In collaboration with HMRC, the Liechtenstein Institute of Professional Trustees and Fiduciaries (LIT) have set out their proposals for treatment of mixed funds managed by trustees with UK connections.
These proposals came off the back of the UK Government's two year window from 6 April 2017 for UK resident non-domiciled individuals who hold bankable assets in historic mixed funds to have those funds segregated into capital, income and capital gains for future remittance purposes. There was no such window for mixed funds which were held by trustees.
The LIT therefore worked on a solution to deal the scenario in which Liechtenstein trustees make distributions to UK resident non-domiciled individuals who are beneficiaries of trusts. At present any such distribution from unsegregated historic funds is treated by HMRC as a taxable remittance.
The proposals, which HMRC have now confirmed are reasonable, are set out below:
- The opportunity for trustees to segregate mixed funds will not be time-limited.
- It is not mandatory for trustees to segregate.
- After segregation, any subsequent distributions to UK resident non-domiciled individuals beneficiaries must be aligned to the UK's new matching requirements against income and gains in priority to capital.
- The Liechtenstein government will not legislate the procedure. Guidance and management will be provided by the LIT.
The procedure by which to work out the segregation will be based on a newly created Standard Performance Table (SPT) which considers the different risk profiles of four strategic criteria:
- Defensive – 10% Equity Holdings
- Conservative – 25% Equity Holdings
- Balanced – 50% Equity Holdings
- Aggressive – 75% Equity Holdings
The SPT will be a series of tables in four currencies (GBP, CHF, USD and EUR) with annual performance indicators from 1999-2017 (1999 being chosen as it is understood the majority of trusts will be post 1999). The approach to be taken by trustees will be to identify which strategy has been used from 1999 (or later where appropriate) and apply the relevant net return percentage to the value of the funds based on the reference currency. For trusts pre-1999 the funds managed will be treated at 1999 as 100% capital.
The SPT will be used to map performance and create three segments for historic trusts and new trusts. Trustees will have the option of creating their own segmentation if they hold full records and they feel the SPT would be disadvantageous.
The SPT will be held centrally by the LIT. If trustees wish to undertake the segmentation exercise they must:
- confirm in writing that the request relates to an entity or trust managed in Liechtenstein
- confirm which investment strategies have been applied to the managed funds
- LIT will ask one of two nominated trust companies to undertake the segmentation at a nominal cost; once completed LIT will notify the trustees of the result
LIT will not provide tax or investment advice as to how the capital, income and capital gains should be managed following segregation or the potential UK tax treatment of any distributions made to a UK resident non-domiciled beneficiary.
