Deemed domicile trust protections and Offshore Income Gains - FURTHER UPDATE

By Technical Team on 18 Jan 2019

There has been a recent development regarding the trust protection rules and offshore income gains, which may be relevant for 2017/18 tax returns. 

As we have previously reported, new rules for foreign domiciliaries and non-UK resident trusts were introduced from April 2017, by Finance (No 2) Act 2017 and Finance Act 2018. The rules contain anti-avoidance provisions but also protections to help settlors of offshore trusts affected by the changes. However, there is a technical defect in the legislation, relating to offshore income gains, which could cause serious problems. 

Our June news item Non-dom reforms: protected trusts and non-reporting funds - a survey for completion by offshore trustees explained the technical issue with the current legislation, which appears to mean that offshore income gains are not included in the protections.   Briefly:

  • In order to be Protected Foreign Source Income (PFSI), ITA 2007 section 721A(3)  requires that the income would be relevant foreign income (RFI) if it were income of the individual.
  • There was a concern that offshore income gains (OIGs) could not be RFI if the settlor of the trust was deemed domiciled due to regulation 19(1)(a) OIG Regulations 2009.
  • We had hoped an amendment to regulation 19 would be made, in view of the stated government policy that: “Non doms who have set up an offshore trust before they become deemed domiciled here under the 15-year rule will not be taxed on trust income and gains that are retained in the trust …”.
  • As reported in our November news item, no statutory change will be made to the legislation with effect for 2017/18 or 2018/19 – but HMRC said it would continue to monitor the situation and liaise with stakeholders. 
  • There is a technical view that OIGs are RFI in any event due to regulation 18(3) charging them to tax under Chapter 8 Part 5 of ITTOIA 2005 (and see section 830(2)(o) ITTOIA 2005).  A click through to a PDF version of a more detailed technical explanation can be found at the bottom of this news item. It is important to note that the analysis does not reflect the views of any of the professional bodies.  It is published so that professional advisers can consider the analysis for themselves using their own professional judgement and constitutes neither advice nor guidance.
  • As stated in our December news item, the detailed technical analysis has been sent to HMRC and is currently being considered.  We understand that HMRC will respond in detail to the submission and will publish full details of the HMRC response when it is available. To be clear, at the time this news item is published, HMRC has provided no comments and has not agreed or endorsed the analysis in any way.

Note that there is a similar issue for accrued income profits with a similar technical argument being available for why the income should come within the trust protections.

2017/18 Tax Returns

For those completing 2017/18 returns now, where this issue is in point, and tax returns have not been submitted members consideration will need to be given as to what filing position to take.  The professional bodies cannot provide advice or guidance; however, the following are options which professional advisers might want to consider:

  • Delaying submission until the HMRC response is published. It is hoped that the response will be available with sufficient time before the filing deadline, but this cannot be guaranteed.
  • Filing the return on the basis of what is considered by the adviser to be the better technical position which will either be that: (i) the trust protections DO NOT apply; or (ii) the trust protections DO apply. 
    Note that since HMRC has not opined on the technical analysis sent in, it has to be assumed that HMRC will be expecting the return to be filed showing any OIGs realised.  As such, if the analysis outlined in brief above and set down more fully in the PDF is adopted (or any other technical analysis which concludes that the protections apply), appropriate white space disclosure of the technical position should be considered.
  • To be on the safe side, the client might wish (at least initially) to file the return on the basis that the trust protections do not apply.  The client will have a year to 31 January 2020 to file an amended return. 

For returns already submitted consideration can be given to amending them (taking into account the issues raised above).

For a more detailed Technical explanation please see here.

Technical Team