628AException for protected foreign-source income

1

The rule in section 624(1) does not apply to income which arises under a settlement if it is protected foreign-source income for a tax year.

2

For this purpose, income arising under a settlement in a tax year is “protected foreign-source income” for the tax year if Conditions A to F are met.

3

Condition A is that the income would be relevant foreign income if it were income of a UK resident individual.

4

Condition B is that the income is from property originating from the settlor (see section 645).

5

Condition C is that when the settlement is created the settlor—

a

is not domiciled in the United Kingdom, and

b

if the settlement is created on or after 6 April 2017, is not deemed domiciled in the United Kingdom.

6

Condition D is that there is no time in the tax year when the settlor is—

a

domiciled in the United Kingdom, or

b

deemed domiciled in the United Kingdom by virtue of Condition A in section 835BA of ITA 2007.

7

Condition E is that the trustees of the settlement are not UK resident for the tax year.

8

Condition F is that no property or income is provided directly or indirectly for the purposes of the settlement by the settlor, or by the trustees of any other settlement of which the settlor is a beneficiary or settlor, at a time in the relevant period when the settlor is—

a

domiciled in the United Kingdom, or

b

deemed domiciled in the United Kingdom.

9

In subsection (8) “relevant period” means the period—

a

beginning with the start of 6 April 2017 or, if later, the creation of the settlement, and

b

ending with the end of the tax year.

10

For the purposes of Condition F, the addition of value to property comprised in the settlement is to be treated as the direct provision of property for the purposes of the settlement.

11

Section 628B (tainting) contains further provision for the purposes of Condition F.

12

In this section “deemed domiciled” means regarded for the purposes of section 809(1)(b) of ITA 2007 as domiciled in the United Kingdom as a result of section 835BA of ITA 2007 having effect.

13

Section 648(3) to (5) (relevant foreign income treated as arising under settlement only if and when remitted) do not apply for the purposes of this section.

628BSection 628A: tainting

1

This section applies for the purposes of Condition F in section 628A.

2

Ignore—

a

property or income provided under a transaction, other than a loan, where the transaction is entered into on arm's length terms,

b

property or income provided, otherwise than under a loan, without any intention by the person providing it to confer a gratuitous benefit on any person,

c

the principal of a loan which is made to the trustees of the settlement on arm's length terms,

d

the payment of interest to the trustees of the settlement under a loan made by them on arm's length terms,

e

repayment to the trustees of the settlement of the principal of a loan made by them,

f

property or income provided in pursuance of a liability incurred by any person before 6 April 2017, and

g

where the settlement's expenses relating to taxation and administration for a tax year exceed its income for that year, property or income provided towards meeting that excess if the value of any such property and income is not greater than the amount of—

i

the excess, or

ii

if greater, the amount by which such expenses exceed the amount of such expenses which may be paid out of the settlement's income.

3

Where—

a

a loan is made to the trustees of the settlement by the settlor or the trustees of a settlement connected with the settlor, and

b

the loan is on arm's length terms, but

c

a relevant event occurs,

the principal of the loan is to be regarded as having been provided to the trustees at the time of that event (despite subsection (2)).

4

In subsection (3) “relevant event” means—

a

capitalisation of interest payable under the loan,

b

any other failure to pay interest in accordance with the terms of the loan, or

c

variation of the terms of the loan such that they cease to be arm's length terms.

5

Subsection (6) applies (subject to subsection (7)) where—

a

the settlor becomes deemed domiciled in the United Kingdom on or after 6 April 2017,

b

before the date on which the settlor becomes deemed domiciled in the United Kingdom ( “ the deemed domicile date ”), a loan has been made to the trustees of the settlement by—

i

the settlor, or

ii

the trustees of a settlement connected with the settlor,

c

the loan is not entered into on arm's length terms, and

d

any amount that is outstanding under the loan on the deemed domicile date (“the outstanding amount”) is payable or repayable on demand on or after that date.

6

Where this subsection applies, the outstanding amount is to be regarded as property directly provided on the deemed domicile date by the lender for the purposes of the settlement (despite subsection (2)).

7

But if the deemed domicile date is 6 April 2017, subsection (6) does not apply if—

a

the principal of the loan is repaid, and all interest payable under the loan is paid, before 6 April 2018, or

b

the loan becomes a loan on arm's length terms before 6 April 2018 and—

i

before that date interest is paid to the lender in respect of the period beginning with 6 April 2017 and ending with 5 April 2018 as if those arm's length terms had been terms of the loan in relation to that period, and

ii

interest continues to be payable from 6 April 2018 in accordance with those terms.

8

For the purposes of this section, a loan is on “arm's length terms”—

a

in the case of a loan made to the trustees of a settlement, only if interest at the official rate or more is payable at least annually under the loan;

b

in the case of a loan made by the trustees of a settlement, only if any interest payable under the loan is payable at no more than the official rate.

9

For the purposes of this section—

• a settlement is “connected” with a person if the person is the settlor or a beneficiary of it;

• “deemed domiciled” has the same meaning as in section 628A;

• “official rate”, in relation to interest, means the rate of interest applicable from time to time under section 178 of FA 1989 for the purposes of Chapter 7 of Part 3 of ITEPA 2003.

628CForeign income arising before, but remitted on or after, 6 April 2017

1

For the purposes of applying section 809L of ITA 2007 (meaning of remitted to the UK) in relation to transitional trust income, “relevant person” in that section does not include the trustees of the settlement concerned.

2

“Transitional trust income” means income—

a

that arises under a settlement in the period beginning with the tax year 2008-09 and ending with the tax year 2016-17 (“the protection period”),

b

that would be protected foreign-source income for the purposes of section 628A(1) if section 628A(2)—

i

had effect for the protection period, and

ii

so had effect with a reference to conditions A to E (instead of A to F),

c

that prior to 6 April 2017 has neither been distributed by the trustees of the settlement nor treated under section 624(1) as income of the settlor, and

d

that would for the tax year in which it arose under the settlement have been treated under section 624(1) as income of the settlor if the settlor had been domiciled in the United Kingdom for that year.

3

Section 648(3) to (5) (relevant foreign income treated as arising under settlement only if and when remitted), and corresponding earlier enactments, do not apply for the purposes of subsection (2)(a) and (d).