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Foreign Trusts Becoming Onshore Trusts in the UK: Legal and Tax Insights

Foreign Trusts Becoming Onshore Trusts in the UK: Legal and Tax Insights

The transformation of foreign trusts into onshore trusts in the UK has become a hot topic in wealth management. The UK has long been recognised as a premier hub for international finance, attracting high-net-worth individuals (HNWIs) from around the globe. However, recent changes in UK tax legislation and trust regulations have prompted many to reassess their foreign trust arrangements.

Understanding Trusts: Onshore vs. Offshore

Trusts are legal instruments where one party (the settlor) transfers assets to trustees, who manage these assets for the benefit of beneficiaries. In Australia, Family Discretionary Trusts and Unit Trusts are the most common types of trusts. They are often utilised for tax planning, asset protection, and estate management.

In categorising trusts, we distinguish them as onshore or offshore based on their jurisdiction. A specific country’s legal and tax framework governs an onshore trust. Whereas, an offshore trust is established in a jurisdiction known for favourable tax conditions. For many years, offshore trusts have been an attractive option for HNWIs seeking to minimise taxes, safeguard assets, and maintain confidentiality. However, recent UK tax reforms have significantly impacted the appeal and effectiveness of these trusts for UK residents and UK-domiciled individuals.

Key Reasons for Foreign Trusts Becoming Onshore in the UK

Several factors are driving the trend of foreign trusts transitioning to onshore trusts:

1. Changes in UK Tax Law

The 2017 reforms to the UK Non-Domiciled Tax Regime altered the landscape for individuals considered “non-domiciled” but residing in the UK for tax purposes. After living in the UK for 15 out of 20 years, these individuals become deemed domiciled, making them subject to UK tax on their worldwide income and gains. This shift has diminished the tax advantages of maintaining foreign trusts.

2. Increased Transparency and Reporting Requirements

Offshore trusts are facing greater scrutiny due to global efforts to combat tax evasion and enhance financial transparency. Initiatives like the Common Reporting Standard (CRS), introduced by the OECD, require jurisdictions to share information about financial accounts and trusts. This increased transparency can undermine the privacy previously enjoyed by offshore trusts.

Tax Implications of Onshore Trusts in the UK

When a foreign trust converts to an onshore trust in the UK, its tax treatment undergoes significant changes, particularly in the following areas:

1. Income Tax

Onshore trusts are subject to UK income tax on their worldwide income. Trustees must file UK tax returns and pay taxes on any income they generate from trust assets, regardless of the income’s source.

2. Capital Gains Tax (CGT)

Onshore trusts are also liable for UK capital gains tax on the disposal of trust assets. This means trustees must report and pay CGT on gains realised globally, not just those from UK sources.

3. Inheritance Tax (IHT)

One of the most critical considerations for onshore trusts is their exposure to UK inheritance tax. While foreign trusts may offer some protection from IHT, once they are classified as onshore, the trust assets can become liable for this tax. This is particularly true if the settlor or beneficiaries are UK-domiciled or residents.

4. Settlor-Interested Trusts

If the settlor of the trust is still alive and has an interest in it (either directly or through family members), the tax authorities may treat the trust as a settlor-interested trust. In this case, the settlor may incur taxes on the trust’s income and gains, even if they do not receive any distributions. This can lead to a more complex tax situation and potentially higher tax liabilities.

 

Final Thoughts of Foreign Trusts Becoming Onshore in the UK

As tax laws evolve and global transparency initiatives gain momentum, it’s essential to evaluate whether a trust remains a beneficial structure for your financial situation. For personalised advice tailored to your unique circumstances, our team is here to help you navigate the complexities of wealth management and tax planning.

 

 

Related news:

What to do with the assets you have accumulated in the UK when you are looking to move back to Australia?
Check out Atlas Wealth Group’s podcast to find out: Expat Chat Episode 122 – Australian Expat Tax and Financial Planning Q&A

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