INTM603560 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017: Benefits charge where deemed income attributed to onward gift recipient

INTM603520 looked at the basic conditions needed for a charge under the onward gift provisions to apply.

This page looks at ITA07/S733D which applies to situations where the recipient of the onward gift (“subsequent recipient”) is:

  • non-UK resident for the gift year, or
  • UK resident in the gift year but non-UK resident in the matching year, where the matching year is later than the onward gift year,

or

  • UK resident in the gift year, and
  • UK resident in the matching year, if that matching year is later than the gift year, and
  • is a remittance basis user for the charging year, and none (or only part) of the onward payment is remitted to the UK in the charging year.

In these situations, ITA07/S733B(1)(a) has effect as if the subsequent recipient were an individual to whom deemed income is treated as arising under ITA07/S732 for the charging year, and as if the amount of that deemed income were an amount equal to the amount or value of so much of the onward payment as is within:

  • the whole of part of the benefit received by the original beneficiary,
  • anything that derives from (in whole or in part, either directly or indirectly) or represents the whole or part of that benefit, or
  • any other property, but only if the benefit is provided with a view to enabling or facilitating the making of the gift to the subsequent recipient,

and that is not treated as arising to someone other than the subsequent recipient as a result of the settlor being liable following the onward gift.

Where the subsequent recipient is a remittance basis user, this has the effect of only treating amounts remitted to the UK as comprising the income treated as arising to the onward recipient under ITA07/S732 for the year of charge.

The effect of the above is that the onward payment is treated as if it were ITA07/S732 notional income arising to the subsequent recipient. If that subsequent recipient makes a further onward gift, then the onward gift rules can apply again to this gift using ITA07/S733B as before (see INTM603520). It should be noted that the matching and arrangements conditions do not need to be satisfied again. It should also be noted that the time limit for making any such onward payments is three years from the time the original beneficiary received the benefit.

Example 1

Johan is a beneficiary of a Guernsey discretionary trust. He is not UK resident. In the year 2019 - 2020 he receives a capital distribution of £100,000 from the trust. For the purpose of the example, it is assumed that there is sufficient protected foreign-source income (PFSI) in the trust to match against the distribution in 2019 - 2020.

In 2019 - 2020 Johan makes a gift to Marcus of the £100,000 he received from the trust. It is assumed that the conditions in ITA07/S733B are met.

During the year 2019 - 2020 Marcus is not UK resident and as a result ITA07/S733D will apply. Marcus is not chargeable to tax under ITA07/S731 as he is not UK resident, but we re-attribute the ITA07/S732 income originally treated as arising to Johan across to Marcus. This means that should Marcus decide to gift the £100,000 (or any part of it) to another person, ITA07/S733B will apply again, and that other individual will potentially be assessable under the onward gift rules depending on their particular circumstances. As the matching of the benefit has already occurred in 2019 – 2020, there will be no requirement for any further matching in a later year.

Example 2

Catherine is the beneficiary of a Jersey discretionary trust. She is not UK resident. She receives a capital distribution of £25,000 from the Jersey trust in the year 2019 - 2020. For the purpose of this example, we are assuming that the conditions in ITA07/S733B are met. There is no PFSI in the Jersey trust to match against the benefit in 2019 - 2020.

Catherine makes a gift of the £25,000 she received to Phillip in 2019 - 2020. Phillip is not UK resident in the year 2019 – 2020. However, he is UK resident in 2020 - 2021 but he is also a remittance basis user during this later year.

During 2020 - 2021 the Jersey trust receives PFSI in excess of the £25,000, so the benefit received by Catherine is matched in 2020 - 2021.

Phillip does not remit any of the £25,000 gift he received from Catherine in the year 2020 – 2021, so ITA07/S733D applies. The ITA07/S732 deemed income originally treated as arising to Catherine is therefore re-attributed to Phillip. By treating Phillip as having deemed ITA07/S732 income, we will be able to apply ITA07/S733B again should Phillip make a gift of any part of the £25,000 to another person.

Note

We can apply this sequence of ITA07/S733B and ITA07/S733D to any number of subsequent recipients, if onward gifts of the benefit continue to be made during the period of three calendar years from when the original beneficiary received the benefit. This prevents an individual from avoiding a tax charge by routing the benefit through several different recipients before the UK resident individual finally receives it.

The recipient of the original benefit from the trust must be an individual as ITA07/S732 only applies to an individual. However, it is possible for subsequent recipients in the middle of the chain to be trustees or companies as well as individuals. The recipient at the end of the chain must also be an individual for a tax charge to be due for the same reason.