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[The Ultimate Guide] Pre-Immigration Planning Trusts for Australia, UK, and Canada
Sep 19, 2024
When moving to another country, understanding tax implications and financial planning is crucial. Pre-immigration trust planning helps manage assets, minimize tax liabilities, and ensure a smooth transition. This article explores pre-immigration trust planning for Australia, the United Kingdom, the United States, and Canada.
Australia
Australia's tax system is residency-based, meaning becoming an Australian tax resident can significantly impact your worldwide income and assets.
Specifically, tax residents (those living in Australia for 183 or more days in a tax year, from July 1 to June 30) are subject to global taxation. This includes income from wages, capital gains, interest, dividends, and rent, all of which are taxable.
Australian income tax rates:
No tax on annual income up to A$18,200
19-45% tax rates for income above A$18,200
Detailed tax brackets:
16% on income between A$18,200-A$45,000
30% on A$45,001-A$135,000
37% on A$135,001-A$190,000
45% on income over A$190,000
Special rules for capital gains tax:
50% discount on assets held over one year
Main Residence Exemption
Net capital losses can offset future capital gains
Key Tax Rules:
Australia taxes residents on their worldwide income
Capital gains tax (CGT) applies to worldwide assets
There's a "deemed disposal" rule for assets when becoming a tax resident
Key Considerations:
Asset Transfer:
Any transfer of assets, including gifts to family members, is treated as a sale at market value and subject to capital gains tax.
This applies to transfers between parents and children, siblings, and even spouses.
The only exception is asset transfers between spouses during divorce, which can retain the original cost basis.
50% Discount Limitation:
Australian tax residents can claim a 50% discount on capital gains for assets held over a year.
This discount is prorated based on the period of tax residency.
Example: If you bought a property 1.5 years before becoming a tax resident of Australia and sold it 1.5 years after, only 25% of the capital gain would be discounted.
Main Residence Exemption:
Both temporary and tax residents can claim capital gains tax exemption on their main residence.
This applies to properties in Australia and overseas.
The exemption may be reduced if the property is rented out or left vacant for extended periods.
Inherited properties can retain this exemption if used as the heir's main residence.
Important note: If a taxpayer becomes a non-resident and sells their former Australian main residence, the exemption no longer applies, and 100% of the capital gain is taxable without the 50% discount.
Inheritance Tax: It's important to note that although Australia doesn't have an inheritance tax, this doesn't mean that heirs are completely free from tax obligations. For instance, the heir might still need to pay tax on capital gains.
Double Taxation Agreement: Hong Kong has no bilateral double taxation agreement with Australia. This means Australian tax residents may face double taxation on income from Hong Kong - taxed in Hong Kong based on territorial principle and in Australia based on global income principle. However, if immigrants have paid taxes on Hong Kong income to the HKSAR government, they can claim tax offsetting from the Australian government. It is advised that immigrants with Hong Kong income and taxes paid to keep records and apply for tax credits in Australia to potentially avoid double taxation.
Pre-Immigration Trust Strategy:
Establish an offshore trust before becoming an Australian tax resident
Transfer assets to the trust before immigration
Ensure the trust is properly structured to avoid being considered an Australian resident trust
Benefits:
Potential deferral of CGT on assets held in the trust
Protection of foreign-source income from Australian taxation
Estate planning benefits and asset protection
United Kingdom
The UK's Spring Budget 2024 abolished the non-domiciled tax status, which previously allowed certain residents to keep overseas income untaxed. Now, your tax liability depends primarily on your residency status, as the remittance basis taxation for non-doms has been removed.
As a UK resident non-domiciled individual ("resident non-dom"), you may opt for “remittance-based” taxation. This allows you to pay UK tax only on:
UK-sourced income and gains
Foreign income and gains remitted to the UK
Resident non-doms are subject to inheritance tax only on UK assets. However, those considered UK domiciled or deemed domiciled face inheritance tax on worldwide assets.
Key Considerations:
Non-domiciled residents can claim the remittance basis of taxation
Worldwide income and gains are taxable if remitted to the UK
After living in the UK for 15 out of 20 tax years, an individual becomes deemed domiciled
When selling your Hong Kong property, the primary tax concern is capital gains tax. The applicability of this tax depends on two key factors:
Your UK tax residency status at the time of sale
Whether the property served as your family home before your UK relocation
These elements will largely determine if you're liable for capital gains tax on the sale proceeds.
If you rent out your Hong Kong property:
Under remittance basis taxation:
No UK tax on rental income if kept outside the UK
Consider Hong Kong tax obligations separately
Without remittance basis:
Rental income subject to UK income tax
Also taxable in Hong Kong
Double taxation agreements should prevent paying tax twice on the same income
Pre-Immigration Trust Strategy:
Non-domiciled individuals can shield non-UK assets from inheritance tax
Carefully structuring the trust before being a UK tax resident can benefit from UK tax
The UK's Excluded Property Trust exempts only Protected Foreign Source Income
Benefits:
Potential tax-free growth of offshore assets
Protection from UK inheritance tax
Flexibility in timing income and capital distributions
Canada
Canada's tax system is residency-based, with a deemed disposition rule that can trigger capital gains tax upon immigration.
Key Considerations:
Residents are taxed on worldwide income.
Deemed Disposition of Capital Property:
While Canada does not have an estate tax, when a Canadian tax resident dies, their assets are considered sold at fair market value. This "deemed disposition" rule subjects half of any capital gains on these assets to income tax, which can be as high as 54%. Thus, the Canadian tax system effectively imposes a tax on unrealized capital gains at death.
Foreign trusts may be subject to Canadian tax rules.
Pre-Immigration Trust Strategy:
Establish an offshore trust before becoming a Canadian resident
Consider an immigration trust (60-month tax holiday)
Canada's "Granny Trust," requires that the trustee, those involved in managing trust assets, and the actual controllers of the trust must not be Canadian tax residents. If the settlor has too much involvement in the trust's operations and management, or can directly influence the trustee's decisions, it's likely to result in the trust completely losing its tax advantages after immigration. This high level of involvement could cause the trust to be deemed resident in Canada for tax purposes, negating the intended tax benefits of the structure.
To achieve tax benefits, most immigration trusts require that the assets placed into them are pre-immigration capital. Some trusts, such as the aforementioned Granny Trust must be established at least 5 years before immigration.
Structure the trust to avoid Canadian residency
Benefits:
Potential deferral of Canadian taxation on foreign income
Protection from the deemed disposition rule
Estate planning and asset protection benefits
General Considerations for Pre-Immigration Trust Planning
Regardless of the destination country, there are several general considerations to keep in mind when implementing a pre-immigration trust strategy:
Timing: Establish the trust well in advance of immigration to preclude any appearance of tax evasion or avoidance.
Compliance: Ensure full compliance with reporting requirements in both the home country and the destination country.
Flexibility: Design the trust structure to adapt to potential changes in tax laws or personal circumstances.
Professional Advice: Consult with tax and legal professionals in both the home country and the destination country to ensure the trust structure is optimized and compliant.
Exit Strategy: Consider potential future relocations or a return to the country of origin when structuring the trust.
Asset Selection: Carefully choose which assets to transfer to the trust, considering factors such as appreciation potential and income generation.
Beneficiary Structure: Plan the beneficiary structure to align with family needs and long-term goals.
Control: Balance the need for control with the tax and legal requirements of the trust structure.
Conclusion
Pre-immigration trust planning is essential for individuals moving to those high tax rate countries such as Australia, the UK, the US and Canada.Properly structuring your assets and income through trusts before you deem tax resident can offer significant benefits, such as tax savings, asset protection, and enhanced estate planning options.
However, tax laws and regulations can change, and each individual's situation is unique. It's crucial to seek advice from experienced cross-border tax and legal experts before setting up a pre-immigration trust. With proper planning, such a trust can ensure a smooth transition and a secure financial future.
Talk to our trust professions today.
Disclaimer:
This article was published by UTGL for informational purposes only. The content provided does not constitute legal, tax, financial, or investment advice.
Tax laws and regulations are complex and subject to change. The information presented in this article may not reflect the most current legal developments or tax laws in the mentioned countries. The application of tax laws can vary widely based on the specific facts and circumstances involved.
Readers should not act or refrain from acting on the basis of the information in this article without first seeking appropriate professional advice specific to their individual situation. UTGL does not guarantee the accuracy, completeness, or timeliness of the information contained herein.
This article is not intended to be a substitute for professional tax, legal, or financial advice. UTGL, its authors, and contributors disclaim all liability in respect to actions taken or not taken based on any or all the content of this article.
For specific advice regarding pre-immigration planning trusts or any tax-related matters for for the above-mentioned countries, please consult with qualified tax professionals, legal advisors, or financial planners.
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