TSEM4620 - Settlements legislation Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2017 – 5 April 2025: Transactions that are ignored for the purposes of tainting
Source: gov.uk (2025-04-07)


The guidance on this page relates to the period 6 April 2017 - 5 April 2025. From 6 April 2025 the rules around the taxation of non-UK domiciled individuals ended and individuals are taxable based on their residence position only. Detailed guidance on the changes from 6 April 2025 can be found at TSEM4700 (https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4700) onwards.

The legislation at ITTOIA 05/S628B provides seven categories, (a) to (g), of property, income or transactions that are to be ignored when considering whether property or income added to the settlement causes tainting. We consider each of the categories below.

Category (a)

Property or income provided under a transaction, other than a loan, entered into on arm’s length terms is to be ignored.

Example 1

In January 2021 Maria sells a sculpture to the trustees of the Maria 2019 Discretionary Settlement at a price agreed with by professional valuations of the asset at that time. The valuations were obtained independently by Maria and the trustees. Maria is deemed domiciled for the tax year 2020/21 and has provided property for the purposes of the settlement. However, this property can be ignored, as it was provided under a transaction entered into on arm’s length terms. The sale and purchase of the sculpture does not taint the Maria 2019 Discretionary Settlement.

Category (b)

Property or income provided otherwise than under a loan without any intention by the person providing it to confer a gratuitous benefit on any person is to be ignored.

Example 2

Maria buys an apartment in San Sebastian from the trustees of the Maria 2019 Discretionary Settlement. The purchase takes place in November 2021 for an agreed price of €1,500,000. She had no intention of providing a gratuitous benefit to the trustees in making the purchase, and she took appropriate measures to ensure that the price paid was the open market value of the property. Maria and the trustees negotiated the price and the transaction was entered into at arm’s length terms. However, subsequent enquiries established that the value of the property was closer to €1,400,000 in November 2021. Although Maria has provided property to the trustees, she had no intention of conferring a gratuitous benefit through her actions. She merely made a disadvantageous bargain, from her perspective, in agreeing the price of the apartment with the trustees. The difference between €1,500,000 and the newly found open market value of the apartment in November 2021 does not taint the Maria 2019 Discretionary Settlement.

Category (c)

The principal of a loan which is made to the trustees of a settlement on arm’s length terms is to be ignored (see TSEM 4625 for the exception to this rule). For this purpose, a loan is on arm’s length terms only if interest at the official rate or more is payable at least annually on the loan.

Example 3

In February 2020 Maria lends the trustees of the Maria 2019 Discretionary Settlement €250,000, repayable in quarterly instalments over 10 years. The loan carries interest at 3% per annum, payable quarterly in arrears. The capital and interest are repaid in accordance with the terms of the loan. The loan principal can be ignored and does not taint the settlement, as the loan is made on arm’s length terms as the official rate of interest in February 2020 was 3% with the interest being payable at least annually.

Category (d)

The payment of interest to the trustees of a settlement under a loan made by them on arm’s length terms is to be ignored. For this purpose, a loan is on arm’s length terms only if any interest payable under the loan is at no more that the official rate of interest.

Example 4

In May 2020 the trustees of the Maria 2019 Discretionary Settlement lend Maria US$20,000. The loan carries interest at 3% per annum, payable 6 monthly. This is no more than the official rate in May 2020 and so the payment of the loan interest can be ignored, as the loan is made on arm’s length terms, for these purposes. It does not taint the trust.

In April 2021 the official rate of interest falls to 2.5%. There is no need for the interest on the loan to be reduced (unless a relevant event occurs TSEM 4625) because the loan was entered into at arm’s length at the time.

Category (e)

Repayment to the trustees of a settlement of the principal of a loan made by them is to be ignored.

Example 5

In December 2020 Maria repays the loan principal of US$20,000 to the trustees, along with the principal of three earlier loans totalling US$75,000. All these repayments can be ignored and do not taint the settlement.

Category (f)

Property or income provided in pursuance of a liability incurred by any person before 6 April 2017 is to be ignored.

Example 6

John has been resident in the UK since 2001/02. He has a domicile of origin in Australia and has not acquired a domicile of choice in the UK. He will, however, be deemed domiciled in the UK from 6 April 2017 due to his long-term residence. John settled the John 2009 Family Discretionary Trust, which has Jersey resident trustees, in 2009 with £1,000,000. The trustees invested the funds in long-term overseas investments which cannot be readily accessed.

In December 2016 the trustees were asked to purchase a residential property for the use of John’s adult son, Adam, who is a beneficiary of the trust. The trustees do not have the funds available to provide the cash and so John agrees to settle a further £200,000 into the trust to assist with the purchase. John agrees to provide the funds on the date of completion. The trustees enter into a conditional contract to purchase the property in March 2017, but the conditions for the purchase are complied with only in May 2017. Consequently, John provides the £200,000 to complete the purchase in that month. As John had already committed to provide the £200,000 before 6 April 2017 the trust will not be tainted.

Category (g)

Where a settlement’s expenses relating to taxation, both UK and overseas, and administration for a tax year exceed its income for that year, property or income provided towards meeting that excess is to be ignored. This is provided that the value of such property or income is not greater than the larger of the excess or the amount by which the relevant expenses exceed the amount of the expenses which may be paid out of the settlement’s income under the terms of the trust deed. Only the settlement’s expenses and not those of any underlying company are to be taken into account for these purposes.

Example 7

The taxation and admin expenses of the Maria 2009 Discretionary Trust for the 2017/18 tax year are €35,000. Its income is €30,000. The amount of the relevant expenses that may be paid out of the settlement’s income is €25,000, the balance of the expenses being capital. Maria gives the trustees €10,000 to meet the expenses. The excess of the income over the expenses is €5,000. The amount given by Maria exceeds this, but it does not exceed the difference of €10,000 between the expenses and the amount of expenses to be paid out of the settlement’s income. The gift can therefore be ignored and will not taint the settlement.