Offshore Trusts As Tax Shelters

An offshore trust as a tax shelter for UK domiciliaries…

With tax anti-avoidance legislation being potentially all encompassing for UK domicilaries how is it possible to use an offshore trust as an effective tool for the sheltering of assets and income from taxation?

There are actually only 3 main ways for a UK domiciled settlor to benefit…that said, it is most certainly worth speaking to a financial or taxation adviser with an international offshore focus to determine whether or not a trust or something like a portfolio bond could be of benefit for you.

The 3 main ways for a UK domiciled settlor to benefit from the establishment of a trust for tax sheltering purposes are: -

1) If the settlor has died an offshore trust can be used as a tax shelter

2) If no ‘defined person’ is a beneficiary then the establishment of a trust offshore can be used for taxation avoidance purposes

3) If a child is the beneficiary of the offshore settlement again the use of a trust can prove tax efficient

1) If the settlor has died - a trust which is created by testamentary disposition (i.e., through a settlor’s will) will only be formed once the settlor has died, therefore as the settlor is dead then no income or capital gains taxes can be levied against him.  The assets being disposed of into the trust are of course potentially subject to IHT however…unless they fall within the nil rate band or are IHT exempt.

2) If no ‘defined person’ is a beneficiary - the term ‘defined person’ covers most close family members and so this exception is quite rare, however trusts can be set up by distant relatives or friends of the beneficiaries.  These trusts would still operate as a shelter for both income and capital gains.

3) If a child is the beneficiary of the offshore settlement - if a settlor places assets into a trust from which children or grandchildren benefit from foreign income (though not foreign gains) then this is still a fairly tax effective way of using a trust, though care has to be taken not to trigger taxation anti-avoidance legislation.

Offshore trusts and overseas taxes

Depending on the taxation rules of the overseas country the settlor is resident and/or domiciled in, an offshore trust can minimise the overseas taxes as well. 

In this instance a settlor can use a trust effectively to avoid or reduce inheritance tax.