Beware the taint

Tainting will be a major theme for trust practitioners under the new HMRC rules for offshore trusts. At the recent BL Guernsey Trusts Conference Moore Stephens’ Hazel Johnson joined Carolyn Steppler from EY to discuss issues for tax and taxation in the world of trusts.
Tainting, they agreed, would be a major challenge for trust practitioners as HMRC updates residency rules in an attempt to levy tax charges against more offshore trusts.
In terms of UK res-non-doms many previously ‘protected’ settlements will now need to be carefully checked for any signs of ‘taint’ – they must be able to demonstrate that no value is being added to the trust and the beneficiary is not receiving any benefit from the trust while a resident of the UK. If the trust is active and therefore ‘tainted’, it would contravene tax rules on foreign income and gains as well as incur IHT and potentially CGT.
IHT was an important consideration for trusts, according to Johnson, however it was not the death knell for trusts that many might be predicting: ”Certainly older settlors view IHT as an issue as they are much nearer to the time where they will need to pass on wealth, but for young entrepreneurs IHT is not an issue. They would rather have control of their wealth in a protected environment, with the capacity for entrepreneurial relief if needed,” she said.
Regardless of what a client’s priorities are, tainting will need to be watched carefully. If a trust structure becomes tainted and protection is lost, the cost could be significant and clients may feel their advisors should have been more vigilant to their status.