The recently published Finance Bill 2017 No.2 contains the new rules for deemed domiciles. The good news is that the plans for protecting some of the of the advantages for non-doms from existing non-UK trusts have been captured in the legislation. An offshore trust set up by an individual when they were non-UK domiciled will be protected going forwards. The existing anti-avoidance provisions will not apply in full; trust income and gains will not be attributed to and taxed on a UK resident settlor as it arises once they become deemed UK domiciled under the new rules. Instead, a UK resident settlor of such an offshore trust will be taxed as and when distributions and benefits are provided to them or “close family members” from the trust.
The rules that protect trusts going forward will be very valuable to those settlors who become deemed UK domiciled from 6 April 2017 onwards. It is therefore important that settlors, trustees and beneficiaries do not do anything to jeopardise a trust’s protected status. A trust will lose its protection and become tainted if the settlor or another trust connected with the settlor contributes further assets to the trust. The legislation specifies certain situations which will cause a further settlement to occur. Broadly, the settlor cannot enter into any arrangement with the trustees that is not on arm’s length terms and results in extra value passing to the trust.
There are detailed rules on loans between settlors and trustees that define arm’s length e.g. interest paid by trustees to a settlor must be at or above the official rate, whilst interest paid by settlor to trustees must be at or below the official rate. This means that loan arrangements must be monitored and reviewed at least annually to ensure the limits are not breached.
Any existing loan from a settlor to a trust made before 6 April 2017 will be treated as creating a further settlement if it is not already on arm’s length terms. There are, however, transitional rules that give settlors and trustees some time to amend loan arrangements in order to prevent a further settlement occurring and the trust becoming tainted. The loan must be put on commercial terms before 6 April 2018 but importantly, the revised terms must be applied for the whole of 2017/18 i.e. a full year’s interest must be paid at a commercial rate.
There is also a danger of creating a further settlement if an existing loan with arm’s length terms is varied and put on non-commercial terms e.g. if interest is capitalised, the term for repayment is extended indefinitely or the interest rate is set below the official rate.
Trustees should review any loan arrangements in place with the settlor of a protected trust and consider whether action is required prior to 6 April 2018. Going forwards, trustees of a protected trust must consider the implications of any transaction with a settlor in advance to determine whether there is a risk of tainting the trust’s status.