INTM601540 - Transfer of assets abroad: The benefits charge: Interaction with offshore income gains

When an offshore income gain arises to a person abroad, then the transfer of assets abroad legislation can apply to treat the offshore income gain as if the amount were foreign income becoming payable to that person. For further guidance on this, see IFM13440 in the Investment Funds Manual. 

A consequence of this is that any benefits received by a beneficiary of an offshore trust can also be matched to offshore income gains as well as any relevant income. There is an order for matching which is set out in regulations 20 and 21 of Offshore Funds (Tax) Regulations 2009 (OFTR) (SI 2009/3001) and is described in IFM13420 onwards.

In broad terms, if a non-resident trust pays a benefit, in the first instance this benefit should be matched against any offshore income gains arising in that year, or to the extent that the benefit remains unmatched in that year, it is matched with offshore income gains that arose in earlier years, with the latest year being matched first. To the extent that there remain unmatched benefits, then they can be matched with relevant income and taxed under ITA07/S731. This can be demonstrated by way of the following example.

Example

Trust D is a non-resident trust that is not settlor interested. The trust was established in 2010-2011, beneficiary Z is UK resident and domiciled and in 2010-2011 the trustees make a capital payment of £50,000 to him. During 2010-2011 the trustees have received the following;

Offshore income gains: £50,000

Relevant income: £100,000

By applying the rules at section TCGA92/S87/S87A in accordance with OFTR reg 20 and 21(5), the amount of the offshore income gains attributed to Mr Z (£50,000) is not the income of the person abroad as referred to at OFTR reg 21(1). The relevant income of £100,000 may be matched with any capital payments / benefits made in subsequent years, in considering a charge under ITA07/S731.