TSEM4720 - Settlements Legislation: Rules affecting non-domiciled and deemed domiciled settlors of non-resident trusts from 6 April 2025: Benefits鈥��

For details of the rules introduced from 6 April 2018 on the benefit charge see TSEM 4635.鈥赌�听

Under the trust protections measures in place up to and including the 5听April 2025, a settlor of a protected settlement was not taxed on the Protected Foreign-Source Income (PFSI) of the structure as it arose, provided it remained offshore, but they were taxed under section 643A ITTOIA 2005 on any benefits that they received, or under section听643J or section 643L ITTOIA 2005 in relation to onwards gifts,听to the extent that the benefit or onward gift was matched with the PFSI of the trust.鈥赌��听

From 6 April 2025 a charge applies听to a settlor听or close family member (CFM)听under section 643A听ITTOIA 2005听to the extent that they: receive a benefit from the settlement,听are UK resident, have an untaxed benefits total听and there is available听protected income听(PFSI or TTI).听听

If there is a choice about individuals as to whom听the income is treated as arising,听then HMRC听can apportion the tax charge on a just and reasonable basis to prevent any potential double taxation.鈥�听

From 6 April 2025 if a beneficiary receives a benefit from a previously protected settlement which would ordinarily be taxed on that individual under section 643A ITTOIA 2005, but the recipient of the benefit is eligible for听and makes a claim to听the 4-year FIG regime for the relevant tax year, no tax will be paid by the individual in relation to the benefit.鈥� However, that benefit will not听be treated听as reducing the pool of available relevant income for matching to future benefits听paid out of PFSI/TTI,听under section 643C听ITTOIA 2005.鈥�听

What is an untaxed benefit?听

For each individual听you must determine听what their untaxed benefits total is.听There are 4听steps set out in the legislation at section 643B ITTOIA 2005 to tell you how to do this.听

Step 1听

Identify听each benefit provided by the trustees to that individual at any time when they were UK resident in the current or an earlier tax year.听 If the individual is a close family member (CFM)听then听only include the benefits provided to them at a time when they were a CFM.听

If a benefit is provided to a CFM at a time when they are not UK resident, but the settlor is UK resident,听then the benefit will be included in the settlor鈥�s untaxed benefits听total for the year.听

Step 2听

Next听identify听the amount or value of each benefit for that individual at Step 1 and calculate the total.听

Step 3听

Then, deduct from the听total听at Step 2:听

  1. Any part of it where the individual has already been subject to income tax by a means other than section 643A听ITTOIA 2005,听

  2. Any part that has been subject to income tax by virtue of section 643A, or previously under old section 643J or section 643L听ITTOIA 2005听(onward gifts rules听from 6 April 2018 鈥� 5 April 2025),听

  3. Any whole or part benefit that has been taken听into account听when charging income tax under the Transfer of Assets Abroad (ToAA)听legislation听(seeINTM600000),听

  4. Any amount required to be deducted by section 643D(2)听ITTOIA 2005听(reduction听due to previous听capital gains tax charge).听

Step 4听

If the amount at Step 3 of the calculation is greater than nil,听then that is the individual鈥�s untaxed benefits听total for the current tax year.听

Meaning of available protected income听

To determine听the amount of available protected income,听there are 5 steps that you need to follow.听These are set out at section 643C听ITTOIA 2005:听

  1. Identify听any PFSI and TTI that arose at any time under the settlement.听 This is the total protected income*.听

  2. Deduct from the total protected income any amount that has been matched under the ToAA legislation in the current or an earlier tax year.听

  3. Deduct any amount of the total protected income on which the individual or another individual has been subject to income tax in the current or an earlier tax year.听

  4. Deduct any amount that is treated as income under section 643A ITTOIA 2005 in an earlier tax year.听

  5. Add back any amount of income that falls within step 4 at a time that the individual听or another individual has claimed relief under the 4-year FIG regime听for any tax year.听

The amount calculated is the total amount of available protected income听(API).听

*New section 643ZA ITTOIA 2005 defines what is PFSI and confirms that it is only income which arose to the settlement during听tax years 2017/18 to 2024/25.鈥� New section 643ZA also defines what is TTI and confirms that it is only income which arose to the settlement between听tax years听2008/09 to 2016/17.听听