Discretionary Trust revocation, property Tax payable & broken Domicile

[Elain]

Hi, I’d be grateful for any assistance anyone can offer on a predicament which I outline below:

Background synopsis:
My husband (LN) was born legitimate in Northern Ireland (NI) in 1945 and moved to Southern Africa (SA) in 1968 where he took permanent residence, working, paying taxes, buying property etc.
LN carries a UK Passport.
LN visited NI annually for 10-14 days when he visited his parents up until his mother’s death in 1995.
We married 1983 – I was not born in the UK and have not resided there other than for 3 months on a work contract in 1998.

In 1991 LN’s father died leaving him an old fishing cottage in NI, which LN was undecided about accepting at the time so he requested that the property passing to him be put immediately into Trust for the time being. In 1992 an Offshore Trust company (OTC) drew up a Discretionary, Revocable trust document, allowing for beneficiaries to be added and/or changed by discretion of Trustees – a long-stop charity was named as well. The trust was not registered in the Offshore jurisdiction as it was not a requirement to do so.
The value of the property at the time of LN’s father’s probate (1992) was £40’000. The property was never put into LN’s name, but directly into trust but LN was technically the Settlor.
(4 years after the Trust was formed, both myself and LN, were added by the OTC, as beneficiaries of the Trust.)

In 1993 LN notified the Reserve bank and tax authorities of SA, of his inheritance and the trust existence.
Also, in 1993, LN spent some £60K (his own funds) renovating the house; The property remained locked and uninhabited.

In 1994 LN officially emigrated from SA, closing his SA tax file, and moved to the Middle East – a tax-free jurisdiction, where he took employment for 10 years.

In 2000 the OTC closed down and with my consent, I was appointed a trustee by the OTC together with another family member (2 trustees were required by the Trust company, but this is not a requirement in the Trust document). (I knew at the time of agreeing to be a trustee, that I would have to resign as a trustee in order to benefit from the Trust).
Within a few days of accepting trusteeship and after all paperwork had been completed by the OTC, the 2nd trustee resigned – simply sending us a copy of hand written note which he had sent to the old OTC.
The property was then re-registered in my sole name (as NI Land Registry in those days did not register private property in a company or trust name – so they told us). I am however uncertain if there is any indication in the Land Registry that this was a trust property.

There are no funds/bank accounts set up to maintain the property; LN has paid costs annually for the upkeep/maintenance of the grounds – very little has been done to the house since 1993, which has always remained uninhabited except for 6 weeks (less than 90 days) annually when we have lived in the house in the summer, attending to maintenance (wood varnishing, clearing mould and airing the house, garden, lawn & hedge cutting and rodent control etc.). The house is near derelict and is registered as uninhabited with the rates office. All expenses for upkeep and rates have been a loan from LN to the Trust. The house has never been let out for income since it passed to LN into Trust.

LN wrote in 2002 that he wished to revoke the trust. As the property was registered with Land Registry NI in my name, LN & I decided that there was no need to do anything further on the property regarding the Trust revocation. (Memorandum & Resolution covering this having been made.)

I officially emigrated from SA in 2004 and closed my tax file there, having lived in the Middle East with LN for the previous 10 years.
When LN retired in 2005 we began spending only the cooler months (6) in the Middle East and travelling extensively for the remaining months, never staying in any one place for longer than 90 days. The hot Middle East months away travelling has become our annual practise and our intention to live in the Middle East remains unchanged. Neither of us has an open tax file anywhere since we retired and have chosen as our permanent home, a tax-free country, where we have resided permanently for over 20 years.

Present situation:
We wish to sell the UK property, as it is a financial drain, and we do not intend to live there.
We remain resident in the Middle East where we have our bank accounts and own property in which we live.
LN has registered a Will in the Middle East (which does not include or refer to the UK property registered in my name).

We approached a solicitor in NI to act on our behalf to sell the house. As soon as he heard there had been a trust involved, he said we needed to deal with the Offshore Country in which the Trust had been declared to clear tax issues with them before he could get involved with selling the house.
We approached a solicitor in the Offshore jurisdiction who in turn said that the finances of the trust may be an issue and we required to see an accountant in the Offshore territory and that LN may still be considered a UK domicile. (Surely LN can be seen to have broken his UK domicile – being away from UK for over 50 years and his intention is to never go back?)

We contacted a recommended accountant in the Offshore territory, who said that because the house was a UK asset and Trust property, the matter had to be dealt with by a UK accountant.
A UK accountant said that we needed to get clearance from the Offshore centre first. Help!!

Chasing around in circles, I then suggested to LN that all I (as a (lay) trustee) could see as being required, was to present the relevant letter of revocation from the settlor, together with Memorandum and Resolution passed in 2002 to an Accountant for us to confirm that the trust had been revoked.
We both know that there may be taxes that need to be paid on the property as even though the house is near derelict, the property value in today’s market may be around £250’000, being in an area of outstanding natural beauty. We want to keep everything above board but have no idea how to proceed.
The Trust was not registered with HMRC to my knowledge and no tax has been paid as per the 10 year rule for Trusts viz. the Offshore Trust Company closed before the first 10 year anniversary of the Trust and the Settlor ‘technically’ revoked the trust in 2002 although nothing was done beyond the Memo & resolution to this effect.

How do we progress this?
Can LN still be classified as UK domiciled?
Is it possible, or even recommended, that we approach HMRC directly to assist?
What will be LN’s obligation regarding IHT and CGT and additionally would/are any taxes likely to be due on the defunct/closed trust?


I hope I have outlined our dilemma clearly enough and Apologise for the length of this submission.

[AGoodman]

This doesn't make a lot of sense on its own, suggesting something is missing or more detail is needed - specifically why advisers are saying you need to clear off foreign tax issues to sell the property.

In particular: "he said we needed to deal with the Offshore Country in which the Trust had been declared to clear tax issues with them before he could get involved with selling the house". Most offshore jurisdictions (e.g. channel islands) would not subject this structure to tax, nevermind provide some clearance.

Husband's domicile fairly irrelevant to this issue because the property is located in the UK (so subject to IHT anyway). It's uncertain where he is domiciled because you cannot just lose a domicile of origin, you need to acquire a new domicile of choice to displace it. He may have acquired a domicile of choice in SA but could well have abandoned that (so reverting to the UK) and he has not necessarily acquired a domicile in the Middle East.

The only obvious UK tax issues are:

- IHT on settling the trust and exit. You don't mention whether there was a formal variation of father's estate but, assuming no other trusts, the values all sound under the thresholds for taxes and/or reporting.
- There could be CGT to pay (and you will definitely have to file a non-resident CGT return within 30 days of sale) but only if the value has increased since April 2019.

The other possibility is that the trust could well have been tax resident in SA when you were sole trustee. If so, there might have been an SA tax charge on the trust (i.e. you) when the trust was revoked and/or when you ceased to be tax resident in SA (there would have been if it were the UK). If you never took SA advice on this, now would be a good time.

I'd suggest clarifying the tax with a good UK adviser who knows what they are talking about and then speak to another conveyancer - perhaps a solicitors firm that can do both (check out the STEP member directory for NI).