Trident Tax has been helping trustees outside the UK to identify possible UK tax issues ahead of the 30 September 2018 deadline for Requirement to Correct. The UK tax legislation will allow for swingeing “Failure to Correct” penalties to be charged if UK tax liabilities arising from non-UK assets are not disclosed by this date. With only 6 months left to identify any problems and disclose them to HMRC, we thought it would be useful to share our experience to date.
The first step in the process is for Trustees and CSPs to complete our anonymous questionnaire, which is designed to collect information on the background and history of a trust or company in order to identify any UK tax issues that they will need to address. Trident Tax will produce a report free of charge summarising any areas of risk or recommended actions. Some common problems have emerged that are typically caused by the actions of third parties, unbeknown to the trustees:
UK-sourced income giving rise to a trustee income tax liability
A non-UK trust is not liable to income tax in the UK on certain classes of UK sourced income providing there are no UK resident beneficiaries. This may appear straight forward, but trustees are reliant on beneficiaries keeping them informed of their tax residence status. It is not uncommon to find that a settlor’s children or grandchildren have moved to the UK to study or work without telling the trustees and inadvertently triggered a UK tax liability for the trustees on UK investment income. Similarly, we have seen cases where there has been a change of investment manager but the original instructions to avoid UK investments because the trust has UK resident beneficiaries has not been communicated in the handover to the new manager.
UK Inheritance Tax (IHT) on relevant property
The mistake whereby an investment manager makes investments in the UK without checking with the trustees also has a potential IHT impact for what would otherwise be excluded property trusts. The UK situs investments are relevant property and can trigger IHT anniversary or exit charges if the value of the assets exceeds the trust’s nil rate band.
A much easier trap to fall into is for trustees to make loans to UK resident beneficiaries. Recent case law suggests that the situs of a loan is usually in the place where the borrower resides, as this is where collection of the debt can be enforced. This means loans to UK beneficiaries are normally UK situs assets that are liable to IHT under the relevant property regime.
A far more difficult problem for trustees is to understand whether assets settled in trust are relevant or excluded property when settled. The question of an individual’s domicile or deemed domicile status is complicated but we have seen cases where settlors who are non-UK domiciled when a trust was settled with excluded property have either become UK domiciled or deemed domiciled before settling further property or have settled UK situs assets into trust believing them to be excluded property.
Another common compliance problem is overlooking the requirement to make ATED Relief Declaration Returns in circumstances where an ATED property is exempt from charge. For example, UK residential property held through a company is exempt from the ATED provisions if the property is rented out on a commercial basis or is held as part of a property development trade. However, the directors of the company, must still submit an ATED return to declare the exemption. Late claims for relief can be made but significant penalties can still arise, even when there is no ATED charge due to an exemption.
Issues for UK beneficiaries
There are a number of ways in which a UK resident individual can be liable to tax in the UK as a consequence of being the beneficiary of a non-UK resident trust. Without understanding whether the individual has taken UK tax advice and made appropriate disclosures to HMRC, it is not possible to be clear whether the individual has a requirement to correct. We have identified a number of situations where there is a high degree of risk for UK beneficiaries and we have recommended, via the trustees, that individuals take urgent advice ahead of the 30 September deadline.
Our advice to any beneficiary of a non-UK resident trust is to take UK tax advice from a specialist advisor, even if advice has been taken in the past. The consequences of failing to correct are too significant to risk getting it wrong. Please contact a member of our team to discuss any of the above issues in more detail.