With the passing into law of the Finance (No.2) Act 2017, the new category of “Protected Trusts” was introduced. A “Protected Trust” is a discretionary irrevocable trust that a resident non-domiciled individual (RND) may set up prior to them being deemed domiciled in the UK.

One of the reasons why some individuals may be interested in Protected Trust status, is its preservation of the remittance basis of taxation for the foreign income and gains that arise within the trust. This continues to be the case even after the settlor becomes deemed domiciled in the UK.

As a consequence of this, the settlor and the beneficiaries of the trust are able to access the trust income and gains, without any need to pay UK tax. However, this advantage is subject to them not remitting such income and gains to the UK.

Trustees must take great care in the administration of a Protected Trust
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If you are interested in taking advantage of Protected Trust status, you will need to be extremely mindful of the range of ways in which the protections brought by this status could be lost. This underlines the importance of carefully selecting only the most competent trustees to administer or manage the trust.

Those trustees, once put in place, will need to know what steps to take to avoid a Protected Trust becoming “tainted”, particularly in relation to loans.

A Protected Trust can be said to have been “tainted” – thereby having lost its protected status – if property or value is added to the trust. There is no disregarded minimum, so even the transferral of £1 to the trust would cause the entire settlement to be tainted.

Examples of actions that would result in the tainting of a Protected Trust include the transferral of investments to the trustees or an underlying company, the payment of the insurance premiums on a policy that the trust holds, and/or the addition of cash to a property-owning trust to pay for trust expenses and costs incurred in running the property.

The ease with which a Protected Trust can be tainted, is heightened by the fact that it is not only the settlor who can potentially taint a trust. A beneficiary can also taint a trust if they add value, as can another trust of which you are also the settlor.

In the event of someone else adding assets to your trust, this will not have the effect of them tainting your trust. However, they may be treated as having created a new trust of their own.
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Some ‘safe harbours’ are excluded from the tainting rules

The trustees for a Protected Trust should also be well-informed about the specific exclusions the relevant legislation contains.

A trust will not be tainted, for example, simply because of the settlor entering a transaction with the trustees on arm’s length terms. Nor will a loan by you to the trustees taint the trust, as long as the rate of interest paid by the trustees is at least the ‘official rate’.

You should bear in mind, however, that if the trustees extend a loan to you and you pay interest on it at a rate higher than the ‘official rate’, this will have the effect of tainting the trust.
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Professional advice

The information outlined above should only be treated as generic in nature and does not constitute advice. You should therefore not rely upon any of its content in order to make any decisions in relation to your affairs. The subject of Protected Trusts is a highly specialised one, so it is of the utmost importance to seek out proper professional advice from a specialist advisor. Readers should avoid entering into any transactions until appropriate advice has been received.
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Should you require advice we have a network of trusted advisers who we work with and would be happy to make introductions.

Contact us

In order to learn about how we can assist with the administration of a Protected Trusts, and/or any aspect of our trust services in Gibraltar, please contact Acquarius using our online form, and we will get back to you as soon as we can.