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TAXguide 05/17 - Tainting protected settlements

Technical release

Published: 08 Mar 2017 Update History

Reforms to the taxation of non UK domiciled individuals resident in the UK are set to change from 6 April 2017. In TAXguide 05/17, Sue Moore outlines practical situations (agreed with HMRC) where the protected status of a trust set up before an individual was deemed to be domiciled in the UK might be affected.

From 6 April 2017, non UK domiciled individuals resident in the UK for more than 15 out of the last 20 years are deemed domiciled in the UK for all taxes.

Under these new rules, where offshore trusts were established prior to an individual becoming deemed to be domiciled in the UK, protections will be in place such that the settlor will only be subject to tax when benefits are taken from the trust.

The protections do not apply to those born in the UK with a UK domicile of origin even if they have acquired a domicile of choice elsewhere. This protected settlement status will be lost for both income tax and capital gains tax purposes where property or income is added directly or indirectly for the purposes of the settlement.

The legislation, which was published in draft in December 2016, is still work in progress and the Tax Faculty has been working with HMRC to try and clarify how the legislation is intended to work.

In TAXguide 05/17 we outline explanatory notes agreed with HMRC, that set out some practical situations where a trust’s protected status might otherwise be affected. The guide offers information on:

  • loans;
  • shares in the trust;
  • income of life interest settlements; and
  • the recycling rule.

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TAXguide 05/17

Tax Faculty members and ICAEW members can download this guidance in full.

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