Foreign Trusts - Anti Conduit/Recycling Rules

[SanchoPanza]

Hi All

I am not sure if anyone will be able to help with this query.

I understand that the Finance Bill 2017 was going introduce rules to combat UK beneficiaries receiving a payment from a foreign trust tax-free, where that payment comes through a non-UK resident by way of a gift i.e. a distribution is made from a foreign trust to a non-UK resident beneficiary who then pays the funds (or part thereof) on to a UK-resident by way of a gift. As the payment from non-UK resident to UK resident is a gift, it is not taxable.

The idea of the new legislation being that the UK-resident recipient would be liable to income tax on the distribution as if the distribution had been made directly from the trust to the UK resident.

It seems that this has been dropped from the Finance Bill 2017 and most commentators seem to think this rule will only be brought into force to apply as of April 2018. Assuming this is true, is it the case that the current state of the law would mean that, in the scenario described in my first paragraph, the ultimate UK recipient would face no tax liability as a result of the gift payment ?

Thanks for reading

[AGoodman]

The contrary I'm afraid. There is a strong body of thought that a distribution in these circumstances could well be taxed on the end recipient.

I suspect the argument is much stronger where:

(a) the trustee is aware that the end recipient is likely to receive the benefit; and
(b) the end recipient is also a beneficiary of the trust.

If you have (a) but not (b) then the original distribution could be void as a fraud on a power. If you don't have (a) or (b) then I suspect the position is far safer and it would be a hard argument for HMRC to make.

[SanchoPanza]

Thank you for your reply. This does not come as a surprise.

We seem to be caught in a somewhat "unfair" position of having to pay income tax on a final distribution (following a death) in circumstances where IHT would not have been payable as (a) deceased was not resident in UK and (b) funds to be distributed are less than the nil rate threshold.

I have thought about the "motive defence" however from what little the internet tells me it seems as though it is practically impossible to claim this successfully where the settlor of the trust is dead, notwithstanding that the trust was never set up to avoid tax.

Thanks again

[maths]

You seem to start in your initial post referring to income tax charges on distributions out of non-UK resident trusts to UK resident beneficiaries.

Your later posts states:

We seem to be caught in a somewhat "unfair" position of having to pay income tax on a final distribution (following a death) in circumstances where IHT would not have been payable as (a) deceased was not resident in UK and (b) funds to be distributed are less than the nil rate threshold.

I don't understand the connection?

[SanchoPanza]

Sorry - yes that is unclear.
My father died. He had what I think is a (foreign) single premium life insurance policy (it may be a pension). I am pretty sure he was not domiciled in the UK (he had not even travelled to the UK for 30 years).
On his death we though the proceeds of this were going to pass into his estate. Unbeknownst to us, the policy was in fact written in trust with my mother (pre-deceased) and then my brother and I as equal beneficiaries. My brother is not domiciled in the UK. I am. The net result seems to be that I may face an income tax charge at 40/45% on my share of the "gain" in the policy when proceeds are distributed to me. Had the proceeds formed part of the estate, Inheritance tax would not have been payable as my father was not domiciled and in any event the amount is below the inheritance tax threshold.

I understand I may get caught by the transfer of assets abroad anti avoidance provisions, which seems a little unfair as these arrangements were not put into place to avoid UK tax (which is perhaps demonstrated by the fact that no tax would have been payable had the investment not been held in trust).

I am sure that is not very clear, however I am struggling to get to grips with it all. Tax, it seems, is very taxing indeed.