TSEM4705 - Settlements Legislation: Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2025: Introduction
From 6 April 2025,听the concept of domicile is听苍o longer听relevant in determining听how individuals are taxed in the UK, instead a residence-based test now applies.听 This means that听the protection from tax on foreign income and gains arising within offshore settlor-interested structures is no longer available for individuals previously classed as non-domiciled or听deemed听domiciled听under condition B in the UK,听even if the income and gains remain听offshore.听
A听4-year Foreign Income and Gains (FIG) regime听has been implemented allowing eligible individuals to claim a tax relief in respect of their听eligible听FIG听in their first 4 years of UK residence.鈥�(See RFIG41000)听
It is recognised that many UK residents who were previously classed听as non-domiciled or deemed domiciled under condition B,听had access to the 鈥�Trust Protections鈥�听and remittance basis prior to 6 April 2025,听so听could have a pool of income held in an offshore structure that has not been taxed in the UK, because it has not been remitted to the UK听or matched to a benefit received by the settlor or a close member of the settlors family.听
If this income arose from 6 April 2008 鈥� 5 April 2025听then it can become taxable in the UK if it is used to provide a benefit or onward gift to the settlor or a close member of the settlor鈥�s family.听
If the income arose on or before the 5听April 2008听then it can become taxable on the settlor if it is remitted to the UK.听
A Temporary Repatriation Facility (TRF) is being introduced from tax year 2025/26 through to 2027/28听whereby taxpayers can designate听income that arose before 6 April 2025听and will pay tax on that income at a reduced rate.听 The TRF is available in relation to income taxable under the settlements听legislation. (See RDRM71000)听
Section 624 ITTOIA 2005听(Settlor retains听an interest)听听
From 6 April 2025,听a UK resident settlor of a trust听where the settlor retains an interest (because the settlor or their spouse / civil partner can or may听benefit)听will pay tax on all income that arises under the settlement听as it arises听under section 624 ITTOIA 2005, including any foreign income,听regardless of when the trust was established.听 The settlor may be听eligible to听claim relief under the 4-year FIG regime. This means that settlors who were previously classed as non-domiciled or deemed听domiciled under condition B are now taxed in the same way as those who were previously classed as UK domiciled or deemed听domiciled under condition A.听听
Section 629听ITTOIA 2005 (Income paid to relevant听child of the settlor)听
From 6 April 2025 a UK resident settlor听will pay tax on any听settlement听income, including foreign听income,听that is paid to or used for the benefit of a relevant child听of the settlor, or income that would be treated as the income of that relevant child if it were not for this section, even if that income remains offshore.听听
This section will not apply where the settlor has already paid tax on that income under section 624 ITTOIA 2005听or where the income paid to the relevant child does not exceed 拢100.听
A relevant child means听a minor child who is unmarried or not in a civil partnership, and child includes a stepchild.听听
S633 ITTOIA 2005 (Capital sums听paid to settlor听by trustees of settlement)听
From 6 April 2025 a capital sum paid to the settlor from a foreign听source can听苍ow also be treated as income of the settlor and attract a tax charge at the time it is matched, even if it remains offshore,听in the same way that the capital sum would be taxed听in听on an individual previously classed听UK resident and domiciled individual.听听听
Sections 643A (Benefits) and 643EA (Onward gifts)听ITTOIA 2005听
A听charge under new section 643A ITTOIA 2005听will continue to听apply, from听6 April 2025,听to听treat a benefit received by the settlor or their close family member听as income of the settlor or the close family member听if there is sufficient 鈥榓vailable protected income鈥�听for matching purposes.听 Section 643EA ITTOIA 2005听determines听if there has been an onward gift.听 Where this applies, this will be charged under section 643A ITTIOA 2005.听听
From 6 April 2025, beneficiaries and settlors who听are qualifying new residents that听make an annual听claim under听the 4-year FIG regime will听be relieved from tax in the听first 4 years of their UK听residence, so they will essentially be听able to receive these benefits free of tax.鈥� However, such benefits/onward gifts听will not reduce the pool of unmatched income and gains within the overseas entity for matching purposes and can be subject to a modified onwards gift rule and close family member rule.听