UK Tax reforms make Bermuda trust appealing
Article first published in the Royal Gazette February 2017
The Bermuda trust is a popular estate planning vehicle for private clients wishing to structure their affairs in a tax efficient manner. There are a whole host of reasons why this is so, including asset protection, preservation of wealth for future generations, confidentiality, settlor reservation of control, ensuring business continuity, protection of vulnerable heirs and prudent succession planning.
Now, there is another reason.
On 6 April 2017 widespread reforms to UK tax rules for UK resident but non-domiciled individuals and their property holding structures are scheduled to take effect. From 6 April (the beginning of the new UK tax year), individuals who have been resident in the UK for 15 of the previous 20 tax years will become “deemed domiciled” for all UK tax purposes under the proposed changes. These individuals will become subject to UK tax on their worldwide personal income and gains. In addition their worldwide personal assets will become subject to UK inheritance tax on their death.
An individual wishing to break the deeming provisions will need to leave the UK for six complete tax years before returning to the UK and restarting the clock, or three years (for inheritance tax purpose only) where there is no intention to return to the UK.
Many UK advisors are recommending the use of offshore trusts settled with suitable assets before an individual becomes UK deemed domiciled on April 6 under the so called “protected trust” rules. A Bermuda trust is one such example.
The settlor of a protected trust will generally be exempt from UK income tax (on the trust’s foreign income) and UK capital gains tax (on the trust’s UK or non-UK gains). This benefit can be incredibly attractive to a non-UK domiciliary who subsequently acquires UK deemed domicile status and wishes to protect assets from UK tax.