Enter Your E-mail

Matthew Hutton MA, CTA (fellow), AIIT, TEP, author of Monthly Tax Review, highlights the question of remittances to the beneficiary of an offshore discretionary trust.  

Matthew Hutton

Context

Consider a non-resident discretionary trust with a UK resident, ordinarily resident but non-domiciled beneficiary. The settlor was non-UK domiciled for his entire life and is deceased.

The trust was settled with cash and the trustee invested all of the funds in a fixed income bond.

The trust fund is administered as a separate income and capital account. There are no capital gains. Income is not capitalised and expenses are debited separately to each account. Capital is therefore untouched except for deducting the trustee's management fees. Interest is received by the trust on an annual basis and is accumulated in the income account and shown as such in the trust accounts.

When the bond matures the capital is redeemed and paid back to the capital account. There is no gain on this investment.

If a payment is made from the capital account to the beneficiary who is then deemed to remit the income, is this payment matched to relevant income that has arisen as a result of the portfolio investments?

HMRC state they would match the capital payment to the accumulated income. This is based upon ITA 2007, ss 727-730:  ‘income has become the income of a person abroad as a  result of...a relevant transfer’ and a person has received a capital sum that is ‘in any way connected with any relevant transaction’ therefore the income is treated arising to an individual who is ordinarily UK resident.

A remittance of pure capital was never caught by TA 1988, ss 739 - 740. Unfortunately, there seems to be little by way of tangible support for this view. Though, in Tax Planning for the Foreign Domiciliary, Kessler and Vaines state at 6.14:

"In particular it should be noted, trust capital may be remitted safely."

May be quoting out of context, but this would appear to be relevant to the scenario.

In this case, however, by transferring the capital abroad and using that capital to generate income, the beneficiaries fall foul of ss 727-730, even though it is strictly the capital and not the income that has been received in the UK. What is the answer?

(Trust Discussion Forum 20 August 2007, posting by Neil Smith, Creaseys LLP)

A response

On the facts given, the settlor is dead. Therefore the regime that now applies is contained principally in ITA 2007, ss 731 to 733, and not in the earlier sections mentioned in the post.

Sections 732 and 733 set out how the charge applies to non-transferors.

Assuming that the beneficiary in this case is a non-transferor (i.e. has never provided funds to the trust) then there will be a charge to tax in the circumstances mentioned in the post, if the capital distribution is remitted to the UK. It is immaterial that income and capital have been segregated, although that would have been material so far as concerned capital distributions to the settlor while the settlor was alive, when the separate regime applicable to transferors would have applied. The situation is simply that there is relevant income in the trust, and a benefit has been received.

If the capital distribution is not remitted to the UK, and the bond interest has a non-UK source, then there will be no liability if HMRC accept that the beneficiary is non-UK domiciled.

Since the income has been segregated, and has not been capitalised, it may be possible first to distribute the entire pool of relevant income, preferably to another beneficiary who is non-UK resident or resident but not domiciled and does not remit it, and then distribute the capital to the intended beneficiary in a subsequent tax year.

The argument will then be that there is no relevant income which can be used for providing a benefit to the beneficiary as required by s 733. But this will only work if the entire capital is distributed - if not, there will be an annual charge in subsequent years in respect of subsequent accruals of relevant income.

If the settlor died recently, and if he was a beneficiary, then it may be possible to argue that all income that arose up to his death does not form part of the pool of ‘relevant income’, on the grounds that during his lifetime it was treated as his income because it was a settlor-interested trust. But HMRC may argue that the income was physically available to benefit other beneficiaries, albeit imputed to the settlor, and therefore does form part of the relevant income pool.

On the assumption that the fixed interest bond is just that, and not held in an insurance wrapper (in which case different provisions would apply), the accrued income scheme would normally apply so far as concerns the income and relevant income calculations. However, it may be that during the settlor's lifetime, assuming he was a beneficiary, it can be argued that the accrued income scheme did not apply. TA 1988, s 715(1)(j) provided that the accrued income scheme did not apply to non-domiciled UK residents, and it is arguable that this would include accrued income of settlor-interested trusts since the income would have been treated as that of the settlor.

(Michael Hayes, Maitland Legal Advisory, reply 22 August 2007)

About Monthly Tax Review (MTR)

MTR is a 90 minute monthly training course, held in London, Ipswich and Norwich – as well as a reference work.  Each Issue records the most significant tax developments over a wide range of subjects (see below) during the previous month, containing 30 to 40 items.  The aim is not necessarily to take the place of the journals, but rather to provide an easily digestible summary of them and, through the six-monthly Indexes, to build up, over the years, a useful reference work. 

Who should come to MTR? Does it attract CPD?

MTR is designed not primarily for the person who spends 100% of his/her time on tax, but rather for the practitioner (whether private client or company/commercial) for whom tax issues form part of his/her practice.  Attendance at MTR qualifies for 1.5 CPD hours for members of the Law Society, for 1.5 CPD points for accountants (if MTR is considered relevant to the delegate’s practice) and (subject to the individual’s self-certification) should also count towards training requirements for the CIOT.  For STEP purposes, MTR qualifies for CPD in principle, on the grounds that at least 50% of the content is trust and estate related.  
 
How is MTR circulated?

The Notes are emailed to each delegate in the week before the presentations (and thus can easily be circulated around the office), with a follow-up page or two of practical points arising during the various sessions (whether in London, Ipswich or Norwich).

How do I find out more?

For further details, and for those whose firms unable to make the monthly seminars but wishing to order MTR as 'Notes Only' (at £180 per annum for the 12 issues, invoiced six-monthly in advance), visit http://www.taxationweb.co.uk/taxevents/monthly_tax_review.php