Tax on capital payments from non-resident trusts

Produced by Tolley

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Tax on capital payments from non-resident trusts
  • Introduction
  • Income tax charge on Available Relevant Income
  • Calculation of the charge on ARI
  • Non-domiciled and deemed domiciled beneficiaries
  • Section 87 capital gains tax charge
  • Disregarded payments and washing out
  • Onward gifts
  • Capital payments made to a close family member of the settlor
  • Supplementary charge
  • More...

Tax on capital payments from non-resident trusts

Introduction

Payments made by a non-UK resident trust to UK resident beneficiaries are governed by a series of ‘tax hierarchy’ rules, which govern the tax treatment of the amounts received by the beneficiary. See the Tax on UK resident beneficiaries of non-resident trusts (overview) guidance note.

The first step is to determine whether the payment is a distribution of income. If it is, the payment is subject to income tax according to the principles set out in the Tax on income distributions from non-resident trusts guidance note.

If the payment is a ‘capital payment’ and the beneficiary is not the settlor, the primary charging provision is the transfer of assets abroad code (TAAC), which taxes individuals receiving a benefit. This is an income tax charge on the beneficiary calculated with reference to the amount of Available Relevant Income (ARI) within the trust.

If there is no ARI against which to match the beneficiary’s payment, the provisions of TCGA 1992, s87 are to be considered. This is a capital gains tax charge on beneficiaries, calculated with reference to the amount of undistributed capital gains within the trust.

This guidance note explains how each charge works and the interaction between the two.

Income tax charge on Available Relevant Income

Income tax may be charged on a UK resident individual in a tax year if:

  1. a relevant transfer has occurred, and

  2. he ‘receives a benefit’ in that tax year from assets available as a result of the transfer

ITA 2007, s732

For an explanation of the term ‘relevant transfer’, see the Transfer of assets abroad code guidance note. In broad terms, the creation of a non-resident trust constitutes a relevant transfer but the code does not apply if it can be demonstrated that no tax avoidance motive applied.

Receiving a benefit is not defined in the legislation. It is accepted that any kind of payment is covered and, historically, it has been HMRC’s view and that of the courts

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