Does your Family Trust have UK Tax Obligations?
If your family trust has a ‘UK tax connection’ the trust might now be obliged to register with H M Revenue and Customs (HMRC) in the UK. The UK has recently introduced a Trusts Register and there will be a significant number of New Zealand family trusts which will need to register. The following article by Martin Riley of Sterling Tax Services explains which family trusts might be affected.
The reason for the introduction of the Trusts Register in the UK is to ensure that the UK complies with the Common Reporting Standard which is the worldwide initiative to counter tax avoidance. All participating countries (including New Zealand) are now collecting information about taxpayers which will be exchanged between tax authorities in order to ensure that taxpayers receiving overseas income are correctly taxed on that income in their country of residence.
Although most trusts on the UK Trusts Register will be UK constituted trusts, there will be some New Zealand family trusts which will be obliged to register. These will, broadly speaking, fall into four categories:
1. Trusts which were established in New Zealand either before the settler became resident here or within a period of 3 years after leaving the UK.
Many UK migrants will have established a family trust soon after arriving in New Zealand – these trusts could be subject to the UK inheritance tax (IHT) regime. If you established a family trust within 3 years of leaving the UK permanently, then you should seek advice.
Even if the trust was established after 3 years it may also be subject to the IHT regime if you are unable to show that you are no longer domiciled in the UK – and it should be noted that you can still be domiciled in the UK years after you have left the UK if you regularly visit and maintain a close connection with the UK.
It should be noted that IHT liabilities can arise (a) when the trust was established; (b) on a subsequent 10 year anniversary; or (c) when capital was withdrawn. In many cases the liability may be NIL but there is still a duty to report to HMRC. The obligation to register the trust only arises where there is a tax liability.
2. Trusts which have untaxed UK sourced income.
These trusts will have a UK tax liability on their UK sourced income.
3. Trusts which have UK interest and dividend income and a UK resident beneficiary.
Normally a New Zealand family trust with UK interest and dividend income would not be subject to UK tax on the interest/dividend income derived in the UK. However, this exemption does not apply where there is a UK resident beneficiary.
If you have set up a typical family trust with children and grandchildren as beneficiaries and one of your children/grandchildren is resident in the UK (either working in the UK or doing their ‘OE’) then this may trigger a UK tax liability if the trust is invested in a UK company. This will apply even where there is no distribution to the UK resident beneficiary.
Most diversified portfolios are likely to acquire some UK listed shares – this could trigger the obligation to (a) pay some UK tax; and (b) register the trust in the UK. Does your trust have UK listed shares or UK sourced interest?
4. Trusts which acquire UK listed shares (including UK investment trusts).
The purchase of UK listed shares triggers Stamp Duty Reserve Tax and this, in turn, triggers the obligation to register the trust in the UK. Therefore it would be much easier from a tax compliance point of view if the trust’s investment adviser purchases shares in New Zealand or Australian unit trusts rather than investing directly into UK listed shares.
All of these tax issues are manageable – but some of them may be best avoided. We are urging all clients who think they might have an obligation to register their family trust in the UK to seek advice.
Martin is a local chartered accountant and chartered tax adviser who can be contacted on 03-374-3595 or via the website www.sterlingtax.co.nz.