I understand that a non resident trust with UK source income should be completing tax returns to declare the UK rental income and tax paid by the trustees. The settlor is non resident and I need to ascertain whether the income should also be reported on his tax return as a settlor interested trust with credit for the tax paid by the trust. I am unclear as to whether his residence status has any bearing on the inclusion on his personal tax returns.
Why is it “settlor interested”? What kind of trust is it? Who are the beneficiaries and where are they resident? What kind of property is let?
It is an Australian discretionary trust, the beneficiaries are the setllor and his adult children. Settlor is resident in Australia and one of the children is resident in the UK. the rental income is from a residential property.
The answer is that, yes, the UK source income needs to be reported in the settlor’s personal tax return. This is dealt with in James Kessler KC’s book, Taxation of Foreign Domiciliaries 2022-23, at [47.9] and [47.9.2].
I presume that the trustee or trustees are non-resident making the trust a non-resident trust for UK income tax.
It sounds like the settlor has retained an interest so the UK settlement rules apply but as he is non-resident they catch only UK source income. S811 ITA applies but UK rent is still caught. The UK/Australia DTC allows the UK to tax him and though in principle he is entitled to a credit against Australian tax he may not be liable to tax there unless he receives a distribution, which may therefore be desirable… Trusts are covered in Division 6 of Part III of the Income Tax assessment Act 1936. Family discretionary trusts are common in Australia as a means of flexibly distributing trust income to best effect round family members with the result that instead of the trust being taxed on trust income as if an individual those beneficiaries who receive distributions of income are taxed on it instead as they would be in a trust where they were “presently entitled” to the income or a share in it. Under s 624 (1) ITTOIA the settlor is the “only” taxable person on the income, during his life, to the exclusion of the trustees. The settlor must make a return.
Where the settlor is not taxable the trustees are and s811 does not apply as s812 excludes it where there is even one beneficiary, actual or potential, who is UK resident in the tax year (presumably ignoring unborns!). The trustees would then be liable to tax on the rents with the standard band @20% and the rest @45%. ESC B18 should apply to the UK resident beneficiary who receives a distribution provided the trustees make a return. That income may well not be taxed in Australia as it is non-Australian tax income (but one disadvantage is that Australian resident individuals do not have a personal allowance just a lower initial rate band, so the UK does not give them one either!).
TSEM10000 is very helpful and has useful examples. The ATO website https://www.ato.gov.au/ is a good source of information but local advice is as ever essential to a non-expert even one expert in UK tax.
the trustees are non-resident, thank you for your help
Despite ITTOIA 2005 s624 treating the income as that of the settlor (during his lifetime), and only the settlor, this does not preclude the trustees being required to file returns and on which the 45%/ will be levied (the settlor then being entitled to an appropriate tax credit). See ITTOIA 2005 s646(8).
While Malcolm is factually correct, there is no mechanism whereby HMRC can force non-resident trustees to submit returns and pay tax at 45%. This is implicit in ESC B18. Nor are they likely to be too miffed if the settlor files his own returns and pays the tax. If he does not they have another remedy, namely to collect tax at 20% on the gross rent from the letting agent or, if none, the tenant subject to a disregard of £100 per week per tenant. This is subject to the Non Resident Landlord Scheme which this query does not say is or is not applicable.
If distributions to the UK resident beneficiary are planned and ESC B18 would be favourable a condition of it is that trustees should make tax returns. While they might consider it worthwhile to save themselves the hassle and any expense until they need to they should bear in mind that HMRC will not go back more than 6 years and a refusal to allow the concession cannot be litigated save by JR. If the Settlor has a UK agent for his returns it is likely to be advisable for the agent to file the trust returns and deal with the NRLS if the letting is long-term.
“Technically” correct !!
Apologies! But perhaps a mere technicality?
A postscript curiosity. The 1995 NRL regulations made under s42A ICTA 1988 were kept in force, like many others, by Sch 2 ITA 2007 with their references to that section and to Schedule A (an old friend no longer with us). ss971 and s972 ITA enacted the new regime beginning with 6 April 2007. The 2020 NRL amendment regulations were made under s971 but amended the 1995 regulations (to cover the new corporate interest restriction regime) without changing their old terminology. Simples! Why on earth did they not amend the 1995 regs by inserting new nomenclature as from 6 April 2007 or just produce a new set of regulations at a convenient moment after that date? Surely they have not been WFH for all this time.
Apologies kindly accepted ! As you say, just a technicality.
I think I’ll need a wet towel round my head to digest your Postscript!
If the trust has UK property income, the trustees should be made aware of a possible UK CGT liability on a capital gain.
Re Malcolm’s “Despite ITTOIA 2005 s624 treating the income as that of the settlor (during his lifetime), and only the settlor, this does not preclude the trustees being required to file returns and on which the 45%/ will be levied (the settlor then being entitled to an appropriate tax credit). See ITTOIA 2005 s646(8).”, could you please provide authority for this? All that section 646(8) (of ITTOIA) says is “(8) Nothing in sections 624 to 632 is to be read as excluding a charge to tax on the trustees as persons by whom any income is received.”
So what imposes the charge at 45% in the first place? It is obviously not ITA 2007 section 479 as that applies only to income within section 480 and section 480(3) makes it clear that income is excluded from the scope of that section “so far as- (a) before being distributed, it is the income of any person other than the trustees”.
While this may seem obvious to Malcolm and the other contributors, it is not at all obvious to me. So far as I am aware, if the trustees are to be liable at all (on account of receipt) it would be at the basic rate only. What have I missed?
Thank you Robert for your post and I take the point you make.
When I posted my response you may note that next to “45%” appears “/”. It should have been a “?”" as it was intended to remind me to check my authority for the “45%” rate before I actually posted. In the event I posted and forgot to check.
On ploughing through miscellaneous notes I have made over the years I found what I believed was my authority for the “45%” rate to apply, namely, Tax Bulletin 84:
"Settlor-interested trusts and settlements
Section 686(2)(b) ICTA 1988 has been amended and from 6 April 2006 the trustees of settlor-interested trusts are no longer taken out of the charge to the special trust rates. The normal rules for accumulation and discretionary trusts will therefore apply in these cases, so that dividend income is assessable at 32.5% and all other income is assessable at the rate applicable to trusts, currently 40%. As a result boxes 13.1 to 13.6 in Question 13 of the Trust and Estate return will
I also made notes which indicate I had had discussions with HMRC on this issue in which it would seem they took the view that the interaction of the sections `Robert refers to in his post did not preclude assessment on trustees at the trust rate; rightly or wrongly.
Section 686(2)(b) ICTA 1988 as originally enacted read:
“(b) is neither (before being distributed) the income of any person other than the trustees nor treated for any of the purposes of the Income Tax Acts as the income of a settlor; and”
It was amended by para 2 Sch 13 FA 2006 as follows:
" 2 (1) In section 686(2)(b) of ICTA—
(a) omit “either”, and
(b) for sub-paragraphs (i) and (ii) substitute “the income of a person other than the trustees.”
(2) This paragraph shall come into force on 6th April 2006 (in relation to settlements whenever created)."
Para 2 (1) does not make sense unless s686(2)(b) was amended earlier but I cannot find on legislation.gov.uk when that might have occurred because the website only gives access to the original and revised versions. The latter only gives references to the relevant repeals.
At any rate after 6 April 2006 it seems that the exception for income treated as taxable on the settlor was excised. TSEM 3019 confirms HMRC’s view. Trying to find Explanatory Notes to the Bill on parliament.uk seems to require AI. So may be possible by next week.
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