Double Trust Structure
The benefits and flexibility delivered by Trusts make them a highly attractive option for clients across the globe. Trusts provide a flexible method for the protection and distribution of personal, family and institutional assets. Although Trusts are used in a wide variety of situations, the use of a Trust as described below is an example of a more specific application, in this case, for ring‑fencing clean capital using a Double Trust Structure.
Background
As a general principle, UK resident individuals are subject to taxation on their worldwide income and gains. The UK tax position has, however, historically favoured individuals with UK non‑domiciled status.
The Finance Act 2008 introduced the Remittance Basis Charge (RBC) which specifically applied to UK non‑domiciled individuals who had been resident in the UK for 7 or more years out of the last 9. The intent of the RBC was to charge those individuals a fee (currently £30,000 per annum with a £50,000 charge being introduced for individuals resident for 12 years or more) for retaining favourable tax treatment of foreign income and gains. The result of an RBC election is that foreign income and gains are taxed only upon remittance to the UK.
HMRC deem foreign remittances to the UK to be made in a predetermined order. Generally speaking, remittances are considered first to be comprised of income, followed by gains and then capital.
Given the significant difference in UK rates of taxation on income and gains and, most importantly, the UK treatment of remittances of “clean capital”, it is of paramount importance to ensure proper segregation. In this context “clean capital” refers to assets held by an individual before becoming UK tax resident. It may also include subsequent inheritances or gifts (which are neither income or capital in nature).
Care must therefore be taken to preserve “clean capital” as to ensure that UK capital remittances are not tainted by either income or gains.
Whilst it is relatively straightforward to segregate income from gains, the segregation of gains from capital is far more
problematic without specific planning (and simply not possible if an investment portfolio, for example, is held personally in an individual’s name). A Double Trust Structure provides a solution to the segregation problem and a number of other benefits too.
Features of a Double Trust Structure
The purpose of the Double Trust Structure is to ring‑fence and preserve “clean capital”. The Trusts would ordinarily both be Guernsey Trusts formed under the provisions of The Trusts (Guernsey) Law, 2007. They would also both be established with UK non‑resident trustees provided by Ardel.
Trust 1 would be settled with “clean capital”. Trust 1 would loan the settled funds to Trust 2 on an interest free basis.
Trust 2 would invest funds as appropriate (with the trustees maintaining suitable records of income and gains). All stockpiled gains would be ring fenced in Trust 2. Trust 2 would be able to make loan repayments to Trust 1, as and when distributions of capital are required. It is important to note that Trust 1 should never make capital gains.
The gains made by the Trust 2 are outside the scope of UK Capital Gains Tax (unless or until such time as the trustees provide benefits from the gains made to UK beneficiaries).
The assets may also be considered “excluded property” which can offer significant advantages in UK Inheritance Tax planning.
Advantages
- A means to ensure distributions of “clean capital”
- Allows tax efficient and effective distribution to UK non‑resident beneficiaries
- Capital Gains Tax planning
- Inheritance Tax Planning opportunities
- Roll‑up of investments
For further information contact
Ian Rouget on +44 (0) 1481 731204