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Offshore Trust – Non-Domiciled Clients

Inheritance Tax

Can I also start by saying that most of the non-domiciled clients for whom I act  are deemed to be domiciled in the United Kingdom because they have been resident here for 17 out of the last 20 years.  In general terms, therefore, it is generally believed that such clients have little to gain in using offshore structures to hold their assets because the deemed domicile rules will mean that they are fully subject to UK inheritance tax.  However, that is not the case for those clients whose real domicile is either India or Pakistan (there are some other jurisdictions including Italy but they tend to be less of a practical issue).  For clients whose real domicile is India or Pakistan, the estate duty treaty tells us that on death, the UK deemed domicile rules do not apply to assets situated outside the United Kingdom.  Thus, purely by way of example, if such a client holds all his UK property interests through a foreign incorporated company, there should not normally be an inheritance tax charge at all on death provided he has maintained his Indian or Pakistani domicile even if he has lived here for 50 years.

That is a very simple and straight forward way of improving a client’s inheritance tax position.  There may also be scope in many such families to create a proper excluded property trust during the client’s lifetime.  I suppose what I have in mind is that there may be members of the family who are clearly neither resident, ordinarily resident nor domiciled in the United Kingdom who might be prepared to contribute funds to create an offshore trust.  It might then be possible for the clients to seize the opportunity to use that trust structure to build up assets totally outside the UK tax net and which are likely to stay outside that tax net for inheritance tax purposes for the next 100 years or so.  This clearly requires much more careful thought but it can be enormously useful for the right families.

Capital Gains Tax

Once we move away from inheritance tax, we are, of course, no longer concerned with deemed domicile; a client is either domiciled in the United Kingdom or he is not.  If the client is not domiciled in the United Kingdom, then he is not caught by Section 86 TCGA 1992 because there is a specific exemption.  The effect of that is that a non-domiciled person creating an offshore trust can use that offshore trust to make capital gains provided a gain is properly structured and will only be subject to UK tax as and when he brings the money back into the UK for his own personal consumption.  In most wealthy families, that is not the major issue; the problem is the ability to sell assets but pay no tax and reinvest in new ones and that facility is available.

Income Tax

As with capital gains tax, there are specific protections for UK resident and ordinarily resident individuals who are domiciled outside the UK.  If they set up foreign structures which receive income, there is no automatic taxation of that income on them (as there would for those of us domiciled here under Section 739); instead they are once again taxed on a basis where the tax charge arises only when the income is received by them in the United Kingdom.