TSEM10440 - Non-resident trusts: beneficiary’s chargeability: trust income - Extra Statutory Concession B18

The precise text of the concession is at ESC B18. 

If certain conditions are met (TSEM10445), then a beneficiary receiving a discretionary income payment from a trust can ‘look through’ to the sources of trust income out of which the payment is made, and claim reliefs or exemption as if he or she received the income directly.

Credit is given to the beneficiary for tax paid by the trustees on the particular sources of income, and is taken into account in calculating the gross income treated as taxable on the beneficiary under the concession.

No credit is given for UK tax treated as paid on income received by trustees which would not go in to a ‘tax pool’ (TSEM3020) if ITA/S494 applied, for example tax at the dividend ordinary rate (see TSEM3021). Although that tax is not repayable, it is not taken into account in calculating the gross income of the beneficiary.

Previously, it was HMRC's understanding of ESC B18 that the payment received by the trust beneficiary should be treated as having been made rateably out of all sources of income which arose to the trustees not earlier than six years before the end of the year in which the payment is made, on a last-in, first-out basis.

The Court of Appeal clarified matters in the case of Murphy & Linnett v HMRC [2023] EWCA Civ 497. The Court concluded that ESC B18 contains three concessions:

  • Concession 1, relating to the beneficiaries of UK resident trusts
  • Concession 2, relating to non-UK resident beneficiaries of non-UK resident trusts, and
  • Concession 3, relating to UK resident beneficiaries of non-UK resident trusts.

In a unanimous judgment, the Court of Appeal concluded that Concession 3 is not subject to a six-year income limit and as a result it is possible for a beneficiary to claim relief for tax paid by the trustees going back more than six years. The six-year income limit does continue to apply to Concessions 1 and 2.

Time limit: a beneficiary must claim relief under Extra Statutory Concession B18 within five years and ten months of the end of the tax year in which the payment was made.