Tax on account held in trust

DC22

Hi,

My son has been travelling for some time now and is no longer tax resident in the UK. At the same time he has not become tax resident anywhere else (no longer than 3 months in any one country, no employment, just staying in temporary airbnb type places). He started off with some inherited cash and also has income from property in the UK. This income has been well above what he's been spending, so he now has quite a bit of cash. With inflation as it is I feel this ought to be invested, but when he looks at opening an investment account (he has tried a good few providers, with prodding from me) he is asked to confirm that he is tax resident in the UK, and he isn't.

An alternative would be for him to transfer the money to me for me to invest, but I already use my CGT allowance, and I think if we did it that way, it might be seen as a gift from me when he eventually takes the money out, and might then get hit for inheritance tax as well.

Looking at the HMRC webpages I can see that if an account is held on a "bare trust", where it's just someone else's money and they can demand it back at any time, it's the beneficiary (i.e. my son) who pays the tax, so no CGT problem. This would also mean that there was no gift, as it would have been his money all along. So it looks like a good solution, but I'm not sure how it works practically, especially with HMRC. At my end, my tax code would be changed automatically (wouldn't it?), and at my son's end, he's concerned that if he's putting trust income or gains on his tax return when he's already non-resident, the whole situation looks too unusual and he'll end up having to deal with an investigation. His view is it's better to leave it in cash and take the inflation hit because the alternatives are just too complicated. Is he right?

NorthYorkie

I presume he has registered under the non-resident landlord's scheme?

When you say "cash" do you mean that this is carried round in a suitcase or is it in a current account somewhere?

Personally I would avoid having any of this invested in your name, even as a bare trustee, things can get messy. It's his money, let him make the decisions about it (and any mistakes).

DC22

NorthYorkie said:

I presume he has registered under the non-resident landlord's scheme?

Yes

When you say "cash" do you mean that this is carried round in a suitcase or is it in a current account somewhere?

It no longer fits in his suitcase but he has a duffel bag with one of those little padlocks on it. It's not the risk of it being stolen that bothers me so much as the fact that cash is depreciating so quickly at the moment.

Personally I would avoid having any of this invested in your name, even as a bare trustee, things can get messy. It's his money, let him make the decisions about it (and any mistakes).

Yes you may be right there. It's just frustrating that you can lose the ability to invest just by going travelling (admittedly he has been away for well over a year at this point, but still).

Jeremy535897

I am not an expert, but I think that you will find that you are now required, under anti money laundering rules, to state where the beneficial owner is resident for tax purposes when you open an account as bare trustee. So what you propose is a non starter.

DC22

Jeremy535897 said:

I am not an expert, but I think that you will find that you are now required, under anti money laundering rules, to state where the beneficial owner is resident for tax purposes when you open an account as bare trustee. So what you propose is a non starter.

Good thought. I'm not an expert either but having just read [a webpage which, it turns out, I'm not allowed to link to as a newbie, but which is at open ownership and deals with beneficial ownership and transparency of trusts] it looks like the requirement is on the trustee to register the trust (and beneficiary details) in a central registry - but under the UK implementation of the EU/OECD rules, this does not need to be done if the trustee has no tax liability in relation to the trust (which I wouldn't, because the beneficiary is responsible for tax if it's a bare trust). This seems to be reflected in the HMRC guidance on when a trust needs to be registered. So I don't think that's the obstacle, although it's definitely a reminder of how complicated things can get.

I don't understand how you can have such a sophisticated framework that is so completely based on the idea that everybody has to be tax resident somewhere, side by side with a law on residence that says it's totally possible not to be tax resident anywhere. Why can't you just put down your home country / country of citizenship, if you have no country of tax residence?

Of course my son's mates didn't bother with any paperwork and will still show as resident in the UK. Maybe that was the wise thing to do.

NorthYorkie

DC22 - you have obviously done a considerable amount of research and will therefore have considered the Statutory Residence Test ('SRT') particularly the ' First Automatic Overseas Test' which says that someone is not resident in the UK if they were resident in any one of the three preceding years but, in the current year, have not been in the UK for more than 16 days. This seems to fit your son's case. Interestingly whilst the Statutory Test says he is not resident in the UK, it does not regard him as tax resident in any particular overseas county. Indeed being tax resident elsewhere is not a condition of being non-resident under the SRT.

Prior to 2013 when the SRT was introduced, there was no statutory definition of tax residence. The question was decided by reference to Revenue practice which in turn was based on earlier case law. It would be under this system that the belief arose that a person had to be tax resident somewhere. The problem your son faces is that the staff working for banks can't cope with anything slightly out of the ordinary.

You have said your son receives rents from UK properties. How? Does he not already have a bank account somewhere into which these rents are paid?

One final point, is it really wise to be travelling around with a duffle bag stuffed full of bank notes? If stopped by the authorities, to what conclusions are they going to jump? 

DC22

One final point, is it really wise to be travelling around with a duffle bag stuffed full of bank notes? If stopped by the authorities, to what conclusions are they going to jump? 

Well he's in Mexico at the moment so I would think they'd just run off with it.

That's an interesting bit of background. I actually came at it from the other end and looked at the OECD regulations that seem to be behind the EU regulations that seem to be behind the UK legislation. These are also on the basis that everybody has to be resident somewhere. They say the individual rules of each country have to be applied, and recognise that this means a person may be resident in more than one country, while ignoring the fact that it also means a person may not be resident in any country. No idea if this is deliberate, but in this case I don't think it's just a computer says no, much as I know and hate that phenomenon. The assumption is built right in to the international framework. Should the UK delegates have been speaking up for the tiny tiny proportion of UK citizens who - because we have a residency test that makes it easy to lose resident status - end up financially stateless? Do they see that in itself as a tax dodge and want to discourage it? Pass.

To be honest I think 9 out of 10 people would just say they were UK resident and put down their dad's address. It's not as though there would be any tax dodging or money laundering involved in that. He's not that type of person though, and we don't know what the consequences might be (although my strong suspicion is there wouldn't be any). Anyway, as you said, you just have to leave them to it.

I was joking about the duffel bag btw... he does have a current account but he can't / isn't supposed to open any new facilities (such as an investment or brokerage account), which means there's nothing he can do to try and avoid getting hammered by inflation. Well except come home, but that's not an easy sell.

Jeremy535897

DC22 said:

Jeremy535897 said:

I am not an expert, but I think that you will find that you are now required, under anti money laundering rules, to state where the beneficial owner is resident for tax purposes when you open an account as bare trustee. So what you propose is a non starter.

Good thought. I'm not an expert either but having just read [a webpage which, it turns out, I'm not allowed to link to as a newbie, but which is at open ownership and deals with beneficial ownership and transparency of trusts] it looks like the requirement is on the trustee to register the trust (and beneficiary details) in a central registry - but under the UK implementation of the EU/OECD rules, this does not need to be done if the trustee has no tax liability in relation to the trust (which I wouldn't, because the beneficiary is responsible for tax if it's a bare trust). This seems to be reflected in the HMRC guidance on when a trust needs to be registered. So I don't think that's the obstacle, although it's definitely a reminder of how complicated things can get.

I don't understand how you can have such a sophisticated framework that is so completely based on the idea that everybody has to be tax resident somewhere, side by side with a law on residence that says it's totally possible not to be tax resident anywhere. Why can't you just put down your home country / country of citizenship, if you have no country of tax residence?

Of course my son's mates didn't bother with any paperwork and will still show as resident in the UK. Maybe that was the wise thing to do.

As I explained that the idea was a non starter, I did not pursue the TRS point, but your assumption that the lack of a UK tax liability obviates the need to register the trust is incorrect. See https://www.gov.uk/guidance/trust-registration-extension-an-overview

The requirement for there to be a UK tax liability has gone. The list of excluded trusts is brief (and if they have a UK tax liability, they too need to be registered). Even a simple co-ownership of the family home by husband and wife needs to be registered, unless both parties are named on the deeds. So husband holding the family home (or any property) on bare trust for the two of them is caught by the new rules, even though there is no prospect of any income arising, although such trusts are unlikely to be required to be registered before September 2022.

sheramber

Any use?

https://www.gov.uk/guidance/uk-tax-on-investment-managers-and-non-resident-investors