The UK trust, an efficient tax planning vehicle

As you know, non residents are not generally subject to capital gains tax in the UK, even where the assets from which the gain is derived are situated in British Territory. In the other hand, the United Kingdom has a capital gain tax regime for the trust companies incorporated in the United Kingdom, or managed and controlled there, which manages trusts as a business and acts as Trustee of a settlement made by a non-resident. These companies are treated, in its capacity as Trustee, as non resident and are therefore not subject to capital gains tax on gains it makes in that capacity. Regarding income (as dividends or interests), the trust can be transparent for income tax, with the result that non-UK income can pass through the trust to a non-resident beneficiary, without attracting any UK Tax. The key lies in the ability of the trust to qualify as UK tax resident for the purposes of the double tax treaties between UK and other EC countries, and benefit from EC Directives (as Parent-Subsidiary, for dividends) and EU law of precedent (as the Lankhorst sentence, for interests);

An example of this is that of an investor, not resident in any EU country, who plans to acquire a major share in a Spanish company. He would be subject to capital gains tax in Spain on disposal of the investment (at 18% rate) and withholding tax on dividends received (at 18% rate). Instead, he incorporates a company in an offshore jurisdiction, to act as settlor and beneficiary of a British trust, with two or more trustees, one of them UK resident, and the rest non resident. The UK trustee makes the investment in the Spanish company.

 Dividends paid out by the Spanish Company will pass through the UK trustee: they are not income of the trustee but income of the income beneficiary and therefore not subject to UK tax.

If we had only one UK resident trustee, and instead of paying out the dividends, accumulates them for the ultimate benefit of the beneficiary, it would be regarded as income of the UK trustee, and subject to taxation in the United Kingdom. But we have more non resident Trustees, so the UK Trustee will be treated for domestic purposes as non-resident and the trust income which has its source outside the United Kingdom will not be subject to UK tax, even if it is actually received by the UK trustee. The UK Trustee, in that position, will be treated as non-resident as regards the trust income, just as it is as regards the trust capital gains, but it is actually resident: it pays its tax on other income - its trust fees for instance - in the ordinary way, and it is still a resident of the UK for the purposes of a Tax Treaty, and a company of a member state for the purposes of the EU Parent Subsidiary Directive.

In case of disposal of the investment, the capital gains are realized by the UK Trustee, but they are exempt from UK tax because it would be acting in the capacity of trustee of a settlement made by a non-resident, and exempt from Spanish tax under the terms of the treaty between the United Kingdom and Spain, and the Spanish non resident tax rules (provided total share in the company represented 25% or less, in the 12 months previous to the disposal)

  All this makes the UK Trust an interesting tax planning vehicle, worth to consider.