Deemed domicile trust protections - HMRC response

By Technical Team on 28 Jan 2019

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 Protected trusts and non-reporting funds - help us gather evidence 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), s721A(3) ITA 2007 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 ITTOIA 2005 (and see section 830(2)(o) ITTOIA 2005). The PDF document, found by clicking on the link at the bottom of this news item, provides a more detailed technical explanation (pages 2 and 3). 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 judgment and constitutes neither advice nor guidance.

As stated in our December news item, the detailed technical analysis was sent to HMRC.  It has been considered in detail by HMRC and we have permission to publish the detailed response provided (which we do on pages 4 and 5 of the PDF document that you can click through to using the link at the bottom of this news item).    

As such, the current position is that HMRC do not see there is any change from the situation when the November statement was made.  That is HMRC’s view is that the trust protections DO NOT apply to OIGs.  No statutory changes are envisaged but HMRC has re-iterated its commitment to monitor the situation and liaise with stakeholders.

2017/18 Tax Returns

For those completing 2017/18 returns now, where this issue is in point, consideration will need to be given as to what filing position to take.  The professional bodies cannot provide advice or guidance; however, professional advisers may want to take the following into account.

  • HMRC expect: (i) tax returns to be filed on the basis that the trust protections do not apply to OIGs; and (ii) for tax to be paid accordingly.
  • Notwithstanding HMRC’s response, an adviser might consider that the better technical position is that the trust protections DO apply.  This could be on the basis of the analysis set down briefly above and in more depth in the PDF or as a result of a different technical analysis.  Appropriate white space disclosure of the technical position should be considered (this would include a reference to the view taken being contrary to that of HMRC) bearing in mind the fundamental principles and standards set out in PCRT with particular reference to paragraph 2.29 et seq,
  • If the tax return is filed on the basis that the trust protections do not apply, the client will have to 31 January 2020 to file an amended return.

In the light of the HMRC response, tax advisers may want to consider: (i) whether to amend returns already submitted on the basis that the trust protections do apply; or (ii) whether they feel that the HMRC response is incorrect (in such cases the adequacy of the initial white space disclosure may be something to review).

For a more detailed Technical explanation please see here.