Foreign trusts and inheritance tax

[Newroad]

Afternoon All.

It is possible, perhaps likely, that I may be one (of a number of) beneficiaries of a trust in Australia set up by family members. I would be grateful to know

1. If and when I become a beneficiary of said trust, on the death of the relevant family members, does that have any immediate UK tax implications for me?
2. If and when I die, should my children then become beneficiaries of said trust, does that have any UK tax implications for them?
3. Is there anything not covered by (1) or (2) above that it is worth considering?

In considering the above, please note

I am aware that Australia has no inheritance tax (it did, but it was abolished in the late 1970's) but does have a (tapered) Capital Gains Tax. I'll consider the latter separately if relevant.
My children and I are all UK resident/domiciled etc
I appreciate all trusts may not be equal - please make whatever assumptions you need and do the best you can, if you can

Thoughts appreciated.

Regards, Newroad

[genou]

In fine detail it matters what type of trust the UK regards it to be, but mostly on what benefit you actually get from the trust.

If the trust is distributing income to you / your children, then there will be a UK liability to income tax on that income. There'll be no liability to UK CGT for you, as any gains would be chargeable on the trust. A distribution of capital by the trust should, I think, give no rise to UK tax.

It sounds as if your children benefit under the terms of the trust, rather than in any way from your estate, so I can't see any UK IHT arising on your death.

There is some discussion of trusts in the UK/Aus DTA, but it seems on a quick skim to be targeted at hiding a business in State1 inside a trust in State2, which I assume is irrelevant.

[Newroad]

Thanks, Genou.

That is very helpful.

It may well be that any income I get would be past my point of retirement - if so, no issues in paying tax on that (likely not to be higher rate in any case).

I was interested that you thought any distributions of capital from the trust wouldn't give rise to UK tax - and would be grateful for any clarification you might provide? I would have thought that if, say, I was in receipt of a distribution of capital then if nothing else, it would become a taxable part of my estate (i.e. taxable on the next generation - i.e. my children).

Other than potentially as above, then yes, I would have hoped my children would otherwise not be subject to additional inheritance tax from anything they might receive from the trust. As noted, though, I'm only hoping - if I knew, I wouldn't be asking the question

Finally, you are correct, this would all be within one state - not trying to hide anything in context. I did read somewhere that trusts have limited longevity in most Australian states, something like 60 or 80 years. I believe South Australia is the exception, where they can be indefinite (not relevant to me - my family are not Crow-Eaters ).

If anything else springs to mind, now or later, very happy to hear it!.

Regards, Newroad

[genou]

Thanks, Genou.


I was interested that you thought any distributions of capital from the trust wouldn't give rise to UK tax - and would be grateful for any clarification you might provide? I would have thought that if, say, I was in receipt of a distribution of capital then if nothing else, it would become a taxable part of my estate (i.e. taxable on the next generation - i.e. my children).

Regards, Newroad

A capital distribution would, I think, give rise to no tax in and of itself - it's not income and it's not gains (- it depends on the distribution having been capital in the hands of the trustees, but that's normally quite clear* ). If you neglect to spend the money, then it will be sat in your estate at death and could then attract IHT, but that's true of anything you keep.



* I'd guess Aus trust law bears a remarkable resemblance to English trust law.

[Newroad]

Hi Genou.

Yes - and no. For the avoidance of doubt, I am not a lawyer. Comments below are my understanding in this context.

Australian law is very similar to UK law, unsurprisingly as the former was based largely on the latter. The Australia Act (1986) formally repealed all UK law as applying in Australia by right, with the exception of the Right of Succession. I believe UK case law can still be cited where not superseded by Australian case law or statute (same in the US too I understand) - though of course, there are probably few current examples of this.

However, the way pensions/superannuation are recommended to be handled is quite different. In the UK, we are advised not even to mention SIPP's etc in a will, lest they get drawn into the perceived estate - and hence inheritance tax. Conversely, in Australia, they are encouraged in the opposite direction. The following is not the link I originally saw, but it is close enough

https://www.afr.com/wealth/personal-finance/best-ways-to-include-super-in-your-will-20210913-p58r5l

As to trust law, I don't have adequate/pertinent knowledge above and beyond the above.

Regards, Newroad