UK resident IIP trust.
Non-UK resident beneficiary - USA.
Beneficiary has UK source income in their own name, largely dividends (£16,000), a small amount of interest and a Property Income Dividend.
The UK trust, of which he is the IIP beneficiary has a similar amount of UK dividends and interest, but also some non-UK interest and dividends.
Initially I was concerned about reclaiming UK tax suffered by the IIP on the foreign dividends and interest.
Now I’m thinking none of the income is taxable here under the DTA, subject to giving up the personal allowance, so I should be putting in a claim for DTR and reclaiming all of the tax that the trust has withheld and not paying tax on any of the UK interest and dividends held by the taxpayer in his own name.
I’ve had a long January and can’t see the end of the tunnel, so I am now questioning my own judgment and looking for reassurance. It would also be useful to understand how best to do this on the tax return as I’m not convinced the software can work this out on its own!
The trustees are not liable under UK domestic law on the non-UK source dividends and interest and neither is the non-UK resident life interest beneficiary. The DTA is irrelevant to this issue.
If the UK source income of the trust is mandated to the beneficiary (ie does not pass through the trust) the trustees have no liability on such income although the beneficiary does in principle have a liability (as UK source income). However, the DTA should remove any such liability on the part of the beneficiary re interest and dividends. However, the UK source interest and dividends should qualify as “disregarded” income and thus not subject to tax hence no need for DTA exemptions (ITA 2007, s.811, 813).
If not mandated, then trustees have a liability (at the basic/dividend rate) on all UK source income and the beneficiary (who is liable thereon) receives a credit for tax paid by trustees against their own liability.
The UK source interest and dividends accruing in the beneficiary’s own name qualify as disregarded income and hence effectively exempt. In this case it would seem necessary if the tax paid by the trustees is to be reclaimed that the DTA be invoked.