Taxation of trusts—income tax and capital gains tax

Tax categories for trusts

Taxation of trusts—introduction

Trusts are subject to the same taxes as individuals—income tax, capital gains tax (CGT) and inheritance tax (IHT)—but the application of those taxes varies according to the status and terms of the trust. The determining factor is most commonly the entitlement of the beneficiaries. Other relevant factors are the date of commencement of the trust, the age of the beneficiaries, and whether it was created during lifetime or on death. Therefore, the first step in working out how a trust is to be taxed is to read the trust deed or instrument to assess what type of trust it is. For a basic introduction as to how trusts are taxed, see Practice Note: Introductory guide to the taxation of trusts.

This subtopic deals with trusts that are resident for UK tax purposes and have no foreign connections (such as a non-UK resident or domiciled settlor). For information on the taxation of trusts whose trustees are non-UK resident, see subtopic: Offshore trusts—taxation.

Reform to the taxation of trusts

The government ran a consultation on the taxation of trusts

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FTT holds that OIGs and AIPs arising in offshore protected trusts are not protected foreign source income (Louwman v Revenue and Customs Commissioners)

Private Client analysis: The case of Louwman v Revenue and Customs concerned Ms Louwman, a UK resident non-domiciled taxpayer who had set up offshore protected property trusts on 7 March 2017, just prior to the implementation of the deemed domicile regime on 6 April 2017. Ms Louwman sought to shield income and gains in those trusts from taxation after she became deemed domiciled for the tax year commencing 6 April 2018, on the basis that the trusts were offshore protected property trusts and the income and gains in those trusts would not be attributed to her on an arising basis. HMRC assessed Ms Louwman to income tax on the basis that offshore income gains (OIGs) and accrued income profits (AIPs) that had arisen in the offshore protected trusts were subject to income tax on an arising basis. Ms Louwman resisted the assessments on the basis that these items of income were ‘protected foreign source income’. The matter went to the irst-tier tribunal for determination and the tribunal considered that the items of income were not ‘protected foreign source income’ on the basis that they could not be said to have a source, and particularly a foreign source. The tribunal therefore considered that they should be subject to income tax. The tribunal also considered that it was not appropriate to take a rectifying interpretation of the definition of ‘protected foreign source income’ in section 721A of the Income Tax Act 2007 (ITA 2007) even though OIGs and AIPs may have been omitted from the definition of protected foreign source income by the inadvertence of Parliament. Written by Ben Symons, barrister at Old Square Tax Chambers.

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