RDRM33595 - Remittance Basis: Identifying Remittances: Specific Topics: Settlements - Chapter 5 Part 5 ITTOIA 2005 - settlement for minor child

Where the settlor does not retain an interest in property in a settlement but the income arising is paid to, or for the benefit of a child of the settlor or it would otherwise be treated as income of such a child (apart from the provisions of ITTOIA/s629) then it is treated for income tax purposes as the income of the settlor alone. Also refer to the Trusts, Settlements and Estates Manual TSEM4300+.

The above does not apply for any year if the income that would be chargeable for that year is less than £100 (ITTOIA05/s629(3)).

However where the settlor uses the remittance basis and the settlement income is not remitted to the UK in the year it is not chargeable on the settlor until it is remitted to the UK. Where such income is not remitted in the year that it arises then it may be chargeable on the child as if the special rules at ITTOIA/s629 did not apply. But if the trust income is remitted in a later tax year it will be treated as income of the settlor for the year in which it is remitted (ITTOIA05/s648(3)).

Example 1

On 19 July 2009 Mitsuo who is not domiciled in the UK makes an absolute gift of £200,000 to his 8 year old son Kaito. The money is invested in an Isle of Man bank account and interest of £6,025 is paid during 2009-10. Nothing is remitted to the UK in 2009-10.

Mitsuo chooses to be taxed on the arising basis for that year. Because Kaito is a minor ITTOIA05/s629 applies to treat the interest of £6,025 as the income of Mitsuo for tax purposes.

If Mitsuo chooses to be taxed on the remittance basis he is not taxed on the foreign income arising under the settlement because he is using the remittance basis. Instead Mitsuo will be chargeable only if any of the income is remitted to the UK, whether by Mitsuo himself or his son Kaito or any other relevant person.

Note: This type of gift where the child has an indefeasibly vested legal interest (absolutely entitled to both the income and the capital) in the gift is generally known as a bare trust.

Example 2

On 20 July 2009 Mitsuo creates a non resident discretionary trust and appoints £425,000 from his capital account to it. It is not possible for Mitsuo or his wife to benefit from the trust but his son Kaito is a beneficiary of the trust.

The trustees invest the money and decide not to pay out any of the income that arises on the investment to any of the beneficiaries until 2011-12.

In 2011/12 the trustees make a payment from income for Kaito’s education in the UK. At this point sITTOIA/s629 applies. As the payment has been remitted to the UK in the year it is chargeable on Mitsuo whether he chooses to be taxed on the arising or the remittance basis.

In 2012/13 the trustees make an income payment of £9,000 to buy a double bass for Kaito when he is on holiday visiting his grandparents in Japan which he leaves at his grandparent’s home when he returns to the UK.

Mitsuo chooses to be taxed on the arising basis for that year. Because Kaito is a minor ITTOIA05/s629 applies to treat the £9,000 income distribution as the income of Mitsuo for tax purposes.

If Mitsuo chooses to be taxed on the remittance basis he is not chargeable on the distribution because he is using the remittance basis and the double bass has not been brought to the UK, that is, he hasn’t made a remittance to the UK. Instead Mitsuo will be chargeable only if the double bass is brought to the UK, whether by Mitsuo himself or his son Kaito or any other relevant person.

Note: The gift in this case has created a valid settlement. Kaito does not have any entitlement to the income of the settlement unless the trustees decide to make a distribution to him.