Trust Taxation Issues And How To Set Up An Offshore Trust

Offshore trusts are usually set up in tax friendly offshore jurisdictions to enable the settlor and beneficiaries of the trust to benefit to the fullest from the trust’s establishment.

When it comes to taxation of a trust it may help to think of the trust as an individual person in its own right.  So, when it comes to the taxation of an offshore trust, the trust as a legal entity has to be deemed ‘non-resident’ in order for it to avoid both income and capital gains taxes being levied against it.  Basically, to achieve this non-resident status the trust’s trustees have to be non-resident and the full administration of the trust has to be carried out abroad.

An offshore trust with non-resident status will be treated in the same way as an individual would - i.e., both UK and overseas assets within the trust should remain free from capital gains taxes.  Therefore, subject to any anti-avoidance legislature of course, an offshore trust is an effective way of protecting both UK and overseas capital gains from taxation.  However placing assets into a trust can be a chargeable action from a capital gains tax point of view…more about this in a moment

In certain instances an income taxation liability can arise for an offshore trust if the non-resident trust’s income is actually sourced from the UK for example.  And bear in mind that different types of trust actually pay any tax arising at different levels and it would depend on the circumstances of the trust’s establishment and the requirements of the settlor and beneficiaries as to which type of trust would be set up.

What are some specific uses of trusts for limiting exposure to taxation?

1) If a high net worth individual is about to relocate overseas, it may be advantageous for him to dispose of assets into a trust based in a lower tax offshore jurisdiction before becoming a resident in a higher taxation location.

2) Placing shares with a low initial value but with long term growth potential into an offshore trust may allow the growth of capital tax free.

3) Placing assets and property from an estate into trust to avoid death or inheritance taxes can allow the settlor’s beneficiaries to benefit more fully from the assets’ worth without excessive taxation being levied against their gains.

4) Corporations can establish a trust for the benefit of expatriate executives in an attempt to reduce their taxation costs against the remuneration of the executives.