Protected settlements and Offshore Income Gains (OIGs)

It was widely understood that the “protected Settlements” legislation did not include OIGs within the definition of protected foreign source income. Despite a recent technical argument that OIGs fit the description, HMRC have confirmed that they do not accept that OIGs from non-reporting funds qualify as protected foreign source income and no statutory amendments are anticipated to change this.

As many offshore trusts are understood to invest in non-reporting funds there could be significant tax consequences going forward. Any disposal of such funds would give rise to a potential UK income tax liability for the long-term UK resident settlor.

An international bond as a trustee investment solution:

Trustees of non-resident trusts may want to consider investing in an International Bond before the settlor either establishes a UK domicile of choice or is deemed UK domiciled under the long term resident provisions, thereby enabling them to invest in funds via the Bond.

Benefits of an international bond:

  • Gross roll up of investment returns of non-reporting or reporting funds is maintained within the policy.
  • The policy will prevent the accumulation of income and/or gains within the trust.
  • A portfolio of investments, including UK situs assets, can be managed within the policy without adverse tax consequences.
  • The policy offers a trading platform to facilitate portfolio rebalancing without realising chargeable event gains.
  • The cumulative 5% tax deferred withdrawal option can facilitate tax efficient withdrawals. Withdrawals can be remitted back to the UK if funded from ‘clean’ capital or utilised outside the UK if funded from ‘mixed’ or tainted funds.
  • Assignment of the bond (or segments thereof) can provide added tax planning options and offers a potentially highly efficient way of transferring any tax liability from the settlor to beneficiaries.

Our Technical team will be producing a Technical Briefing on this in the coming weeks.