HMRC Trusts & Estates: Non-resident trusts

Trustees abroad

These pages give a non-statutory outline of the UK tax liabilities that may arise in respect of income and gains arising to trustees operating abroad. They do not deal with:

  • resident trusts
  • specialised trusts such as unit trust schemes
  • the Employment Income tax or PAYE (Pay As You Earn) aspects of company employee non-resident trusts
  • any other tax liabilities, for example Inheritance Tax, that may arise

They offer general guidance on how the rules apply. But the rules are complex and the way in which they apply in a particular case will depend on all the facts of that case. For fuller information see the legislation itself.

Some practices explained in these pages are concessions that HM Revenue & Customs (HMRC) makes. A concession will not be given in any case where there is an attempt to use it for tax avoidance. These notes are for guidance only and reflect the tax position at the time of writing. They do not affect any right of appeal.

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Contents

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Forms and guidance

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FAQs

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Self Assessment

Responsibility to notify liability

Like any other taxpayer, non-resident trustees are obliged to notify liability to Income Tax and Capital Gains Tax.

There is no separate legislation. The obligation applies to all trustees who are liable to UK tax. It does not matter where they live.

Self Assessment tax returns

HMRC Trusts & Estates issues Self Assessment tax returns to non-resident trustees.

Non-resident trustees must send back a completed Self Assessment tax return to HMRC by the usual date.

Supplementary pages

Non-resident trustees will require the Trust And Estate Non-Residence pages. They may occasionally require other supplementary pages, including those for capital gains.

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Trusts that HMRC Trusts & Estates, Non Resident Trusts deals with

HMRC Trusts & Estates, Non Resident Trusts is the tax office for most non resident trusts:

  • with trustees who are not resident in the UK for Income Tax purposes
  • with trustees who are not resident in the UK for Capital Gains Tax purposes

HMRC Trusts & Estates, Non Resident Trusts also deal with, or give advice on, foreign estates.

I want to:

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Residence rules for trustees

The rules for deciding trustees' residence status were different for Income Tax and Capital Gains Tax purposes for periods to 5 April 2007. From 6 April 2007 there is a common residence test for both taxes based on the old Income Tax definition.

Residence rules for Income Tax and Capital Gains Tax purposes from 6 April 2007

The rules treat the trustees as a single and continuing body of persons. That body's residence status depends on the residence status of each trustee.

All trustees are resident in the UK

The body of trustees is resident in the UK.

All trustees are resident outside the UK

The body of trustees is not resident in the UK.

There is a mixture of resident and non-resident trustees acting at the same time

The body of trustees is resident in the UK unless the settlor was:

  • not resident in the UK
  • not ordinarily resident in the UK
  • not domiciled in the UK

when the settlement was set up and when any later funds were added.

If the settlor meets all the conditions, the body of trustees is not resident in the UK.

Non-resident professional trustee being deemed to be UK resident

There is a special rule that can deem a trustee to be UK resident even though the trustee is non-resident. The deeming is only for the purposes of determining the residence status of the body of trustees. The rule only applies if a non-resident trustee:

  • carries on a business in the UK through a branch, agency or permanent establishment in the UK
  • acts as a trustee in the course of that business

There is further guidance on this available in 'Guidance on non-UK resident professional trustees being treated as UK resident for trustees' residence test (Word 150K).

The legislation

The rules are in Section 475 Income Tax Act 2007 and Section 69 Taxation of Chargeable Gains Act 1992.

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Residence rules for Income Tax up to 5 April 2007

These rules were broadly the same as those shown above for periods from 6 April 2007 onwards. The special rule that can now deem a non-resident professional trustee to be UK resident did not apply for periods up to 5 April 2007. These rules were in Section 110 Finance Act 1989.

Residence rules for Capital Gains Tax up to 5 April 2007

These rules were in Section 69 Taxation of Chargeable Gains Act 1992.

The rules treated trustees as a single and continuing body of persons. That body was resident in the UK for Capital Gains Tax unless:

  • all, or a majority, of the trustees were regarded as not resident in the UK
  • the general administration of the trust was ordinarily carried on outside the UK

If there were an equal number of resident and non-resident trustees, the trustees were resident for Capital Gains Tax purposes.

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Where a trust is administered

Normally it was a matter of fact where a trust was administered.

There were special rules for trusts with professional trustees who were regarded as non-resident. In such a case, where all, or a majority, of trustees were regarded as not resident in the UK, these special rules treated the trust as ordinarily administered outside the UK.

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'Professional' trustee in the UK - period to 5 April 2007

It is possible for a professional trustee, who was resident in the UK, to be regarded as non-resident for Capital Gains Tax purposes.

The trustee must:

  • Have been carrying on a business that includes the management of trusts.
  • Acted as trustee in the course of that business. This would usually have been an accountant, solicitor or bank. The trustee must not have been acting as an employee or in a personal, rather than a professional, capacity.

Whenever funds were settled, the settlor must have been:

  • not resident in the UK
  • not ordinarily resident in the UK
  • not domiciled in the UK

If the trust arose under a will or intestacy, the deceased must have been:

  • not resident in the UK
  • not ordinarily resident in the UK
  • not domiciled in the UK

at the date of death.

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Dual-resident trustees

Trustees may be resident in the UK and another country at the same time. HMRC Trusts & Estates checks in detail any claim for dual residence.

If there is a Double Taxation Agreement with another country, it may have a 'tie-breaker' provision. A tie-breaker makes the trustees a resident of one of the countries. But this is only for the purposes of applying the provisions of the Double Taxation Agreement.

Change in residence status of body of trustees

A change in the residence status of a body of trustees is usually caused by a change in the trustees who make up the body. It can also happen where the trustees remain the same but one of them changes their residence status.

For Income Tax purposes if the residence status of a body of trustees changes during the tax year then the trustees are potentially liable for Income Tax on all their worldwide income for the period they were actually resident. They are only liable for Income Tax on their UK source income for the period they were actually non-resident.

For Capital Gains Tax purposes if trustees as a body are regarded as resident for any part of a tax year, gains arising at any time in the tax year are chargeable to Capital Gains Tax. Where the trustees become not resident during the year, there may be an exit charge. See Trustees becoming non- resident.

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Information needed for trusts

When setting up records for a trust, HMRC Trusts & Estates requires:

You do not have to complete the form and provide the information but it will help in dealing with the tax affairs of the trust, its settlor and the beneficiaries.

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Returning income and gains by non-resident trustees

Bare trusts

A bare trust, also known as a simple trust, is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.

The property is held in the name of a trustee, but the trustee has no discretion over what income to pay the beneficiary. In effect, the trustee is a nominee in whose name the property is held and has no active duties to perform.

Returning income and gains by non-resident trustees

Income

Bare trustees are not obliged to complete trust returns. But they can choose to make a return of trust income. They would then account for the UK Income Tax due.

The beneficiary gets credit for UK Income Tax that the bare trustee has paid.

The beneficiary of a bare trust returns the income on his personal Self Assessment tax return. The beneficiary enters it on the page for the particular income in question.

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Returning income and gains by non-resident trustees

Capital gains

Bare trustees are not chargeable on any capital gains they make and do not make a return of those gains to HMRC. The beneficiaries must return gains personally.

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Income Tax liability of non-resident trustees

Income Tax

It is necessary to decide if the trust is within Section 479 Income Tax Act 2007.

A trust is within Section 479 Income Tax Act 2007 if:

  • The trustees have the power to accumulate income or make discretionary payments
  • The trust income is not treated as that of the settlor. (This condition applies for years up to and including 2005-06 only. For 2006-07 onwards the exemption from the special trust rates for settlor-interested settlements no longer applies.)

Tax is charged at the trust rate. For 1999-2000 onwards dividend type income is charged at the dividend trust rate. From 2005-06 onwards the first slice of income is charged at ordinary rates instead of the trust rate or dividend trust rate - Section 491 Income Tax Act 2007.

The following income of an accumulation or discretionary trust, is exempt from charge under Section 479 Income Tax Act 2007:

  • income arising to a trust established for charitable purposes only
  • income from investments, deposits or other property, held for an approved superannuation fund

Tell me about Income Tax liability of non-resident trustees if:

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Non-resident trust within Section 479 Income Tax Act 2007

Foreign income

Foreign income is not chargeable to UK tax.

FOTRA securities

Interest from FOTRA (free of tax to residents abroad) securities remains chargeable to UK tax unless:

  • HMRC Trusts & Estates confirms that it is exempt.
  • The provisions of Section 811 Income Tax Act 2007 apply. Briefly, if no beneficiaries are ordinarily resident in the UK, the trustees do not pay tax on interest they receive gross.

For more information see FOTRA securities.

Other UK interest received gross

Under Section 811 Income Tax Act 2007, if no beneficiaries are ordinarily resident in the UK, the trustees do not pay tax on interest they receive gross. If Section 811 Income Tax Act 2007 does not apply, the trustees are chargeable to tax.

Other UK income

Subject to the possible effects of Section 811 Income Tax Act 2007, other UK income remains chargeable to UK tax.

HMRC Trusts & Estates will give general advice about Section 811 Income Tax Act 2007.

The legislation

S479 ITA 2007

S811 ITA 2007

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Non-resident trust not within Section 479 Income Tax Act 2007: Interest in possession trust

This type of trust exists when a beneficiary, known as an 'income beneficiary', has a current legal right to the income from the trust as it arises. The trustees must pass all of the income received, less any trustees' expenses and tax, to the beneficiary. An interest in possession trust is not within Section 479 Income Tax Act 2007.

A beneficiary who is entitled to the income of the trust for life is known as a 'life tenant' (a 'liferenter' in Scotland) or as having a 'life interest' (a 'liferent interest' in Scotland).

The income beneficiary need not, and often does not, have any rights over the capital of such a trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future or after a specific future event. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

A beneficiary who is entitled to the trust capital is known as the 'remainderman' ('fiar' in Scotland) or the 'capital beneficiary'.

Foreign income

Foreign income is not chargeable to UK tax.

FOTRA securities

Section 811 Income Tax Act 2007 applies to interest from FOTRA securities. Briefly, if no beneficiaries are ordinarily resident in the UK, the trustees do not pay tax on interest they receive gross.

For more information see FOTRA securities

Other UK income

Subject to the possible effects of Section 811 Income Tax Act 2007, other UK income remains chargeable to UK tax.

The legislation

S811 ITA 2007

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Trustees becoming non-resident

Where trustees become not resident and not ordinarily resident in the UK, there may be a charge to Capital Gains Tax. The relevant rules treat the trustees as disposing of, and immediately reacquiring, the trust assets. This deemed disposal is immediately before the trustees became not resident and not ordinarily resident. The deemed disposal and re-acquisition are at the market value at that time.

The provisions are effective for trustees who become not resident and not ordinarily resident in the UK after 18 March 1991.

There are two exceptions to the charge:

1. The trustees may have assets in the UK that they use for the purposes of a trade. If the trustees trade through a branch or agency in the UK, these assets are excluded from the charge.

2. Some double taxation agreements exempt gains on certain assets. If a disposal immediately before the change of residence would be exempt, there is no charge under these rules on those assets.

Persons chargeable

These rules deem the trustees to have disposed of assets. The charge therefore falls on the trustees. There is one exception. For years up to and including the year 2007-08 a settlor who retains an interest in the settlement can be chargeable on gains that accrue to the trustees. The provisions are known as the settlor charge. If the settlor charge applies the settlor is charged in respect of the gains arising under these rules.

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Failure to pay tax due

If the non-resident trustees do not pay the tax due on gains arising under these rules within six months, a former trustee may be required to pay the unpaid tax and interest. The trustee must pay it within 30 days of the notice. This trustee must have held office in the 12 months before the trustees became not resident and not ordinarily resident.

The former trustee does not have to pay the tax and interest if he shows:

  • he ceased to be a trustee before the date the trustees became not resident and not ordinarily resident
  • there was no proposal for the trustees to become not resident and not ordinarily resident when he ceased to be a trustee

Trustees becoming dual resident

Trustees can be resident in both the UK and another country. They become 'dual resident'. A Double Taxation Agreement may exempt gains on the disposal of certain of the trust assets. These are known as relevant assets.

The rules treat the trustees as having made a deemed disposal of the relevant assets. The deemed disposal and re-acquisition is immediately before the date the trustees became dual resident.

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Income

Bare trustees are not obliged to complete Self Assessment tax returns. But they can choose to make a return of trust income. They would then account for the UK Income Tax due.

The beneficiary gets credit for UK Income Tax that the bare trustee has paid.

The beneficiary of a bare trust returns the income on his personal Self Assessment tax return. The beneficiary enters it on the page for the particular income in question.

Interest in possession trusts - beneficiary entitled to trust income

These notes refer to a beneficiary who is absolutely entitled to trust income, as it arises, subject to any prior claims by the trustees for expenses or other outgoings properly payable out of income.

Beneficiary who is resident in the UK

Beneficiaries who are resident in the UK and are absolutely entitled to trust income except from a bare trust should follow the instructions contained in the SA107 (Notes) under the heading Income from trusts and settlements when making their Self Assessment.

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Beneficiary is not resident and not ordinarily resident in the UK

Beneficiaries who are:

  • not resident and not ordinarily resident in the UK
  • absolutely entitled to trust income except from a bare trust

should follow the instructions contained in the SA107 (Notes) under the heading Income from trusts and settlements when making their Self Assessment.

The beneficiary should not declare any income from a non-UK source.

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Income - interest in possession trusts

Trusts governed by foreign law

Trusts governed by foreign law are either Baker types or Garland types. These classifications are based on the cases of Archer-Shee v Baker (11TC749) and Garland v Archer-Shee (15TC693).

Baker type trust

Beneficiaries of a Baker type trust are entitled to their appropriate share of each item of income as and when it arises to the trust. This is subject only to a deduction for trustees' expenses.

Unless the remittance basis applies, the beneficiaries are chargeable on their share of the trust income, less a rateable proportion of the trust expenses. If the trust income has borne UK tax, it is taxed income of the beneficiaries.

Each beneficiary's share (after a rateable proportion of trust expenses) is income that has been taxed at whatever rate of tax it has borne.

Beneficiaries of a Baker type trust should make their Self Assessment on the Trust etc supplementary pages. They follow the instructions in the SA107 (Notes) under the heading Income from trusts and settlements.

See the list of countries that shows if trusts governed by the law of those countries are Baker or Garland.

Garland type trust

Beneficiaries of a Garland type trust are entitled only to their appropriate share of the net trust income remaining after the trustees have ascertained the balance available after meeting the expenses of administering the trust.

Beneficiaries chargeable on the arising basis are liable by reference to the actual income receivable from the trust in the basis year. This applies whether or not it was paid out by the trustees or remitted to the UK. The nature of the income that arose to the trustees is irrelevant.

Beneficiaries of a Garland type trust should enter the amount received on their Self Assessment tax return, on the Foreign supplementary pages. It is an untaxed source.

Some of the income chargeable may be from trust income that has borne UK tax. A claim for relief in respect of the tax must be a free standing claim. It must not affect a beneficiary's Self Assessment.

Trust income may have suffered foreign tax. Beneficiaries can claim credit relief for that foreign tax. This is in the same way and to the same extent as if the beneficiaries were entitled to their proportionate share of the underlying investments of the trust. A claim for credit must be a free-standing claim. It must not affect a beneficiary's Self Assessment.

See the list of countries that shows if trusts governed by the law of those countries are 'Baker' or 'Garland'.

If you require:

  • further clarification about the above
  • a particular country is not shown on the list

please contact HMRC Trusts & Estates, Non Resident Trusts .

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Income - discretionary income payment

Non-resident trustees may make a discretionary payment out of trust income to a beneficiary. It is treated as untaxed income of a beneficiary who is resident in the UK. It does not matter that the trustees have suffered tax on the trust income. The payment is not treated as made up from the separate sources of income arising to the trustees. The beneficiary shows the income on the foreign pages. The beneficiary can claim relief, under Extra Statutory Concession B18, for some of the tax suffered by the trustees.

If an income distribution is made on or after 6 April 2006, and part or all of the distribution has already been charged to tax in the UK on the settlor of trust, then include the amount so charged on Trust supplementary page and not on Foreign supplementary page.

Extra-Statutory Concession B18 ('ESC B18')

This concession allows credit for some of the tax suffered by the trustees. The amount of credit available will depend on the precise facts of the case. It is a stand-alone claim and does not affect how the beneficiary completes his or her Self Assessment tax return. Credit can also be available where the discretionary income payment from the trustees is taxable as employment income. The beneficiary must claim within five years and ten months of the end of the tax year in which the payment was made.

The concession only applies if:

  • The trustees have made trust returns, giving details of all sources of trust income and payments made to beneficiaries. Those returns must be for each and every year for which they are required.
  • They have paid all tax due, and any interest, surcharges and penalties arising.
  • They keep available for inspection by HMRC any relevant tax certificates.

If the conditions are not satisfied, no relief is due.

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Extra-Statutory Concession (ESC) B18

Beneficiary claims relief

The beneficiary should contact HMRC Trusts & Estates, Non Resident Trusts about claiming relief under ESC B18. HMRC Trusts & Estates will give whatever advice is required.

The beneficiary should also advise their tax office that they wish to claim relief. The beneficiary's tax office will then contact HMRC Trusts & Estates, Non Resident Trusts to check if any relief is due. If relief is due, HMRC Trusts & Estates will calculate the amount. They will then tell the beneficiary's tax office:

  • The amount of credit available.
  • The revised notional income from the trust. This is for the purposes of the claim only. It must not be used in the Self Assessment computation.

The beneficiary's tax office manually recalculates the Self Assessment liability. In this computation it replaces the trust income with:

  • the credit due under the concession
  • the revised notional figure

The beneficiary's tax office will deal with any tax overpaid.

HMRC Trusts & Estates will give general advice about ESC B18. HMRC Trusts & Estates cannot let a beneficiary have a copy of the calculation of the relief due under ESC B18. This is because the calculation may contain details of total trust income and tax, and any distributions to other beneficiaries. The trustees may not wish the beneficiary to have this information.

For text of ESC B18 please see booklet IR1 (PDF 337K).

Payment to relevant child (including stepchild) of settlor

Payments to a relevant child of settlor, can be treated as the settlor's income for all tax purposes. 'Relevant child' means a minor child who is unmarried or not in a civil partnership. The payments must be out of income or, if not, there must be sufficient retained or accumulated income. In the latter case, the settlor's liability is restricted to the lesser of the payment and the amount of retained or accumulated income.

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How the settlor returns the income

Payments from non-resident trustees are returned as untaxed income. For years up to, and including that ended 5 April 2002 the settlor shows such income in boxes 13.1 and 13.3 of the Self Assessment tax return. The same figure goes in both boxes, as box 13.2 is NIL. The settlor adds a cross-reference in the 'Additional Information' box on page 8 of the tax return. This should show the full name of the non-resident trust.

For the years ended 5 April 2003 to year ended 5 April 2007 the settlor enters the payment on the Trusts etc supplementary pages in boxes 7.4.to 7.6. The entry at 7.5 is NIL. The settlor uses the 'Additional Information' box on the Trusts supplementary pages to claim relief under Extra Statutory Concession A93. Again this should include the full name of the non-resident trust. For the year ended 5 April 2008, the settlor enters the payment in box 12 and for the year to 5 April 2009, in box 13.

Relief under Extra Statutory Concession A93

The settlor can claim relief, under Extra Statutory Concession A93. The concession allows credit for some of the tax suffered by the trustees.

Extra-Statutory Concession A93: Relief under ESC A93

Payments to or for the benefit of the settlor's minor unmarried child can be treated as the settlor's income for all tax purposes. If the payments are from non-resident trustees they are deemed to be untaxed income.

The settlor can claim relief under ESC A93. The concession allows credit for some of the tax suffered by the trustees. It is a stand-alone claim and does not affect the Self Assessment liability. The settlor must claim within five years and ten months of the end of the year that the child received the payment.

The concession only applies if:

  • The trustees have sent tax returns to HMRC, giving details of all sources of trust income and payments made to beneficiaries. Those tax returns must be for each and every year for which they are required.
  • The trustees have paid all tax due, and any interest, surcharges and penalties arising.
  • The trustees keep available for inspection by HMRC any relevant tax certificates.

If the conditions are not satisfied, no relief is due.

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Settlor claims relief

The settlor notifies his tax office that he wishes to claim relief under ESC A93. The settlor's tax office will then contact HMRC Trusts & Estates, Non Resident Trusts to check if any relief is due. If relief is due, HMRC Trusts & Estates will calculate the amount. They will then tell the settlor's tax office:

  • The amount of the credit.
  • The revised notional income from the trust. This is for the purposes of the claim only. It must not be used in the Self Assessment computation.
  • The settlor's tax office manually re-calculates the Self Assessment liability.
    In this computation it replaces the trust income with:
  • the credit due under the concession
  • the revised notional figure

The settlor's tax office will deal with any tax overpaid.

HMRC Trusts & Estates will give general advice about ESC A93. HMRC Trusts & Estates cannot let a claimant have a copy of their calculation of the relief due under ESC A93. This is because the calculation may contain details of total trust income and tax, and any distributions to other beneficiaries. The trustees may not wish the claimant to have this information.

For text of ESC A93 please see booklet IR1 (PDF 337K).

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Settlor retains interest in trust

If the settlor retains an interest in a settlement, the income arising is taxable as part of the settlor's own personal income.

In general, a settlor will be regarded as having retained an interest in property that forms part of a settlement if that property, any substituted property or the income from the property, can be paid to the settlor or the settlor's spouse or civil partner, or can be applied for the benefit of the settlor or the settlor's spouse or civil partner, in any circumstances whatsoever.

Helpsheet HS270 shows whether income is to be treated as the settlor's.

Where settlor returns settlement income

If the settlor retains an interest in a settlement, the settlement income may be treated as the settlor's for all tax purposes. Settlors should follow the instructions in the SA107 (Notes) under the heading 'Income chargeable on settlors' when making their Self Assessment.

Transfer of assets abroad

These pages give a broad outline of the subject. For greater detail see the legislation itself. For further information about HMRC interpretations of the legislation (see tell me about below) as it stood before amendments introduced by FA 2006 click on Tax Bulletin Article of April 1999 issue 40 (Opens new window) or see Revenue Interpretation (RI) 201.

These pages offer broad outline on how HMRC will apply the rules. But the rules are complex and the way in which they apply in a particular case will depend on all the facts of that case.

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Section 720 onwards Income Tax Act 2007

Sections 720-751 Income Tax Act 2007 are anti-avoidance provisions designed to counter the effect of certain transactions involving transfers of assets abroad and other associated operations (relevant transactions).

HMRC Trusts & Estates , is responsible for operating the provisions.

Tell me about

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Transfer of assets abroad

Key Features - Sections 720 & 727 Income Tax Act 2007

Sections 720 & 727 may apply where individuals transfer assets abroad in such a way that they are able to enjoy the income from the assets in a way that would otherwise be non-taxable.

Sections 720 & 727 impose an Income Tax charge on an individual who is ordinarily resident in the UK for the year of charge where the following conditions are met:

  • the individual has the power in the tax year to enjoy income of a person abroad, and that income would be chargeable to Income Tax if it were the individual's and received by the individual in the UK
  • the individual receives or is entitled to receive in the relevant year any capital sum whether before or after the relevant transfer, or in an earlier tax year had received any capital sum, whether before or after the relevant transfer, and the payment of that sum is, or in the case of entitlement, would be, in any way connected with any relevant transaction
  • income has become the income of a person abroad as a result of a relevant transfer, one or more associated operations; or a relevant transfer and one or more associated operations

Income of the person abroad is treated as arising to the UK resident individual in a tax year for the purpose of charging Income Tax for that year.

Key Features - Section 731 Income Tax Act 2007

Section 731 extends the Income Tax charge to non-transferors. It applies where there are relevant transactions and individuals other than the transferor receive a benefit.

Section 731 imposes an Income Tax charge on an individual who is ordinarily resident in the UK, where the following conditions are satisfied:

  • a relevant transfer occurs
  • an individual ordinarily resident in the UK receives a benefit (which includes a payment of any kind)
  • the benefit is provided out of assets which are available for the purpose as a result of the transfer, or one or more associated operations
  • the individual is not liable to Income Tax under Section 720 or 727 by reference to the transfer
  • the individual is not otherwise liable to Income Tax on the amount or value of the benefit

Section 731 charges the amount or value of the benefit received to the extent that it is matched by the available relevant income. This means any income which arises to a person abroad and which, as a result of the transfer or associated operation, can be used directly or indirectly for providing a benefit for the individual.

To find the amount, if any, of the income treated as arising to the individual for any tax year under these provisions the six step formula in Section 733 is applied.

Exemption from Sections 720, 727 and 731 Income Tax Act 2007

Sections 736 to 742 Income Tax Act 2007 provide that sections 720, 727 and 731 will not apply if the individual satisfies an officer of HMRC that Condition A is met, or if that Condition is not met, that Condition B is met.

Where all relevant transactions took place on or after 5 December 2005:

Condition A

  • It would not be reasonable to draw the conclusion, from all the circumstances of the case, that the purpose of avoiding liability to taxation was the purpose, or one of the purposes, for which the relevant transactions or any of them were effected.

Condition B

  • All the relevant transactions were genuine commercial transactions
  • It would not be reasonable to draw the conclusion, from all the circumstances of the case, that any one or more of those transactions was more than incidentally designed for the purpose of avoiding liability to taxation

The decision on what the purposes of the relevant transfer and associated operations are is to be drawn from all the circumstances of the case.

Where all relevant transactions took place before 5 December 2005:

Condition A

  • The purpose of avoiding liability to taxation was not the purpose, or one of the purposes, for which the relevant transactions or any of them were effected

Condition B

  • The transfer and any associated operations were genuine commercial transactions and were not designed for the purpose of avoiding liability to taxation

Individuals not domiciled in the UK

Individuals who are ordinarily resident but not domiciled in the UK may be liable under Section 720, 727 or 731. However the legislation restricts the liability of a non-domiciled individual in relation to any income and benefits received outside the UK.

More guidance on this topic can be found by following the link to Residence and Domicile: Guidance on the new tax rules and following the link to 'New guidance on the application of the remittance basis to the Transfer of Assets'.

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No duplication of charge

Section 743 Income Tax Act 2007 provides that no amount of income shall be taken into account more than once in charging tax under the provisions of sections 720, 727 and 731.

Where more than one person can be potentially charged Income Tax under sections 720, 727 and 731, HMRC will seek to agree a 'just and reasonable' division of liability.

Power to obtain information

Section 748 Income Tax Act 2007 gives an officer of HMRC extensive formal powers to obtain information. The officer may, by notice in writing, require any person to supply such particulars as they think necessary for the purposes of the legislation. Penalties can be imposed under S98 TMA 1970 for failure to comply.

Returning income charged under S720, 727 or 731 Income Tax Act 2007

Income chargeable under Sections 720, 727 and 731 goes on the Foreign Pages of the Self Assessment tax return. See SA106 (Notes) under the heading Income received by overseas trusts, companies and other entities.

Contacting HMRC Trusts & Estates, Non Resident Trusts

If you have any questions on the transfer of assets abroad, please contact HMRC Trusts & Estates, Non Resident Trusts.

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Examples involving non-resident trusts

These are not exclusively trust charging provisions. The legislation can apply to tax income in any type of foreign structure. However the following links lead to very simple examples of situations in which the legislation could apply in the context of non-resident trusts.

  • Example of Section 720 Income Tax Act 2007
  • Example of Section 731 Income Tax Act 2007

Example of Section 720 Income Tax Act 2007

  • A UK resident individual, 'John', is the settlor of a non-resident trust. The trustees use the trust capital to subscribe for the entire issued share capital of a non-UK company. The company invests its capital in an offshore bank account. The company receives investment income (bank interest) but pays no dividends.
  • John has power to enjoy the income of the company because the trustees could cause the company to pay a dividend. The trustees could then use their discretion to pay income to John.
  • It is established that the arrangements described above were effected with a view to avoiding UK taxation. If John had invested directly in the offshore bank account, he would have been liable to tax on the interest received.
  • Section 720 deems all the income of the company to be John's.

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Example of Section 731 Income Tax Act 2007

  • A UK resident individual, James, sets up a non-resident trust solely for the benefit of his daughter, Sarah. He settles cash in the trust and the trustees' offshore investments result in significant non-UK source investment income, which is undistributed.
  • It is established that James created the settlement with a view to avoiding UK tax.
  • The trustees buy a house in the UK out of trust capital, and allow Sarah to live in it, rent free.
  • Section 731 will tax Sarah on the benefit of her occupation of the house. The value of the benefit would be taxable year by year up to the value of 'the available relevant income' of the trust.

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Gains from offshore fund

What is an offshore fund?

An offshore fund is a collective investment scheme in the form of:

  • a non-resident company
  • a foreign unit trust
  • any other arrangement which takes effect under the law of a foreign country and creates rights in the nature of co-ownership

An investor in an offshore fund holds a 'material interest'. When that 'material interest' is disposed of it can lead to a gain that is potentially chargeable to Income Tax, called an 'offshore income gain'. For further information see SA106 (Notes) under the heading 'Other overseas income'.

Non-resident Trustees and offshore income gains

Non-resident trustees are not liable to tax on offshore income gains (Section 761(7) Income and Corporation Taxes Act 1988).

Gain attributed to settlor or beneficiary

The amount of an offshore income gain can be attributed to the settlor under Section 720 Income Tax act 2007 or to a beneficiary using the Section 87 TCGA 1992 rules as modified by Section 762(2) Income and Corporation Taxes Act 1988. The settlor or beneficiary shows it on the Foreign pages of their Self Assessment tax return.

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Non-Resident Trusts capital gains

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Gains of non-resident trustees

Capital Gains Tax

Trustees who are not resident for Capital Gains Tax purposes are not generally chargeable to Capital Gains Tax. The trustees' gains may instead be charged on the settlor or beneficiaries.

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Returning income and gains by beneficiaries of non-resident trusts

The beneficiary charge

Gains made by trustees

Beneficiaries of non-resident or dual resident trusts may be chargeable to Capital Gains Tax in respect of gains realised by the trustees. This is known as the 'beneficiary charge'.

Legislation

The rules are at Sections 87-90 and 96-98 TCGA 1992

Gains made by certain non-resident companies in which the trustees invest

Gains made by certain non-resident companies in which the trustees invest may also be taken into account.

Legislation

The rules are in Section 13 TCGA 1992.

Calculating trust gains

The trustees compute gains as if they were resident in the UK. Any exemptions and reliefs due to resident trustees are included in this computation. But no annual exempt amount is available. The trustees then add any amount brought forward from earlier years (see attributed gains: example). The result is the 'trust gains' for the year. If there is an overall loss, the trust gains for the year are NIL.

Trust losses

Non-resident trustees can set allowable losses against deemed gains of the same or later tax years. They cannot set them against gains for earlier tax years. Losses cannot be attributed to a beneficiary.

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Returning income and gains by settlors of non-resident trusts

Gains chargeable on settlor

A settlor may be chargeable in respect of gains arising to non-resident or dual resident trustees, and on gains arising to certain non-resident companies in which such trustees invest. The rules are contained at Sections 13 & 86 and Schedule 5 TCGA 1992. These rules apply where the settlor has retained an 'interest' in the trust for Capital Gains Tax purposes. This can happen even if he hasn't an interest for Income Tax purposes. This is because the rules for Capital Gains Tax are much wider.

Any gains falling within these special rules are deducted when the trustees calculate trust gains for the beneficiary charge. See Helpsheet HS299 Non-Resident Trusts and Capital Gains Tax for further details.

Personal losses of the settlor

Prior to 6 April 1998, personal losses could be set against these gains.

For most gains arising in the period 6 April 1998 onwards, taper relief is given. For the tax years 1998-99 and 1999-2000 any taper relief due was given in calculating the amount on which the settlor was charged, and a settlor's personal losses were not available to set off against attributed Section 86 gains.

For years 2000-01 to 2002-03 inclusive, a settlor may elect for gains to be attributed before taper relief. Where such an election is made the settlor will be able to apply the rate of taper relief to which the trustees would have been entitled in calculating the chargeable proportion of those gains, if appropriate after first deducting personal losses. Further details about the election including the time limit can be found in Helpsheet HS277.

For years 2003-04 onwards gains attributed to a settlor under Section 86 will be before taper relief, and the settlor will be able to set off any personal losses against those attributed gains. This will also be true of gains arising to UK resident trustees which are attributed to a settlor under Section 77 TCGA 1992. Personal losses will first have to be set off against personal gains, and only any unused balance of losses will then be set off against attributed trust gains. As with personal gains, losses will be set against attributed gains in the order that benefits settlors the most, that is against those gains qualifying for the least taper relief first, and so on. Helpsheet HS277 gives further details.

Legislation

The rules are in Sections 13 & 86, Schedule 5 and Schedule 11 TCGA 1992.

Civil Partnership Act 2004

The Tax and Civil Partnership Regulations 2005 give effect to the Civil Partnership Act 2004 ('CPA'), and apply with effect from 5 December 2005.

For settlements made before 5 December 2005, the settlor may not have been considered to have retained an interest in the settlement for Income Tax purposes, as both the settlor and his spouse were specifically excluded from benefit under the particular terms of the settlement deed. Although such an 'exclusion clause' would not have included a 'civil partner', HMRC will not regard the settlor as retaining an interest unless and until a beneficiary becomes the civil partner of the settlor.

With regards to the provisions of Section 86 TCGA 1992, whereby the gains of a non-resident trust or dual resident trust are chargeable on the settlor. If such provisions did not apply in relation to a settlement made prior to 5 December 2005, and the deed was drafted in such an obvious way as to exclude spouses or future spouses without particular definition of those terms, that exclusion might reasonably be regarded in the context as covering civil partners and those treated as such under CPA who stand in the same position as spouses under the law from 5 December 2005. In such circumstances it will not be HMRC's intention to apply those provisions to a settlement only as a result of the coming into effect of the CPA. For settlements made on or after 5 December 2005, it is expected that the drafting of the settlement deed excludes the full list of 'defined persons' (Schedule 5, Para 2(3) TCGA 1992), including 'civil partners', from benefiting in any circumstances under the settlement, if it is intended for the settlement not to be caught by the provisions.

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Returning income and gains by settlors of non-resident trusts

Where settlor returns gains

A settlor shows these gains on the Self Assessment tax return. Helpsheet HS277 gives further details.

Returning income and gains by beneficiaries of non-resident trusts

The beneficiary charge

Gains chargeable on beneficiaries

Beneficiaries of non-resident trusts may be chargeable to Capital Gains Tax in respect of gains realised by the trustees. Payments or benefits they receive are matched with gains that the trustees have made. But the beneficiary may first need to consider whether he has liability under Section 731 Income Tax Act 2007.

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Legislation

The rules are in Sections 87-90 and 96-98 TCGA 1992.

The beneficiary charge

Who is chargeable?

The rules state beneficiaries are charged in respect of gains realised by the trustees. This is in proportion to capital payments they receive directly or indirectly from the trust. Amounts of 'trust gains', computed under the rules set out above are attributed to each beneficiary who receives a capital payment. The gains are not necessarily chargeable on all beneficiaries. To be chargeable, a beneficiary must be:

If trust gains exceed capital payments, the gains are added to trust gains in subsequent years. If the capital payments exceed trust gains, they can be used to attribute trust gains in later years.

The beneficiary may also be subject to the increase in tax provisions. The increase is an amount of tax. It is in addition to the normal liability of the beneficiary.

Personal losses of the beneficiary

Prior to 6 April 1998, personal losses could be set against these gains.

Any personal losses of a beneficiary (which will not have been 'tapered') are not to be set off against gains that have already had the benefit of taper relief. Such losses are not available to reduce a beneficiary's liability on trust gains attributed to the beneficiary from the tax year 1998-99 onwards.

Capital payments

A capital payment is any payment that is not chargeable to Income Tax on the beneficiary. It does not include payments received under 'arm's length' transactions. So, for example, where the trustees purchase an asset from the beneficiary at open market value, the sale proceeds paid to the beneficiary do not count as a capital payment.

Definitions of capital payment

The rules indicate that a wide view must be taken of the phrase 'capital payment'. It includes:

  • The transfer of an asset.
  • A capital payment is not restricted to payment of money. It includes the transfer of assets - for example company shares.
  • The conferring of any benefit.
  • Benefit is a wide term. It includes, for example, rent-free occupation of trust property.
  • Any occasion that a beneficiary becomes absolutely entitled to trust assets.
  • Any occasion that a beneficiary would become absolutely entitled but for being an infant or under disability.

Legislation

The rules defining a capital payment are in Sections 97(1) and (2) TCGA 1992.

Example

A non-resident trust has the following gains/losses:

Years Gain Loss

1996-97 12,000 6,000
1997-98 25,000 37,000

1998-99 104,000 2,000

There are two beneficiaries, Alan and Brian. Both are resident and ordinarily resident in the UK. Alan is domiciled in the UK. Brian was not domiciled in the UK before 6 February 1999. He then became domiciled in the UK.

The trustees make the following payments:

Years Alan Brian
1996-97 NIL NIL
1997-98 20,000 30,000
1998-99 35,000 35,000

The position for each year is:

1996-97

The trust gains are 6,000 (12,000 less 6,000)

As there are no capital payments the gains go forward to 1997-98.

1997-98

The trust gains are 6,000. The losses must reduce gains of the same or later years. The loss of 12,000 (37,000 less 25,000) must go forward to 1998-99.

The trustees made capital payments of 50,000. Trust gains are attributed to the beneficiaries in proportion to the payment each received.

Alan 20,000/50,000 x 6,000 = 2,400 Brian 30,000/50,000 x 6,000 = 3,600

Alan is chargeable on 2,400.

Brian is not chargeable on the 3,600 attributed to him. This is because he is not domiciled in the UK.

The process has not used up all the capital payments. The balance goes forward to 1998-99. The details are

Alan 17,600 (20,000 less 2,400) Brian 26,400 (30,000 less 3,600)

1998-99

The trust gains are 90,000 (104,000 less 2,000 and less 12,000)

The capital payments are:

Description Amount

Made 1998-99 70,000

Brought forward 44,000

Total 114,000

Alan's share of payments 52,600 (35,000 + 17,600)

Brian's share of payments 61,400 (35,000 + 26,400)

The attributed gains are:

Alan 52,600/114,000 x 90,000 = 41,526 Brian 61,400/114,000 x 90,000 = 48,474

Alan is chargeable on 41,526.

Brian is chargeable on the 48,474 attributed to him. This is because he was domiciled in the UK at some time in the year.

The process has used all the gains and losses. There is still a balance of unused capital payments. This balance goes forward to 1999-2000. The details are:

Alan 11,074 (52,600 less 41,526) Brian 12,926 (61,400 less 48,474).

Increase in tax

Sections 91-95 TCGA 1992 impose an increase in tax due under the beneficiary charge. The increase is an amount of tax. It is not an interest charge.

Calculating an increase in tax

There are four stages to the computation:

1. Match capital payments to qualifying amounts (gains). Matching is on a 'first in first out' basis for years up to and including the year 2007-08. For the year 2008-09, or later, a 'last in first out' basis will apply.

2. Compute the beneficiary's Capital Gains Tax liability on gains arising under the beneficiary charge. Use the basis that these gains represent the lowest slice of the beneficiary's total gains. Sometimes these gains result from payments from more than one non-resident trust. The tax due should be split pro rata on the amounts of the capital payments from each trust that have triggered the liability.

3. If applicable apportion the tax between different years. The split is based on the gains of each year.

4. Apply the appropriate factors to the tax apportioned to gains. See Helpsheet HS301 for these factors.

The increase is calculated over a chargeable period. This runs from1 December in the year after the gain arose to 30 November in the year after the trustees make the capital payment.

The chargeable period cannot exceed six years.

The total tax payable (including the increase in tax) cannot exceed the amount of the capital payment.

Helpsheet HS301 has instructions for calculating the increase in tax. It includes a table of the increase in tax percentages.

The beneficiary enters the liability on the Self Assessment tax return.

Where beneficiary returns trust gains

UK beneficiaries include such gains on their Self Assessment tax return in accordance with Helpsheet HS299.

They should also show:

  • the name of the non-resident trust
  • on what basis the gains were attributed to them

The beneficiaries may be chargeable to the 'increase in tax' provisions. Helpsheet HS301 has details. Beneficiaries should enter such additional liability on the Self Assessment tax return.

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Monitoring trust gains and capital payments

Form 50(FS)

HMRC Trusts & Estates issues forms 50(FS) to trustees who are not resident in the UK for Capital Gains Tax purposes. The form asks about possible tax liability of the settlor or beneficiaries.

The information provided can be used to reconcile the entries made on an individual's Self Assessment tax return. This may mean that the tax office may not need to make an enquiry into the tax return.

Please select from the following list of tax years to access a form 50(FS)

Power to obtain information

Section 98 TCGA 1992 gives the Board of HMRC extensive formal powers to obtain information. The Board may, by notice in writing, require any person to supply such particulars, as they think necessary for the purposes of the legislation. Penalties can be imposed for failure to comply.

Administration periods

Office responsible for period of administration liabilities

If trustees are outside the UK HMRC Trusts & Estates, Non Resident Trusts is the appropriate trust office.

Foreign estates

HMRC Trusts & Estates, Non Resident Trusts will give advice on administration periods if any of the following apply:

  • the deceased died not resident in the UK
  • the deceased died resident in the UK but was not domiciled
  • a personal representative is not resident in the UK
  • a beneficiary receives income from a foreign estate

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Contacting the HMRC Trusts & Estates, Non Resident Trusts

By post:

HMRC Trusts & Estates
Non Resident Trusts
Ferrers House
PO Box 38
Castle Meadow Road
Nottingham
NG2 1BB
England

By telephone:

HMRC Trusts & Estates, Non Resident Trusts has specialist staff who will answer enquiries about non-resident trusts. But they may not be able to answer hypothetical questions. And you will need to identify any specific case to which your query relates. They cannot help with tax planning, or with transactions designed to avoid tax. See HMRC's Clearances and Approvals 1 on the giving of information and advice. For help and advice on non resident trusts or UK administration periods phone the Trusts and Deceased Estates Helpline.

Trusts and Deceased Estates Helpline

By email:

Contact HMRC Trusts & Estates, Non Resident Trusts by email

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'Baker/Garland' country designation

Please select the initial letter of the appropriate country:

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

List of countries
Country State Trust Law
A    
Argentina No Trust Law
Australia    
  New South Wales Baker
  Queensland Baker
  South Australia Baker
  Victoria Baker
  Western Australia Baker
B    
Bahamas   Baker
Barbados   Baker
Belgium   No Trust Law
Belize   Baker
C    
Canada    
  British Columbia Baker
  Nova Scotia Baker
  Ontario Baker
  Saskatchewan Baker
  Quebec Garland
Cayman Islands   Baker
D    
Denmark   Garland
E    
Egypt   Baker
Estonia   Baker
F    
Fiji   Baker
G    
Ghana   Baker
Gibraltar   Baker
Guernsey   Baker
Guyana   Baker
H    
Hong Kong   Baker
Hungary   Baker
I    
India   Garland
Ireland,Republic of   Baker
Isle of Man   Baker
Italy   No Trust Law
J    
Japan   No Trust Law
Jersey   Baker
K    
Kenya   Baker
L    
Latvia   Baker
Liechtenstein   Garland
Lithuania   Baker
Luxembourg   Baker
M    
Malaysia   Baker
Malawi   Baker
Malta   No Trust Law
Monaco   No Trust Law
Montserrat   Baker
N    
Namibia   Garland
Netherlands   No Trust Law
New Hebrides   Baker
New Zealand   Baker
Nigeria   Baker
Norway   Garland
S    
St Helena   Baker
St Vincent   Baker
Singapore   Baker
South Africa   Garland
South Yemen   Baker
Spain   No Trust Law
Sri Lanka   Baker
Sweden   Garland
T    
Trinidad & Tobago   Baker
U    
Uganda   Baker
USA    
  New York Garland
  Minnesota Garland
  Montana Garland
  North Dakota Garland
  South Dakota Garland
  Wisconsin Garland
  All other states Baker
Z    
Zambia   Baker
Zimbabwe   Garland