Best Tax Services Ltd
valuationofbenefitsreceivedfromoffshoretrusts
Change to the valuation of certain benefits received from offshore trusts
Updated 1st December 2017
The Finance (No. 2) Act 2017 which received Royal Assent on 16th November 2017 has put on a statutory footing to the quantification of benefits involving loans, moveable property and land from offshore trusts by UK residents. These provisions apply to all offshore trusts and not just situations involving deemed domiciliaries. This change is retrospective to 6th April 2017.
The legislation is intended to deal with what the government sees as two shortcomings in the existing rules:
• taxpayers being able to argue that the value of the benefit is very low, even where capital values are high; and
• arrangements which are said to be on arm’s length terms but where payment of any consideration by the taxpayer is deferred until the arrangement comes to an end.
• certain land transactions where the taxpayer can argue that benefit does not arise.
The legislation deals with three specific areas:
1. Loans
From 6 April 2017, the recipient of a loan will be treated as receiving a benefit for each year the loan is outstanding equal to the official rate of interest, less the amount of any interest actually paid by the beneficiary to the trustees in the tax year in question. The official rate of interest is 2.5% in 2017/18.
This means that if interest is rolled up until the end of the loan, the beneficiary will still be treated as receiving a taxable benefit each year, even though the loan could be argued to be on arm’s length terms.
One point to bear in mind where a UK resident beneficiary pays interest is that this will often give rise to a liability for the beneficiary to withhold UK income tax at the basic rate (20 per cent ) and pay this to HMRC when the interest is paid.
2. Use of moveable property
This will apply principally to assets such as works of art, yachts and aero planes.
The quantum of the benefit is based on a formula which involves applying the official rate of interest to the price paid by the trustees when they acquired the asset in question or, if greater, the market value of the asset when it was acquired. This means that the tax charge could be relatively low if the asset was acquired many years ago.
The amount of the benefit is reduced by anything paid by the beneficiary to the trustees for the use of the asset and also by any amount paid by the beneficiary in respect of the repair, insurance, maintenance or storage of the asset.
The beneficiary is only taxed by reference to the number of days on which the asset is “made available” to the beneficiary. There is no guidance in the legislation as to whether this means the number of days on which the asset
is actually used by the beneficiary or whether it includes any days where the beneficiary could have used the asset even though he / she did not do so. HMRC will no doubt adopt the latter interpretation although, with assets such as yachts and planes, it may well be possible to argue to the contrary, especially if they are also chartered to third parties.
3. Land
The amount of the benefit where land is made available to a beneficiary is the open market rent based on certain
assumptions as to what is paid for by the landlord and what is paid for by the tenant.
As with moveable property, the benefit is then reduced by anything paid by the beneficiary to the trustees in the relevant tax year for his occupation of the land and anything paid by the beneficiary for the repair, insurance or maintenance of the land. The main purpose of this provision is to ensure that rent is paid each year.
These new provisions do have the benefit of providing certainty to taxpayers as to what their tax liabilities will be where they receive benefits from a trust. They do, however, also mean that tax may now be payable where this was not previously the case or that there may be a significant increase in the amount of any tax payable.
It should also be noted that that these provisions apply to offshore trusts in which the settlor does not have a beneficial interest. i.e. The settlor and their spouse have been specifically been excluded to benefit from the trust. This is because if the settlor has retained interest in an overseas settlement, the trust income arising is taxable as part of settlor’s own personal income. Therefore if for example rent is paid by the beneficiary to the trust, this then becomes settlor’s personal income. For UK tax purposes, offshore trustees need to be careful and should take advice from a UK tax adviser on any benefits received by either the settlor themselves or the beneficiaries.
What to do next?
For beneficiaries with an outstanding loan with the trustees will now need to declare the benefit applicable from this loan in their UK tax returns for 2017/18.
Trustees will also need to tell the beneficiaries if the benefit will be ‘income’ or ‘capital’ based on how it is matched with the relevant income and stockpiled capital gains in the trust. These matching rules are specific to UK tax rules which tend not to follow normal trust rules, advice or help from UK tax accountant is necessary to determine the correct amount of relevant income and capital gains in the trust. For example:
• There are some assets which normally would produce a capital gain but for UK tax purposes these may be treated as income i.e. also known as offshore income gains.
• Trustees may treat a distribution as capital distribution but it may be that this distribution will be an income distribution due to how it’s matched with trust relevant income.
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