Peter Trevett QC and Jonathan Peacock say Gordon Brown's second Budget could leave professional advisers scrambling to review trust arrangements. Peter Trevett QC and Jonathan Peacock are barristers at 11 New Square.
The immediate impact of Gordon Brown's second Budget on offshore jurisdictions is twofold.
First, the changes to UK capital gains tax and inheritance tax are not as bad as had been feared.
Advisers can breathe a limited sigh of relief on the basis that there are still some offshore structures which can be attractive from a UK standpoint indeed, it is possible that the new rules will create the opportunity for UK settlors to transfer property into non-resident trusts without any charge to inheritance tax.
Equally, while there are still real concerns among those offshore jurisdictions linked constitutionally to the UK about the UK Inland Revenue's attempts to extend its information gathering powers, there has been no frontal assault on the offshore centres themselves.
Instead, Mr Brown seems to have accepted the present territorial limits of UK tax, subject to modifications for certain assets of certain taxpayers who leave the UK for less than five complete tax years.
Second, the new rules will raise difficult questions for existing trust arrangements, particularly those pre-1991 settlements which have one year in which to restructure themselves to avoid a potential charge on a UK resident settlor.
All such arrangements will have to be reviewed as a matter of urgency.
To take one example of a problem facing settlors, anyone who transferred property to trustees who are now non-UK resident will be liable to capital gains tax in the UK, on the gains made by the trustees from 1999/2000 onwards.
Yet the trustees are under no duty to provide information as to the gains they make to the settlor (who must give details in his or her self-assessment forms, with severe penalties for incorrect information). And even if there were such a duty it will be difficult to enforce.
More seriously, where such a settlor is charged tax in the UK, any right of recovery he may have against the trustees (under statute or the terms of the trust) will be unenforcable (see Govt of India v Taylor (1955)); in the absence of a specific power to do so, reimbursement of the settlor is likely to be a breach of trust which the beneficiaries can restrain.
All these problems arise from the Government's belief that all offshore trusts are collusive in nature and that trustees will in practice do as a settlor asks. Advisers will be well aware that this is rarely so, particularly where adult (litigious) beneficiaries are involved.
Anyone who has ever added property to any trust which is now non-resident should be asking some hard questions of the trustees.
This leaves professional advisers in the usual position of trying to review the positions of all those affected before the guillotine falls in April 1999.