INTM603340 - Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017 to 5 April 2025: Impact of pre-6 April 2017 remittance basis rules on ITA07/S727 charge
Source: gov.uk (2025-04-07)


If the settlor of a non-resident trust was a non-UK domiciled remittance basis user, any relevant foreign income which arose before 6 April 2017 in either a non-resident trust or an underlying company will not have been subject to tax under ITA07/S727 on the settlor if the income remained in the structure and was not remitted to the UK by the trust or company.

INTM601960 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm601960) onwards looks at the impact of the remittance basis on the application of ITA07/S727 and in particular ITA07/S730 which deals with individuals assessable under ITA07/S727 to whom the remittance basis applies. To take into account the changes made to the transfer of assets abroad provisions with the introduction of the concept of protected foreign-source income (PFSI: see INTM603320 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603320)), two new subsections (6) and (7) have been added to ITA07/S730.

Consequently, from 2017 - 2018 the position has changed such that ITTOIA05/S832 will no longer apply to the foreign deemed income, in so far as it is remitted to the UK in 2017 - 2018 or a later year, provided that the income comes within the definition of transitionally protected income as defined by ITA07/S730(7). This is any deemed foreign income where the associated foreign income of the person abroad arising from a relevant transfer
- arose in a tax year that is earlier than 2017 – 2018,
- would have been PFSI (see INTM603320 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603320)), had the legislation been in place in the year in which the income arose, and
- has not been distributed by the trustees of the settlement concerned prior to 6 April 2017.
As a result of these changes the trustees of a trust that is within the capital sum rules will from 6 April 2017 be able to bring trust income to the UK without the non-domiciled UK resident settlor being liable to a charge under ITA07/S727 on this income. This undistributed income will be relevant income available when calculating any liabilities that may arise under ITA07/S731 in relation to any benefits that are provided to the settlor or any other beneficiary (see INTM603420 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603420)).

So, for example, if the trustees were to make a capital distribution post-April 2017, then - to the extent the distribution is paid with monies containing pre-6 April 2017 unremitted foreign income - that pre-6 April 2017 foreign income cannot be treated as a taxable remittance by the settlor under ITA07/S727 if brought to the UK. Of course, the capital distribution will itself be subject to the anti-avoidance provisions dealing with capital distributions from offshore trusts which may deem the capital distribution to be income or gains. This would need to be dealt with on its own merits, but the issue of remitting the underlying pre-6 April 2017 income referred to above would no longer exist.

Example

Mick, who is not UK domiciled, has been UK resident since 1997. In 2010 Mick settles a non-resident discretionary trust for the benefit of his daughter Janet, from which he is irrevocably excluded. He settles £1,000 into the trust, but to provide further capital for investment he advances an interest free loan of £200,000 to the trust.

The trustees use the funds to subscribe for shares in an offshore company J Ltd and the company invests in overseas investments. From 2010 - 2011 to 2016 - 2017 the overseas investments generate total income of £100,000.

It is assumed for the purposes of this example that the transfer of assets abroad legislation applies, and other provisions are ignored.

The income arising is treated as Mick’s deemed foreign income. Should any of this income be remitted to the UK, Mick would be assessable to income tax on it by virtue of ITA07/S727 as he has an entitlement to receive a capital sum.

The company did not remit any of the income to the UK before 6 April 2017. In April 2017, in order to ensure that the trust is not tainted (see INTM603380 (https://www.gov.uk/hmrc-internal-manuals/international-manual/intm603380)), the terms of the loan are amended such that it is on arm’s length terms and interest is payable by the trustees from 6 April 2017.

In July 2017 the company directors identify a UK investment opportunity and bring £50,000 of the accumulated income into the UK to fund it. The sums brought to the UK will not be assessable as Mick’s income unless at a later date Mick receives a benefit that was matched with this income.

If before 6 April 2017 the directors of J Ltd made a distribution of £10,000 to the trustees who in turn distributed this income to Janet, Mick’s daughter, this would reduce the amount of the transitionally protected income to £90,000. Janet may have a tax liability on this distribution in the UK depending on her personal circumstances.