Under the current rules, where a capital payment is made from an offshore trust to a beneficiary whether UK resident or not, the capital gains that are within the section 87 pool of the trust are matched to the distribution. Also, if the settlor is UK resident but non-UK domiciled, the distribution is not taxable on the settlor. Distributions offshore have historically been a way of cleansing the trust of accumulated capital gains, so that subsequent distributions to UK beneficiaries do not attract a liability to capital gains tax.
The change in this rule, which will be effective from 6 April 2018, will have several ramifications. Now future distributions to offshore beneficiaries will not attract the stockpiled section 87 gains, these will remain in the trust and attach to future distributions to UK beneficiaries.
A second change is that distributions to close family members of the settlor will not only attract the section 87 gains but will also have those gains imputed to the UK resident settlor.
Finally, capital payments distributed to a non-UK resident or remittance basis user that are not taxed will be taxed if gifts are then made to UK resident recipients. In this case the UK resident gift recipient will be taxed on the trust gains to the extent of the gift. This will apply if there is an intention to make such a gift when the distribution is made by the trustees. The intention test has no time limit.
This measure will largely affect high net worth individuals who have established offshore trust in previous years. These rules will restrict the ability of the trustees to wash capital gains through non-UK resident beneficiaries.