IFM13420 - Offshore Funds: participants in offshore funds: the charge to tax on disposal of an interest in a non-reporting fund: non-resident settlements

Offshore income gains arising in non-resident settlement structures

As the trustees are non-UK resident they are not chargeable on an offshore income gain that arises to them or to an underlying non-UK resident company -see IFM13442 for guidance on OIGs arising to companies with UK participators that hold a direct interest in those companies. Instead there are rules that can charge UK resident settlors or beneficiaries of such trusts by reference to those offshore income gains.

Tax Years up to 2024/25

An offshore income gain that arose to a non-resident trust could result in a tax charge for the settlor or beneficiary of a trust in two potential ways prior to a change in the law with effect from the 2025 tax year which is set out in the separate subheading below.

Firstly, the non-resident capital gain tax attribution mechanisms under s87 TCGA 1992 were co-opted for the purpose of matching offshore income gains with capital payments received by an individual under Regulation 20 (2), (3) and (4) Offshore Funds (Tax) Regulations 2009 (OFTR) with capital payments matched in priority with offshore income gains over capital gains.

The offshore income gains were defined by the term ‘OIG amount’ and the s87 TCGA 1992 matching rules were applied as if references to ‘chargeable gains’ were to offshore income gains, references to ‘section 2 (2)’ amounts were to ‘OIG amounts’ and references to ‘accruing’ were to ‘arising’. (Part 1 of TCGA 1992 was rewritten by the Finance Act 2019 and the reference was then to the section 1(3) amount instead of the section 2 (2) amount).

The result of the matching process was that the individual who received the capital payment was treated as the person who made the disposal that give rise to the offshore income gain (Regulation 20 (5) OFTR 2009) – see IFM13425. For more details about the matching rules under s87 TCGA 1992, see CG38570c.

Secondly, the offshore income gains were treated as income of the non-resident trust (or other non-resident entities) under Regulation 21 (1) OFTR 2009. This meant that the offshore income gains were relevant to determining whether deemed income could be treated as arising to settlors or beneficiaries of non-resident trusts under the Transfer of Assets Abroad rules in Chapter 2, Part 13 ITA 2007. This only applied to the extent the offshore income gain had not already been attributed in accordance with the s87 TCGA attribution rules to a person who is resident or ordinarily resident in the UK (Regulation 21 (5) OFTR 2009). For more details on the Transfer of Assets Abroad provisions, see INTM600000.

Any offshore income gain that was not attributed to an individual (Regulation 20) or which did not result in a charge to income tax under the Transfer of Assets Abroad provisions (Regulation 21) was carried forward and the same procedure applied in the next and subsequent tax years. If the OIG did result in a tax charge under the Transfer of Assets Abroad provisions, the ‘OIG amount’ was reduced by the same amount for the purpose of adopting the matching rules in s87 TCGA 1992 in later tax years (Regulation 21 (6) OFTR 2009).

Tax Years 2025/26 Onwards

From 6 April 2025, an amendment was made to Regulation 20 and 21 OFTR 2009. This amendment repealed Regulation 20 (2) to (5) and Regulation 21 (4) to (6) OFTR 2009 with effect from the start of the 2025/26 tax year with the effect that unmatched OIGs of trusts will only be taxed under the Transfer of Assets Abroad provisions, either as they arise for transferors, or as they can be matched with benefits received by non-transferors  – see INTM600000 onwards for more detailed guidance on the application of the ToAA provisions.

The treatment that applied in previous years was preserved in relation to offshore income gains that were matched with capital payments in tax years up to the 2024/25 tax year by s53 (2) Finance Act 2026, which provides that Chapter 2 of Part 13 of ITA 2007 does not apply to offshore income gains that were matched to capital payments under Regulation 20 prior to the tax year 2025-26 and which resulted in an offshore income gain being treated as arising to an individual.

Reliefs relating to offshore income gains that arose or capital payments that were received prior to 6 April 2008, or relating to the rebasing of offshore income gains that relate to interests held in non-reporting funds prior to 6th April 2008, were also preserved by s53 (3) to (6) Finance Act 2026  – see IFM13434 for further details.

Under both the previous and existing rules, an offshore income gain arising to a non-resident settlement is not treated as income of the settlor under Chapter 5 Part 5 ITTOIA (regulation 20(1)).

Example 1

A settlement with non-UK resident trustees has never been settlor interested and has never received any income. The following OIGs and chargeable gains have been received by the settlement:

  • 2017-18 OIGs £30,000.
  • 2018-19 OIGs £40,000 and chargeable gains £50,000.
  • 2024/25 OIGs £50,000 and chargeable gains £60,000.

The first capital payment out of the settlement is made in 2019-20. That is a capital payment of £60,000 to a UK resident beneficiary who was UK domiciled.

Prior to its repeal with effect from 6 April 2025, Regulation 20(4) stipulated that you must match any capital payments with OIGs arising in the non-resident settlement before matching with chargeable gains. This applied even if the OIG amount arose in an earlier year than the capital gain.

Using the section 87A TCGA attribution rules the capital payment was matched first with the entire £40,000 OIG amount arising in 2018/19, then £20,000 (£60,000 - £40,000) is matched with £20,000 of the £30,000 OIG amount arising in 2017-18.

The beneficiary is treated as receiving £60,000 offshore income gains chargeable to income tax in 2019-20.

There were unmatched OIG amounts and chargeable gains in the settlement to carry forward at 5 April 2025 of:

  • 2017-18 OIGs £10,000 (£30,000 less £20,000 matched with capital payment)
  • 2018-19 Capital gains £50,000
  • 2024/25 – OIGs £50,000 and capital gains £60,000

No further capital payments are made until 2026/27 when a capital payment of £70,000 was received by a UK resident individual who did not qualify for the FIG regime. Following the repeal of Regulation 20 (2) to (5) and Regulation 21 (4) to (6) OFTR with effect from 6 April 2025, the unmatched OIGs from 2017/18 and 2024/25 can no longer be matched with capital payments under the s87A TCGA 1992 matching rules and instead, they constitute income of the non-resident settlement that can be matched with the capital payment as it is also meets the definition of a benefit received by the individual for the purposes of the Transfer of Assets Abroad provisions – see INTM600000.

The capital payment (or benefit) of £70,000 is matched first with the £60,000 of unmatched OIGs on the basis that they are income of a person abroad. The remaining £10,000 of benefit can then be matched with £10,000 of the unmatched capital gains from 2024/25 as there is no further income available to match with that payment. The individual has £60,000 of income and £10,000 of gains treated as arising and accruing to them in 2026/27.

There are no unmatched OIGs or other income available to match with benefits received in future tax years, but there are £100,000 of unmatched capital gains (£50,000 + £60,000 - £10,000) to carry forward to match with capital payments received in future tax years.