INTM603540 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017: Benefits charge where income treated as arising to onward gift recipient

INTM603520 looked at the basic conditions needed for a charge under the onwards gift provisions to apply.

This page looks at the specific circumstances where an onward gift is treated as the income of the recipient.

For the recipient of the onward gift to be assessable on it, ITA07/S733C states that the recipient must be:

  • UK resident in the year of the gift, and
  • UK resident for the year in which the gift is matched with protected foreign-source income (PFSI), if that is later than the year in which the gift is received, and
  • not a remittance basis user for the year of charge,

or

  • UK resident in the year of the gift, and
  • UK resident for the year in which the gift is matched with PFSI, if that is later than the year in which the gift is received, and
  • a remittance basis user for the year of charge, and the whole or part of the onward payment is remitted to the UK in the year of charge.

The section has the effect of treating the onward gift recipient as if they were the individual to whom income is treated as arising under ITA07/S732 for the year of charge, and as if the amount of that deemed income were equal to the amount or value of so much of the onward payment as is within:

  • the whole or part of the benefit received by the original beneficiary,
  • anything that derives from (in whole or in part, either directly or indirectly) or represents the whole or part of that benefit, or
  • any other property, but only if the benefit is provided with a view to enabling or facilitating the making of the gift to the subsequent recipient.

Where the onward recipient is a remittance basis user, this has the effect of only treating amounts remitted to the UK as comprising the income treated as arising to the onward recipient under ITA07/S732 for the year of charge.

The amount of income to be treated as the onward recipient’s is reduced by any amount of that income assessable under any other provisions of the Taxes Acts.

Example 1

Both Charles and Madeleine are beneficiaries of the Madeleine Discretionary Trust. This is a non-resident trust settled by Madeleine when she was UK resident, but non-UK domiciled. Both Charles and Madeleine are UK resident in the year 2019 - 2020, but Charles is not UK domiciled while Madeleine is UK deemed domiciled because she has been UK resident for more than 15 of the last 20 years.

Charles receives a capital distribution of £100,000 from the Madeleine Discretionary Trust into his Jersey bank account in 2019 - 2020. Charles does not remit the funds to the UK, but instead gifts the £100,000 he received to Madeleine.

For the purpose of this example, it is assumed that all the conditions in ITA07/S733B, as discussed in INTM603520, are met. For the year 2019 - 2020 no PFSI has arisen in the Madeleine Discretionary Trust and, as there is no income to match with, no charge will arise on Madeleine.

Madeleine continues to be UK resident in 2020 - 2021. In 2020 - 2021 the trustees receive income of £150,000 which is PFSI. This PFSI will be matched to the benefit of £100,000 and Madeleine will be charged to tax under ITA07/S731 on the notional income arising to Charles, which is treated as arising to her. The charging year will be 2020 - 2021. Charles will not be chargeable to tax under ITA07/S731 in any year on the £100,000 distribution he received.

Example 2

Adriana is a non-resident beneficiary of a Jersey discretionary trust. In the tax year 2019 - 2020 she receives a capital distribution from this trust of £50,000. She makes a gift of £30,000 of this distribution to Gregor in 2019 – 2020 and he remits £15,000 to the UK. Gregor is UK resident, but non-UK domiciled in 2019 - 2020. He is also a remittance basis user. The Jersey discretionary trust has sufficient PFSI in the year 2019 - 2020 to match with the distribution made.

It is assumed for the purpose of this example that the conditions in ITA07/S733B (see INTM603520) have been met.

ITA07/S733C applies to Gregor as he is UK resident in 2019 - 2020 - the year in which the gift was made - and is matched against PFSI. Gregor will be charged under ITA07/S731 on £15,000: that part of the notional income treated as arising to him which he has remitted to the UK during the year. Adriana will not be chargeable to tax under ITA07/S731 in any tax year.