Warning for Offshore Trusts
A recent decision from the Special Commissioners has highlighted the fact that UK advisers should not take too much of a hands on approach with regard to offshore trusts. The particular case (Trustees of the Trevor Smallwood Trust and HMRC) involved a tax scheme to avoid UK capital gains tax.
Briefly the facts were:
- A Jersey trust held shares that were pregnant with gain which would have been assessed on the UK resident settlor if they were realised.
- On the advice of UK tax advisers new trustees were appointed who were resident in Mauritius.
- The plan was that the Mauritian trustees would sell the shares and subsequently, but in the same UK tax year, the Mauritian Trustees would resign in favour of UK trustees.
- Under the Double Tax Treaty with Mauritius the gains would have assessable in Mauritius (with no tax payable) and not in the UK.
Whether this plan worked relied on a tie-breaker clause in the treaty. This referred to the Place of Effective Management (POEM) of the trust. The Commissioners found that, despite the fact that all the actions of the trustees were….
“..carried out correctly and were well documented”
… the “guiding hands” of the UK tax advisers were “evident throughout”. The fact that the settlor, who had the power to appoint trustees, was UK resident was also taken into account.
The Commissioners also made reference to the fact that there was no engagement letter between the Mauritian trustees and the UK Tax advisers confining their engagement to tax advice.
This decision seems to be limited to cases where relief under a double tax treaty is relevant but it is not a great leap to see it being extended to determining the residence of trustees generally.
Although not relevant to this case the Commissioners did compare POEM with Central Management and Control (CMC) which is used to determine whether offshore companies are resident in the UK for tax purposes. It may be, therefore that this decision could be applied in the corporate field as well.
It is not known whether this decision will be appealed but as there is £2.7million of tax at stake it is a possibility.
