Offshore trusts—attribution of income to settlors
Offshore trusts—attribution of income to settlors

The following Private Client guidance note provides comprehensive and up to date legal information covering:

  • Offshore trusts—attribution of income to settlors
  • Elements of the settlor provisions
  • Settlements code—charge to tax
  • Non-resident settlors
  • Non-domiciled settlors
  • Disposals of carried interest by trustees
  • Transfer of assets abroad code

Various legislative provisions make up what practitioners often refer to as the 'settlements code'. Part 5, Chapter 5 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) and Part 3 Chapter 2 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) form part of the settlements code.

This Practice Note considers the provisions of ITTOIA 2005, Part 5, ss 619–648 (Ch 5) (referred to here as the ‘settlor code’) which deems the income arising under the settlement to be that of the settlor. The Offshore trust avoidance—attribution of gains to settlors Practice Note discusses the TCGA 1992 provisions.

The settlor code is designed to counteract the tax sheltering potential of both onshore and offshore settlements.

The provisions charge tax to the settlor on:

  1. income arising under a settlement where the settlor retains an interest in the settlement

  2. income of a settlement paid to the settlor's minor child, or

  3. certain capital payments (including loans) made to the settlor

However where there is no element of bounty, ie no gratuitous transfer, and the arrangements are made for bona fide commercial reasons, a settlement may fall outside the settlor provisions (eg an employee benefit trust). See the outcome of the case Chinn v Collins[1978] 1 All ER 65 below.

The provisions apply irrespective of whether the settlement is UK resident.

The predecessor legislation of the settlor