PCRT webinar ‚ members questions on PCRT answered

15 Jan 2019

The CIOT response referred firstly to the unintuitive consequence of the new ‚ fifteen out of twenty year‚ rule (set out in Condition B at section 835BA(4) as inserted by Clause 40) that an individual can become deemed domiciled in a year when he or she is not resident (ie in the sixteenth year). An example is set out in the response. That result has potentially adverse consequences for a trust established before the settlor becomes deemed domiciled as an addition to such a trust in the sixteenth year would mean that the proposed legislative protections for overseas trusts established before becoming deemed domicile will no longer apply.

Our response continues with a detailed review of the CGT aspects of the protection for offshore trusts that are contained in Schedule 12 Part 2 of the draft clauses (‚ Protection of Overseas Trusts‚ ). The response also considers the draft provisions in Schedule 12 Part 3 providing for CGT rebasing of non-UK assets held personally by individuals who become deemed domiciled on 6 April 2017 under the fifteen out of twenty year rule. An earlier submission (included as an appendix in the 19 January submission) responded also to Schedule 12 Part 4 dealing with the ‚ cleansing‚ of mixed funds ie the provisions allowing mixed funds held in overseas bank accounts to be segregated into income, capital gains and ‚ clean‚ capital for future use.

Business Investment Relief

The CIOT has also submitted a response on clause 18 of the draft FB 2017 provisions setting out changes to business investment relief (BIR) (see www.tax.org.uk/ref256). The aim of the changes is to expand the scope of this relief to make it easier and more attractive for potential non-UK domiciled investors. Non‚ UK domiciled Individuals who are taxed on the remittance basis will not generally pay UK income tax and CGT on foreign income and gains as long as they do not remit them to the UK. By its nature the remittance basis inevitably discourages remitting monies into the UK for investment. BIR is aimed at alleviating that consequence by providing relief from the UK tax charge that would otherwise arise on remittance when foreign income or gains are brought into the UK and invested in a qualifying business.

The focus of the CIOT‚ s previous representations has been on the extent to which the existing BIR anti-avoidance rules discourage take up of the relief. The proposed changes address some of the disincentives. However significant legislative deterrents remain. It is hoped that consideration will be given to removing the remaining barriers.

Subsequent to the CIOT‚ s 19 January submission, the government published a further draft of the legislation on 26 January. The new draft together with explanatory notes can be found at https://www.gov.uk/government/publications/draft-legislation-deemed-domicile-income-tax-capital-gains-tax-and-inheritance-tax. This second tranche contains new draft legislation in respect of the income tax protections for overseas trusts and includes changes to the draft provisions for ‚ cleansing‚ of mixed funds and CGT rebasing. The CIOT‚ s response to the further draft is in progress at the time of writing.


The latest tranche of the draft legislation for deemed domicile includes changes to the rebasing provisions in Part 3 of the Schedule from the draft published in December 2016. The opening words of paragraph 41(5) of the Schedule now reads ‚ In computing, for the purposes of TCGA 1992‚ rather than ‚ as was the case in the Schedule published on 5 December - ‚ In computing, for the purposes of capital gains tax‚ . It has been confirmed to the CIOT that the effect is to clarify that rebasing will now apply to non-reporting status offshore funds, provided all the other conditions in Part 3 to the Schedule are met.

Additions to trust property

Please see below an updated HMRC confirmation in relation to the ‚ tainting‚ of the trust protections by an addition to trust property. Following further discussion and consideration HMRC has adjusted its statement to the following:

1) A repayable on demand loan which was made directly or indirectly to a relevant trust prior to 6 April 2017 on non-commercial terms e.g. at a low or nil rate of interest and which remains outstanding on that date will generally be regarded as a provision of property for the purposes of the settlement. Consequently, where after 5 April 2017 a loan has not been repaid or adjusted to commercial terms, the condition at new sub paragraph 5A(1)( e) for CGT would be met (equally the provision for Income Tax would be met). The provision at 5A(1)( e) (and the Income Tax equivalent) will apply equally where the loan was initially for a fixed period but falls to be repaid after 6 April 2017 such that it becomes a repayable on demand loan. There will however be a transitional provision so that the condition is not regarded as met for Income Tax or CGT where, before 6 April 2018, the loan is either repaid in full together with any outstanding interest or made subject to fully commercial terms, including a commercial rate of interest payable at least annually for the year ending 5 April 2018 and subsequent years.

There will be a specific provision in the legislation stating that a loan will be regarded as being on arm‚ s length terms (such that the trust is not tainted) if (and only if) the official rate of interest is charged and actually paid annually.

2) Certain trusts require the settlor to have the power to revoke the trust to safeguard the position of beneficiaries. HMRC will not regard the failure to exercise such a power the same as an addition of property or value to the trust and therefore it will not cause the trust to lose its protection.

That is the original reference to needing to pay commercial interest for the current year has been dropped and HMRC has said that the legislation will provide that a loan will be seen as being on arm‚ s length terms if (and only if) the official rate of interest is charged and actually paid annually.

Other aspects upon which HMRC has expressed a view as part of the consultative process on the draft clauses, and in advance of the publication of the Finance Bill 2017, are set out below. For the avoidance of doubt , these are HMRC‚ s confirmations of their views on some of the issues raised by members of representative bodies. They do not necessarily reflect the views of the representative bodies.

The draft legislation states that the following should be disregarded when considering if property has been added for the purposes of the settlement:

1. Property or income provided under a transaction entered into at arm's length

We understand that "at arm's length" should be read as being "on arm's length terms" so that the settlement will not be tainted simply because the settlor enters into the transaction with the trustees.

2. Property or income provided in pursuance of a liability incurred by any person before 6 April 2017

This exception would apply where a legally binding commitment (a covenant under seal) has been entered into before 6 April 2017. Adding property to the settlement in fulfilment of this commitment will not be treated as tainting the protected settlement. The inheritance tax implications of such arrangements should be considered.

3. Property or income provided as a result of the settlement‚ s expenses relating to tax and administration for a tax year exceeding its income for the year. The permitted addition being limited to the deficit.

Shares in the trust

HMRC has been asked to comment on a position where prior to becoming deemed domiciled the settlor added shares/options to the trust which might be forfeited or were otherwise ‚ unvested‚ . HMRC was asked if its analysis differed between:

a) shares which the trust already has, but which can be taken away if the employees fails to do something; or

b) an option that the trustee has to acquire shares, but only if the employee positively does something.

HMRC stated that it would not argue that the trust lost its protected status because of either (a) or (b) above.

Income of life interest settlements

HMRC has been asked to comment on the position where trustees of a life interest settlement simply retain income due to the life tenant. It was suggested to HMRC that in such cases the trustees just hold the income as nominee for the life tenant. If there were to be reinvestment then again there is no provision of property as everything deriving from the original income would be that of the life tenant and again the trustees would just be nominees.

HMRC considered that it was difficult to give a definitive answer as it could be argued that where the life tenant simply leaves their income entitlement in the trust and after a passage of time it gets mixed up with other trust income, this would in fact taint the trust. On the other hand, where the trustees simply have not got round to making the distribution but they fully intend to, then this would not taint.

On a related point, HMRC consider that where there is an underlying company it is a decision for the directors to decide when to pay a dividend and therefore in HMRC's view non-payment of a dividend by the company would not taint the trust. This would be the case even in a situation where there is non-payment of dividends over a number of years such that income is effectively accumulated at company level.

Offshore trust changes ‚ income tax legislation

Transfer of assets

The intention is that relevant foreign income which is treated as arising to a transferor who is a non-domiciled remittance basis user under the transfer of assets abroad provisions (s720) prior to 6 April 2017 and which has been retained within the settlement as at 6 April 2017 will not be seen as the income of the settlor when considering any of the relevant person remittance basis provisions going forward. As such, the trustees will be able to use the funds to remit to the UK for investment purposes without resulting in a tax charge on the settlor. Similarly the trustees would be able to provide funds to a foreign closely held company they owned which made such investments without triggering a tax charge on the settlor. This is only the case if the investment does not provide a benefit to the settlor/transferor or any other beneficiary.

It is understood that the changes will mean that any ITA s721 income within the settlement that would meet the ‚ protected foreign source income definition‚ if it had arisen after 6 April 2017 will enter the ITA s 731 relevant income pool. As a corollary of this:

Transferors/settlors will now come within the scope of S731 with regard to benefits received and can be taxed on such benefits when matched against available income. Such income will include income that arose prior to the settlor/transferor becoming UK resident

Benefits received by a transferor prior to 6 April 2017 will not be brought into account and cannot therefore be matched against the pool of relevant income. This is principally because of the requirement in step 1 in section 733(1) that benefits are only to be taken into account if they were received in an earlier tax year in which section 732 has applied. This should be read as meaning "has applied to the individual in question" which will not be the case for tax years up to 2016/17 as a result of the existing section 732(1)(d) (which excludes transferors).

Settlements legislation

Where there is no tax charge under the transfer of assets abroad provisions (which has priority) and there is income at the settlement level, new ITTOIA s 643A should result in a tax charge on a benefit provided to the settlor. The draft legislation will be corrected in this respect.

The income tax matching rules will contain a provision (similar to that which already exists for capital gains tax) so that where income is matched against a benefit received by a non-domiciled beneficiary who is subject to the new s643A charge, tax will only be paid if the benefit is remitted. There will be no tax charge just because the underlying income has been remitted by the trustees or the company to which the income arose.

Offshore trusts ‚ the recycling rule

From 6 April 2017 a ‚ recycling‚ or ‚ anti-conduit‚ rule will be included in the settlements‚ code, the transfer of assets abroad legislation and the TCGA 1992, s 87 attribution of gains to beneficiaries‚ anti-avoidance provisions.

HMRC has confirmed that where a beneficiary has received a distribution from the trust and he or she uses those funds to meet an obligation pursuant to a court order in relation to a divorce settlement, the provision will not apply.

Finance Bill 2017 UPDATE

The Finance Bill 2017 was published on 20 March 2017 see https://www.gov.uk/government/publications/finance-bill-2017-legislation-and-explanatory-notes.

Legislation to be published in a future Finance Bill

Capital Gains Tax TCGA Schedule 5:

disregard of section 87 capital payments to non-residents

disregard of section 87 capital payments to migrating beneficiaries

transfer of s 87 benefits charge to the settlor where the beneficiary is a close family member of the settlor and is not liable to CGT on the payment

attribution of gains to recipients of onward gifts (recycling rule)

Chapter 5 of Part 5 of ITTOIA (Settlements):

benefits charge for settlor and close family members of settlor

benefits charge on settlor when beneficiary is close family member and is not taxable on the benefit

attribution of deemed income to recipients of onward gifts (recycling rule)

Chapter 2 of part 13 of ITA 2007 (Transfer of Assets Abroad)

attribution of deemed income to recipient of onward gift (recycling rule)

A technical update was released by the government on 21 March 2017 explaining the absence of the above provisions.

It states that: ‚ The draft legislation on the trust protections was consulted on between 5 December 2016 and 22 February 2017. Stakeholders were advised that where the legislation was incomplete or incorrect, the necessary amendments would be made no later than the date for the publication of the Finance Bill. However, it has not been possible to make all of these changes in time and consequently, the government has taken the view to defer publication of the provisions affected. This note sets out the provisions that have been published on 21 March 2017 and those that will be included in a future Finance Bill.‚

HMRC have also stated that, although not made explicit in the technical note, any future legislation will take effect from the start of the relevant tax year for the Finance Bill in question. They have also made clear that it would not be backdated to April 2017 as that would be retrospective in effect, and contrary to the standard practice of avoiding retrospective legislation wherever possible. However, it should be emphasised that final decisions on future legislation will rest with HMT Ministers.

It has not been confirmed whether the omitted provisions will appear in Finance Bill 2018 or a later Bill.

Technical Team