TSEM4615 | Settlements legislation Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2017 – 5 April 2025: How a protected settlement can be tainted

The guidance on this page relates to the period 6 April 2017 - 5 April 2025. From 6 April 2025 the rules around the taxation of non-UK domiciled individuals ended and individuals are taxable based on their residence position only. Detailed guidance on the changes from 6 April 2025 can be found at TSEM4700 onwards.

TSEM4610 looked at the definition of protected foreign source income (PFSI) and in particular the conditions that must be met for income to be PFSI. One of the conditions that must be met 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 a settlement where the settlor is a beneficiary or settlor. If the settlor or those trustees add property to the trust the trust will become tainted from that point and the protections offered in the form of PFSI will be lost. The income will fall within the scope of ITTOIA 05/S624 as it arises and will be assessable on the deemed domiciled settlor from the date tainting occurs.

For the purposes of tainting the addition of value to settlement property is treated as the direct provision of property to the settlement, for example a debt due to the settlor with an uncommercial rate of interest is being paid by the trustees. The provision of goods or services by the settlor to the trustees can also constitute the provision of property if they are provided at undervalue.

The tainting rules are not avoided by making additions to an underlying company rather than the non-resident trust that owns it.

It is important to note that the settlor cannot taint the trust if they are non-domiciled and not deemed domiciled. It is only after they become deemed domiciled and add property to the trust that tainting can happen.

Tainting will not usually occur when someone other than the settlor or trustees of a connected settlement adds property to the settlement. If a third party adds property this may constitute a separate settlement and carry its own consequences, but it will not usually taint the settlement made by the original settlor.

If a settlor fails to exercise a right of recovery in relation to settlement property this may cause the tainting of the settlement. HMRC’s long established practice, set out in paragraph 24 of SP5/92, will apply for the purposes of the trust protections. A failure to exercise a power of recovery will be regarded as tainting the settlement unless a genuine attempt to enforce the right had proved to be unsuccessful.

Normal exchange rate fluctuations in respect of loans should not cause the tainting of a settlement. However, arrangements involving the use of appreciating or depreciating currency balances or payments designed to add value could well result in result in the tainting of a trust.

The concept of tainting is removed from 6 April 2025. From that date, all the income within the structure is taxable on the settlor on the arising basis under ITTOIA/S624