RDRM33596 | Remittance basis: Identifying remittances: Specific topics: Settlements: Chapter 5 ITTOIA 2005 - under £2,000 threshold

Income arising to a trust is treated, for income tax purposes, as the income of the settlor if he or she retains an interest in the property of that trust. This is the case even where the trust income is paid to someone else.

Where this applies, the settlor must take into account the income arising to the trust in calculating whether to claim the remittance basis or whether the remittance basis can be given without the need to claim.

Where the remittance basis applies, ITTOIA05 s648(3) provides for the foreign element of income arising to the trust not to be assessed on the settlor in the year it arises to the trust, until such times as it is remitted. This means that once it is established that the remittance basis applies, foreign income arising to the trust is not treated as the remittance basis user’s income unless it is remitted to the UK.

However, the individual must take into account the total income arising to the trust when establishing whether he must make a claim to the remittance basis under ITA07 s809B, or whether it is due without the need to claim because his unremitted foreign income and chargeable foreign gains are less than £2,000 (ITA07 s809D)

Once on the remittance basis an individual’s unremitted income and gains for that year may be less than £2,000 - because the foreign income arising to the trust is no longer treated as his under ITTOIA05 s648(3); however, this position can only be achieved once it has been established that the remittance basis is being used. Therefore, the income arising to the trust before ITTOIA05 s648(3) is applied must be included in deciding under what section the remittance basis is to be accessed.

Example

Gael created a discretionary trust several years ago and in year 2010-2011 interest of £55,450 is credited to the trust’s Jersey bank account. Gael retains an interest in the trust. He must therefore include the £55,450 interest arising to the trust in his calculations when choosing whether to be use the remittance basis.

If Gael chooses to be taxed on the remittance basis, he must make a claim for it under s809B. He will lose his personal allowances and the annual exempt amount for capital gains. If he is a long-term resident, he will also have to pay the applicable remittance basis charge.