On 26 January, the government released the first draft of the legislation giving effect to the promised protection of non-UK source income arising in a trust structure established by a long-term non-domiciliary before becoming deemed domiciled in the UK as a result of having spent 15 years in the UK in a 20 year period.

The legislation for the capital gains tax trust protections was released in December and our note dealing with this and with our expectation of what the income tax rules would look like can be accessed here.

The good news is that the draft income tax legislation broadly speaking takes the approach which most advisers had anticipated. The bad news is that the legislation still needs a good deal of work to make it fit for purpose and also leaves one or two very important questions unanswered.

The draft legislation fundamentally changes the way in which non-UK source income within a trust structure is taxed for all non-UK trusts with a settlor who is not domiciled in the UK or who is deemed domiciled in the UK as a result of having spent at least 15 out of the previous 20 tax years in the UK.

It is very important to understand that this change therefore affects settlors who are not yet deemed domiciled. All trust structures with non-domiciled settlors will need to be reviewed to see what impact the income tax changes will have and whether any action needs to be taken before 5 April 2017.

The main features of the new approach are as follows:

  • UK source income within the structure will continue to be taxed on the settlor as it arises (i.e. no remittance basis because it is not foreign income).
  • At the moment, foreign source income is deemed to belong to the settlor if the settlor is a beneficiary of the trust. This means, for example, that if the income is remitted to the UK by the trustees or by a company within the structure (for example, to make a UK investment) the settlor will have to pay tax on the amount remitted.
  • After 5 April 2017, this will no longer be the case. Income arising in the trust structure will not be deemed to belong to the settlor. The trustees (or an underlying company) can therefore safely bring the money to the UK without a UK tax charge arising. This is a significant benefit compared with the current regime.
  • Instead, the income will be taxed when the settlor (or another beneficiary) receives a benefit from the trust structure. If the settlor is deemed domiciled, tax will be payable in the year the benefit is conferred whether or not the benefit is received in the UK. On the other hand, if the settlor is not deemed domiciled and claims the benefit of the remittance basis of taxation, tax will only be payable if the benefit is received in or remitted to the UK.
  • The non-domiciled / deemed domiciled settlor will also be taxable on income which is matched with benefits conferred on close family members (spouse / partner and minor children) unless the family member is taxable on the benefit in the year in which it is conferred. A distribution to a non-domiciled spouse (who pays tax on the remittance basis and does not remit the distribution) would therefore be taxed on a deemed domiciled settlor in the year the distribution is made.
  • In addition, the legislation contains an "anti-conduit" rule which prevents a tax-free distribution being made to a nonresident or non-domiciled beneficiary followed by a gift to somebody in the UK. The ultimate recipient in the UK will be treated as if he / she had received the gift direct from the trust and will be taxed on any income in the trust structure which can be matched against the benefit.

The anti-conduit rule only catches gifts made in the tax year of the original distribution and the following three tax years unless there is some sort of arrangement for the onward gift to take place in which case there is no time limit.

This will be something which trustees and beneficiaries are going to have to watch out for. The definition of "arrangement" is very wide and if, for example in the context of the termination of a trust, a non-UK resident beneficiary receiving the trust assets indicates that they would intend in due course to provide for their children (who may be UK resident) out of proceeds, this could constitute an arrangement.

In the first three to four years after the distribution, there is no requirement for any arrangement and so non-UK beneficiaries need to be aware that, if they have received a distribution from an offshore trust, any gift (there is currently no de minimis exception) to a UK resident beneficiary will very likely result in a tax liability for the UK individual.

  • The pool of income which can be matched against benefits is not just the income which arises after 5 April 2017. Income which has arisen in the past and which has been retained in the trust structure will also be available to be matched against benefits received by the settlor (or other beneficiaries).
  • The trust protections will be lost if an addition is made to a trust after the settlor has become deemed domiciled in the UK. There will be no de minimis exception. An addition of 1 (even inadvertent) will result in all trust protections (income tax and capital gains tax) being lost forever. Great care will therefore need to be taken to avoid mistakes in this area.

The two significant areas where uncertainty remains are as follows:

  • It had been understood following discussions with HM Treasury / HMRC that benefits provided to settlors on or before 5 April 2017 would not be capable of being matched with income which arises in the trust structure after 5 April 2017. There is nothing in the legislation which makes this clear although we would still expect that this will be included in the final draft. If not, action may need to be taken to avoid potential tax liabilities for those individuals who will become deemed domiciled on 6 April 2017 and indeed for those non-domiciliaries who have previously received distributions which have been remitted to the UK.
  • It was also expected that the legislation would confirm that income which arises on or before 5 April 2017 (which will be part of the pool of income that can be matched against future benefits) will no longer be treated as the settlor's income if it is retained in the trust structure. This would mean that the trustees (or any underlying companies) would be free to use those funds in the UK without any tax liabilities arising. Again, the draft legislation does not make this clear. If this is not clarified, it may be sensible to consider distributing past income out of the structure before 5 April 2017.


  • Review all trusts with non-domiciled settlors whether or not the settlor will become deemed domiciled on 6 April 2017.
  • Consider whether income up to 5 April 2017 should be distributed out of the structure so that it cannot be matched against future benefits.
  • However, if past income will no longer be treated as the settlor's income and there is no intention to provide benefits, there may be an advantage in leaving the income in the structure so that it can be used in the UK without a tax charge.
  • If benefits are needed, it may make sense for distributions to be made before 5 April 2017.
  • Where there are ongoing benefits (for example, rent free occupation of a property or interest free loans) and the settlor / beneficiary is going to become deemed domiciled on 6 April 2017, consider granting a fixed term benefit (e.g. a ten year lease or a fixed repayment date for the loan) so that all of the benefit is received before 5 April 2017.
  • Make sure there are no arrangements in place which could constitute an addition to the trust after 5 April 2017 e.g. interest free loans made by the settlor to the trustees.
  • If beneficiaries who have previously received distributions are considering gifts to UK residents, these should be made before 5 April 2017.
  • Distributions to non-taxable close family members should also be made before 5 April 2017.
  • In some structures it may no longer be necessary to segregate income and capital after 5 April 2017 which will simplify administration.

These considerations apply principally in the context of the income tax changes. Other considerations may apply as a result of the changes to the capital gains tax and inheritance tax rules for those who are becoming deemed domiciled in the UK and the wider position clearly needs to be taken into account.


The government has taken account of the many representations made following the original announcement that offshore nonreporting status funds (which produce offshore income gains as opposed to capital gains) would not qualify for rebasing for those individuals becoming deemed domiciled on 6 April 2017.

Confirmation has been received that such investments will qualify for rebasing (assuming the other conditions are satisfied). There is therefore no need for individuals becoming deemed domiciled on 6 April 2017 to make an actual disposal of these investments before that date.


In another piece of good news, the government has amended the draft legislation to make it clear that, if it can be shown that there is a certain amount of clean capital in a mixed fund, that clean capital can be distributed to a new account by way of a single transfer leaving all of the income and gains behind.

The bad news however is that there is some uncertainty at the moment as to whether pre-2008 income / gains / capital can be segregated. This is currently being clarified with HMRC.