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Malcolm Finney outlines the background to trust residence for Income Tax and Capital Gains Tax purposes.

Background

While a trust is a separate taxable entity, certain anti-avoidance provisions may apply, the consequences of which are that it is the settlor, and not the trust, who is subject to tax on the trust’s income and/or capital gains.

The taxation of a trust depends upon the following factors:

• residence of the trust (i.e., UK resident or non-UK resident);
• type of trust (e.g., discretionary or interest in possession);
• residence status of the settlor;
• domicile status of the settlor;
• residence status of the beneficiaries;
• domicile status of the beneficiaries; and
• UK or non-UK source income/gains.

Strictly speaking, it is the trustees of the trust (not the trust, per se) who are liable to any Income Tax and/or CGT charges. Trustees are treated as a single person, or single body, distinct from the persons who are in fact the trustees (companies and individuals may be trustees) (ITA 2007 s 474; TCGA 1992 s 69).

Trust Residency

Pre-6 April 2007

Capital Gains Tax

Prior to 6 April 2007, a trust was non-UK resident if:

• all or a majority of the trustees were neither resident nor ordinarily resident in the UK; and
• the general administration of the trust was ordinarily carried on outside the UK.

A UK resident professional trustee (broadly, a person carrying on the business of trust management) was, however, deemed to be resident outside the UK if the whole of the settled property consisted of property provided by someone who at that time was neither UK domiciled, resident nor ordinarily resident. The general administration of the trust was regarded as carried on outside the UK if a majority of the trustees were non-UK resident.
 
However, the professional trustee ‘let-out’ did not apply for Income Tax purposes.

Income Tax

A trust was UK resident for Income Tax purposes if there was a sole trustee who was UK resident or, if there was more than one trustee, all were UK resident.
 
If one or more trustees were UK resident and one or more were not (i.e., mixed residence trust) then the trust was UK resident if the settlor was domiciled or resident or ordinarily resident in the UK when the funds were provided.

Post-5 April 2007

The consequence of the changes introduced by FA 2006 (effective 6 April 2007) is that the test for residence of trustees is now the same for Income Tax and CGT. The pre-6 April 2007 Income Tax rules now apply.

UK Resident Trusts: Income and Capital Gains Taxation

The trust is treated as resident and ordinarily resident in the UK at any time if:

• all the trustees are resident in the UK; or
• at least one trustee is resident in the UK and at least one trustee is not resident in the UK and the settlor is resident or ordinarily resident or domiciled in the UK when the trust is made (whether in lifetime or on death) (ITA 2007 ss 475 and 476; TCGA 1992 s 69).

Thus, a trust where all of the trustees are non-UK resident will be non-UK resident irrespective of the domicile and/or residence status of the settlor.

Where the settlor is non-UK resident, not ordinarily resident and non-UK domiciled at the time the trust is made the trust is non-UK resident so long as at least one trustee is non-UK resident.

The professional trustee let-out referred to above has been abolished (regarded as State Aid under EU competition law) and the place of administration of the trust is now also irrelevant.

Example

Bertrand Dublin, a non-UK domiciled but UK resident individual, is keen to set up a trust (post-6 April 2007) outside the UK for family planning purposes.

He is a little wary of the trust comprising exclusively non-UK resident professional trustees and suggests that in addition his UK domiciled and UK resident brother or his non-UK domiciled but UK resident sister (or both) should also act as trustees.

If either Bertrand’s brother and/or sister act as trustees the trust is classified as UK resident.

Capital Gains Tax Trap for non-Resident Trusts

The changes introduced in FA 2006 (effective from 6 April 2007) align the CGT treatment for residence with that for Income Tax; in essence no change was made with respect to the Income Tax rules. However, the change to the CGT rules meant that it was possible for a trust which was non-UK resident under the pre-FA 2006 rules to automatically fall to be treated as UK resident post-FA 2006. This could have disastrous CGT consequences where the trust is then re-exported.

The re-exportation of the trust’s UK residence precipitates a CGT charge on the part of the trustees; this occurs because there is a deemed disposal by the trustees of all trust assets at their market value at the date of export and a deemed re-acquisition at the same values (TCGA 1992 s 80).

The situation postulated above arises if, for example, pre-6 April 2007 the trust administration was carried on outside the UK, a majority of the trustees were non-resident and the settlor was resident in the UK but non-UK domiciled. Such a trust would have been UK resident for Income Tax but non-UK resident for CGT. However, on 6 April 2007 such a trust would, while remaining UK resident for Income Tax, become UK resident for CGT.

It was therefore important if any such UK CGT charges were to be avoided that steps were taken pre-6 April 2007 to ensure that the non-UK resident trust remained so for CGT under the new rules. In the scenario above, this required that all (not just a majority) of the trustees be non-UK resident.

Although the exportation (or re-exportation) of a UK resident trust may give rise to significant CGT liabilities the Income Tax effects are less likely to be so serious. The exportation, per se, precipitates no general Income Iax consequences although Offshore Income Gains (OIGs) are precipitated (in the same manner as capital gains are precipitated; OFTR 2009 SI 2009/3001 reg 20). Any non-UK source income arising to the trust in the period between exportation and the end of the tax year of exportation continues to fall within the charge to Income Tax.

A trust is UK resident for the whole of a tax year for CGT if it is resident in any part of that year. ESC D2 provides split tax year treatment for CGT purposes only in the case of individuals, not trustees (see SP 5/92).

Similarly, ESC A11 provides for split tax year treatment for Income Tax purposes only in the case of individuals, not trustees.

The above is adapted from Personal Tax Planning: Principles and Practice, published by Bloomsbury Professional.