News & Insights

Offshore Trusts and Unexpected Tax Consequences

Bill Dixon, a partner and member of FSP’s Inheritance and Trusts Disputes team, considers what an individual’s remedies are if an offshore trust fails to deliver anticipated tax savings.

It used to be the case that offshore trusts were frequently used by UK clients as part of an overall tax planning strategy.  Over the years, however, the rules have become more complicated and HMRC has sought to minimise opportunities to avoid tax.

In a recent case reported from the Jersey courts, a situation arose where a married couple in the UK were advised to enter into a complex scheme involving remortgaging their house and then paying the proceeds into a Jersey trust.  The aim was to save inheritance tax by reducing the value of the property on death.  In fact, however, the tax consequences were described as “disastrous”.  There was an immediate 20% tax charge and the scheme did not work since it was clear the value of the trust would get taken into account on death.

One obvious remedy in such a situation is to bring a claim against the advisers for professional negligence.  However this kind of claim can be complicated.  One can recover financial losses resulting from bad advice.  However, one cannot necessarily recover on the basis of a failed tax scheme if the only loss is payment of tax that would have been payable anyway.

Can one actually back out of the transaction?  In the recent Jersey case (S Trust and the T Trust) the Jersey courts were persuaded to set aside the disposition into the trust on the grounds of a mistake as to the tax consequences.  In this particular instance the Jersey courts decided that in the interests of justice the transaction could be reversed.

Obviously it is relatively rare to be able to unravel a disposition into a trust in this way.  Much will depend on the local law of the relevant offshore jurisdiction.  Clearly the better approach is to take proper advice beforehand!