Policy paper

Statement of Practice 3 (1986)

Published 2 April 1986

Introduction

1. This statement explains how relief from UK tax under double taxation agreements will be given in respect of payments made to a non-resident (from) a UK discretionary trust or a UK estate.

Background

Discretionary trusts

2. Generally speaking, a non-resident beneficiary receiving payments from a UK discretionary trust is not entitled to repayment of the tax paid by the trustees on the trust income. However, under concession B18 (which embodies a longstanding practice) HM Revenue and Customs (HMRC) ‘looks through’ the trust income to the underlying component parts of that income. The purpose of this ‘looking through’ is to allow the recipient of the income any relief that would have been available to him under the Taxes Acts had the income come to him direct instead of through the trustees.

3. Where the beneficiary is resident in a country with which the UK has a double taxation agreement, further relief under the ‘looking through’ principle may be due. Thus, for example, if the agreement provides for a withholding rate on interest of 15% and interest liable to UK tax formed part of the trust income which had suffered tax at 40% (ie, the rate applicable to trusts) then, under the looking through principle, the beneficiary would be repaid the amount of tax suffered in excess of the withholding rate, in this case 25%.

4. Some of the UK’s double taxation agreements include an ‘other income’ Article. The purpose of this Article is to determine in which country income not expressly dealt with elsewhere in the agreement should be taxed. In the UK’s agreement the article sometimes gives sole taxing rights in respect of such income to the recipient’s country of residence.

5. It has been the practice of HMRC to apply the ‘looking through’ principle to all cases where relief in respect of the discretionary payment was sought and to refuse claims where full repayment of UK tax was claimed under the provision of [the] ‘other income’ Article in the agreement.

Payments out of UK estates during administration period

6. The same principles set out in paragraphs 2-5 apply in the case of payments to non-resident residuary beneficiaries out of UK estates during the administration period. In these cases, the ‘looking through’ concession was explained in statement of practice 7/80 and is now contained in concession A14. Again it has been HMRC practice to make repayment to beneficiaries on the ‘looking through’ basis in all cases.

Change of practice

7. Following a review of their practice in these 2 areas, HMRC have accepted that if a payment made by trustees out of a UK discretionary trust falls to be treated as a net amount in accordance with TA 1988 s 687(2), the ‘looking through’ principle is not appropriate where the beneficiary is resident in a country with which the UK has a double taxation agreement and the ‘other income’ Article gives sole taxing rights in respect of such income to that country. (This will usually be the case where income from trusts is not specifically excluded from the Article.) This means that tax paid by the trustees in respect of the discretionary payment will be repayable to the beneficiary, provided that any conditions set out in the ‘other income’ Article are met. For example, the recipient may be required to show that he is subject to tax on the income in his country of residence.

8. The practice set out in paragraph 7 will also be applied to payments from the residuary income of a UK estate during the administration period. Under ITTOIA 2005 ss 652 or 654, such payments are deemed to be income of the beneficiary which has suffered UK tax at the basic rate.

9. Where the ‘other income’ Article does not give sole taxing rights to the country of residence in respect of the trust or estate income or there is no double taxation agreement with the country concerned, the existing ‘looking through’ practice will continue to be applied where it is to the advantage of the beneficiary.

Claims for relief under the new practice

10. The change in practice will be applied to all new and open claims. HMRC will also accept supplementary claims which are made within the time limits applicable to the original claim under the provisions of TMA 1970 s 42(8). The normal time limit is 6 years from the end of the year to which the claim relates but this may be extended by ITTOIA 2005 s 682(5) in the case of estates.

Procedure for dealing with claims for previous years

11. The change in practice may require a consequential adjustment to claims under TA 1988 s 278. HMRC will automatically review a beneficiary’s entitlement to this relief and make any adjustments necessary.

12. In relation to deceased estates, the provisions of TA 1988 Part XVI were rewritten as ITTOIA 2005 Part 5 Chapter 6 with effect from 6 April 2005, so for all payments made before this date, the relevant provisions of TA 1988 Part XVI apply.

Note: Statement of Practice 3/86 was partially reworded in Inland Revenue 131 (July 1994) and Inland Revenue 131 (November 1996), and revised again in August 2005.