Liquidation of US-based Trust

[Groover]

Hi, in 2008 my wife became the beneficiary of a trust based in the US. At the time she was living in the US and only a US citizen.
In 2010 she moved to the UK and in 2014 she became a dual UK-US citizen.

The trust was created from the death of a relative and at the time estate tax in the US was paid and an appraisal on the property was made.

Coming up soon the trust will end, the assets liquidated and the proceeds distributed to the beneficiaries.

I know that CGT will be payable on any gain in value in the US, looks like 15%.

We expect her share of the liquidation to be in the region of $950k (£684k). Her share when the trust was created was worth $500k (£360k). I guess that US CGT would be $67.5k (£48.6k).

The proceeds will most likely stay in the US and not be brought to the UK.

My question is - what are the consequences of the trust ending on her UK tax situation?

Thanks!

[Groover]

Property in the trust is not residential property.

[AGoodman]

She's going to need an accountant with a knowledge of offshore trust taxation to look at it properly, but there are a few flavours of tax here:

1. If any income arises within the trust and is distributed to her (at any time, including in a final distribution), that is subject to income tax;
2. If any income has been accumulated in the trust at any time and not already distributed to other beneficiaries in prior years, that may be subject to income tax under the transfer of assets abroad rules. It probably won't be subject to tax as there is a defence that there was no UK tax avoidance motive to the creation of the trust (I'm assuming the deceased was just a US citizen living in the US). It is necessary to claim the defence on a tax return.
3. For UK purposes, the trustees will make a disposal (resulting in a gain) when they sell the asset(s). However, if the trust was a will trust and the beneficiaries have become absolutely entitled to the assets on the death of a life tenant, there may be a tax free uplift to market value on that death. Any further gain/loss on sale (vs value on that death) would accrue to the beneficiary personally. Gains accruing to the trustees are taxed in the beneficiary's hands under s.86 TCGA 1992 when the distribution is made. CGT would be 20%. There may be credit for US taxes but there are some peculiarities of how the legislation works here so that needs checking.

The key points are:

- what are the terms of the trust;
- how was it formed
- whether she can claim credit in the UK for the US tax paid.

There is a further option. If she is non-domiciled, which is perfectly possible after just 10 years here, she could elect to be taxed on the remittance basis and so avoid UK tax on the distribution. However, it does also involve:

- a £30,000 remittance basis charge
- the loss of her personal allowance (IT) and annual exemption (CGT) for the year
- she would still be taxed if she (or anybody connected to her) ever brought that money to the UK

overall, it's unlikely to be worth it.

[Groover]

Many thanks AGoodman - that is very helpful!

[AGoodman]

Of all the things to get wrong - it's s.87 TCGA 1992, not s.86...