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INTM603300 | Transfer of assets abroad: Non-domiciled and deemed domiciled settlors from 6 April 2017 to 5 April 2025: Changes to ITA07/S727 income charge

From HM Revenue & Customs · International Manual

INTM601020 onwards looked at the application of the income charge where the transferor meets the capital receipt conditions, namely that the individual receives or is entitled to receive a capital sum which is connected with a relevant transaction. Prior to the changes introduced by the Finance (No. 2) Act 2017, ITA07/S727 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 has received (or is entitled to receive) a capital sum which is in any way connected with any relevant transaction.

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/S728(1A) with a new subsection (1A) similar to the new subsection ITA07/S721(3B).

This new subsection (1A) is what causes the income arising in non-resident trusts and their underlying companies, with non-UK domiciled or UK deemed domiciled settlors/transferors, to be treated differently to other arrangements coming within the transfer of assets abroad legislation.

It does this by dis-applying ITA07/S727 for certain income if, broadly speaking,

  • that income is foreign income of a non-resident trust (or its underlying companies)

  • settled by an individual who

Specifically, ITA07/S728(1A) defines the amount of income treated as arising under ITA07/S727 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 deemed 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). INTM603320 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/S727 on all the income arising to the person abroad. If the individual is non-UK domiciled or UK deemed domiciled under Condition B, then PFSI will be excluded from charge under ITA07/S727. So, in broad terms, the individual will only be assessable to the income charge on UK source income.