Technical insights: 8 options for capital gains tax mitigation under the new rules

The Autumn 2024 Budget introduced several new tax changes by Labour Chancellor Rachel Reeves, from employer national insurance increases to ending the stamp duty holiday, which becomes effective from April 2025.

Reeves further outlined key changes to capital gains tax (CGT), which took effect immediately. CGT rates on assets increased from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers on most asset classes. This, combined with her confirmation of the desire to press ahead with the changes to the taxation of non-domiciled individuals, is particularly concerning for UK resident non-domiciled settlers of non-UK resident trusts.

 In the following article, we provide a comprehensive overview of the various strategies available to taxpayers to mitigate CGT under the new rules.

1. Exclusion of settlor and spouse as beneficiaries of the trust 

It is important to note that this will not block CGT attribution. However, if the trust or the underlying company only invests in non-reporting status funds, disposals would result in offshore income gains rather than capital gains and thus cannot be attributed to the settlor on that basis.

Offshore income gains are attributed under the transfer of assets abroad (TOAA) rules or settlements legislation as currently drafted. As long as the settlor and the settlor’s spouse cannot benefit, there would be no attribution under these anti-avoidance provisions. There is a risk that TOAA and settlements legislation may be reviewed to align income tax rules with CGT rules, which could require excluding a wider class of beneficiaries, making it unattractive. These changes are currently subject to consultation.

2. Insurance bonds

Insurance bonds can prevent capital gains tax attribution. The bondholder is seen as owning a right against the insurer, not the underlying investments. Tax-free roll-up continues, but if withdrawals exceed the annual 5% initial capital amount, they are taxed as offshore income gains.

3. Protected cell companies (PCC)

To avoid attribution, there must be enough different owners to keep the PCC from being considered ‘close’. This means more than five families should own cells, and no five families should own cells worth more than 50% of the PCC's value. Using an open and possibly listed PCC can help achieve this. If not considered close, CGT attribution is avoided, but it won't help with deferring income tax attribution.

4. UK OEICs

Investments should be held through a non-UK company to keep them outside the settlor's estate for inheritance tax purposes if the settlor is a long-term resident. Private OEICs can be designed with high investment thresholds and limited withdrawal options. Income tax is due when dividends are declared, but costs can offset much of this income. Capital gains tax is due when units are sold, which can be managed by the company's directors and trustees. A challenge with this approach is that moving funds to the UK could trigger tax on any unremitted foreign income and gains of the settlor.

5. Private label funds

The treatment depends on the type of fund structure. Standard GP/LP structures or partnerships might not help, but this varies based on the jurisdiction and the number of investors.

6. Transparent unit trusts 

If each structure invests through the unit trust and it is transparent, each structure would own the underlying investments, which wouldn't help. However, if structured as a Jersey LLP (opaque), this would prevent CGT attribution since investors aren't seen as participants. Capital gains tax would apply when the units are sold, but this may not be useful for income tax purposes.

7. Import the underlying company to the UK

The company would then pay corporation tax on its profits while still being considered a non-UK asset for inheritance tax purposes, thus maintaining protection from gifts with reservation of benefit rules. Since the income and capital gains are taxed in the UK, there should be no attribution to the settlor.

8. Import the trust to the UK

If the trust becomes a UK resident, the rules that attribute capital gains and income to the settlor will no longer apply. However, the trust would then be taxed in the UK at the highest rates. Additionally, if the trust is later moved out of the UK, there would be a capital gains tax on all the assets.

How can Ocorian help with CGT mitigation under the new rules?

Remember, it is important to carefully evaluate your individual circumstances and goals to determine the most appropriate strategy for preserving wealth and optimising tax efficiency.

Our Private Client team has extensive experience navigating complex tax situations. We can help you explore personalised strategies to minimise the impact on your family's finances.

Don't wait – reach out to the Ocorian team to discuss in more detail.