Non dom tax changes (5) – The changes in relation to trusts


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Non dom tax changes: the changes in relation to non-UK trusts


Updated for Finance Bill 2017

The introduction of deemed domicile provisions as part of the non dom tax changes for income tax and capital gains tax purposes creates significant issues with the current legislation applicable to non-UK resident trusts.

As such, the non dom tax changes bring in a number of protections for trusts where the settlor of the trust is affected by the new rules.

It should be noted that there are significant changes to those announced in the ConDoc. The application of the CGT anti-avoidance provisions in particular has changed significantly in Finance Bill 2017

Let us first remind ourselves of the existing framework…

Current position – CGT


The basic position is that a non-UK trust (other than in respect of UK residential property from April 2015) will not pay UK CGT regardless of where the asset is located. This is based on the fundamental jurisdictional basis of UK CGT.

However, such a simple rule – which would be open to significant abuse if existed in isolation – is bolstered by a plethora of anti-avoidance rules. It is these anti-avoidance rules that need to be recast in cases where relevant persons have become deemed domiciled for CGT purposes.

Currently the anti-avoidance rules will:

  • Look to attach the gains of the trust to a UK settlor under certain circumstances; or
  • Alternatively, look to attach the gains of the trust to a UK beneficiary where possible.

Gains taxed on settlor – Section 86

At present, where a settlor retains an interest (for ease, let’s say they may benefit from the trust property) under a non-UK trust then the tax position will depend on one’s domicile position:

  • A UK domiciled settlor will be taxed on the trust gains as they arise under s86;
  • A non-dom settlor will not

Clearly, in the absence of any protections, the new deemed domicile rules could potentially spoil this party for existing trusts where the settlor is non domiciled under general law.

Gains taxed on the beneficiary – Section 87

Where the trust is not settlor interested the anti-avoidance code switches its beady eyes to the beneficiaries of the trust. Specifically, it looks for there to be a link between the beneficiary and the UK:

  • If the beneficiary is UK resident and domiciled then and capital payments (or benefits) he or she receives are matched with any trust gains and the beneficiary pays tax;
  • If the beneficiary is non-dom then, at present, he or she is only taxable (in respect of any capital payments or benefits matched with trust gains) on the remittance basis;
  • If the beneficiary is non dom and non-res then Section 87 is unlikely to impose a charge (subject to other anti-avoidance rules).

Current position – Income tax


The basic position for income tax is different to that of CGT.

Income tax is slightly more sophisticated than CGT in that it not only looks at the residence of the recipient, but also at the source of the income.

The basic position is that Trustees will usually be subject to UK income tax on UK source income.

However, again, there are anti-avoidance provisions at work in this area. These anti-avoidance rules, at least in terms of who they strike, mirror those that apply for CGT purposes. There are important differences and this analogy only goes so far.

Income taxed on the settlor – s624 and s720

However, anti-avoidance rules may operate to attribute the income which has arisen within the trust to either the settlor of the trust or the beneficiaries.

At present, where the settlor retains an interest in the trust then:

  • If the settlor is UK domiciled, then he is likely to pay tax under ITTOIA s624 (also known as the settlements legislation) or ITA 2007, s720 (known as the Transfer of Assets Abroad, Transferor’s charge) on all income. There is significant overlap between these two provisions;
  • If the settlor is non-dom, then both s624 and s720 will operate under the remittance basis of taxation.

Income taxed on the beneficiary – s731

At present, where the settlor has excluded himself from benefiting from the trust then:

  • If he or she is UK domiciled, where a capital payment or benefit is matched with income in the trust, then he or she is subject to tax under ITA 2007, s731 (known as the Transfer of Assets Abroad, Non-Transferor’s charge);
  • If he or she is non-dom then s731 will apply only on the remittance basis.

One can hopefully see that the new deeming provisions, in the absence of any relief, would impose heavily on a non-UK trust created by a non dom (and / or where there are non dom beneficiaries).

Protection from the non dom tax changes 


Special rules will provide relief for those who (have) set up trusts whilst non dom but will become deemed dom in years from 2017/18 onwards.

We will call any such trust a ‘protected trust.’

Protections under the non dom tax changes – CGT

Finance Bill 2017 reveals that Section 86 will generally not apply where there is a deemed domicile settlor:

‘Section 86 not apply in relation to a year if-

  • [2017/18 onwards]
  • Settlor is not domiciled in UK when the settlement is created
  • If settlement created on or after 6 April 2017 [created whilst not deemed domiciled]
  • [The Settlor is not domiciled in the relevant year]’

Under the consultation process s86 was going to bite where there were certain payments to family members. This is no longer the case as per Finance Bill 2017.

It will mean that whilst value is left within the trust there will be a gross roll up of gains.

Instead, we will concentrate on capital payments or benefits that are actually paid out to beneficiaries.

The tax treatment will depend on which category of person the payment or benefit is made to:

  • Close family members (spouses, co-habitees, minor children, not grandchildren):
  • Other persons

Where receipt is by a close family member then, if they are subject to tax on the receipt, then that will be that. If they are not, for instance they are non-resident, then the Settlor will be liable for tax.

Where the receipt is by an ‘other person’ then the tax position will depend on the recipient’s status. Of course, if it is the settlor then he will pay tax based on his own position.

From 6 April 2017, it will not be possible to wash out gains within the trust by matching them with capital payments made to non-resident beneficiaries. These will not be taxable but will not reduce the pool of gains.

There are also be anti avoidance rules to stop one making a payment to a non-resident beneficiary and for him to then gift this to a UK resident one.

Protections under the non dom tax changes – income tax

The protections broadly reflect the CGT position outlined above

If the income within the trust is UK income, then the settlor will be taxed on this income regardless (as is the current position). This will be under the s624 settlements code.

Where there is foreign income and we have a UK resident deemed domicile person and a protected trust then we are essentially in the same position as outlined for CGT purposes. In other words, it will depend on the

Transitional rules – undistributed income

The non dom tax changes also introduce transitional rules where there is undistributed foreign income, that has arisen before April 2017, and remains undistributed in the trust. This will become ‘protected relevant income’. Its treatment will depend on whether it is matched with payments before or after April.

Where it is matched with pre April 2017 payments / benefits, then the current rules apply. For example, there will be no close family rule etc.

Where such income is matched with post April 2017 payments / benefits then it is available to be matched with post April 2017 payments / benefits. If already taxed – not taxed again.

Of course, as the trust potentially benefits from gross roll up whilst funds are held in the trust, will this encourage UK investment within a wrapper?

Added property

It should be noted that protections will be lost where new property is added to the trust on or after 6 April 2017. So don’t do it.

If you, or any of your Clients, are affected by any of the non dom tax changes then please get in touch.


Related articles:

Part one: Setting the scene and what is domicile?

Part two: The income tax and CGT changes (including rebasing, mixed fund rules and Business Investment Relief)

Part three: The Inheritance Tax (“IHT”) changes (including revisions to excluded property)

Part four: Returning non-doms – a tax pariah?

Part five: The changes in relation to trusts

Part six: A summary of actions and planning ideas

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