Our client’s father established a foundation under the laws of a foreign country over a decade ago. The father was non-UK domiciled and had never lived in the UK.
The only assets held by the foundation were cash and investments which were managed by an overseas bank.
On the death of their father, our client (a UK tax resident) obtained an interest in the foundation, however our client was unsure what this would mean from a UK tax perspective. In particular, our client was concerned that the foundation would be treated as a discretionary trust which would give rise to large tax liabilities.
Some months after the father’s death it was agreed that the foundation would be wound up by selling the assets investments and distributing the cash.
Our client therefore required assistance to understand the tax implications of her interest in the foundation and the proposed distribution, as well as compliance with UK self-assessment tax returns.
The first step was to consider the tax treatment of the foundation from a UK perspective.
This is a tricky area because whereas foundations are often used in civil law jurisdictions, in common law jurisdictions such as the UK we tend to use trusts. Trusts and foundations may have some similarities, however there are a number of distinct differences which will vary depending on the country in question and the terms of the specific foundation.
After a detailed review of the deed and arrangements we determined that our client became absolutely entitled to the income and capital of the foundation immediately following the father’s death, and the foundation was in effect equivalent to a bare trust under English law.
This meant that our client was responsible for income tax and capital gains tax on the income/gains arising since the father’s death, and that there were no tax consequences in relation to the distribution of cash as this simply aligned the legal and beneficial ownership position.
The second step was to report the income/gains arising from the investments on our client’s self-assessment tax returns. As part of this work, we considered our client’s UK tax liability on the receipt of overseas interest, dividends, gains from foreign exchange (FOREX) contracts and reporting/non-reporting funds.
Our client could rest assured in the knowledge that their tax return had been submitted and their UK tax affairs were in order.