Do UK citizens have no tax to pay on assets put into Czech Trusts?
And, what happens when the original settlor dies?
Czech trusts have become popular since the change in law back in 2014 that recognised trusts for the first time. In fact, I was involved in the establishment of the first Czech Trust Association at the time (see Trust Association Launched in Czech Republic).
At this point, it is important to point out that Aisa International is not a law firm and this article is written with the purpose of raising questions that lawyers and trust experts may be able to answer.
Inheritance Tax (UK domiciled Settlor, Czech Resident)
This article is written from the perspective of a UK domiciled individual, resident in the Czech Republic that wishes to set up a trust. While Inheritance Tax in the Czech Republic was abolished at the end of 2013, (although there is still a notary proportional charge which can appear like a tax) it most certainly still exists in the UK and it follows UK domiciled individuals that reside abroad (see Inheritance Tax Deemed Domicile Rules.)
A recent article by a Czech lawyer on Expats.cz caught my eye and specifically, this paragraph:
‘Assets contained within trust funds are not involved in the inheritance process – the legal owner of the asset is the trustee, not the founder – so any future tax levied on inherited assets would not affect those in trusts.’
This got me thinking. While, no doubt, this is absolutely correct from a Czech perspective, it raised the question, ‘Does the settlor’s (or founder’s) domicile not influence this at all? Also, if the money is returning to beneficiaries in the UK, will they have no obligation to report it?
Non-Resident Trusts
According to HMRC, trustees of trusts, including of non-resident trusts, may have to pay Inheritance Tax on assets in the trust. Trustees of non-resident trusts will only have to pay it on assets situated outside the UK, if the settlor was domiciled (or deemed domiciled) in the UK when the assets were put into the trust.
Depending on the value of the assets in the trust, Inheritance Tax may be due when:
- assets are put into the trust
- the trust reaches a ten-year anniversary
- assets are taken out of the trust or the trust ceases
It does not matter if the trustees or beneficiaries are resident in the UK or not. However, if the executers or beneficiaries are in the UK, they do have a fiduciary duty to report to HMRC!
Normally the tax is paid by the trust.
In addition to the tax rules, overseas trustees should be alert to a possible obligation to register the trust’s existence with HMRC as well (see https://www.gov.uk/trusts-taxes/registering-a-trust, and update those details in the event of any changes. Inevitably, there can be financial penalties for failures to comply with these complex UK obligations for non-resident trusts.
Executers or beneficiaries are in the UK
Throughout, I have referred to executers or beneficiaries being UK residents. The UK imposes a fiduciary duty on any executer or beneficiary in the UK to declare assets received when inherited. This is critical as HMRC may not agree with the Inheritance Tax position of the Czech trust. Are financial advisers outside of the UK aware of these issues?
Take Advice
Taking account of the above, where a UK domiciled individual living in the Czech Republic has a potential UK Inheritance Tax liability and pays into a Czech trust, there is a strong argument to take additional tax and trust advice – possibly from a UK qualified lawyer.
If such a trust should be registered as a non-resident trust with HMRC, due to the domicile of the settlor at the point of setting up the trust, does the comment ‘…so any future tax levied on inherited assets would not affect those in trusts.’ hold true in such a case?
Again, I would like to remind people that we are not lawyers or tax advisers and are really just raising this as a question for debate.
