TSEM4705 - Settlements Legislation: Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2025: Introduction
From 6 April 2025, the concept of domicile is no longer relevant in determining how individuals are taxed in the UK, instead a residence-based test now applies. This means that the protection from tax on foreign income and gains arising within offshore settlor-interested structures is no longer available for individuals previously classed as non-domiciled or deemed domiciled under condition B in the UK, even if the income and gains remain offshore.
A 4-year Foreign Income and Gains (FIG) regime has been implemented allowing eligible individuals to claim a tax relief in respect of their eligible FIG in their first 4 years of UK residence. (See RFIG41000)
It is recognised that many UK residents who were previously classed as non-domiciled or deemed domiciled under condition B, had access to the ‘Trust Protections’ and remittance basis prior to 6 April 2025, so could have a pool of income held in an offshore structure that has not been taxed in the UK, because it has not been remitted to the UK or matched to a benefit received by the settlor or a close member of the settlors family.
If this income arose from 6 April 2008 – 5 April 2025 then it can become taxable in the UK if it is used to provide a benefit or onward gift to the settlor or a close member of the settlor’s family.
If the income arose on or before the 5 April 2008 then it can become taxable on the settlor if it is remitted to the UK.
A Temporary Repatriation Facility (TRF) is being introduced from tax year 2025/26 through to 2027/28 whereby taxpayers can designate income that arose before 6 April 2025 and will pay tax on that income at a reduced rate. The TRF is available in relation to income taxable under the settlements legislation. (See RDRM71000)
Section 624 ITTOIA 2005 (Settlor retains an interest)
From 6 April 2025, a UK resident settlor of a trust where the settlor retains an interest (because the settlor or their spouse / civil partner can or may benefit) will pay tax on all income that arises under the settlement as it arises under section 624 ITTOIA 2005, including any foreign income, regardless of when the trust was established. The settlor may be eligible to claim relief under the 4-year FIG regime. This means that settlors who were previously classed as non-domiciled or deemed domiciled under condition B are now taxed in the same way as those who were previously classed as UK domiciled or deemed domiciled under condition A.
Section 629 ITTOIA 2005 (Income paid to relevant child of the settlor)
From 6 April 2025 a UK resident settlor will pay tax on any settlement income, including foreign income, that is paid to or used for the benefit of a relevant child of the settlor, or income that would be treated as the income of that relevant child if it were not for this section, even if that income remains offshore.
This section will not apply where the settlor has already paid tax on that income under section 624 ITTOIA 2005 or where the income paid to the relevant child does not exceed £100.
A relevant child means a minor child who is unmarried or not in a civil partnership, and child includes a stepchild.
S633 ITTOIA 2005 (Capital sums paid to settlor by trustees of settlement)
From 6 April 2025 a capital sum paid to the settlor from a foreign source can now also be treated as income of the settlor and attract a tax charge at the time it is matched, even if it remains offshore, in the same way that the capital sum would be taxed in on an individual previously classed UK resident and domiciled individual.
Sections 643A (Benefits) and 643EA (Onward gifts) ITTOIA 2005
A charge under new section 643A ITTOIA 2005 will continue to apply, from 6 April 2025, to treat a benefit received by the settlor or their close family member as income of the settlor or the close family member if there is sufficient ‘available protected income’ for matching purposes. Section 643EA ITTOIA 2005 determines if there has been an onward gift. Where this applies, this will be charged under section 643A ITTIOA 2005.
From 6 April 2025, beneficiaries and settlors who are qualifying new residents that make an annual claim under the 4-year FIG regime will be relieved from tax in the first 4 years of their UK residence, so they will essentially be able to receive these benefits free of tax. However, such benefits/onward gifts will not reduce the pool of unmatched income and gains within the overseas entity for matching purposes and can be subject to a modified onwards gift rule and close family member rule.