For UK-domiciled and UK-resident individuals, Guernsey trusts are often part of sophisticated wealth planning. However, the UK tax regime is designed to ensure that “offshore” does not mean “outside the tax net.”

1. UK Taxation of Guernsey Trusts: The Core Principles

Income Tax

• Settlor-Interested Trusts: If the settlor or their spouse/civil partner can benefit, all trust income (regardless of whether distributed) is attributed to the settlor under ITTOIA 2005, s.624. This includes both UK and non-UK source income. The settlor must declare this on their UK tax return, using information from the trustees (often via the R185(Settlor) form).

  
  

• Discretionary Trusts: Trustees pay income tax at the trust rate (currently 45%) on most income. When a UK-resident beneficiary receives a discretionary payment, it is “grossed up” for the tax already paid by the trustees. The beneficiary is taxed at their marginal rate, with credit for the tax paid by the trustees. The R185 (Trust Income) form provides the necessary figures.

  
  

• Interest in Possession Trusts: The beneficiary is entitled to the income as it arises and is taxed on it, with credit for any tax paid by the trustees. The R185 form details the income and tax deducted.

Capital Gains Tax (CGT)

• Trustee CGT: Guernsey trustees are not subject to UK CGT unless the trust is UK-resident or holds UK land. However, UK-resident or domiciled beneficiaries may be taxed on capital payments under the “beneficiary charge” (TCGA 1992, s.87).

  
  

• Stockpiled Gains: Gains realised by the trust but not distributed are “stockpiled.” When a UK-resident beneficiary receives a capital payment, these gains are matched and taxed, even if the gains arose years earlier. The “matching” rules are complex and can result in tax on amounts the beneficiary never actually received as cash.

  
  

• Supplementary Charge: If the beneficiary is a remittance basis user, special rules apply to determine whether the gain is taxable on the arising or remittance basis.

Inheritance Tax (IHT)

• Relevant Property Regime: Most Guernsey trusts created by UK-domiciled settlors are subject to the relevant property regime (IHTA 1984, s.58). This means:

  • Entry Charge: 20% on the value of assets settled above the nil-rate band.

  • Ten-Year Anniversary Charge: Up to 6% of the value of trust assets every ten years.

  • Exit Charge: Proportionate charge when assets leave the trust.

    
    

• Excluded Property Trusts: If the settlor is non-UK domiciled and settles non-UK assets, the trust may qualify as an “excluded property trust” and fall outside the UK IHT net. However, “deemed domicile” rules (IHTA 1984, s.267) can bring such trusts into charge if the settlor becomes UK domiciled or deemed domiciled.

2. The R185 (Trust Income) Form: Technical Use and Pitfalls

Purpose and Structure

• The R185 (Trust Income) form is issued by trustees to beneficiaries, detailing income paid or entitled to in the tax year. It breaks down:

  • Discretionary income payments (net and grossed up)

  • Non-discretionary (interest in possession) income

  • Savings income, dividend income, property income, foreign income

  • Tax deducted at source

How to Use the R185

• Beneficiaries must copy the figures from the R185 to the relevant boxes on the SA107 ‘Trusts etc’ pages of their self-assessment tax return.

• For discretionary payments, the net amount and tax credit are entered, and the payment is taxed at the beneficiary’s marginal rate.

• For interest in possession income, the beneficiary is taxed as if they received the income directly, with credit for tax paid by the trustees.

• For foreign income, the R185 provides gross income, UK tax paid, and foreign tax paid, which must be reported on the SA106 ‘Foreign’ pages.

Common Pitfalls

• Omitting R185 Income: Failing to include R185 income on your tax return is a common error. HMRC receives information from Guernsey trustees under CRS and FATCA, so non-disclosure is likely to be detected.

  
  

• Misunderstanding Tax Credits: Beneficiaries sometimes claim the wrong amount of tax credit, leading to under- or overpayment.

  
  

• Settlor-Interested Trusts: If you are the settlor, income may be taxed on you even if you do not receive it. The R185(Settlor) form, not the standard R185, is relevant here.

  
  

• Minor Children: Income paid to a settlor’s minor child is taxed on the settlor, not the child.

Worked Example: R185 (Trust Income) Form for a High-Value Discretionary Trust

Suppose a Guernsey discretionary trust holds assets valued at £3 million, generating £150,000 of income in the tax year. The trustees pay income tax at the trust rate (45%), so tax deducted is £67,500. The trustees make a discretionary distribution of £100,000 to a UK-resident beneficiary.

R185 Entries:

• Box 1 (Net payment): £100,000

• Tax credit at trust rate: £81,818 (grossing up: £100,000 ÷ 55% = £181,818; tax credit = £181,818 – £100,000 = £81,818)

• Beneficiary’s total taxable income from trust: £181,818

• Tax already paid by trustees: £81,818

• Beneficiary’s tax liability: If the beneficiary is a higher-rate taxpayer (45%), their liability is £81,818, fully covered by the tax credit. If their marginal rate is lower, they may be entitled to a repayment.

How to use on the tax return:
The beneficiary enters the grossed-up amount (£181,818) and the tax credit (£81,818) on the SA107. If their total income is below the additional rate threshold, they may receive a refund.

3. Trust Registration and Reporting

• Trust Registration Service (TRS): Non-UK trusts with UK tax liabilities must register with the TRS. This includes Guernsey trusts with UK source income, UK assets, or UK-resident beneficiaries.

• Annual Declarations: Trustees must update the TRS annually and report changes in beneficial ownership.

• Disclosure to HMRC: Trustees must provide information to HMRC on request, and beneficiaries must declare trust income and gains on their self-assessment returns.

Worked Example: Capital Gains Tax (CGT) Matching for UK Beneficiaries

Assume the same trust has realised capital gains of £500,000 over several years, which have not yet been distributed (“stockpiled gains”). In the current year, the trustees make a capital payment of £300,000 to a UK-resident beneficiary.

CGT Matching Calculation:

• Stockpiled gains available: £500,000

• Capital payment: £300,000

• Gains matched to payment: £300,000 (the payment is fully matched to available gains)

• Beneficiary’s CGT liability:

  • If the beneficiary is a higher-rate taxpayer, the CGT rate is 20% (or 28% for residential property).

  • CGT due: £300,000 × 20% = £60,000

Reporting:
The beneficiary must declare the matched gain on their self-assessment return. If the payment exceeds available gains, the excess is not taxable as a gain.

4. Anti-Avoidance and Compliance

• Transfer of Assets Abroad (TOAA): If a UK resident transfers assets to a Guernsey trust and retains the ability to benefit, anti-avoidance rules (ITA 2007, s.720) may apply, attributing trust income to the transferor.

• Settlor-Interested Trusts: The “settlor charge” applies if the settlor or their spouse/civil partner can benefit, regardless of whether they actually do.

• Disclosure of Tax Avoidance Schemes (DOTAS): Certain trust arrangements may need to be disclosed under DOTAS if they have tax avoidance features.

Worked Example: Inheritance Tax (IHT) Charges on a Guernsey Trust

Suppose a UK-domiciled settlor settles £2.5 million into a Guernsey discretionary trust.

Entry Charge:

• Nil-rate band (2025/26): £325,000

• Chargeable transfer: £2,500,000 – £325,000 = £2,175,000

• Entry charge at 20%: £2,175,000 × 20% = £435,000

Ten-Year Anniversary Charge:

• Assume trust assets have grown to £3 million at the ten-year anniversary.

• Available nil-rate band: £325,000

• Chargeable amount: £3,000,000 – £325,000 = £2,675,000

• Maximum charge at 6%: £2,675,000 × 6% = £160,500

Exit Charge:

• If £1 million is distributed between anniversaries, and 5 years have elapsed since the last charge:

• Proportion of 10-year charge: 5/10 = 0.5

• Exit charge: £1,000,000 × 6% × 0.5 = £30,000

Reporting:
Trustees must file IHT100 forms and pay the relevant charges to HMRC.

5. Practical Tips for Settlors, Beneficiaries, and Trustees

• Maintain Detailed Records: Keep all trust accounts, R185 forms, trustee statements, and correspondence.

• Coordinate with Trustees: Ensure trustees are aware of your UK tax status and provide timely, accurate R185 and R185(Settlor) forms.

• Understand the Matching Rules: If you are a beneficiary, ask trustees for a breakdown of stockpiled gains and how they are matched to capital payments.

• Plan for IHT Charges: Trustees should diarise ten-year anniversaries and calculate potential charges well in advance.

• Register and Update the Trust: Ensure the trust is registered with the TRS if required, and keep details up to date.

• Seek Specialist Advice: The interaction of Guernsey and UK tax law is highly technical. Before making distributions, adding assets, or changing trust terms, seek advice specific to your circumstances.

6. When Might a Guernsey Trust Still Be Effective?

• Excluded Property Trusts: For non-UK domiciled settlors, Guernsey trusts can shield non-UK assets from UK IHT, provided the settlor does not become deemed domiciled.

• International Families: Where beneficiaries are resident in multiple jurisdictions, Guernsey trusts can provide a neutral platform for asset holding and succession.

• Asset Protection and Succession: Even where tax benefits are limited, trusts can offer robust asset protection, privacy, and control over succession.

Conclusion

Guernsey trusts remain a powerful tool for international wealth management, but for UK-domiciled and UK-resident individuals, the UK tax regime is comprehensive and complex. The R185 form is central to compliance, but understanding the underlying tax rules is essential to avoid unexpected liabilities. With careful planning, transparent reporting, and ongoing professional support, you can navigate the technicalities and make the most of your trust structure.

Disclaimer: This article is for general information only and does not constitute legal, financial, or tax advice. You should consider your own circumstances and seek professional support if you need specific guidance. Requirements and procedures may change.