INTM603360 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017 to 5 April 2025: How a protected settlement can be tainted
Source: gov.uk (2025-04-07)


INTM603260 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603260) and INTM603320 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603320) looked at the definition of protected foreign-source income (PFSI) for the purposes of ITA07/S720 and ITA07/S727 respectively and, in particular, the conditions that must be met for income to be PFSI.

One of the conditions that must be met is that no property or income is provided directly or indirectly for the purposes of the settlement
- by the settlor, or
- by the trustees of a 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
when the individual is UK domiciled or UK deemed domiciled.

If the settlor adds property to the trust after this time, any relevant foreign income arising in the trust or one of its underlying entities will not be treated as PFSI. The effect of this will be to bring that income back into the scope of ITA07/S720 and ITA07/S727 such that the income arising within the settlement and any underlying companies will be assessable on the deemed domiciled settlor as it arises.

This section looks in more detail at how a settlement can be tainted and in particular at ITA07/S721B. It should be noted that the addition of value to settlement property is treated as the direct provision of property to the settlement for the purpose of tainting. Also, the provision of goods or services by the settlor to the trustees can also constitute the provision of property if they are provided at undervalue.

The tainting rules are not avoided by making additions to an underlying company rather than the non-resident trust that owns it.

The settlor cannot taint the trust if they are non-UK domiciled; it is only after they become UK deemed domiciled and add property to the trust that they may taint it.

Tainting will not occur when someone other than
- the settlor,
- someone at the settlor’s direction, or
- the trustees of another settlement of which the settlor is a settlor or a beneficiary
adds property to the settlement. If a third party adds property this may constitute a separate settlement and carry with it its own consequences, but it will not taint the settlement made by the original settlor.

If a settlor fails to exercise a right of recovery in relation to settlement property, this may cause the tainting of the settlement. HMRC’s long established practice, set out in paragraph 24 of SP5/92, will apply for the purposes of the trust protections. A failure to exercise a power of recovery will be regarded as tainting the settlement unless a genuine attempt to enforce the right had proved to be unsuccessful.

Normal exchange rate fluctuations in respect of loans that would not in themselves taint a trust should not cause the tainting of a settlement. However, arrangements involving the use of appreciating or depreciating currency balances or payments designed to add value could well result in the tainting of a trust.

If you come across situations that you believe may taint the trust, refer these to the Personal Tax International technical team in Liverpool (see INTM604440 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm604440)) so that consistency of approach in applying the tainting provisions is maintained.