INTM601540 - Transfer of assets abroad: The benefits charge: Interaction with offshore income gains
When an offshore income gain arises to a person abroad, then the transfer of assets abroad legislation can apply to treat the offshore income gain as if the amount were foreign income becoming payable to that person. For further guidance on this, see IFM13440 in the Investment Funds Manual.
A consequence of this is that any benefits received by a beneficiary of an offshore trust can also be matched to offshore income gains as well as any relevant income. For tax years up to and including 2024-2025, there was an order for matching which was set out in regulations 20 and 21 of Offshore Funds (Tax) Regulations 2009 (OFTR) (SI 2009/3001) and is described in IFM13420 onwards.
In broad terms, if a non-resident trust paid a benefit and there was no relevant income available, in the first instance this benefit should be matched against any offshore income gains arising in that year, or to the extent that the benefit remains unmatched in that year, it is matched with offshore income gains that arose in earlier years, with the latest year being matched first. To the extent that there remain unmatched benefits, then they can be matched with any capital gains under TCGA92/S87. This can be demonstrated by way of the following example.
Example
Trust D is a non-resident trust that is not settlor interested. The trust was established in 2010-2011, beneficiary Z is UK resident and domiciled and in 2010-2011 the trustees make a capital payment of £50,000 to him. During 2010-2011 the trustees have received the following;
Offshore income gains: £50,000
Relevant income: £10,000
Under ITA07/S731 the benefit would be matched in the first instance with £10,000 of relevant income. Then by applying the rules at section TCGA92/S87/S87A in accordance with OFTR reg 20 and 21(5), the amount of the offshore income gains attributed to Mr Z (£40,000) is not the income of the person abroad as referred to at OFTR reg 21(1).
The balance of the offshore income gain of £10,000 is carried forward to be matched with any capital payments or benefits made in later years.
From 2025-2026 paragraphs (2) to (5) of OFTR 2009 reg 20 and paragraphs (4) to (6) of reg 21 have been repealed. This means that going forward any offshore income gains arising in an offshore trust that are not taxed under ITA 07/S720 or S727 will be treated as relevant income for the purposes of the benefits charge and will be matched under ITA07/S733 (see INTM601740 for details of the matching calculation). Offshore income gains arising in offshore trusts will no longer be matched under TCGA92/S87A.
Example
Trust E is a non-resident trust that was established by Edward in 2024-2025. Edward who is UK resident and domiciled settled the trust for the benefit of his two UK resident children Charlotte and James, and he is specifically excluded from benefit. Trust E holds offshore non-reporting funds.
In 2026-2027 Trust E disposes of some of its holding in these funds and realises offshore income gains of £50,000. In 2027-2028 the trust made further disposals realising offshore income gains of £100,000.
In 2028-2029 the trustees of the E Trust made a capital distribution of £75,000 to Charlotte and in 2029-2030 a capital distribution of £100,000 to James.
Using the step calculation in INTM601740 to calculate the amount the benefits charges arising to Charlotte and James are as follows.
2028-2029
The total benefit received by Charlotte is £75,000.
The total relevant income is £150,000.
The amount of income treated as arising to Charlotte will be the lesser of the total benefit received and the total available relevant income. So in this case Charlotte will be assessable on £75,000.
2029-2030
The total benefit received by James is £100,000.
The total relevant income is £150,000 less £75,000 the amount matched to Charlotte’s benefit in 2028-2029 leaving total available relevant income of £75,000.
The amount of income treated as arising to James will be the lesser of the total benefit received and the total available relevant income. So in this case James will be assessable on £75,000. The balance of the benefit received by James will be carried forward to be matched with any future relevant income that arises.