Stockpiled gains in offshore trusts
Quick overview of Stockpiled Gains
When UK-resident individuals are beneficiaries of offshore trusts, there can be significant UK tax implications under Capital Gains Tax (CGT) and Transfer of Assets Abroad (TAA) anti-avoidance rules. One of the most complex aspects is the calculation of stockpiled gains summary.
Relevant Income Pool
A non-UK resident trust, or an offshore company owned by the trust (an underlying offshore company), is not subject to income tax on non-UK-source income received in the trust structure. The offshore income is required to be accumulated in the trust as ‘relevant income’ (accumulated untaxed offshore income).
Relevant income is then matched to capital distributions and trust benefits (capital payments) received by UK resident beneficiaries. The term ‘capital payment’ includes not only capital distributions but also deemed trust benefits, such as use of trust assets e.g. rent-free occupation of trust property or interest-free loans.
The matched income is then added to the total income of the recipient beneficiary and subject to income tax at his personal income tax rates.
Stockpiled gains
Where Trustees of a non-UK resident trust realise gains (at a trust level or in the underlying offshore company), such gains are not subject to CGT as they arise. Instead, offshore trustees are required to stockpile (i.e. accumulate) the gains in the trust.
The stockpiled gains are matched to capital payments received by UK resident beneficiaries. The matched gains are then assessed on the recipient beneficiary.
Summary of Work Required:
In order to ensure that UK resident beneficiaries and settlors are up to date with their UK tax compliance tax reporting, the following work may need to be undertaken.
- Review Trust and Company Structure.
- Gather financial information in relation to Trust and underlying offshore companies.
- Calculate Stockpiled Gains.
- Calculate Relevant Income.
- Calculate capital distributions and trust benefits (‘capital payments’).
- Match capital payments to relevant income and stockpiled gains.
- Summarise matched relevant income and stockpiled gains and provide the information to beneficiaries for their personal tax compliance reporting.
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Frequently asked questions
What is a Stockpiled Gain?
Stockpiled Gain are Capital Gain realised by an offshore trust or its underlying company. They are accumulated in the trust year on year until it is matched to capital distributions or trust benefits received by a UK resident beneficiary. If a realised gain is not matched and subject to CGT for 2 tax years or more, an additional CGT charge is levied at 10% for each of such year up to a maximum 60%.
Why are stockpiled gains relevant for UK taxpayers?
UK tax law may charge beneficiaries to Capital Gains Tax when trust distributions are matched to historic unmatched gains, even if those gains were realised well before a UK tax payer became a trust beneficiary.
Can I be taxed on gains I never received?
Yes. A UK resident settlor could be subject to CGT on gains in the trust structure under the anti-avoidance rules if certain conditions are satisfied, even if he has not received a distribution or trust benefit from the trust.
How far back do I need to go for the calculations?
The calculations could go back as far as the year in which the trust was settled.
What happens if I don’t calculate or report Stockpiled Gains?
Not reporting matched income and gains means that a UK resident beneficiary’s your tax compliance reporting is not complete, which inevitably give rise to unexpected tax bills, penalties and late payment interests.
Is it possible to rebase assets or mitigate the tax?
In some cases, yes. For example, rebasing on becoming UK resident, restructuring trusts may offer planning opportunities for which professional advice is essential. Trust distributions to UK resident beneficiaries may also be made in a tax-efficient manner if they are planned in advance, taking into account each recipient beneficiary’s circumstances.
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