Tax on UK resident settlors of 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 UK resident settlors of non-resident trusts
  • Income tax charges on settlor-interested trusts
  • Settlor retains an interest
  • Income paid to minor child of settlor
  • Capital sums paid to settlor
  • Non-domiciled settlors and deemed domiciled settlors after 6 April 2017
  • Transfer of assets abroad code
  • Attribution of capital gains to settlors (section 86)
  • Underlying companies
  • Reporting the gain
  • More...

Tax on UK resident settlors of non-resident trusts

Where a UK resident settlor has created a non-UK resident trust, he may become personally liable to income tax or capital gains tax in relation to the trust’s income or gains, even if he does not receive a payment from the trust. The following legislative provisions levy a potential charge on UK settlors of non-resident trusts:

  1. the settlements code set out in ITTOIA 2005, ss 619–648 imposes an income tax charge on settlors with respect to income arising within a ‘settlor-interested’ trust. The provisions apply equally to UK resident and non-resident trusts

  2. the transfer of assets abroad code (TAAC) set out in ITA 2007, ss 714–747 imposes an income tax charge on settlors who may benefit from a non-resident trust as a result of a ‘relevant transfer’

  3. TCGA 1992, s 86 attributes capital gains arising within a non-UK resident trust to settlors who have an interest in the settlement

  4. TCGA 1992, s 87 imposes a capital gains tax charge on the settlor in relation to certain benefits received by himself or others. This applies principally (but not exclusively) to non-domiciled settlors

There is a degree of overlap between the different provisions and the order in which they are listed above represents the order of priority to be applied. This guidance note outlines the application of each type of charge and provides links to more detailed material as appropriate.

Income tax charges on settlor-interested trusts

In general terms, the settlements code is a set of anti-avoidance measures which attribute income arising under a settlement to the settlor if he (or his spouse or minor children) is able to benefit from it. With a UK resident trust and settlor, the code has the effect of taxing the trust income at the settlor’s rates. Currently, the difference between personal and trust income tax rates (for UK resident trusts) favours the individual, but the code was created when personal tax rates were higher. It

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