Non-resident Trustees

[rhooda001]

Husband and wife have become non-resident. They are also Trustees of a discretionary trust that holds shares in their trading company. Do they crystallise a charge to CGT on their shares on the date of their departure as a deemed disposal and reacquisition at MV? Or would their shares qualify under the trading exception?

Not an issue if a gain does crytallise as the Trustees wanted to dispose of their interest in the company anyway. IF the husband and wife buy the shares from the Trustees (same people) at MV, would that give rise to any adverse tax implications?

appreciate your comments.

R

[Anthony Nixon]

Yes, there is a deemed disposal on the trustees' emigration, so that they are taxable as if they had sold the shares for their market value on that date.

The “trading exemption” will not help. This is a holdover relief which can defer CGT on disposals (other than sales) of shares in trading companies, but only if the transferee is UK resident.

Since there is a disposal in any event, a sale by the trustees to the individuals should be no problem.

However, everything to do with changes of residence and trusts with non-UK resident trustees is fiendishly complex and full of traps. Good professional advice is essential on the specific circumstances of your case.


Anthony Nixon CTA TEP Solicitor
Partner, Thomas Eggar LLP, Southampton and Chichester
anthony.nixon@thomaseggar.com
023 8083 1224

[maths]

I agree with Anthony's comments.

I would also add:

1. the trustees remain within the charge to UK CGT for the balance of the tax year in which the trust became non-UK resident as ESCD2 is inapplicable to trustees (even if the trustees become resident in a country with which the UK has a double tax agreement providing for UK CGT exemption); and

2. the assets which are deemed disposed of on the trustees emigration does not include UK situs assets used for a trade carried on in the UK through a branch/agency (but this would not extend to shares held in a UK trading company).

[rhooda001]

Thank you for your responses.

What would be the tax implications of the non-resident Trust receiving UK dividends on the shares held? If the intention was to distribute the income straight out to the UK beneficiaries, would they be in the same position as if they received the distribution from a UK Trust? if so, are there any implications in the Trustees waiving their right to dividends with a view to being bought out by the other shareholders from the dividends they receive? currently the two main shareholders (of three in the company) are non-resident and therefore would be not be liable to uk income tax on the dividends received. The plan is for them to take a dividend and buy the shares back from the Trustees (ie. themselves). Wonder if the waiver on the part of the Trustees would give rise to any tax issues?

[maths]

Who are the beneficiaries of the trust?

Are they not in fact non-UK resident ie how can trust distribute income of trust to UK residents as you suggest?

[rhooda001]

The beneficiaries are the Trustees' adult children and are UK resident. Mum and Dad were the Settlors.

Mum, Dad (60%) and 3rd Party (20%) own the shares of the trading company in the UK. The trust holds the other 20%. Mum and Dad left UK for Malaysia in 09/10. Mum and Dad want to effectively wind up trust by buying shares back into their own name rather than in capacity as Trustees and use their non-res status to receive divis tax free.

[maths]

What would be the tax implications of the non-resident Trust receiving UK dividends on the shares held? If the intention was to distribute the income straight out to the UK beneficiaries, would they be in the same position as if they received the distribution from a UK Trust?

None of the UK source income of the non-UK resident trust qualifies for "disregarded" income status. Thus, UK source dividend income is subject to income tax at 32.5% (technically such trusts are not entitled to the attaching tax credit but effectively due to the computational mechanics effectively the credit is obtained); a net liability arises.

In principle a distribution of this income to UK resident beneficiaries is subject at their marginal rate (40%?). By concession only,the tax paid by the trustees is eligible for credit by the beneficiaries. Due to differing 32.5% and 40% rates the trust may need to reduce the amount of dividends paid depending upon its own tax pool.

In principle, for beneficiaries, same result as if trust UK resident.

if so, are there any implications in the Trustees waiving their right to dividends with a view to being bought out by the other shareholders from the dividends they receive? currently the two main shareholders (of three in the company) are non-resident and therefore would be not be liable to uk income tax on the dividends received. The plan is for them to take a dividend and buy the shares back from the Trustees (ie. themselves). Wonder if the waiver on the part of the Trustees would give rise to any tax
issues

?

The trustees have to act in the best interests of the beneficiaries not themselves. I can see no justification for the trustees waiving their rights to dividends on their shareholding so as to increase the quantum going to the others (who happen to include the trustees in a separate capacity). This would seem to be a clear breach of trust.

As a cgt liability has already arisen on the trust exportation the trust could sell to the parents precipitating no further CGT charge on their part.

[rhooda001]

Following up from the case outlined above, once the Trustees sell the shares and are then holding cash for the beneficiaries, would an exit charge to IHT arise in the event that the cash was distributed as capital to the beneficiaries? The Trust was formed in 1999 i.e over 10 years with £100. Subsequently the shares (qualifying for BPR) were transferred in 2004 and remained the only assets in the Trust.

If an exit charge was due, the alternative could be to appoint the shares out to the beneficiaries whilst still qualifying for BPR and then effect a sale of the shares to the buyers subsequently i.e from the adult children (beneficiaries) to their parents. Any IHT issues with this?

many thanks.