Tax on UK resident beneficiaries of non-resident trusts (overview)

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 UK resident beneficiaries of non-resident trusts (overview)
  • Introduction
  • Income or capital
  • Income distributions ― fixed interest trusts
  • Income distributions ― discretionary trusts
  • Capital payments
  • Transfer of assets abroad code
  • Attribution of capital gains
  • Non-UK domiciled beneficiaries

Tax on UK resident beneficiaries of non-resident trusts (overview)

Introduction

UK resident beneficiaries of non-resident trusts are subject to UK tax on payments or benefits received from the trust. They are liable for income tax on income distributions from the trust and they may also be liable to income tax or capital gains tax on payments of capital from the trust.

In contrast to UK settlors of non-resident trusts, the liability of beneficiaries is determined by the extent of their entitlement or the amounts actually paid to them. They have no UK tax liability in a year in which they have not benefited from the trust. See the Tax on UK resident settlors of non-resident trusts guidance note.

This guidance note provides an overview of the tax treatment of both income distributions and capital payments, and provides links to more detailed material.

Income or capital

In order to establish which tax provision applies, one must first determine whether the payment or entitlement is of income or capital. With a non-resident trust, an income distribution is always subject to income tax in the UK resident beneficiary’s hands. A capital distribution may be subject to income tax or capital gains tax, or not subject to tax at all.

The general rules, which apply equally to both UK resident and non-resident trusts, are that:

  1. a payment out of available trust income is income of the beneficiary

  2. a payment from capital, or from income which has been formally accumulated, is a payment of capital

  3. exceptionally, a payment from trust capital will be regarded as income in the hands of a beneficiary (and therefore be taxed as income) if the terms of the trust specifically provide for an income supplement to be paid from capital

It may not be obvious whether a distribution is from trust income or capital, particularly if the trustees do not keep accounts in the recognised UK format of separate income and capital accounts. There should be no difficulty with an ‘English style’

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