Commentary

I5.1235 Income tax for beneficiaries of non-resident settlements

IHT, trusts and estates

I5.1235 Income tax for beneficiaries of non-resident settlements

Liability of beneficiaries—income tax

I5.1235 Income tax for beneficiaries of non-resident settlements

Overview of income tax for beneficiaries of non-resident settlements

A non-resident trust is usually a foreign law trust governed by the laws of a country outside the UK, for example, Jersey1.

The income tax treatment of the beneficiaries of a non-resident trust depends on whether the trust is an interest in possession settlement, where the beneficiary has some entitlement to the income of the trust or, alternatively, a discretionary settlement.

Whether a payment to beneficiaries is an income or capital payment is discussed at I5.1307.

Interest in possession (IIP) settlements

IIP beneficiary's entitlement

Where a trust is governed by foreign law the beneficiary's entitlement to the income of an interest in possession (IIP) trust, and hence their tax treatment, depends on the law of the jurisdiction governing the trust2.

In some jurisdictions, the beneficiary's interest entitles them to the trust income as it arises and the source of the beneficiary's income is the underlying income of the trust3. This type of IIP trust is known as a 'Baker type' trust4.

In other jurisdictions the beneficiary's interest consists of a right against the trustees to require them to pay over trust income after they have paid trust expenses. In such cases the beneficiary's right to income from the trust is against the trustees, rather than in the underlying assets held in the trust5. This type of IIP trust is known as a 'Garland type' trust6. HMRC provides a list of countries showing if trusts

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