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

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

  • is not UK domiciled, or

  • is UK deemed domiciled under Condition B of ITA07/S835BA (see INTM603220).

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.