INTM603705 - Transfer of assets abroad: 6 April 2025 non-UK domicile reforms: Settlor liable for benefits charge despite being transferor
From 6 April 2017 the settlors of non-resident trusts who were non-UK domiciled when the trust was settled became subject to the benefits charge in respect of any benefits that they received that were matched to transitionally protected income (TPI) or protected foreign-source income (PFSI) arising in the trust or an underlying company. Details of the benefits charge on settlors of protected trusts can be found at INTM603420.
From 6 April 2025 with the removal of the remittance basis of taxation, ITA07/S731 reverted to applying only to non-transferors. However, a charge can still arise on a transferor under ITA07/S735AD as this section acts to disapply ITA07/S732(1)(d) where the individual receiving the benefit is the settlor. This section prevents a benefits charge arising on an individual who is liable to income tax under ITA07/S720 or ITA07/S727 in respect of a relevant transfer. Any income treated as arising to the settlor under ITA07/S732(2) is not taxable under ITA07/S731 unless the income would, if ITA07/S735A applied for the purpose, be matched under that section with an amount of relevant income that is PFSI or TPI in relation to the relevant transfer.
Example
Mrs F is UK resident, but non-UK domiciled. Mrs F is a remittance basis user who became deemed domiciled in the UK in 2017 - 2018 by virtue of the number of years she has been UK resident. In April 2013 Mrs F settled £500,000 into a BVI resident trust, the F Trust, of which she was a beneficiary. The trustees used the settled funds to subscribe for shares in a BVI company F Ltd. F Ltd used the funds to invest in both UK and overseas investments giving rise to UK income of £15,000 per year and foreign income of £25,000 per year.
For the years 2013 - 2014 to 2016 - 2017, the income of F Ltd will be treated as Mrs F’s income for the purposes of ITA07/S720. However, as Mrs F is a remittance basis user she will only be assessable on the UK source income of £15,000 per annum as it arises to F Ltd. The other £25,000 income of F Ltd is foreign source income and so will not be taxable on Mrs F until such time as it is remitted to the UK. The total foreign source income of F Ltd during these years is £100,000.
For the years 2017 - 2018 to 2024 - 2025, the UK source income of F Ltd will continue to be assessable on Mrs F under ITA07/S720 as it arises. As Mrs F was non-UK domiciled when she settled the trust and from 2017 - 2018 became deemed domiciled because she is a long-stayer under Condition B of ITA07/S835BA, the foreign source income of F Ltd will be treated as PFSI. Mrs F will not be taxable on this income under ITA07/S720 when it arises but instead will be taxable to the extent that she receives benefits from the trust that are matched to the PFSI. During these years, no benefits are provided to her. The total PFSI arising during this period is £200,000. It should also be noted that the unremitted income of F Ltd for the years 2013 - 2014 to 2016 - 2017 will be treated as TPI and will only be taxable on Mrs F to the extent that it is matched to any benefit that she received.
From the year 2025 - 2026 onwards, the remittance basis of taxation no longer applies, and Mrs F will from this year be taxable on all the income arising to F Ltd (£40,000 per year), as from this date the concept of PFSI no longer applies. However, the TPI of £100,000 and PFSI of £200,000 will be available to match against any future benefits received. If, for example, Mrs F received a benefit of £200,000 from the trust structure in 2027 - 2028 this would be matched with TPI of £100,000 and £100,000 of PFSI giving rise to a taxable benefit under ITA07/ S731 of £200,000. The unmatched PFSI of £100,000 would be carried forward to match against any future benefits. The matching is with the TPI first because under the matching rules at ITA07/S735A the income of the earliest year is matched first (see INTM602200 for a detailed example of matching under ITA07/S735A).