Despite the policy intention behind the concept of protected trusts, it has now been discovered that a flaw in the legislation means that deemed domiciles will be taxable on an arising basis on any Offshore Income Gains realised within what they believed were protected trusts. Although this point is not covered specifically in the ICAEW article we have provided a link for, we believe there is also a problem for non-doms who have not yet become deemed domiciled but have been resident in the UK for 7 years or more and have used a protected trust to avoid the need to pay the Remittance Basis Charge.
The problem lies not in the new legislation specifically, but the fact that Regulation 19 of the Offshore Funds Regulations has not been amended to take account of the protected trust legislation. The protection in question applies to “protected foreign source income”, which is income that would be relevant foreign income of a UK resident individual. Regulation 19 still defines relevant foreign income as income to which the remittance basis applies in the tax year in question – that can never be the case for a deemed domicile person and, therefore, no protection is given to prevent OIGs of the trust being taxed as they arise on the deemed domiciled settlor. Similarly, a non-dom who is not yet deemed domiciled and is not using the remittance basis because their overseas income and gains arise in a protected trust will also have the problem of being taxed on OIG’s that have arisen in the trust structure.
Until this issue is resolved, trustees may need to be very cautious about any decisions to dispose of units in non-reporting funds that could trigger unexpected income tax liabilities for deemed domiciled settlors and those who aren’t yet deemed domiciled but have used protected trusts as an alternative to the Remittance Basis Charge. If the OIGs arose by 5 April 2018, the problem already exists and the settlor’s 2017/18 tax return will need to include OIGs where relevant, unless HMRC make an appropriate statement on policy or publish something akin to an extra statutory concession to deal with what is a very unfortunate problem.
Four professional bodies – ICAEW, the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and the Law Society of England and Wales – are lobbying HMRC to amend the legislation and have produced a survey for offshore trustees that is designed to inform HMRC of the scale of the problem. The questionnaire is very short – just six questions – and we would encourage all trustees to complete it.
It is very disappointing this error has arisen and perhaps even more disappointing that the government apparently needs to be persuaded of the need to correct it; why else would the survey be needed?
We would be interested to hear any feedback you have and have attached links below to an ICAEW article on the subject and, secondly, a link that allows you to complete the survey.