the more offshore trustees, to start with?
|
|
Cath
|
Yeah of course, with pleasure, and that's certainly been where our attention has been focused recently, so we've been having lots of conversations with offshore trustees who've often got numerous trusts for wealthy settlors and they're wondering what they should do in relation to these changes.
So, I suppose as a starting point it's worth remembering that not all offshore trusts will be impacted by these changes, there will be plenty of offshore trusts which aren't. The ones which are potentially impacted are ones with a living UK resident settlor. So, if your settlor's dead, not great for lots of other reasons but it's quite good in relation to these changes, or if your settlor is not UK resident and has got no intention of becoming UK resident then broadly speaking you can forget about most of these changes. So that's a lot of trustees and trusts won't be impacted.
Where you have got a UK resident living settlor then there are significant changes ahead, and the changes relate to both Income and Capital Gains Tax and to Inheritance Tax.
|
|
Tim
|
So should we start with Income and Capital Gains Tax? What are going to be the main changes for offshore trusts?
|
|
Cath
|
Sure of course, so currently most trusts which are established by, most offshore trusts sorry, which are established by UK resident settlors benefit from protected status for Income and Capital Gains Tax, and what that means is that, broadly speaking, as long as the trust was established and funded by the UK resident settlor before they became deemed domiciled in the UK, the Income and Gains within the trust roll up tax-free and usually there's only UK tax when there are distributions to UK resident beneficiaries, which can match to the Income and Gains within the trust. So a really beneficial status.
From the 6th of April '25 those trusts will lose the protected status and the Income and Gains within the trust will be taxed on the UK resident settlor, as they arise. So that's a very significant change and we've been speaking to trustees about how they can potentially minimize the impact of those changes.
|
|
Tim
|
And I should just say at this point for any of you who are struggling to remember what things like residence, domicile, and all of that means, do go back to listen to the episodes in our last series where we covered the basics of residence domicile and Inheritance Tax, as a reminder.
That's great Cath, thank you very much, and should we move on to Inheritance Tax for offshore trusts?
|
|
Cath
|
Sure, of course. So again just a recap, that currently non-UK trusts which are established by settlors who are not domiciled and not deemed domiciled in the UK, provided those trusts don't own UK assets directly or own UK residential property interests even indirectly, they are excluded from UK Inheritance Tax. Which means they're essentially out outside of the scope of UK Inheritance Tax and that remains the case indefinitely under the current rules. So again a really really nice Inheritance Tax advantage.
The very big change, which is coming into effect from the 6th of April next year, is that moving forward the Inheritance Tax status of a trust is directly linked to the Inheritance Tax status of its settlor. So if the settlor of the trust is a long-term resident, and I'll come on to explain to what that means, the trust will remain an Excluded Property Trust, as long as it doesn't have UK situs assets, if the settlor of the trust becomes a long-term resident then the trust will no longer be an Excluded Property Trust and it will fall within our relevant property regime, which is a really significant change.
The term long-term resident is going to become really really important and what it essentially means is that the starting point is that once a settlor has been UK tax resident for at least 10 of the last 20 tax years they will be deemed a long-term resident, which is broadly the same as being UK domiciled at present, but it's not just for the period that they're UK resident. They will also remain a long-term resident if they fall within the period of having a tail, which is a relatively new term we're all becoming used to, and the length of your Inheritance Tax tail depends on how long you have been resident in the UK, and it can be anywhere between 3 and 10 years so it can be quite significant.
|
|
Tim
|
And just by way of reminder, the relevant property regime is the Inheritance Tax regime that applies to current UK trusts. So that's the 10-year anniversary charges and exit charges when Capital leaves the trust. So a really big change for trusts which have previously been entirely outside the UK Inheritance Tax net coming within the standard 10-year charge regime from now on.
In the run-up to the Budget there was lots of discussion about whether or not grandfathering would be allowed, what's happened with that?
|
|
Cath
|
You're quite right Tim, there was lots of chat about that and lots of different opinions on it. There is a very limited form of grandfathering for trusts, so the professional bodies were lobbying for total grandfathering for trusts which were set up and funded, either at the date of the Budget or on the 6th of April '25, and the government hasn't allowed that, but what they have introduced is that there are two potential tax charges for Inheritance Tax for trust. So it's then falling within the relevant property regime which you've discussed which is this maximum of 6% charge on 10 year anniversaries and when assets leave the trust, and there's also a separate charge which can apply called the gift with the reservation of benefit regime and that can apply when the settlor is a beneficiary of the trust, so they're deemed to have reserved a benefit by way of being a beneficiary, and that can be a particularly nasty tax charge because if the gift with a reservation of benefit applies the assets of the trust are deemed to be the settlor's and they are subject to Inheritance Tax on the death of the settlor at up to 40%. So a really unpleasant tax charge and that the limited grandfathering that's been allowed is that for trusts which are in existence on Budget day, so in existence on 30th of October 2024 they won't be subject to that gift with a reservation of benefit rule, they'll only be subject to the relevant property regime. So there is a limited form of grandfathering.
|
|
Tim
|
And those rules for reservation of benefit, are they the same as the sort of current UK reservation of benefit rules as we understand them? So you know the donor, or the person who's given away the property, the settlor in this instance, needs to be completely excluded from benefit from those assets.
|
|
Cath
|
Exactly, exactly. So the other way you - so for trusts which were established after the 30th of October '24 they can avoid that gift with a reservation of benefit by excluding the settlor, but if the exclusion happens after 30th of October the settlor is going to have to survive for at least seven years from the date of the exclusion to be totally outside of that rule.
|
|
Tim
|
And that's the same as the normal rules for reservation of benefit isn't it? Exactly. So the date that the reservation ceases starts a new 7year clock running for Inheritance Tax purposes. Okay. So that's one of the stings, what about the exit charge that you mentioned?
|
|
Cath
|
Sure, so this exit charge is different to the exit charge which can apply under the relevant property regime when assets leave the trust. This exit charge wasn't anticipated in the discussions leading up to the Budget so it's been a nasty surprise this exit charge is imposed when the settlor loses their long-term resident status, so when they effectively lose their right to tail there's a deemed exit charge on the value of the trust assets, at up to a maximum of 6%. And this has been particularly unexpected and unwelcome.
So, for example it can apply, we've had some clients who chose to become non-UK resident in the current tax year in anticipation of these changes and even those clients if they were already deemed domiciled, they will still have a form of Inheritance Tax tail, albeit that they'll qualify for some transitionary relief so their tail will only be three years. But they will still - even though - so even those clients who've already left the UK they will be impacted by this exit charge. When they lose their tail all of the trust assets are subject to this exit charge and for those with significant assets in trusts it can be a really big issue.
|
|
Tim
|
And there's a lot of discussion going on isn't there between various representative bodies and government at the moment, are we expecting that, or indeed any of the other changes you've mentioned, to move between now and 5th April, or are we?
|
|
Cath
|
Yeah, it's very difficult to say. I think that this is probably the area that's one of the most contentious areas because it does seem slightly unfair for people who've already left to be subject to this, so I think it is one of the areas of biggest lobbying. It's really difficult to know if they if they're going to budge or not, because it's clear that they're going to potentially get quite a lot of tax from it so we'll have to see whether the lobbying works.
So Tim, I've sort of been chatting about the changes to offshore trusts. In your world, I know the big changes are the changes to business property relief and agricultural property relief, can you tell us a bit about those changes?
|
|
Tim
|
Absolutely, and those of you who listen to the last podcast will already have heard me talking about the changes to APR and BPR, mainly about how that was going to apply to individuals, but there are lots of trustees in the UK owning APR and BPR property to whom this will also be relevant, and that's going to be on the 10 year anniversary charges that we talked about with relevant property trusts and also when property leaves the trust as well.
The tricky bit here is that the announcements of this new policy following the Budget said that there will be a consultation on how this would apply to trusts, which will come in early 2025 so while I think we're reasonably clear on how the rules will work for individuals, although we haven't got any draft legislation yet and there may be some movement on all of that, we're not really clear on how this will work for trustees. And the questions in my mind are around the calculation of the rate.
So Cath as you said the rate of tax at these 10 year anniversaries is a maximum of 6% but there is a sort of slightly fiddly calculation that gets you to your settlement rate, and also things like whether or not trusts which aren't in the relevant property regime, so the what's usually called pre-2006 life interest trusts, are going to have their own 1 million pound allowance.
One of the things in the policy paper that's really worth noting around of things that happened before the Budget and things that have happened afterwards is it looks quite likely that trusts which were created before the Budget will have their own million pound allowance and it looks from the commentary that those trusts will need to all already be owning some sort of qualifying property, say some business or agricultural property but that's not very clear, or whether it will be any trust will have a million pound allowance. So if you would if you created a number of trusts with relatively low value could you now add some APR/BPR property to them and still get a million pound allowance. So wait for clarification on that. But the policy paper does announce that if you've created trusts after 30th of October then those new trusts will share a million pound allowance. So if you created you know 10 trusts they'd have £100,000 each. Now that's -
|
|
Cath
|
Sorry Tim, trusts created by the same settlor then, so -
|
|
Tim
|
Oh yeah, sorry yeah, yes. Yeah exactly. So trusts created by the same settlor. So, you're absolutely right Cath there is an opportunity there for families to maybe create trusts through different settlors, but if the ownership of the property is concentrated in the hands of one person that might be quite a challenging thing.
|
|
Cath
|
Of course.
|
|
Tim
|
So yes, so still news yet to come for APR and BPR for trusts. But I mean Cath, whilst you know, there may be some movement on all of these things, what a clients looking to do? What can clients look to do between now and the 5th of April 2025?
|
|
Cath
|
Sure, so quite a few things. So unfortunately, quite a few clients are looking to leave, or if they haven't left already. So there are clients who have just decided that it's all a bit too much and they are becoming non-resident. Not least because if they, there is again, I mentioned it briefly before, but this IHT tail which is quite a significant issue, there's this transitionary relief which means that if clients become non-resident in '25/26, provided they're not domiciled or deemed domiciled on the 30th of October 2024, instead their tail will be under the current rules which means it will be a maximum of three years, rather than potentially up to 10 years.
So some clients are deciding to take advantage of that relief and they're looking at becoming non-UK residents. That's one thing we're giving advice on. The other thing that we're looking at with trustees is how we mitigate the impact of the Income and Capital Gains Tax changes so the loss of those trust protections.
So again settlors who were in the first four years, so if they qualify for the four year FIG regime they've got a little bit of time before these changes impact them, but for settlors who won't qualify for the four-year FIG regime, so that from 6th of April '25 they're going to be subject to the trusts Income and Gains on the arising basis, the things we're looking at is potentially rebasing assets before then because if the trust rebases assets before the 6th of April when the trust protections still in place there's no immediate tax on the settlor and then you're starting from a better place going forward. So that's one thing we're looking at.
The motive defence has always been a very valuable relief but it's potentially going to become even more important. The motive defence is a defence which can stop, not just the matching rules when there were distributions to beneficiaries but, can also stop the settlor attribution rules so it can stop the attribution of Income and Gains to the settlor, so a really valuable defence and very broadly speaking, it's much more complicated than this but, if you can show that avoiding UK tax didn't play any part in your decision to establish and fund the trust then the motive defence can apply and there are separate defences for Income and Capital Gains Tax and there are more conditions than that, but that's the easiest way of explaining it for the purposes of this podcast.
You can stop those attribution rules, so a quite common example is I advise a lot of South African clients and they may have established a local South African trust many many years before anyone ever moved to the UK so it was clear that South African estate planning was the reason for establishing the trust not UK tax planning, then it's very likely that that trust will benefit from the motive defence and then the impact of these changes can be mitigated so we're looking at that.
There are also exclusions you can do, so for example to stop the Income Tax exclusion if you exclude the settlor and their spouse or civil partner you can stop that income attribution. Obviously the settlor needs to be able to live without any recourse to the trust so it's not possible in all cases but we're certainly looking at that. The stopping the Capital Gains Tax attribution is much harder, you have to basically exclude spouse, civil partner, children, grandchildren, a whole range of individuals which in most cases makes the trust redundant.
So in almost all cases you're going to have to live at least with the Capital Gains Tax attribution, but then you know you could obviously look at changing the investment strategy of the trust moving it counterintuitively away from growth assets, moving at two income producing assets if you've excluded the settlor and the spouse so that there is no income attribution you can stop the immediate consequences of some of these changes. So that's that's something else we're looking at.
So it's obviously very client specific, very trust specific, and very family specific, but there's a range of things you can do to help minimize the impact of some of these changes.
|
|
Tim
|
Thanks Cath, that's fantastic, and just as a a reminder if you if anyone wants to understand what the rules used to be around things like deemed domicile and residents, do you listen to the previous series where we covered that in quite a lot of detail.
So would it be fair to say Cath overall the message for clients now is that whilst this is going to be a massive change they have got time to do something, or potentially do something, before the 6th of April '25, but it's really now time to get in touch with your advisers start thinking.
|
|
Cath
|
Yes Tim, I think that absolutely is right, and the sooner the better really. There's going to be an awful lot of clients and trustees needing advice on this and there's a relatively small pool of UK advisers who've got this sort of expertise, so I think everyone's anticipating being incredibly busy over the next five or six months, so I think getting advice as soon as possible is key.
|
|
Tim
|
Fantastic, thank you so much Cath.
|
|
Cath
|
Pleasure, thanks Tim. [Music]
|
|
Tim
|
Thanks again for listening to this episode of Death and Taxes, the Private Wealth podcast from Burges Salmon. You can listen to our previous episodes and get in touch with the team at Burges-Salmon.com, or through our LinkedIn page. We'll be publishing new episodes every Friday between now and Christmas, discussing the implications of the Budget for land owners, non-doms, entrepreneurs, and business owners, so don't forget to subscribe and thank you again for listening. [Music]
|