INTM603260 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017 to 5 April 2025: Definition of PFSI for purposes of ITA07/S720
Source: gov.uk (2025-04-07)


For the purposes of determining what income comes within the charge to tax at ITA07/S720, as set out in Rule 2 of ITA07/S721(3B), protected foreign-source income (PFSI) is defined in ITA07/S721A.

There are two definitions of what constitutes PFSI:
- one relates to the income arising in a non-resident trust, and
- the other relates to income arising in an underlying company of a non-resident trust.
PFSI in a non-resident trust

Looking first at what constitutes PFSI in a non-resident trust, there are a number of conditions which must be met:
- if the income had arisen to the individual, it would have been treated as relevant foreign income as defined in ITTOIA05/S830
- for the purposes of the transfer of assets abroad legislation, the person abroad receiving the income is the trustees of a settlement
- the trustees of the settlement are not UK resident for the tax year
- when the settlement was created, the settlor was not UK domiciled and if the settlement was created on or after 6 April 2017 then the settlor was not UK deemed domiciled
- no property or income is provided (directly or indirectly) for the purposes of the settlement by the settlor (or the trustees of any other settlement of which the settlor is a beneficiary or settlor) at any time in the period beginning with 6 April 2017 (or, if later, the date on which the settlement was created) and ending at the end of the tax year in question at a time when the individual is UK domiciled or UK deemed domiciled.
The condition referred to in the fifth bullet point above is referred to as tainting and ITA07/S721B looks at what constitutes the addition of property for the purposes of the tainting of a trust (see INTM603360 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603360) for further information on tainting).

This condition only applies to individuals who have become UK deemed domiciled under Condition B of ITA07/S835BA (see INTM603220 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603220)). It does not apply to non-UK domiciled individuals who are able to continue to add property to a settlement up to the time that they become UK deemed domiciled.

The tainting of a trust means that the protections afforded by PFSI will no longer apply to the settlement, and all the income of the structure will be assessable under ITA07/S720 as it arises.

Example 1

John, who is not UK domiciled, has been UK resident since 1999. He settled a non-resident trust on 6 April 2010 with £1 million of capital. John, his wife and their children are all discretionary beneficiaries of the trust.

The trustees invested half of the funds in offshore investments and half in UK investments. Each year the offshore investments generate income of £50,000 and the UK investments generate income of £55,000 for the trustees. The trustees have retained the income and not made any distributions. For the purposes of this example, it is assumed that the transfer of assets abroad legislation applies and other legislation is ignored.

For the years from 2010 - 2011 to 2016 – 2017, ITA07/S720 will apply; John will be liable to income tax on the income of the trustees as it arises. However, John is a remittance basis user and will therefore only be assessed on an arising basis on the £55,000 of UK source income received by the trustees each year. John will not be liable on the income from the offshore investments as the income has not been remitted to the UK.

On 6 April 2017 John becomes UK deemed domiciled because he is a long-term resident. As John settled the trust before he became deemed domiciled, the charge under ITA07/S720 will be restricted to the income that is not PFSI. John will therefore be liable to income tax under ITA07/S720 on the £55,000 of UK source income arising in the trust. The £50,000 income arising in respect of the offshore investments meets the conditions in ITA07/S721A as set out in the bullet points above and will be PFSI; it will not be assessable under ITA07/S720.

Example 2

Nigel, who is not UK domiciled, has been UK resident since 2006. He settled a non-resident trust on 6 April 2017 with £500,000 of capital. Nigel and his two children are discretionary beneficiaries of the trust.

The trustees invest the £500,000 in offshore investments that generate income of £45,000 per year. The trustees retain the income and have not made any distributions. For the purposes of this example, it is assumed that the transfer of assets abroad legislation applies, and other legislation is ignored.

As the trust was settled on 6 April 2017 it will be subject to the provisions of Finance (No. 2) Act 2017 from the date it was created. Because Nigel was not UK domiciled when the trust was created and he continues to be non-UK domiciled for the year 2017 – 2018, as there is only PFSI arising within the trust Nigel will not be liable to tax under ITA07/S720 on the income arising within the trust.

If on 6 April 2017 Nigel had been UK resident in the UK for 17 years rather than the 11 years in the example above, he would have become UK deemed domiciled on 6 April 2017 under ITA07/S35BA Condition B. As Nigel would not have met the fourth bullet point in the conditions set out above, he would be assessable to income tax on the income of the trust under ITA07/S720 for the years from 2017 - 2018 onwards.

PFSI in an underlying company of a non-resident trust

For an underlying company of a non-resident trust, income will be PFSI for the purposes of ITA07/S721(3B) if the following conditions are met:
- if the income had arisen to the individual, it would have been treated as relevant foreign income as defined in ITTOIA05/S830
- for the purposes of the transfer of assets abroad legislation, the person abroad receiving the income is a company
- the trustees of the settlement are participators in the person abroad (or participators in the first company in a chain of 2 or more companies, where the last company in the chain is the person abroad and where each company in the chain - other than the last one - is a participator in the next company in the chain); a participator for this purpose has the meaning given by CTA10/S454: a person having a share or interest in the capital or income of the company.
- the individual’s power to enjoy the income results from the trustees being participators as mentioned in the bullet point above
- the trustees are not UK resident for the tax year in question
- when the settlement was created, the settlor was not UK domiciled, and if the settlement was created on or after 6 April 2017 then the settlor was not UK deemed domiciled
- no property or income is provided (directly or indirectly) for the purposes of the settlement by the settlor (or the trustees of any other settlement of which the settlor is a beneficiary or settlor) at any time in the period beginning with 6 April 2017 (or, if later, the date on which the settlement was created) and ending at the end of the tax year in question at a time when the individual is UK domiciled or UK deemed domiciled.
The condition referred to in the seventh bullet point above is referred to as tainting and ITA07/S721B looks at what constitutes the addition of property for the purposes of the tainting of a trust (see INTM603360 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603360) for further information on tainting). It should be noted that this condition only applies to individuals who have become UK deemed domiciled under Condition B of ITA07/S835BA (see INTM603220 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603220)), and it does not apply to non-UK domiciled individuals who are able to continue to add property to a settlement up to the time that they become UK deemed domiciled.

The tainting of a trust means that the protections afforded by PFSI will no longer apply to the settlement, and all the income of the structure will be assessable under ITA07/S720 as it arises.

Example 3

Paul, who is not UK domiciled, has been UK resident since 2000. In 2009 Paul settled a non-resident trust in which Paul, his wife and two children are discretionary beneficiaries. When the trust was established, Paul settled £250,000 into the trust together with shares in his UK trading company P Ltd. Paul claims the remittance basis each year.

The trustees used the funds settled to subscribe for shares in a non-resident company, N Ltd, with a view to investing the £250,000 overseas. The trustees also transferred the shares in P Ltd to N Ltd in exchange for shares in N Ltd. For the purposes of this example, it is assumed that the transfer of assets abroad legislation applies, and other legislation is ignored.

Until 2017, Paul will be assessable under ITA07/S720 on the income of the trust on the remittance basis because the trustee’s income will consist of dividends in an overseas company, i.e. relevant foreign income. Under the transfer of assets abroad legislation, N Ltd will also be a person abroad, and Paul will be assessable on the remittance basis in respect of any income arising from the overseas investments. With regards to any dividends paid to N Ltd by P Ltd, as P Ltd is a UK resident company such dividends will be UK source income and Paul will be assessable on this income under ITA07/S720 on an arising basis.

On 6 April 2017 Paul becomes UK deemed domiciled because he is a long-term resident. In 2017 - 2018 the trustees receive no income from N Ltd. N Ltd receives income from its overseas investments of £20,000 and receives a dividend from P Ltd of £50,000. The dividend is UK source income. The £20,000 from overseas investments is relevant foreign income so will be PFSI and will not be treated as Paul’s income for the purposes of ITA07/S720. However, as the £50,000 dividend received from P Ltd would not be treated as relevant foreign income if it had been received by Paul, this will be assessable on Paul under ITA07/S720.

Note

Where the settlor of a non-resident trust is UK deemed domiciled for a particular tax year, offshore income gains (OIGs: see the Investment Funds Manual at IFM12100 (https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm12100) onwards) that arise within the trust or one of its underlying companies are not treated as PFSI and will be assessable on the settlor under ITA07/S720 in the year that they arise. This is because they are not considered to come within the definition of relevant foreign income. If there is a dispute about the treatment of OIGs, refer the matter to the Personal Tax International technical team in Liverpool (see INTM604440 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm604440)).