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INTM603240 | Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017 to 5 April 2025: Changes to ITA07/S720 income charge

From HM Revenue & Customs · International Manual

INTM600520 onwards looks at the application of the income charge where the transferor has the power to enjoy the income of the person abroad. Prior to the changes introduced by the Finance (No. 2) Act 2017, ITA07/S720 imposed a charge to tax on an individual if the following conditions were met:

  • there had been a relevant transfer

  • as a result of the transfer, income became payable to a person abroad

  • the individual was UK resident

  • if the income had arisen to the individual, it would have been taxable in the UK

  • the individual had the power to enjoy the income of the person abroad.

If these conditions were met in a particular tax year, then the transferor would be taxable on the income arising to the person abroad during the year.

The Finance (No. 2) Act 2017 replaced ITA07/S721(3B) with a new subsection (3B). It is this new subsection (3B) that causes the income arising in non-resident trusts - with non-UK domiciled or deemed domiciled settlors/transferors - and their underlying companies to be treated differently from other arrangements coming within the transfer of assets legislation.

It does this by dis-applying ITA07/S720 for certain income if broadly speaking that income is foreign income of a non-resident trust, settled by an individual who

This disapplication also applies to foreign income arising in non-resident companies owned by the trust.

Specifically, ITA07/S721(3B) defines the amount of income treated as arising under ITA07/S720 by virtue of the following rules.

Rule 1

The amount is equal to the amount of the income of the person abroad if the individual:

  • is UK domiciled at any time in the tax year, or

  • is at any time in the tax year regarded for the purposes of ITA07/S718(1)(b) as UK domiciled as a result of ITA07/S835BA having effect because of Condition A in that section being met (see INTM603220).

Rule 2

In any other case, the amount is equal to so much of the income of the person abroad as is not protected foreign-source income (PFSI). INTM603260 looks in detail at what is PFSI.

As can be seen from the two rules above, unless an individual is non-UK domiciled or UK deemed domiciled under Condition B (see INTM603220), they will be assessed to tax under ITA07/S720 on an amount equal to the income arising to the person abroad. If the individual is non-UK domiciled or UK deemed domiciled under Condition B, then PFSI will not be assessed under ITA07/S720. So, in broad terms, the individual will only be assessable to the income charge on UK source income arising within the trust and its underlying companies.