CheckLists.Tax (beta)
i9. Benefits provided by trust
GENERAL
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- Types of benefit
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- Settling a debt is a benefit (INTM601560).
- Loan may or may not be a benefit - see i10. Loan to beneficiary.
- Trust providing collateral/security for loan from third party may be a benefit (INTM601640).
- Occupation of property may be a benefit - see J7. Occupation and ownership.
- Granting an life interest is not a benefit, nor is the receipt of the proceeds of selling a life interest (INTM601580).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX
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Trustee remuneration
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- Remuneration authorised by trust deed is annual payment
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- Remuneration to trustees authorised by the trust instrument is an annual payment subject to deduction of income tax at source.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Settlements: attribution of trust income to settlor
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- Income accumulated followed by subsequent payment/benefit to child of settlor: deemed payment of income
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- If income is accumulated and a payment is subsequently made to or for the benefit of the settlor's child, the payment is deemed, for the purposes of s.629, to be a payment of income insofar as retained/accumulated income is available.
- Various types of income are disregarded in determining whether retained/accumulated income is available.
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Legislation: ITTOIA s.631;
Cases:
HMRC manuals:
Commentary:
See also:
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- Benefit as a capital sum to the settlor triggering the s.633 charge
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General rule
- Where the settlor/spouse of a trust receives a capital payment from the trust, income of the trust can be matched to that capital sum and taxed on the settlor (ITTOIA s.633).​
- See i8. Distributions to beneficiaries for further notes.
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Capital sum
- Capital sum means:
(1) loan;
(2) repayment of a loan;
(3) any other sum paid (i) otherwise than as income and (ii) not for full consideration in money/money's worth.
- "Otherwise than as income" does not require it to be taxable as income (CTM61070).
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Benefit in kind
- Query whether a benefit in kind is a capital sum.
- Associated payments in relation to capital sums from companies expressly includes a transfer of an asset (s.643(3)).
- Chamberlain suggests it does not (§11.59).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Transfer of assets abroad: transferor charge
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- Capital sum
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Transfer of assets abroad: benefits charge
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- Identifying and valuing benefits
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Benefit
- Settling a debt is a benefit (INTM601560).
- Loan may or may not be a benefit - see i10. Loan to beneficiary.
- Trust providing collateral/security for loan from third party may be a benefit (INTM601640).
- Occupation of property may be a benefit - see J7. Occupation and ownership.
- Granting an life interest is not a benefit, nor is the receipt of the proceeds of selling a life interest (INTM601580).
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Indirect receipt
- TOAA applies to benefits "received by the individual".
- Query whether 'indirect' receipt is sufficient (as it is for CGT purposes - TCGA s.97).
- HMRC say: "It may be the case that an individual receives a benefit even though nothing has, at first glance, been received directly. Whether a benefit is received is a question of fact." (INTM601560).
- But the example they give is the person abroad settling a debt on behalf of an individual, which obviously a direct benefit, even though it involves a payment to a third party.
- HMRC also say: "In more sophisticated arrangements, benefits may be disguised or provided by circuitous routes to conceal the fact."​​​
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Value of benefit
- Making asset available - see s.742D and INTM601650.
- Loans - i10. Loan to beneficiary.
- Occupation of land see J7. Occupation and ownership.
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Legislation:
Cases:
HMRC manuals: INTM601560;
Commentary:
See also:
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- Matching benefits to trust income
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General conditions (s.732)
(1) There must have been a relevant transfer.
(2) Individual must be UK resident in the tax year in which the benefit is received.
(3) The benefit must be provided out of assets available for the purpose as a result of the transfer/associated operations.
(4) No matching to benefits provided to transferor in a year in which they are liable as transferor (s.732(1)(d); s.733(1), Step 1).
- Generally this means transferors not liable under the benefits charge (INTM601680).
- Save in relation to transitional measures for protected foreign source income (INTM603705).
- Can be beneficial if transferor was not previously liable and there is significant historic, untaxed relevant income.
(5) The benefit must not otherwise give rise to income tax.
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Aggregate all untaxed benefits (s.733)
- Step 1: aggregate all benefits received by the individual for both the current year and any earlier year in which a benefit satisfying the general conditions was met.
- Reference to 'such benefits' in s.733(1), step 1, is potentially ambiguous, but the intention cannot have been to include benefits that were, for instance, otherwise liable to income tax.
- Step 2: deduct benefits that were matched to income in previous years as a result of these rules.
- No deduction where the income resulting from such matching was not charged by virtue of s.735AD(2) or s.731(1A).
- Deduct benefits matched to capital gains in an earlier tax year (s.734, see below - Matching benefits to later income).
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Aggregate all unmatched relevant income (s.733)
- Steps 3 and 4: aggregate income arising to a person abroad in the tax year or a previous tax year which, as a result of the relevant transfer or associated operations could be used (directly or indirectly) for providing benefits to the individual.
- This does not just include the income of the person who provided the benefit (see below on companies owned by a trust) (INTM600400).
- HMRC accept that what is effectively the same income should not be taken into account twice (e.g. distribution by subsidiary followed by distribution by parent) (INTM602380).
- See also Hoey, §201.
- Similar issue arises where gains are used to pay income (e.g. company realises a gain which is used to pay a dividend to trust).
- And a more complicated one where the dividend is paid using gains and income profit.
- Income arises
- The income must have arisen.
- Case law on when interest arises says it arises when it is received or made available (SAIM2440).
- Unrealised income has not arisen.
- If the settlements code applies to treat the whole income as income of the settlor, income treated as being the settlor's should, logically, not be available for matching under transfer of assets abroad, because it is not income of the person abroad (Dunsby, §173).
- HMRC appear to take a different view (INTM600940).
- Limited attribution of income to settlor where non-resident (see above).
- If there is an interest in possession the income may be considered to arise only to the IIP holder.
- Even if the income was regarded as arising to the trustees, it could not be used to provide benefits to anyone else.
- Calculating income
- Use the UK rules, e.g. UK trading profit computation rules.
- Query whether a loss can be used to reduce other income arising in the same entity.
- Equally, query whether a loss can be carried forward against future income (see Clarke §44.6).
- "Could be used"
- Ability to use income to provide benefits must be as a result of the relevant transfer/associated operations.
- Need not be the same associated operations as included in the relevant transfer (INTM601480).
- Query to what extent soft limits on the ability to use income to benefit an individual prevent it being available (e.g. letter of wishes).
- Money paid away: "Any part of the income that has been genuinely paid away may not be capable of being termed as income that can be used for providing a benefit." (INTM601700).
- Examples given are: income paid to meet legitimate expenses, income distributions, taxes.
- Deemed income
- Where an actual sum received by the trustees is treated as income for tax purposes, that can be relevant income.
- Includes:
- Offshore income gains (INTM601540).
- Chargeable event gains on certain life assurance policies (INTM600400, INTM601100).
- Accrued income scheme charges (INTM600400, INTM601100).
- But where income is treated as arising (e.g. stock dividend, ITTOIA s.410), it is difficult to see how there can be relevant income - benefits cannot be provided out of income only deemed to arise.
- HMRC accept that if a sum is not actually income, and there is no deeming provision for all tax purposes or for TOAA specifically, it is unlikely to be income for TOAA purposes. They give the example of stock dividends (INTM600400).
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- Step 5 - deduct income that was matched to benefits in a previous year as a result of these rules.
- Under Step 5(a), only deduct income matched to benefits provided to that same individual in a previous year (see step 2), not income matched to benefits provided by other individuals.
- However, no amount of income may be taken into account more than once in charging income tax under these rules (s.743(1), Step 5(b)).
- So if income is matched to benefits and actually charged on another individual, it can be deducted.
- This approach is now implicitly confirmed by s.733(2C)(b).
- INTM601480.
- Same applies where someone else was charged on the income as transferor (INTM601500).
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Match benefits to income (s.733)
- Step 6 - income is treated as arising to the extent that the untaxed benefits does not exceed the unmatched relevant income.
- Legislation does not specify which income, within the whole pool of relevant income, is being matched.
- Not technically a charge on the actual income or the actual benefits (INTM601480).
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Benefit would be matched to income on which transferor liable in the same year
- HMRC have a discretion as to who is liable (s.743(2), Step 5(b)).
- HMRC say that it will normally be just to tax the whole income on the individual who sought to avoid tax in setting up the structure (INTM602480).
- But give an example of a different answer where the transferor was liable only as a result of a loan which was repaid in short order.
- If the beneficiary is relieved from liability, the benefit is carried forward (as it was not, in the event, matched) (INTM602480).
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Benefits to multiple individuals in the same year
- If the unmatched relevant income is less than the total untaxed benefits for all individuals from the same structure, HMRC have a discretion as to which beneficiary is liable to tax (s.743(2), Step 5(b)).
- Query how that is supposed to work in relation to self-assessment.
- HMRC say the most appropriate method is by reference to the ratio of the benefits received (INTM602480).
- For benefits to multiple individuals in different years see above on s.733, Step 5.
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Rates and reliefs
- There is no provision permitting the 'same deductions and reliefs' as operates in relation to the transferor charges (INTM601460).
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Treatment as foreign income
- For qualifying new residents (and, previously, remittance basis taxpayers), the deemed income is treated as foreign if the "relevant income to which it relates would be relevant foreign income if it were the individual's" (s.735).
- Rules for determining the extent to which the benefit relates to foreign income are in s.735A.
- To decide whether there has been a remittance, treat the relevant income or benefit as deriving from the foreign deemed income (s.735(4)).
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Legislation:
Cases:
Dunsby v. HMRC [2020] UKFTT 271 (TC);
Hoey v. HMRC [2022] EWCA Civ 656;
HMRC manuals: INTM601460; INTM602380; INTM602480;
Commentary:
See also:
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- Multiple transfers to the same trust: matching income and benefits arising from different transfers
- Benefits are taken into account if provided out of assets available as a result of the transfer or one or more associated operations (s.732(1)(c)).
- Income is taken into account if, as a result of the relevant transfer or associated operations it can be used directly or indirectly to benefit the individual (s.733(1), Step 3).
- If there are two separate transfers to the same trust, it would seem that the income and benefits have to be treated separately for each relevant transfer.
- That would seem to be inevitable if the transfers were by different individuals.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Trust 1 income matched with benefits from Trust 2
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Trust 1 funds Trust 2
- Assume both trusts were previously funded by separate relevant transfers.
- Benefits are taken into account if provided out of assets available as a result of the relevant transfer or one or more associated operations (s.732(1)(c)).
- Income is taken into account if, as a result of the relevant transfer or associated operations it can be used directly or indirectly to benefit the individual (s.733(1), Step 3).
- If assets from the Trust 1 structure are used to fund Trust 2 (outright transfer or loan), that is likely an associated operation as a result of which assets originating from the Trust 1 relevant transfer can now be used to provide benefits through Trust 2.
- Pre-transfer Trust 1 income: This analysis would allow income of Trust 1 up to the point of the transfer to be matched with benefits from Trust 2, insofar as those benefits can be regarded as provided out of the assets transferred (relevant transfer to Trust 1 + associated operation (transfer to Trust 2).
-Post-transfer Trust 1 income: If the benefit is provided by Trust 2 out of the assets transferred, and the recipient is also a beneficiary of Trust 1, it would seem that the benefit can be matched to post-transfer Trust 1 income (both the condition re benefits and re income are satisfied). The position is analogous to two trusts funded by the same transfer (below).
- If the recipient of the benefit cannot benefit from Trust 1, that would seem to block matching to post-transfer Trust 1 income.
- See below on changes in availability of income to provide benefits.
- If Trust 2 had its own assets, separate to the transfer, benefits provided out of those asset should not be matched to income in Trust 1 (see above: Multiple transfers to the same trust).
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Trusts 1 and 2 both funded by an earlier relevant transfer
- Assume T is a beneficiary of both Trust 1 and Trust 2.
- If income arises in Trust 1, but a benefit is provided out of Trust 2, given that both trusts derived from the same earlier relevant transfer plus associated operations, it seems that the income in Trust 1 is available to match against the benefits from Trust 2.
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Legislation:
Cases:
HMRC manuals:
Commentary: Clarke, §43.36;
See also:
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- Matching benefits to income of another entity: trust funded by other entity
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- Similar considerations as set out above in relation to two trust would apply where the trust providing the benefit had received assets from another entity.
- For instance, a loan from a company to a trust.
- If the funds are provided by an individual, that should normally be a fresh relevant transfer rather than associated operation linked to how the individual acquired the funds, unless it was part of a pre-ordained plan.
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Legislation:
Cases:
HMRC manuals:
Commentary: Clarke §43.38;
See also:
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- Matching benefits to earlier unmatched income
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Untaxed income from earlier years matched against future benefits
- Under Step 5(a), only deduct income matched to benefits provided to that same individual in a previous year (see step 2), not income matched to benefits provided by other individuals.
- However, no amount of income may be taken into account more than once in charging income tax under these rules (s.743(1), Step 5(b)).
- So if income is matched to benefits and actually charged on another individual in a previous year, it can be deducted.
- This approach is now implicitly confirmed by s.733(2C)(b).
- INTM601480.
- Same applies where someone else was charged on the income as transferor (INTM601500).
- Essentially, therefore, untaxed relevant income is carried forward.
- Where records are lost/facts unknown, HMRC say it will be necessary to estimate income and gains etc. (INTM601700).
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Changes in the availability of income to provide benefits to the individual
- Query whether relevant income from earlier tax years needs to continue to be available to provide benefits in the later year (explanatory notes say it does in Change 113).
- Parity of logic would suggest that where income could not previously have been used to benefit the individual but can now, it becomes relevant income.
- HMRC suggest relevant income cannot cease to be such: "It should be kept in mind that relevant income has to be considered on a tax year by tax year basis, so that once an amount has been determined as being relevant income of a tax year it will fall to be taken into account as relevant income in any subsequent year's benefits charge calculation." (INTM601700 and see example 2).
- But also seem to accept that subsequent use of income to make an income distribution (taxed in some jurisdiction) can reduce relevant income (INTM601700).
- This must be right, otherwise both the income distribution and the benefit otherwise matched to that income may be taxed, but query what the basis for HMRC's view is if not that the income is no longer available to provide benefits?
- Relevant income reduced by income paid to recognised charity (INTM601700).
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Individual non-resident when income arose (but is resident when benefit received)
- Although s.732 requires the individual to be UK resident when the benefit is received, income is treated as arising for "any tax year for which s.733 provides that income arises" (s.732(2)).
- Query whether, if the income is used, for instance to pay a distribution whilst the individual is non-resident, that income ceases to be relevant income in the later year because it can no longer be used to provide benefits to the individual - see above on changes in the availability of income.
- Also consider the motive defence and the effect of it being lost (see below).
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Legislation:
Cases:
HMRC manuals:
Commentary: Clarke, §44.28;
See also: ITA 2007, explanatory notes;
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- Matching benefits to later income​
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Untaxed benefits from earlier years matched against future income
- When identifying the untaxed benefits, benefits received by an individual in an earlier tax year in which s.732 applied are brought into account.
- Unless income was matched to that benefit in an earlier year, the benefit is available for matching in a later year where income is available.
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Individual non-resident when benefit previously received (but is resident when income arises)
- Benefits are only taken into account if the individual was resident in the year the benefit was received (INTM601740).
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Individual non-resident when income arises (but resident when benefit was previously received)
- Although s.732 requires the individual to be UK resident when the benefit is received, income is treated as arising for "any tax year for which s.733 provides that income arises" (s.732(2)).
- Query whether the general principle of territoriality excludes a charge under s.731 on a non-resident.
- Supported by the fact that, when the remittance basis existed, a UK resident on the remittance basis might avoid a charge where matched to foreign income, but, perversely, a non-resident would be taxed on benefits matched to the same income.
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Benefit treated as capital payment for CGT purposes in the meantime
- Where a benefit is not initially matched to income (e.g. insufficient income), it may, in the meantime, have been matched to capital gains.
- The untaxed benefits amounts is reduced to that extent (ITA s.734, INTM601520).
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Legislation:
Cases:
HMRC manuals: INTM601520;
Commentary:
See also:
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- Matching benefits to income of company owned by trust
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General
- Relevant income is not limited to the income of the provider of the benefit (INTM601700).
- It includes income that can, indirectly, be used to provide benefits as a result of the transfer/associated operation.
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Company distributes income to trust
- Arguably, at this point, the company incomes ceases to be available to provide benefits and thus ceases to be relevant income.
- But the trust receives a distribution which could be relevant income.
- Query what the position is if the company income is distributed in a liquidation and thus is capital.
- HMRC say that the company income remains relevant income (INTM601700, example 2).
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Income arising to company before it was owned by trust
- If relevant income is fixed for a tax year, subsequent acquisition of a company should not make the pre-acquisition income of the company relevant income.
- Query the position of a beneficiary who was a previous shareholder of the company.
- HMRC are understood to argue that the pre-acquisition income becomes relevant income (see Kessler, Chapter 50).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Matching benefits with company income that arose prior to sale
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Sale to third party
- If it is right that the income needs to continue to be available to provide benefits, it ceases to be relevant income.
- HMRC are understood not to accept that income can cease to be relevant income, but query how that can be justified in this situation.
- The CGT rules will have applied to any gain on the sale.
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Sale to the individual/person from whom the individual can still receive benefits
- The income remains available to provide benefits and is relevant income.
- Query the interaction with CGT on the sale proceeds.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Motive defence
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Loss of motive defence: whether to carry forward income or benefits from years when defence applied
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Benefits from motive-protected years not carried forward
- Benefits in years when motive defence applied: not carried forward for matching (INTM601800).
- This is on the basis that benefits are only included for years in which s.732 applies (ITA s.733(1), Step 1).
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Query whether income from motive-protected years carried forward
- Income in years when motive defence applied: appears to be carried forward (and see ITA 2007, s.740(5) where there are pre-5 December 2005 transactions, INTM601760, INTM601800).
- Relevant income is not restricted to years in which s.732 applied (it can include income prior to any benefit).
- But if income is carried forward, leads to the odd result that a transferor will be protected from matching of benefits to historic years due to the disapplication of the benefits charge for individuals taxable as transferor (s.732(1)(d)) but other individuals have no protection.
- The transferor gets this protection from matching of historic income with current benefits even if there is little or no income to be taxed under the transferor charge in the current year.
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Legislation:
Cases:
HMRC manuals: INTM601760; INTM601800;
Commentary:
See also:
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EMPLOYMENT INCOME
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- Employment income provided through third parties
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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CAPITAL GAINS TAX
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Section 87: matching gains to benefits of non-resident trust
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- Trust gains matched to capital payments/benefits
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General
- Where (s.87):
(1) there is no time in the tax year when the trustees are UK resident; and
(2) a beneficiary has received a capital payment from the trustees in that tax year or an earlier tax year;
- Then chargeable gains are treated as accruing to the beneficiary to the extent that the capital payment(s) received are matched with trust gains.
- If the trust is UK resident but treaty non-resident, see s.88.
- Beneficiary is generally extended to include any person receiving or treated as receiving a capital payment (s.97(8)).
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Capital payments (any benefit other than income)
- Exclusion for income
- UK resident recipient: capital payment is any payment which is not chargeable to income tax on the recipient or another person (s.97(1)(a)).
- Query the position where the payment was remittance basis income and not immediately remitted.
- Income distribution from settlor-interested trust to non-settlor beneficiary is chargeable to income tax (but credit for tax).
- Income distribution from settlor-interested trust to settlor is not treated as income for the purposes of the Income Tax Acts (ITTOIA s.685A(5)) but it would be absurd if this was a capital payment. Arguably, this is to be regarded as simply handing over income that was already charged on the settlor.
- Non-resident recipient: capital payment is any payment received otherwise than as income (s.97(1)(a)).
- Payment includes (s.97(2)):
- Transfer of an asset.
- Conferring of any other benefit.
- Beneficiary becoming absolutely entitled to property.
- Arm's length transaction:
- Capital payment excludes a payment under a transaction entered into at arm's length (s.97(1)(b)).
- Connected person transactions not prevented from being arm's length, despite s.18 (CG38625).
- Pre-2008 capital payments - see FA 2008, Sch 7, para 122.​
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Exclusion of benefits already matched to income
- Capital payment excludes any which which is chargeable to income tax on the recipient or chargeable to income tax on another person under the settlements or TOAA codes (TCGA s.97(1)(a)).
- Benefits matched to income under TOAA are not payments chargeable to income tax (an amount of deemed income arises) but HMRC say s.97(1) covers "Capital distributions taxed as income under ITA07/S733" (CG38625).
- Benefits not matched to income where recipient is non-resident or TOAA motive defence applies.
- Matching to gains in an earlier tax year has priority over matching to income in a later year (s.97(3)).
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Received
- Includes direct or indirect receipt from trustees (s.97(5)).
- Indirect receipt means receipt through an intermediary.
- For instance if there is a plan for A to pay B and B to pay C.
- But not where there is an outright, unconditional transfer from A to B (Bowring, §89, 90).
- Indirect receipt by C from A should preclude direct receipt by B from A (Bowring §55).
- Includes application for person's benefit (s.97(5)).
- Includes receipt by a third party at the beneficiary's direction (s.97(5)).
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Trust gains pools
- Identify the trust gains for the current tax year and any earlier tax year (s.87(2)).
- Exclude gains for tax years when there was a time at which the trustees were UK resident (s.87(5)).
- Subject to the rules about dual resident trusts (s.88).
- Where there has been a transfer in from another trust, add any gains transferred under s.90 - see i3. Transfers between trusts.
- Each tax year may be considered to have its own pool of trust gains.
- Pre-2008 trust gains - see FA 2008, Sch 7, para 120.
- 2008 rebasing - FA 2007, Sch 7, para 126.
- Calculate trust net gain on the assumption that the trustees were UK resident in the tax year (s.87(4)).
- Query whether trustees get the benefit of an annual exempt amount in s.1K.
- Logically they should because they are deemed to be UK resident and s.1K applies to arrive at the s.1(3) amount.
- But see CG38610 where HMRC say otherwise.
- Deduct foreign tax paid by trustees on the gain (TIOPA s.113; CG38610).
- Reliefs and elections requiring a claim
- It is not clear what needs to happen where a relief etc. depends on a claim being made.
- Kessler suggests all necessary/beneficial claims can be treated as made (Kessler, Chapter 61).
- Deduct gains treated as accruing under s.86 in a tax year in which s.86 applies to the settlement, i.e. gains attributed to UK resident settlor who retains an interest in the trust (s.87(4)(b)).
- Remove gains/losses that fall within the scope of the charge on non-residents for the trustees (s.87(5A).
- Remove carried interest gains treated as accruing under s.103KA (s.87(5B)).
- Losses may be carried forward (s.97(6)).​
- Voluntary form to disclose gains to HMRC - see TSEM10130.
- Records of historic gains not available - see INTM601700.
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Matching (match most recent gains to most recent capital payments first)
- First, match gains in the trust gains pool for the current tax year to capital payments received by beneficiaries ​​in that tax year (s.87A(2), Step 3).
- More capital payments than available trust gains: match pro-rata (Step 3).
- Reduce both the trust gains pool and the quantum payments by the amounts matched (Step 4).
- Second, if the previous step exhausted the trust gains pool for the most recent tax year, match any remaining capital payments to the unused trust gains pool for the previous year.
- If the previous step exhausted capital payments for the most recent tax year, match any remaining gains to any unmatched capital payments from the previous year.
- Continue applying the previous step progressively exhausting gains and payments until there are none left to match (s.87A(3)).
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Death of capital payment recipient
- Match to trust gains in year of death.
- Do not match to trust gains in future year (CG38605).
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Increase in amount of tax where gains matched to benefits more than 1 year after the gain arose
- If capital payments are matched to gains more than one year after the tax year in which the gain arose, the tax payable on the matching is increased.
- Only applies where gains treated as accruing to an individual (not a company).
- The increase in the tax payable is equal to 10% interest per annum on the original tax for the chargeable period.
- Total tax on the payment cannot exceed the amount of the payment (s.91(2)).
- Chargeable period:
- 1 December in tax year after gain arose to 30 November in tax year after capital payment was made.
- Up to a maximum of 6 years (s.91(5)).
- Consider whether to trigger gains in the current year to avoid the increase applying (by preventing matching to earlier gains).​
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Double tax relief
- No credit for foreign tax paid by trustees on the matched gains as it is a deemed gain (but see above re deduction).
- Query whether trust gains that are protected by a double tax treaty fall the trust gains pool as sums upon which the trustees would be chargeable if UK resident.
- Bricom indicates not.
- Kessler suggests there is an argument.
- No treaty protection where saving clause in treaty prevent third party benefits.
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Legislation: TCGA s.97;
Cases:
Bowring v. HMRC [2015] UKUT 550 (TCC);
Bricom v. IRC 70 TC 272;
HMRC manuals: CG38625; INTM601520;
Commentary: Kessler, Chapter 61;
See also:
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- Close member of settlor's family receiving payment benefit: treated as received by UK resident settlor
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General rule
- If:
(1) the recipient of a capital payment is a close member of the settlor's family at the time of receipt; and
(2) the settlor is UK resident for the tax year;
then the capital payment is treated as received by the settlor and not by the original recipient (s.87G).
- Settlor entitled to recover tax from original recipient (s.87G(3)).
​
Close member of settlor's family: spouse + minor children
- Spouse or civil partner at the time (s.87H(1)).​
- Two people living together as if they were married couple treated as spouses (s.87H(2)).
- Children under 18 of either the settlor or the settlor's s spouse/civil partner (s.87H(1)).
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Exception if settlor is qualifying new resident​
- Reallocation of receipt does not apply if
(1) original recipient was UK resident and
(2) settlor is qualifying new resident (s.87G(2A)).
​
Legislation: TCGA 1992, s.87G, s.87H.
Cases:
HMRC manuals:
Commentary:
See also:
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- Previously UK resident trust: capital payments/benefits provided when trust was UK resident
​
- Section 87 only applies in a year when the trustees are non-resident.
- But if a resident trust becomes non-resident, s.87 will apply to payments/benefits provided whilst the trust was UK resident.
- However such payments/benefits can be disregarded if it was not made in anticipation of a disposal by the trustees during the non-resident period (s.89(1)).
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Legislation: TCGA s.89.
Cases:
HMRC manuals:
Commentary:
See also:
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- Non-resident person receives capital payment/benefit (generally disregard)
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No matching to payment to non-resident
- Disregard capital payment received by a beneficiary who at all time in the tax year of receipt was not resident in the UK (s.87D(2)).
- Disregard does not apply if the recipient is a close member of the settlor's family and the settlor is UK resident (s.87D(3)).
- Disregard overridden if the onward gifting rule applies (s.87HA(2)).
​
Capital payment to non-resident in year settlement ends
- If two or more beneficiaries receive capital payments in the tax year the settlement ceases to exist, and at least one of those recipients is UK resident in that tax year, the capital payment is not disregarded under s.87D(2) (s.87F).
- But may be disregarded under s.87C (non-resident close company).
- This may provide a reason to bring a trust to an end, possibly by partly transferring to a new settlement.
​
Temporarily non-resident individual
- If the individual turns out to only have been temporarily non-resident, the benefit is not disregarded and is treated as received in the tax year of return (TCGA s.87E).
- See P2. Temporary non-resident returns.
- But if the individual was non-resident when the payment was received and not temporarily non-resident, the disregard remains even if they become resident. ​
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Legislation:
Cases:
HMRC manuals:
Commentary:
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- Gains arising whilst settlor/beneficiaries non-resident
​
- Gains arising within a non-resident trust whilst the settlor and all beneficiaries are non-resident will still be in the trust gains pool if they become resident (even though the individual would not have been taxable if the gain had arisen to them instead).
- Pre-arrival precautions should, therefore, be taken in respect of such trusts.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Leaving UK: capital payment/benefit to resident person who becomes non-resident before it is matched (disregarded)
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Disregard of payment whilst non-resident
- If:
(1) A UK resident receives a capital payment whilst UK resident;
(2) The recipient subsequently becomes non-UK resident;
(3) The benefit has not been matched with gains in a year whilst the beneficiary was UK resident;
then for the years when the beneficiary is non-UK resident, the capital payment is disregarded (s.87N).
​​​​
Temporarily non-resident: treat as received in year of return
- If the recipient turns out to only have been temporarily non-resident the temporarily disregarded payment is treated as being received in the period of return (s.87P).
- If the recipient becomes resident again but was not temporarily non-resident, the payment is no longer disregarded, but not treated as received later (which would lead to priority matching to gains).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Close family member of settlor received capital payment/benefit where settlor subsequently becomes non-resident
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Disregard of payment whilst non-resident
- If:
(1) A close-family member of the settlor received a benefit.
(2) The benefit was treated as received by the settlor under the rule in s.87G(2) (settlor UK resident);
(3) The benefit has not been matched with gains in a year whilst the settlor was UK resident;
then for the years when the settlor is non-UK resident, the capital payment is disregarded.
​​​​
Temporarily non-resident: treat as received in year of return
- If the settlor turns out to only have been temporarily non-resident the temporarily disregarded payment is treated as being received in the period of return (s.87P).
- If the settlor becomes resident again but was not temporarily non-resident, the payment is no longer disregarded, but not treated as received later (which would lead to priority matching to gains).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Onward gift from non-resident/qualifying new resident recipient to UK resident recipient: deemed receipt by UK resident
​
General rule
- If:
(1) The original recipient of a capital payment is a non-UK resident/qualifying new resident; and
- Does not matter if qualifying new resident claims FIG relief on the benefit.
(2) The close family member attribution rule does not apply; and
(3) At the time of the original receipt there was an arrangement/intention to pass on all/part of the benefit to another person.
- It must also be reasonable to expect that the other person will be UK resident when they receive at least part of what is passed on.
- Condition 3 is presumed to be met if conditions (4) - (6) are met unless the contrary is shown (s.87HA(6)).
(4) The original recipient provides a benefit to another person either:
(i) within 3 years of receipt of the original benefit; or
(ii) prior to the receipt of the original benefit but it is reasonable to assume in anticipation of it.
- A fair bargain should not be a benefit.
(5) The onward gift is of or includes:
- all or part of the original benefit.
- anything deriving from or representing the original benefit.
- any other property if the original benefit is made with a view to enabling/otherwise in connection with providing the onward gift.
(6) The onward gift recipient is resident in the UK when they receive the onward gift.
Then: the onward gift is treated as a capital payment received from the trustees by the onward gift recipient as a beneficiary (s.87HA).
- May have been a case of indirect receipt, in any event - see above.
​
Time of deemed receipt of capital payment
- Is the time of receipt of the onward gift, unless the onward gift is received before the original recipient actually receives the capital payment (s.87HA(5)).
​
Indirect provision of onward gift
- An original recipient provides a benefit to another even where there is a series of two or more benefits between the original recipient and the final recipient (s.87HA(4)).
- For instance, if the original recipient uses the capital payment to settle a trust which provides the onward benefit.
​​
Precautions
- Segregate benefits from trust and do not use to provide benefits to others.
- Do not use benefits from trust to provide benefits to others for 3 years.
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Legislation:
Cases:
HMRC manuals:
Commentary:
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- Passing on of benefit of capital payment (e.g. use of land or loan) to UK resident recipient: deemed receipt by UK resident
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General rule
- The onward gift rule applies (see above) where (inter alia) the original recipient provides a benefit to the subsequent recipient that includes (all or part) of the original benefit or anything that derives from the original benefit.
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Occupation of land
- If the original recipient receives land and permits the subsequent recipient to occupy it for free, part of the benefit has been passed on (subject to application of the other conditions).
​
Loan of money
- If the original recipient receives money (or, perhaps, converts an asset received into money) and lends it to another on favourable terms, part of the benefit has been passed on. (subject to application of the other conditions).
- The same may apply where a debt on favourable terms is owed by a UK resident to trustees who assign the benefit of the debt to a non-UK resident beneficiary.
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Legislation: TCGA s.87HA.
Cases:
HMRC manuals:
Commentary:
See also:
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- Company receives capital payment/benefit: UK res (taxable), non-UK res (disregard)
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No general exclusion for companies
- Section 87 refers to a beneficiary receiving a capital payment.
- Beneficiary includes anyone receiving a capital payment (s.97(8)).
- Accordingly, a UK resident receiving a capital payment to which gains are matched will be taxable.
- Increase in tax chargeable where payments matched later than received does not apply to companies (s.91(1)).
​​
No matching to payment to non-resident close companies
- In applying the matching rules, disregard a capital payment made by the trustees to a company that is not resident in the UK and would be a close company if it were UK resident (s.87C).
- This does not prevent the amount being treated as received by another person under s.96.
​​​​
Trust makes capital payment to company it 100% owns (generally ignore)
- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).
- E.g. beneficial loan to trust subsidiary disregarded.
- Direct ownership means owning all share capital:
"For this purpose, a company is treated as directly wholly owned by the trustees where the whole of its issued share capital is directly owned by the trustees of the settlement for the benefit of the beneficiaries of the settlement."
- Indirect ownership - 100% subsidiary
"A company is treated as indirectly wholly owned by the trustees where the whole of its issued share capital is directly and beneficially owned by a company which is directly wholly owned by the trustees or it is the 100% subsidiary of such a company, or a chain of companies, which is indirectly wholly owned by the trustees."
- Avoidance carve out
"This approach may not, however, be taken where, on the facts of a particular case, it appears that the transaction has been entered into solely or mainly for the purposes of obtaining a UK tax advantage."
- Query what the position is if the trust owns 99% of the company, and why - Kessler suggests capital payment to the extent of trust non-ownership, at least in some cases.
​
Capital payment within group 100% owned by trust (generally ignore)
- HMRC say: "In general, transactions between trustees and companies which they, directly or indirectly, wholly own, or between such companies, are outside the scope of TCGA 1992 Sch 5 para 9(3) and are not treated as capital payments within TCGA 1992 s 97." (SP5/92, §18)).
- Query what the position is if the trust owns 99% of the company, and why - Kessler suggests capital payment to the extent of trust non-ownership, at least in some cases.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also: SP5/92;
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- Non-resident close company receives capital payment/benefit (deemed receipt by participators)
​
General rule
- If a non-resident close company receives a capital payment from the trustees or from a company controlled by the trustees.
then:
(1) If the receiving company is controlled by 1 person alone who is UK resident, the payment is treated as received by that person (s.96(3)).
(2) If the receiving company is controlled by 2 or more persons, taking each person separately, the capital payment is apportioned equally between the UK resident persons (s.96(4)).
- Equal apportionment applies even where direct ownership levels of each person having control are different (but aggregated through the association rules).
- e.g. A, B and C are associates, but A owns 66% directly.
(3) If the receiving company is controlled by 2 or more persons together, it is apportioned between all of the participators (irrespective of residence) on a just and reasonable basis (s.96(5)).
- Ignore the deemed receipt by anyone getting less than 5% of the capital payment.
- Apply any relevant disregards (e.g. non-resident receipt disregard).​​​
​
Direct and indirect control by UK residents (e.g. individual owning UK HoldCo)
- Both the individual and the UK HoldCo control the non-resident close company.
- Query whether this falls within scenario 2 (2 persons taken separately control).
- Or whether one stops at the first level of attribution.
​
Trust makes capital payment to company it 100% owns (generally ignore)
- See Capital payment/benefit to company, above.
​
Capital payment within group 100% owned by trust (generally ignore)
- See Capital payment/benefit to company, above.​
​
Temporarily non-resident participator
- Deemed to have been UK resident for the purposes of the above rules, so as to retrospectively apportion all/part of the capital payment to the company to be apportioned to them (s.96(9A)).
- The capital payment can then be deemed to be received by that individual in their period of return (s.87E).
- This may alter the matching of gains to benefits in years prior to the individual's period of return - there are no time limits on making consequential claims and assessments to address that (s.96(9B)).
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Legislation: TCGA s.96.
Cases:
HMRC manuals:
Commentary:
See also: SP5/92;
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Section 89: matching gains to benefits from a UK-resident trust
​
- Previously non-resident trust becomes resident with unmatched gains​
​
Match benefits whilst UK resident to gains whilst non-UK resident
- If:
(1) A non-resident trust becomes UK resident; and
(2) At the time of becoming resident it had gains which had not been matched to capital payments
then capital payments during the UK resident period can be matched with the pre-UK residence gains (s.89(2)).
- Apply the matching rules for non-resident trusts (s.89(3)).
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Legislation:
Cases:
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Commentary:
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