TSEM4655 - Settlements legislation: Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2018 – 5 April 2025: Charge on recipients of onward gifts basic conditions

The guidance on this page relates to the period 6 April 2017 - 5 April 2025. From 6 April 2025 the rules around the taxation of non-UK domiciled individuals ended and individuals are taxable based on their residence position only.  Detailed guidance on the changes from 6 April 2025 can be found at TSEM4700 onwards. 

The benefits charge at ITTOIA 05 S643A works by charging tax on a benefit received by an individual that can be matched with PFSI (TSEM4635).  The charge applies to an individual who is the settlor or a close member of the settlor’s family, depending on the circumstances. 

The scope of the benefits charge extends further to ensure that benefits matched to PFSI cannot escape a charge to tax by being routed through an individual who is not taxable on that income. This is known as the onward gift charge. 

The onward gift charge applies where the conditions are met and the final recipient (“the subsequent recipient”) of the onward gift is UK resident.  The broad effect of the onward gift rules is that the non-taxable individual’s notional income under ITTOIA 05/S643A is attributed to the individual in receipt of the onward gift, unless and to the extent that the first recipient is a remittance basis user and has been taxed on the income because it has been remitted to the UK. 

The legislation dealing with this can be found at ITTOIA 05/S643I through to S643M and the following paragraphs look at how this legislation works.   

This paragraph looks at ITTOIA 05/S643I that sets out the basic conditions for when an individual is treated as the recipient of an onward gift.  The charging provisions are contained within S643J to S643L. 

An individual is the recipient of an onward gift (known as subsequent recipient) if the following conditions are met–  

  • an amount is treated by ITTOIA 05/S643A(1)(a), both before and after the application of S643A (3) and (4), as income of an individual (“the original beneficiary”) in a tax year (“the matching year”), or 

  • An amount having been treated by S643A (1) before the application of S643A (3) and (4) as income of an individual (“the original beneficiary”) for the tax year (“the matching year”), is treated as income of the settlor for the matching year, or 

  • is treated by S643A(1)(b), before the application of S643A (3) and (4) as income of the individual (“the original beneficiary”) for a tax year (“the matching year”) but is not treated by S643A (3) and (4) as income of the settlor for the matching year. 

And - 

  • under S643G (if it applied for the purpose) the amount would be matched with a benefit provided in the matching year, or an earlier year, and 

  • when the benefit is provided to the original beneficiary there are arrangements, or an intention to directly or indirectly pass on of the whole or part of that benefit to another person.  It is reasonable to expect that the subsequent recipient will be UK resident when they receive at least part of what is passed to them. 

  • the original beneficiary makes “the onward payment” (either directly or indirectly) to “the subsequent recipient” within 3 years of the benefit being provided to them, or at any time before the benefit is provided to them and it is reasonable to assume that it was made in anticipation of them receiving the original benefit, and  

  • the gift is of or includes the whole or part of the benefit or anything that derives from or represents the whole or part of the benefit  

In a case where: 

  • the original beneficiary is non-UK resident for the matching year, or a remittance basis user and none of the amount is relevantly remitted before the onward payment is made, or 

  • the settlor is a remittance basis user for the matching year and none of the amount in relevantly remitted before the tax year in which the onward payment is made, and 

  • The subsequent recipient is the settlor, or a close member of the settlor's family at the time the onward payment is made, or the time the original benefit is provided if the onward payment is made prior to that  

Then S643J-S643L will apply, and the onward gift charge will arise to the subsequent recipient. 

Where income is taxed by reference to S643J-L it will not then be treated as income of the individual or settlor at in a later tax year.