CheckLists.Tax (beta)
i4. Trust income
INCOME TAX (BENEFICIARY)
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Bare trust/nominee
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- Income taxed on beneficiary (unless settlor interested)​
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Settlor interested
- "Trustees of bare trusts are not generally required to make returns or pay income tax. Income arising under a bare trust is taxed directly on the settlor." (TSEM4512)
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Interest in possession (IIP)
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- Settlor-interested trust: IIP holder not liable
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​- Where income is treated as that of the settlor alone under the settlements code, it is treated as not income of the IIP-holder (ITTOIA s.624(1)).
- "Where the income does not belong to the settlor (for example, it belongs to a spouse or civil partner as life tenant) the income is not taxable on the life tenant and the tax paid by the trustees is not available to that life tenant." (TSEM4512).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Transparent IIP: beneficiary taxable on trust income net of certain expenses
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Transparent interests in possession ("Baker"): income retains original character
- A person with an IIP in a "Baker" trust is entitled to the trust income as it arises and thus taxable under the various provisions charging the person "entitled" to the income (Baker v. Archer Shee; TSEM10420).
- Even though the beneficiary is entitled to the income as it arises, the trustees are still entitled to deduct costs and expenses properly chargeable to income. This is equivalent to an agent being entitled to their expenses from the principal.
- "The trustees, of course, have a first charge upon the trust funds for their costs, charges, and expenses, and American income tax will be a tax which they would have to bear and which would fall upon the beneficiary. But this does not reduce the right of property of the beneficiary to a right only to a balance sum after deducting these. If an owner of shares deposits them with his banker by way of security for a loan he is not reduced to being the owner of a balance sum being the difference between the dividends on the shares and the interest on the loan. He is he owner of the equity of redemption of the whole fund. If a landowner employs an agent to collect his rents and authorises him to deduct a commission he does not cease to be owner of the rents." (Baker)
- The income has the same character for the beneficiary as the original source (e.g. dividend income remains dividend income).
- If the trustees receive the income in the first place, they may be taxable under the various provisions charging the person "receiving" the income - see Income tax (trustees), below.​
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Non-resident trust receiving UK source income (UK source)
- The source is the original UK source, so the beneficiary has UK source income.
- Non-UK resident receiving UK source income is taxable, subject to relief. See A5. Individual receiving or entitled to income.
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Categorisation as transparent or opaque IIP
- HMRC's view is at TSEM10423.
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Scottish liferent
- IIP-holder deemed to have a transparent interest in possession (ITA s.464).
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Deduction of trust expenses properly chargeable to income
- The beneficiary is entitled to and taxed on the net amount after management and administration expenses insofar as they are properly deductible from that income in accordance with the relevant trust/applicable law (Hamilton, Murray, MacFarlane, Dewar, TSEM8320, TSEM8325).
- Trust paying expenses on behalf of beneficiary (e.g. expenses of occupying trust property) is a trust distribution, not a trust expense.
- See i8. Distribution to beneficiary and J7. Occupation and ownership of property.
- However, deduction of expenses is limited by statute (ITA s.500) to expenses that are:
(1) Incurred by the trustees in the current tax year or an earlier tax year; and
(2) Chargeable to income under the terms of the settlement or in accordance with any law.
- Resolve any difference between the terms of the settlement and applicable law.
- If expense that should have been paid out of capital is paid out of income, that does not reduce beneficiary's income (TSEM8340).
- Order of deduction against categories of income is set out in ITA s.503.
- No deduction possible where the income was mandated to be paid directly to the beneficiary.
- Trustees will not be entitled to deduct in computing basic rate tax, and beneficiary will not get credit for tax paid by trustees on the excess of income over expenses (see below).
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Legislation:
Cases:
Baker v. Archer Shee [1927] AC 844;
CIR v. Hamilton of Dalzell 10 TC 406
Murray v. CIR 11 TC 133
MacFarlane v. CIR 14 TC 540;
CIR v. Dewar 16 TC 93;
HMRC manuals:
Commentary:
See also:
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- Opaque IIP: beneficiary taxable on entitlement as against trustees
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Opaque interests in possession ("Garland"): income does not have original character
- If the law governing the trust only gives the IIP-holder a right to trust income net of trust expenditure, the trust is the source of the income.
- IIP beneficiary's income does not have same character as original source(s).
- "The nature of the income that arose to the trustees is irrelevant, and the amount to which the beneficiary is entitled is regarded as an untaxed source of foreign income." (TSEM10430).
- Onward payment to beneficiary is taxable as an annual payment (see i8. Distribution to beneficiary).
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Non-resident trust receiving UK source income (non-UK source)
- As the trust is the source of the income, the income of the beneficiary has a non-UK source.
- Non-UK resident individual receiving non-UK source annual payment not chargeable in the UK.
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Categorisation as transparent or opaque IIP
- HMRC's view is at TSEM10423.
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Legislation:
Cases:
Archer Shee v. Garland (1931) 15 TC 693;
HMRC manuals:
Commentary:
See also:
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- Trust income that has borne overseas tax
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Transparent IIP beneficiary entitled to credit
- A beneficiary is entitled to credit for tax deducted at source or paid by the trustees on the income (TSEM10400).
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Trustees can claim credit on behalf of beneficiary
- If the income is overseas income that has borne foreign tax, the trustees can claim tax credit relief on behalf of the beneficiary (TSEM3655).
- If the trustees do not claim relief, the overseas income chargeable is the net amount after deducting the overseas tax (TSEM3655).
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Opaque IIP beneficiary not entitled to credit (but taxed on net amount)
- The trust is the source of the income. No credit for any foreign tax paid on the underlying sources of income (TSEM10430).
- Quantum of income is the actual amount paid (which may be net of expenses and foreign tax).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Property rental income of trust reduced by non-tax deductible mortgage interest
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- Mortgage interest is not deductible in computing the profit of the trustee's property rental business.
- Individual's (and discretionary trusts) receive relief at the basic rate (ITTOIA s.274A, s.274B).
- Trustees of an IIP trust will not, on the face of it, receive that relief and so will pay basic rate tax.
- If all of the rental income is used paying the mortgage interest, the trustees will have to pay from elsewhere, e.g. capital.
- An IIP holder is generally taxed on the amount received, in this case nil.
- IIP holder will, however, get refundable credit for the tax paid by the trustees.
- Accordingly, IIP holder gets more than they were entitled to (the refundable credit, effectively paid for by the trustees out of capital).
- Query whether the trustees can benefit from s.274B in their 'representative' capacity.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Discretionary trusts
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- IIP as a result of assignment/surrender of prior interest: settlement by person with prior interest
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Assignment/surrender of interest in trust is itself a settlement
- Where there is a trust, the trust may well be a settlement with a settlor.
- But equally, if a person with an interest in the trust assigns/surrenders that interest such that another person becomes entitled to income, that will be a settlement by the person assigning/surrendering.
- E.g. if a parent releases his/her life interest so that child's reversionary life interest takes effect. Settlor of the income is the parent.
- See i12. Disposal of an interest in the trust.
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Effect
- In such a case, one would apply the settlements code vis-a-vis that settlement.
- IIP holder income may be treated as income of settlor alone, e.g. if IIP holder is minor child of person surrendering.
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Legislation: ITTOIA s.620.
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX (TRUSTEES)
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- Beneficiaries taxed on distributions, not when income arises to trust (subject to avoidance rules)
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- Where the trust is discretionary, income arising to the trust is not an event of charge for the (potential) beneficiaries.
- Instead, they are taxed on benefits and distributions, see:
- i8. Distributions to beneficiary
- i9. Benefits provided by trust
- Income arising may trigger a tax on beneficiaries where it is matched to benefits under TOAA - see below.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Bare trust/nominee
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Interest in possession and discretionary trusts
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- Trustees not required to submit returns or pay income tax
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- "Trustees of bare trusts are not generally required to make returns or pay income tax. Income arising under a bare trust is taxed directly on the settlor." (TSEM4512)
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Trustees entitled to/receiving income
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Trustees usually taxable on the basis of entitlement/receipt
- Trustees are normally taxable as the persons receiving/entitled to income (see below for non-resident trustees).
- For the meaning of entitled to and receipt see A5. Individual receiving/entitled to income.
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Other person may be entitled to income trustees receive
- Product of personal exertion derived by the person who performs the personal exertion irrespective of who it is paid to​ (Hadlee v. CIR [1993] AC 524).
- Query the position where the trustees allow a beneficiary to carry on a business owned by the trust.
- Person assigning right to income still entitled to income if receipt by 3rd party benefits assignor (Good v. HMRC [2023] EWCA Civ 114).
- Retaining right to reversion of income rights may means assignor continues to be entitled to income
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Priority between receipt and entitlement
​- "The ‘receiving’ basis enables you to tax the person in receipt of the income, even if you cannot trace the person entitled to it. But ultimately you want to tax the person who is entitled." (TSEM9310).
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Income attributed to settlor: trustees still chargeable
General rule
- Trustees are still chargeable on income that is attributed to the settlor (ITTOIA s.646(8)).
- If it is IIP, the trustees will be taxed at the basic rate - see below.
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Effect for UK resident trust
- Trustees of discretionary trust pay tax on trust income at trust rate (but see ITA 2007 s.480(3)(a)).
- The tax is treated as paid on behalf of the settlor and does not enter the trust tax pool.
- The settlor returns the income and reclaims any excess/accounts for any shortfall.
- There may be a shortfall because the trustees were entitled to deduct trust management expenses but the settlor is taxed on the gross income.
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Repayment of tax recovered by settlor to trustees
- The settlor must pay the amount recovered to the trustees who paid it (ITTOIA s.646(4), (5)).
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Legislation:
Cases:
HMRC manuals:
Commentary: Chamberlain, §11.28 onwards;
See also:
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Interest in possession trusts
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- Transparent interest in possession income: paid directly to beneficiary (not received by trustees)
Trustees not taxable
- If UK resident trustees mandate non-UK source income to a non-UK resident beneficiary, and it is paid directly to the beneficiary, the trustees are not liable to income tax on that income (Williams v. Singer).
- HMRC say this is on the basis that the trustees are neither entitled nor in receipt of the income (TSEM3040).
- Note, however, the developing case law in relation to the meaning of 'entitled'.
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Legislation:
Cases:
HMRC manuals: TSEM7070;
Commentary:
See also:
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- Transparent interest in possession income: received by trustees
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Charges applying to person receiving income
- Prima facie, if the income is paid to the trustees in the first place, they are chargeable as persons receiving the income (see Basic rate for non-discretionary trusts, below).
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Effect of trustees being beneficiary's 'representative'
- However, there appears to be a principle that the trustees are 'representatives' of the beneficiary with an IIP in the income and can rely on exemptions etc. applicable to the beneficiary.
- "...just because they represent those beneficial interests - they may have a good answer to a particular assessment, as regards some share or part of the income assessed, on the ground that such share or part arises or accrues, beneficially to a cestui que trust in whose hands it is not liable to income tax, e.g., a foreigner under Case V., Rules 1 and 3." (see Kelly v. Rogers at 463).
- TSEM3160 which is ambiguous as to whether the trustee's position follows the beneficiary's position only where the income is 'payable' directly to the beneficiary, but may be read as supporting of this principle.
- See TMA s.72, which appears to be concerned only with the position of the beneficiary. ​
- HMRC say that if a beneficiary has an absolute interest in trust income, the trustees' income tax liability is based on the beneficiary's residence position (TSEM3160).
- Absolute interest in income means the beneficiary is entitled to the income but not capital (TSEM6204).
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IIP beneficiary non-resident
- HMRC say exclude foreign source income from trustee's return (TSEM3160).
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IIP beneficiary entitled to 4-year FIG regime
- HMRC say that the trustees should include the income in their return (TSEM3165).
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Legislation:
Cases:
Kelly v. Rogers [1935] 2 KB 446;
HMRC manuals:
Commentary: Chamberlain, §10.10;
See also:
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- Opaque interest in possession income: trustees taxable
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- Trustees are taxed on the income arising to the trust irrespective of the position of the beneficiary.
- See Basic rate tax for non-discretionary trusts, below.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Property rental income of trust reduced by non-tax deductible mortgage interest
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- Mortgage interest is not deductible in computing the profit of the trustee's property rental business.
- Individual's (and discretionary trusts) receive relief at the basic rate (ITTOIA s.274A, s.274B).
- Trustees of an IIP trust will not, on the face of it, receive that relief and so will pay basic rate tax.
- If all of the rental income is used paying the mortgage interest, the trustees will have to pay from elsewhere, e.g. capital.
- An IIP holder is generally taxed on the amount received, in this case nil.
- IIP holder will, however, get refundable credit for the tax paid by the trustees.
- Accordingly, IIP holder gets more than they were entitled to (the refundable credit, effectively paid for by the trustees out of capital).
- Query whether the trustees can benefit from s.274B in their 'representative' capacity.
- Could not apply to opaque IIP income.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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Rates and deductions
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- Basic rate tax for non-discretionary trusts (except certain deemed income)
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- The trustees are persons (not individuals) in receipt of chargeable income, thus the income is charged at the basic rate (ITA s.11).
- No personal allowance.
- No deduction for trust expenses when calculating tax at basic rate - see below.
- But certain deemed income is taxed at the trust rate, even for IIP trusts (s.481, s.482) - see below.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Higher trust rates for discretionary trusts
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General rule
- Trustee income is distinct from any other income the persons who are trustees have (ITA 2007, s.474).
​- Accumulated or discretionary income arising to the trustees of a settlement is taxed at the dividend trust rates or the trust rate (ITA 2007 s.479).
- Income that, before being distributed, is income of a person other than the trustees is not included (s.480(3)).
- Query whether this applies to settlor-interested trusts in light of ITTOIA s.646(8).
- HMRC's view is that it must actually be the income of the person, not deemed to be.
- Various categories of deemed income are also included (s.481, s.482).
- The trust rates apply to this deemed income irrespective of whether there is an IIP in the trust.
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Meaning of trust
- For this purpose, settled property has its more usual definition of property held on trust (s.466(2)).
- Nominees and bare trustees are excluded (s.466(3)).
- Property to which a person would be absolutely entitled but for being an infant or lacking capacity are also excluded (s.466(3)).
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Discretion as to who to pay income to
- A trust is discretionary even if the trustees are obliged to distribute the income, but have a discretion as to which beneficiary to pay it to (s.480(2)).
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Meaning of arising to the trustees
- Query whether income paid directly to the beneficiary by the source of the income "arises to the trustees".
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Exceptions
- Charitable trusts (s.479(1)(b)).
- Share incentive plans (s.488).
- Superannuation funds (s.480(3)).
- Income from service charges paid in respect of UK dwellings held on trust (s.480(3)).
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Legislation: ITA 2007, s.479, s.488.
Cases:
HMRC manuals:
Commentary:
See also:
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- Trust receives sum that is trust capital but taxed as income
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- Where a trust receives a sum that is capital for trust purposes but taxed as income (e.g. proceeds of developing land), that sum is not "accumulated or discretionary income [arising] to the trustees of a settlement" (s.479).
- It is not income that must be accumulated or is payable at the discretion of the trustees (s.480).
- Nevertheless many such sums are caught by s.481/482 (see below), for instance transactions in land income (Type 11).
- If not caught by s.481/482, basic rate income tax applies.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Higher trust rates for certain deemed income (including IIP trusts)
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General rule
- Various categories of deemed income are taxed at the trust rates (s.481, s.482).
- Broad areas are:
(1) Repurchase/redemption of shares/rights by company.
(2) Accrued income profits.
(3) Offshore funds income.
(4) Employee share ownership trusts.
(5) Certain receipts of property business.
(6) Profits from deeply discounted securities.
(7) Gains from contracts of life insurance.
(8) Transactions in deposits.
(9) Disposal of futures and options.
(10) Sales of foreign dividend coupons.
(11) Transactions in land income.
(12) Arrangements offering a choice of income or capital.
No exclusion for IIP
- The trust rates apply to this deemed income irrespective of whether there is an IIP in the trust.
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Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
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- Deduction for expenses of administering the trust
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Usual expenses deductible in computing profit
- Expenses which are deductible in computing income/profit from a particular source are deductible in the ordinary way.
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Trust management expenses not deductible when computing basic rate tax (non-discretionary trusts)
- No deduction for trust expenses incurred in administering the trust when calculating basic rate tax (Aiken v. MacDonald; TSEM8310).
- This is the same as for individuals receiving income who are not entitled to deduct the cost of managing investments, for example.
- As noted above, the beneficiary may only be taxable on the net amount after trust expenses properly chargeable to income.
- But the beneficiary only gets tax credit for basic rate tax on the grossed up amount actually received.
- Thus there will be no tax credit for the tax paid by the trustees on the expense amount.
- And the beneficiary's position does not reverse the effect of the trustees not being entitled to deduct.
- E.g. if trustees have income of £1,000 and expenses of £1,000, the trustees pay tax on £1,000, the beneficiary gets £0 and no tax credit.
- See example in Chamberlain §10.25.
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​Some trust expenses may be set against trust rate income (relieved income is taxed at basic rate)​
- Allowable expenses are set against the trustees' trust rate income for the current tax year (ITA s.484(1)).
- Allowable expenses are expenses of the trustees that are properly chargeable to income (s.484(6)).
- Properly chargeable to income - determine in accordance with general trusts law, ignoring the express terms of the settlement.
- Expense for the benefit of the whole trust (i.e. income and capital), cannot be set off.
- Investment management expenses are usually referable to the capital (Peter Clay's Discretionary Trust).
- Life assurance premiums may be referrable to capital (Craver v. Duncan).
- Accountancy fees and bank charges may be capable of being aportioned (Peter Clay).
- Trustee remuneration usually incurred for benefit of whole estate.
- Income against which allowable expenses are set is charged at the basic rate (s.484(4)).
- Order of deductions set out in s.486.
- Expenses are grossed up before being set off (s.486).
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Deemed income of IIP trusts (expenses deductible)
- Certain kinds of deemed income are liable to the trust rates even for IIP trusts.
- Trust expenses can be set against such income in accordance with the above rules (s.484).
- However, such expenses will normally, in the first place, reduce the IIP beneficiary's entitlement (see above, Income tax (beneficiary)) leaving nothing left to deduct against deemed income.
- But if expenses exceed the IIP income, reducing it to nil, the excess can be used against trust rate income (TSEM8315).
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Non-resident trust
- Relievable expenses are limited to the fraction equivalent to the proportion of the trust's total income which is subject to UK tax (s.487).
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Carry forward of unused trust expenses
- See ITA s.485.
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Legislation:
Cases:
Aikin v. Macdonald's Trustees (1894) 3 TC 306
HMRC manuals:
Commentary:
See also:
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Non-resident trustees
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- Non-resident trustees receiving non-UK income (exclusions)
-In general, a non-UK resident is only taxable on income from a source in the UK:
- Trading income - ITTOIA 2005, s.6
- Property income - ITTOIA 2005, s.269
- Savings and investment income - ITTOIA 2005, s.368
- Miscellaneous income - ITTOIA 2005, s.577
- Employment income - ITEPA 2003, s.15
- Pension income - ITEPA 2003, s.575
- For when income has a UK source, see the relevant page dealing with that type of income.​​
- Trustees to consider holding assets producing UK source income through a non-UK resident company (lower tax rate on income, but note the potential doubling up of capital gains).
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- Non-resident trustees receiving UK income (relief unless UK beneficiary/representative)
Relief
- Income tax liability of non-resident trustees is limited to tax deducted at source plus tax on income that is not disregarded income (ITA s.811).
- Certain reliefs are disregarded (e.g. personal allowance).
- Disregarded income includes dividends and interest.
- Property income is not disregarded income.
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Exception: UK income where trust has a UK resident actual or potential beneficiary
- The limit of UK tax referred to above does not apply if there is a beneficiary (individual or company) that is UK resident (s.812).
- Beneficiary includes a potential beneficiary with a potential interest in the income (including accumulated income).
- Anyone within discretionary class of beneficiaries is a potential beneficiary.
- Query whether a distant potential reversionary interest is sufficient (Chamberlain, §12.12).
- Depends on whether 'actual or potential beneficiary' refers to persons who have actually received a benefit/could now receive a benefit or to anyone who could in future potentially receive a benefit.
- On the latter approach, if a UK resident could be added to the class of discretionary beneficiaries the limit is disapplied, which appears absurdly broad.
- Where the limit does not apply, UK resident trustees are taxable on UK source income, subject to any double tax treaty.
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Exception: UK income in relation to which there is a UK representative
- ​Certain income in relation to which the non-UK resident has a UK representative (branch or agency) is not disregarded income (s.813(2)).
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Legislation: ITA 2007, s.811, s.812, s.813, ss.835C - 835S.
Cases:
HMRC manuals: INTM268020
Commentary: Kessler, Chapter 50; Chamberlain, §12.12;
See also:
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Trust for disabled persons/minors who have lost a parent
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- Income tax relief
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- Income tax relief available
- Disapplication of the settlements charge based on benefits to minor children of settlor (FA 2005, s.28A; s.629(8));
Legislation: FA 2005, s.23 onwards;
Cases:
HMRC manuals:
Commentary:
See also:
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INCOME TAX (OTHERS: SETTLEMENTS)
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Settlements attribution of income to settlor: 3 rules
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(1) Settlor retains an interest - income of trust treated as individual settlor's income
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General rule
- Income under settlement is treated as income of settlor, and of settlor alone, if it arises from property in which the settlor has an interest (ITTOIA s.624(1)).
- Only applies during settlor's lifetime (s.624).
- Applies to income from property in which the settlor has an interest.
- No attribution of trust losses (PIM1045).
- Tax is charged under s.621 on such income, which seems superfluous if the income is actually deemed to be income of the settlor (the primary charging provision for such income would apply).
- Trust will nearly always be a settlement, unless it is a bare trust for the settlor.
- No attribution where settlor is not an individual (s.627(4) and accompanying explanatory notes: "The effect of the amendment is that income from a settlement in which the settlor has an interest is not treated as income of the settlor for tax purposes if the settlor was not an individual.").
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Identifying the settlor(s)
- See i1: Creating and adding to a trust for issues such as indirect provision of property, indirect settlors and multiple settlors.
- See i2: Loan to trust re whether a lender is a settlor.
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Only income arising from property provided by settlor + in which settlor has an interest
- See i1: Creating and adding to a trust for issues such as:
- indirect provision of property,
- indirect settlors and
- multiple settlors.
- If settlor only has interest in part of settlement, s.624 only applies to that income.
- See example at TSEM4513.
- Query whether s.624 applies to income in which the settlor has an interest in possession - it is his/her income anyway.
- Chamberlain says not (§11.38), but there is nothing to exclude s.624. Does not seem to matter.
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Settlor beginning or ceasing (e.g. death) to have an interest
- See TSEM4513.
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Deemed income
- Things that are only deemed to be income for tax purposes are within s.624.
- Accrued income profits, lease premiums etc.
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Effect of treating income as settlor's
- 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; Chamberlain §11.20). HMRC appear to take a different view (INTM600940).
- Income can still be taxed on trustees as persons receiving the income (s.646(8)).
- See above.
- IIP holder not chargeable on such income (TSEM4512).
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Quantum of income
- Apply the usual income tax rules for each type of income to calculate the amount of income (PIM1045).
- Same deductions allowed as would be allowed if income had been received by the individual (s.623).
- Trust expenses not used to reduce the income of the settlor (s.624(1A)).
Reliefs
- Same reliefs allowed as would be allowed if income had been received by the individual (s.623).
- Settlor not entitled to set off trust losses against trust income (PIM1045).
- Settlor not entitled to set off trust losses against personal income.
- Settlor may be able to use trust losses where he/she is the life tenant and carries on the relevant business (PIM1045).
- But not if trustees carry on the relevant business.
- Settlor may be entitled to set off personal losses against attributed trust income (PIM1045).
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Rate of tax
- Same rate as if the income had arisen directly to the settlor (s.619(2)).
- Treated as highest part of total income (s.619A(2)).
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Recovery of tax by settlor from trustees
- Settlor is entitled to recover from the trustee the amount of tax paid (s.646(1)).
- This may happen because trustees are entitled to deduct trust expenses in calculating liability to trust rates, settlor is taxed on gross income.
- Failure to do so may be a settlement/transfer of value to the trust.
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Credit for UK tax paid by trustees
- Where the trustees have paid tax on the income (e.g. UK resident), settlor gets credit for that tax (TSEM4550; TSEM4512).
- Apportion if not settlor interested for whole tax year (TSEM4513).
- If settlor's liability is less than the amount paid by trustees, any repayment must be paid to the trustees by the settlor (ITTOIA s.646(4), (5)).
- Repayment of tax includes set off against other liabilities (TSEM4550).
- Paying the tax recovered to the trustees is not an IHT chargeable transfer.
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Credit for tax paid by IIP holder
- Any refund of tax must be paid to the IIP holder by the settlor (s.646(4)).
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Distribution out of income that was treated as settlor's
- Interest in possession holder is not taxable on the income, even when received.
- Discretionary beneficiary - is not taxable (if settlor) or otherwise receives a tax credit (ITTOIA s.685A, TSEM4512).
- See i8. Distribution to beneficiary.
​
Legislation: ITTOIA, s.619, s.624;
Cases:
Dunsby v. HMRC [2020] UKFTT 271 (TC);
HMRC manuals: PIM1045; TSEM4550; TSEM4512;
Commentary: Chamberlain, §11.33;
See also: FA 2012 explanatory notes to s.12;
​
- Non-resident settlor: only UK source income is deemed to be the settlor's
​
Exclusion of foreign source income from attribution
- If the settlor is non-UK resident, "income arising under a settlement" does not include income which the settlor, if actually entitled to it, would not be chargeable to tax (by deduction or otherwise) due to being non-resident (ITTOIA s.648(2)).
UK resident trust
- The UK resident trustees will be liable to tax on the foreign income - see above.
​
Benefit of attributing UK income to non-resident settlor
- Attribution of UK income to non-resident settlor may be beneficial where tax is limited to the amount deducted at source (ITA s.811).
- Any such benefit must be weighed against other consequences of being settlor-interested, e.g. gift with reservation of benefit.
​
Legislation: ITTOIA s.648;
Cases:
HMRC manuals:
Commentary: Chamberlain §11.21;
See also:
​
- Settlor retains an interest where property is, will or may become payable to settlor/spouse
​
See i1. Creating and adding to a trust.​
​
- Remittance basis applied to settlor: only remitted foreign income is deemed to be the settlor's
​
Exclusion of unremitted income from attribution
- If the settlor claimed the remittance basis for a tax year, foreign income arising in that tax year which would be eligible for the remittance basis was/is only attributed to the settlor if/when it is remitted to the UK (ITTOIA s.648(3)).
- When remitted, the income is treated as arising under the settlement in that tax year (s.648(5)).
Legislation: ITTOIA s.648;
Cases:
HMRC manuals:
Commentary: Chamberlain §11.21;
See also:
​
- Query whether settlor can be taxed on income he/she paid to the trust (e.g. interest on loan by trust)
​
- Held settlor can be taxable on income originating from himself in Rogge.
- Applied to interest on loan to settlor.​
- Applied to rent on lease to settlor.
​
Legislation:
Cases: Rogge v. HMRC [2012] UKFTT 49 (TC);
HMRC manuals:
Commentary:
See also:
​
- Exclusion for trust income given to charity
- Exclusion from attribution for qualifying income arising under UK settlement if the trustees give it to charity in the tax year when it arises or it is income to which a charity is entitled under the terms of the trust (s.628).
- Qualifying income is income that must be accumulated, paid at the discretion of a person or is income of a person other than the trustees.
- Apportion where payments to charity exceed qualifying income.
​
Legislation: ITTOIA s.628;
Cases:
HMRC manuals:
Commentary:
See also:
​
(2) Trust income paid to/benefits minor child of settlor - treat as settlor's
​​
- Income under a settlement is treated as income of the settlor, and the settlor alone, if, in that year, it is paid to or for the benefit of a relevant child of the settlor (s.629(1)).
- The trigger event is the payment of the income to or for the benefit of the child - see further i8. Distribution to beneficiary.
​
(2A) Trust income accumulated followed by subsequent payment/benefit to child of settlor: deemed payment of income
​​
- 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 (s.631).​
- The trigger event is the payment of the income to or for the benefit of the child - see further i8. Distribution to beneficiary.
​
INCOME TAX (OTHERS: TRANSFER OF ASSETS ABROAD)
​
Credit for foreign tax paid by trustees
​
- Settlor can usually claim credit for foreign tax suffered by the trustees on the foreign source income (ITTOIA s.623; HMRC TSEM4017).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
(3) Capital payments to or for settlor/spouse: matched to trust income/future income
​​
General rule
- Where a capital sum is paid (directly or indirectly) by trustees to the settlor/spouse it is treated as income of the settlor up to the available income amount (ITTOIA s.633).
- If there is insufficient available income in year 1, it is matched to available income in future years (s.633(3)).
- Up to a maximum of 10 years after the tax year in which the capital payment was made (s.633(4)).
- Accordingly, trust income arising in future years is a trigger for this charge.
- More detailed notes on effect at i8. Distribution by trust.
​
Previous transfer: matching income to capital payments made by previous trust
- See i3. Transfer between trusts.
​​
Capital sum​ (includes loans and repayments of loans to settlor)
- Capital distribution
- Any sum paid by way of loan.
- Any sum paid by way of repayment of a loan.
- Any other sum which is paid otherwise than income and is not for full consideration.
​
Relevance to capital distributions
- If the trustees have power to make capital distributions to the settlor/settlor's spouse, the trust will be settlor interested in any event.
- However, it can apply to capital distributions where:
- The trust was not settlor interested when the income arose, even if it is when the capital payment is made. Historic income can be matched.
- Income arises after the trust ceases to be settlor interested and is matched with a capital distribution made when it was settlor interested.
​​​
See further
- i9. Benefits provided by trust.
​​​
Legislation: ITTOIA s.633;
Cases:
HMRC manuals:
Commentary:
See also:
​
Transfer of assets abroad: general
​
- Income within the scope of settlements code
​
Income attributed to settlor due to retained interest (s.624)
- Deemed to be income of the settlor alone, so not within TOAA.
- HMRC do not appear to agree - see above.
- Where the transferor is actually taxable on the income of the person abroad (and all that income tax has been paid), the transferor power to enjoy charge is disapplied (s.721(3C)) as is the transferor capital sum charge is disapplied (s.728(2A)).
​
Income paid to minor child of settlor (s.629)
- Deemed to be income of the settlor alone.
- HMRC do not appear to agree - see above.
- Where the transferor is actually taxable on the income of the person abroad (and all that income tax has been paid), the transferor power to enjoy charge is disapplied (s.721(3C)) as is the transferor capital sum charge is disapplied (s.728(2A)).
​
Capital sum matched to income (s.633)
- It is the capital sum that is treated as income of the settlor.
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
(1) Transferor power to enjoy charge
​
- UK resident transferor/spouse with power to enjoy non-resident trust income taxed on equivalent sum
Deemed income for transferor
​- Where, in a tax year:
(a) An individual has power 'in the tax year' to enjoy income of a person abroad as a result of a relevant transfer (alone or in combination with associated operations).
- Does not matter whether the income may be enjoyed immediately or only later (s.721(4)).
(b) The income of the person abroad would be chargeable if it were the individual's.
(c) The individual is UK resident.
Then: income is treated as arising to that individual of an amount "equal to the amount of the income of the person abroad" (s.721(3B)).
- Reference to individual include reference to spouse (s.714).
- Remember that a non-resident trust with a UK beneficiary can be liable to UK income tax on UK source income (ITA s.812) and see above.
​
Transferor
- Irrelevant whether the transferor was UK resident or not when the relevant transfer was made (s.721(5)).
- Individual contributing to trust is transferor.
- Loan to trust is transfer of assets - see i2. Loan to trust.
- Relevant transfer by closely held company can be treated as equivalent to the participators.
- See i1. Creating and adding to trust. for further notes including:
- Indirect transfers.
​
Power to enjoy
- Have regard to the "substantial result and effect of all the relevant transactions" (s.722(3)).
- Take account of all benefits that may accrue, at any time, irrespective of nature/form and whether individual has legal/equitable right to benefit (s.722(4)).
- Discretionary beneficiary has power to enjoy.
- Person who made loan to trust may have power to enjoy - see i2. Loan to trust.
- See i1. Creating and adding to trust.
​
Transferor already taxable on trust income
​- Where the transferor is actually taxable on the income of the person abroad (and all that income tax has been paid), the transferor charge is disapplied (s.721(3C)).
- E.g. transferor has an interest in possession or settlements code applies.
- This can be beneficial because TOAA deemed income does not retain its character.
​
Multiple transferors with power to enjoy
- Just and reasonable apportionment.
- HMRC say to look at who actually made, procured or was associated with the transfer (INTM602480).
- Normally apportion in proportion to the value of assets contributed by each individual.
- If the real income is generated by services provided by an individual, it may be just and reasonable to attribute the income to that individual rather than whoever subscribed for shares.
​
Transfer made by closely held company
- Just and reasonable apportionment in proportion with the individuals' qualifying interest in the company (INTM602480).
​​​
Quantum of overseas person's income deemed to arise to transferor
-
​
Special rule for Condition C power to enjoy
- If the only basis on which there is power to enjoy is receipt/entitlement to receive a benefit out of the income/related money, the amount of deemed income is the value of the benefit (s.724).
- Limited where it is shown the individual has already be taxed on the income (under TOAA) from which the benefit derives (s.724(3)).
- However, the benefit may well mean that the transferor capital sum charge applies (s.728, see below), leading to attribution of all the income.
​
Reliefs and deduction
-
​
Rate of tax
-
​
Qualifying new resident transferor: foreign income if underlying income is foreign
- The income deemed to arise to the transferor is treated as relevant foreign income to the extent that the income of the person abroad that the transferor has power to enjoy would be relevant foreign income if the individual received it (s.726).
​
Right to reimbursement (2025 onwards)
- From 2025, the transferor has a right to reimbursement of tax paid from the person abroad (s.725A).
​
Legislation: ITA 2007, s.720, s.812.
Cases:
HMRC manuals:
Commentary: Kessler, Chapter 50;
​
​
- Motive defence
​
General rule
- Either:
(A) avoiding tax was not a purpose of any relevant transaction; or
(B) the relevant transactions were genuine commercial transactions and none were designed more than incidentally for the purpose of avoiding tax (ITA 2007, s.737).
- Under Condition A, tax avoidance does not need to be a main purpose.
- Under old Condition B (pre-5 December 2005 transactions), the condition was failed if tax avoidance was a main purpose (Carvill v. IRC [2000] STC (SCD) 143; HMRC v. Fisher [2021] EWCA Civ
- Motives of the parties, advisers and orchestrators (ITA 2007, s.737(5)).
- Only applies for as long as the test is met in relation to all relevant transactions.
​
Tax avoidance
- See
- Can include deferral or reduction: "[44] [The taxpayer] correctly accepted that there could be tax “avoidance” where tax was deferred or reduced; it was not necessary for the arrangements to produce the result that no tax was payable in any circumstance." (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Loss of motive defence
​
- Should not cause motive defence to cease to be available in relation to earlier tax years, if otherwise available, as that would amount to retrospectivity.
- Tainting in relation to a small part of the structure may only result in HMRC seeking to charge tax on income from that part (INTM602800).
- Where there are entirely distinct transfers that happen to be to the same overseas person, maybe arguable that tainting of one branch does not cause loss of defence for the other branch.
- Limited partial loss of exemption provision in ITA 2007, s.741.
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- EU law defence
​
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
(2) Transferor capital sum charge
​
(3) Benefit charge
​
- UK resident transferor/spouse who received capital sum taxed on sum equivalent to trust income
​
Deemed income for transferor/spouse
- Where, in a tax year:
(1) The transferor/spouse is UK resident
(2) Income arises to a person abroad as a result of a relevant transferor (alone or with associated operations).
(3) The transferor/spouse has received/is entitled to receive a capital sum connected with any relevant transaction.
Then: income is treated as arising to that individual of an amount "equal to the amount of the income of the person abroad" (s.728(1A)).
​​
Capital sum
- Means (s.729(3)):
(1) A loan;
(2) Repayment of a loan
(3) Any other sum paid otherwise than as income and not for full consideration in money/money's worth.
​
Loan fully repaid
- Ceases to be a capital sum in the following tax year (s.729(2)).
​
Entitled to receive
- A person who makes a loan to a trust thereby becomes entitled to a capital sum (repayment of the loan).
- Query whether entitlement must be to payment in the tax year or whether entitlement to repayment only in a future tax year is sufficient.
​
Third party receiving capital sum at transferor's direction/due to assignment
- Transferor treated as receiving/entitled to receive a sum
​
Connected to relevant transaction
- A capital sum is taken into account if it is "in any way connected with any relevant transaction".
- Relevant transaction:
​
Capital sum received in earlier tax year
- The deeming of income to the transferor continues in years after the capital sum is received.
- It is not capped or linked to the quantum of the capital sum (a small capital sum leads to full deeming of income).
- Only exception is where the capital sum was a loan that has been wholly repaid.
​
Quantum of income deemed to arise
-
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Matching benefits with income
​
- Income arising to the trust may trigger a charge where benefits were provided in an earlier year but there was insufficient income to match to those benefits at the time.
- See i9: Benefits provided by trust re matching benefits to later income.
​
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Double tax relief
​
- Reliance on Treaty by settlor/transferor
​
- Other income article usually states that income of a resident of a contracting state is only taxable in that state, subject to some exclusions.
- A UK resident settlor could argue that the income deemed to arise to them under the Settlements legislation fell within the other income article on the basis that it retained its character as income arising to the non-resident trust.
- The multi-lateral instrument, however, where it applies, prevents this argument because it limits the ability of a resident of a state to rely on the treaty against their state of residence.
- This argument did not apply to TOAA income because it is an amount calculated by reference to the trust income, rather than that income (Davies v. HMRC [2020] UKUT 67 (TCC), §78 and Bricom Holdings Inc v. CIR 70 TC 272).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
- Credit for tax paid by trustees
​
- Settlor can usually claim credit for foreign tax suffered by the trustees on the foreign source income (ITTOIA s.623; HMRC TSEM4017).
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
​
Trust for disabled persons/minors who have lost a parent
​
- Income tax relief
​
- Income tax relief available
- Disapplication of the settlements charge based on benefits to minor children of settlor (FA 2005, s.28A; s.629(8));
Legislation: FA 2005, s.23 onwards;
Cases:
HMRC manuals:
Commentary:
See also:
​
INHERITANCE TAX
​​
Gift with reservation
​
- Gift not traced into income of settled property
​
- See Sch 20, para 4A(5) and 5(5).
Legislation: FA 1986, Sch 20, paras 4A and 5;
Cases:
HMRC manuals:
Commentary:
See also:
​