INTM603280 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017: Impact of pre-6 April 2017 remittance basis rules on ITA07/S720 charge

If the settlor of a non-resident trust was a non-UK domiciled remittance basis user, any relevant foreign income which arose before 6 April 2017 in either a non-resident trust or an underlying company will not have been subject to tax under ITA07/S720 on the settlor if the income remained in the structure and was not remitted to the UK by the trust or company. INTM601960 onwards looks at the impact of the remittance basis on the application of ITA07/S720 and in particular ITA07/S726 - which deals with individuals assessable under ITA07/S720 to whom the remittance basis applies. To take into account the changes made to the transfer of assets abroad provisions with the introduction of the concept of protected foreign-source income (PFSI) (see INTM603260), two new subsections (6) and (7) have been added to ITA07/S726.

Consequently from 2017 - 2018 the position has changed such that ITTOIA05/S832 will no longer apply to the foreign deemed income in so far as it is remitted to the UK in 2017 - 2018 or a later year, provided that the income comes within the definition of transitionally protected income as defined by ITA07/S726(7). This is any deemed foreign income where the associated foreign income of the person abroad arising from a relevant transfer

  • arose in a tax year earlier than 2017 – 2018,
  • would have been PFSI (see INTM603260), had the legislation been in place in the year in which the income arose, and
  • has not been distributed prior to 6 April 2017 by the trustees of the settlement concerned.

This means that if, for example, the trustees of a non-resident settlor interested trust, with a non-domiciled or deemed domiciled settlor, were to make a capital distribution post-April 2017 then - to the extent the distribution is paid with monies containing pre-6 April 2017 previously unremitted foreign income - that pre-6 April 2017 income cannot be treated as a taxable remittance by the settlor under ITA07/S720 if brought to the UK by a relevant person. Of course, the capital distribution will itself be subject to the anti-avoidance provisions dealing with capital distributions/benefits from offshore trusts, which may deem the capital distribution to be income or gains in the hands of the recipient. This will need to be dealt with on its own merits, but the issue of remitting the underlying pre-6 April 2017 income referred to above will no longer exist.

Also, from 6 April 2017, the trustees of a settlor interested trust will be able to bring trust income (whether arising before or after 6 April 2017) to the UK without the non-domiciled, but UK resident settlor being liable to a charge under ITA07/S720 on this income. Following the changes introduced by the Finance (No. 2) Act 2017, the trustees and their closely held companies can now invest PFSI in UK assets without triggering a charge to tax on the settlor under ITA07/S720. However, it should be noted that this undistributed income will be relevant income available for matching purposes when calculating any liabilities that may arise under ITA07/S731 in relation to any benefits provided to the settlor or another beneficiary. The amendments that have been made to the benefits charge are covered in INTM603420 onwards.

Example

George, who is non-UK domiciled, has been UK resident since 1997. He is a remittance basis user and in April 2010 he settled a non-resident trust in which he, his wife and son Ringo were discretionary beneficiaries.

The trustees subscribed for shares in G Ltd, an offshore company, which invested the sums settled in offshore investments. From April 2010 to March 2017 the company’s investments generated a total income of £1 million. It is assumed that the transfer of assets abroad legislation applies to the arrangements and in particular to the income arising in G Ltd. This income is treated as deriving from George’s foreign deemed income (which itself is classified as relevant foreign income). Should any of this income have been remitted to the UK prior to 6 April 2017 George would have been assessable to income tax on it under ITA07/S720. The company did not remit any of the income to the UK before 6 April 2017.

In May 2017 the company directors identified a UK investment opportunity and brought £500,000 of the accumulated income to the UK to fund the investment. The funds brought to the UK would not be assessable as George’s income under ITA07/S720. However, if later

  • George received a benefit that was matched to this income, or
  • a close family member of his received a benefit on which George would be taxable (see INTM603500)

George would be liable under the benefits charge at ITA07/S731 (see INTM603480).

If before 6 April 2017 the directors of G Ltd made a distribution of £100,000 to the trustees who in turn distributed this income to Ringo, George’s adult son, this would reduce the amount of transitionally protected income to £900,000. Ringo may have a tax liability on this distribution in the UK depending on his personal circumstances.

If George had not been UK resident for sufficient time on 6 April 2017 to become UK deemed domiciled on that date, then he would still be able to claim the remittance basis in respect of any benefits he received. So, to the extent that G Ltd or the trust provided him with a benefit that could be matched under the benefits charge provisions (see INTM601400 onwards), this benefit would only be assessable if

  • it was remitted to the UK, or
  • It was matched with income retained within the structure which is remitted to the UK by the trustees or G Ltd,

applying the ordering rules set out at ITA07/S735A.