INTM603200 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017: Background and introduction
Background
In his 2015 budget statement the Chancellor announced changes to the taxation of non-domiciled individuals. A number of these changes affected two groups of individuals who, from 6 April 2017, will be considered UK deemed domiciled for tax purposes and so will not be able to claim the remittance basis of taxation.
The first group are long-term UK resident non-domiciles, and the second group are individuals who were born in and have a UK domicile of origin. Such individuals will be treated as UK deemed domiciled whenever they are UK resident. For further details of when an individual will be considered deemed domiciled see INTM603220.
It was recognised that many non-domiciles living in the UK hold their wealth in non-resident trusts (often with underlying companies). The removal of the remittance basis for long-term resident non-domiciles could result in them being liable to income tax on all the income arising in their non-resident trusts and underlying offshore companies under either the settlements legislation or the transfer of assets abroad provisions, if they could not claim the remittance basis for foreign-source trust income.
The government announced that non-domiciles who set up non-resident trust structures before becoming UK deemed domiciled under the long-term resident rules (see INTM603220) would not be taxed on the foreign-source income of such trusts and their underlying companies provided that such income was retained within the structure.
From 6 April 2017 deemed domiciled long-term resident settlors would continue to pay income tax on the UK source income arising within a trust structure in which they had retained an interest. They would also be taxed on any benefits they received from the trust structure on a worldwide basis to the extent that such benefits could be matched with the protected foreign-source income (see INTM603320) arising within the trust structure.
It was subsequently decided that:
- the introduction of this benefits charge should be extended to all non-domiciled settlors of non-resident trusts, and
- non-domiciled individuals who are not long-term UK residents under the deemed domiciled provisions will continue to have the opportunity to access the remittance basis of assessment.
Similar amendments have also been made in respect of capital gains arising in such structures, but this is not covered within this manual: see CG38200 onwards for further details.
Introduction
Paragraphs 27 to 38 of Part 2, Schedule 8 of Finance (No. 2) Act 2017 and paragraphs 16 to 21 of Part 2, Schedule 10 of Finance Act 2018 make a number of changes to the transfer of assets abroad legislation as a result of the changes referred to above.
The remainder of this part of the guidance focuses on these changes and their impact on the transfer of assets abroad provisions. When considering the changes introduced, attention should also be given to the changes made to the settlements legislation. The settlements legislation is not covered by this guidance and details of the changes to the settlements legislation can be found at TSEM4000 onwards.
In general terms, the changes that are made by Finance (No. 2) Act 2017 remove certain income of overseas trusts and their underlying companies - Protected Foreign-Source Income (PFSI) (see INTM603320) - from the charge under either ITA07/S720 or ITA07/S727, and instead bring it within the scope of ITA07/S731 (the benefits charge).
Under ITA07/S731, the non-UK domiciled (or long-term resident deemed domiciled) settlor of the overseas trust will be assessed on any benefits they receive from the trust and its underlying entities to the extent that there is PFSI available in the structure to match against the benefit.
The benefits charge on non-domiciled and deemed domiciled settlors can also cover benefits received by close members of the settlor’s family (see INTM603500 for further details), and also benefits made to other individuals which by way of an onward gift find their way to the settlor or a close family member (see INTM603540 for further details).
It is possible for a deemed domiciled settlor of a non-resident trust that comes within the arrangement to lose the benefit of the treatment afforded under the provisions of PFSI, and for the treatment of the income of the trust and its underlying entities to revert back to being assessed under ITA07 /S720 or ITA07/S727 if the settlor taints the trust. The tainting of a non-resident trust structure is looked at in detail in INTM603360.
It should be noted that the scope of the transfer of assets abroad legislation goes wider than non-resident trusts and their underlying entities, but the changes dealt with in this chapter only affect non-resident trusts and their underlying companies specifically covered by the new protections. So, for example, if a UK resident individual who is either not domiciled in the UK or who is deemed domiciled in the UK owns a standalone or singleton non-resident company, the transfer of assets income and benefits charges will be unaffected by the amendments referred to in this chapter. The changes also included foreign entities that fall to be treated like trusts under the principle in Memec Plc v IRC, (1998) 71 TC 77 certain types of foundations.
The treatment does not extend to settlors of non-resident trusts who are UK resident and domiciled, or to settlors born in the UK with a UK domicile of origin, even if they have acquired a domicile of choice elsewhere. The definitions of deemed domicile are covered in further detail at INTM603220.