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Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review (MTR), highlights a question on the priority of anti-avoidance provisions in respect of settlor-interested trusts.

Context: The Question

Where a non-UK resident settlor of a settlor-interested trust moves to the UK, he will become chargeable to UK income tax on the trust’s UK income on an arising basis under ITTOIA 2005 s 624.

The transfer of assets abroad provisions (now contained in ITA 2007 ss 720-735) can also apply to a UK resident settlor of a settlor-interested trust. 

Do members agree that s 624 will take precedence in the circumstances where both provisions could apply to the settlor? 

(Trusts Discussion Forum 7.5.09, posting by Toby Crump)

A variety of responses posted on the TDF

A UK resident settlor of a non-UK settlor-interested trust will be assessable on income under ITTOIA 2005 s 624.  This will be as it arises and not by reference to receipt.

I have always taken the view that ITTOIA 2005 s 624 will ‘trump’ ITA 2007 s 720 (TA 1988 s 739 as was).  This view is supported by James Kessler and his chapter 15 of the ‘Taxation of Foreign Domiciliaries’ provides some very useful guidance.

If they are not UK-domiciled, then it may be efficient to claim the remittance basis of taxation - ITA 2007 s 726.  If they have not been resident in the UK for more than 7 of the previous 9 years then the cost will be the loss of the personal allowance and the CGT exemption.

There is little one can do with the UK income as the settlor will be taxed under ITA 2007 s 720 on their return if they are deemed to be ordinarily resident.

Finally, the other issue is that there is no express indemnity for the settlor under ITA 2007 s 720.  James Kessler's view is that one cannot be implied, which would seem correct.

(Trusts Discussion Forum 12.5.09, posting by Graeme Privett of Frank Hirth)

The question of priority of these provisions is a fairly ancient one. It arises whenever there is a UK resident and ordinarily resident [and domiciled] settlor of a non-UK resident trust. I don't think the settlor initially being non-UK resident affects the position, for years after UK residence is acquired.

The precise legislative wording has changed over the years but I have always taken the view that what is now ITTOIA s 624 takes priority. I think HMRC agree.

I would support my view on the basis that under s 624 the income is that of ‘the settlor and of the settlor alone’. Therefore when one reads ITA 2007 s 721 there is no ‘income of a person abroad’.

The former legislation TA 1988 s 660A was arguably clearer because it was stated to apply ‘for all purposes of the Income Tax Acts’. That is now omitted.

I will be interested in learned views on this question.

(Trusts Discussion Forum 12.5.09, posting by Jon Zigmond of Pricewaterhouse Coopers LLP)

The only public announcement by HMRC concerning the apparent ‘clash’ re the ‘transfer of asset’ provisions and the settlement provisions of which I am aware was in Tax Bulletin 40 back in 1999 where they stated:

‘Where income could be fully assessed under both Section 739 and the settlements legislation in Part XV of the ICTA 1988, it will not in practice be charged under both. Similarly, income will not in practice be charged on both the beneficiary under Section 740 and the settlor under the settlements legislation, where an assessment could in strictness be made on each of them in a case involving income that is accumulated within a discretionary offshore trust in which the settlor retains an interest, and then paid to a beneficiary as capital.

However, in both cases this is subject to the proviso that the Revenue may sometimes raise alternative assessments, for example where a taxpayer has not provided full information. Moreover, where income arises in an offshore company underlying a settlement and the income is not paid up immediately to that settlement, the provisions of Section 739 will be invoked where necessary to assess the income of the underlying company.'

This does not appear to me to suggest which, if any, of the provisions takes priority. 

Prima facie, I would agree with the other contributors that the wording of ITTOIA 2005 s 624 suggests that this section effectively precludes ITA 2007 s 720  from applying on the same facts.

(Trusts Discussion Forum 12.5.09, posting by Malcolm Finney of Pythagoras Training)

It often helps to examine the loophole that the anti-avoidance legislation in question is trying to close. Except in limited circumstances, s 624 will not apply to income arising in a company held within the trust. My understanding is that the transfer of assets provisions were introduced to combat avoidance where income-producing assets were being transferred to offshore companies. On that basis, surely s 624 should take precedence where the income can be said to arise under the settlement?

(Trusts Discussion Forum 13.5.09, posting by Katharina Byrne of Burges Salmon LLP)

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