I am going to reply only to the specific question asked and not comment on any other issues that might apply. I have to assume that the trust is not settlor-interested and no Double Tax Treaty is relevant.
S.811 (1)(a) and (3)-(5) ITA 2007 limits a NR trust’s UK income tax liability to income tax deducted at source and tax payable on income other than “disregarded income”.
Interest on UK gilts is free of withholding tax (they are FOTRA securities—free of tax to a non-resident: SAIM1180) and there is no WT on dividends payable to a NR. These are both “disregarded savings and investment income”: s.825.
S.812 (1)(a) overrides this favourable treatment for non-resident trustees if a UK resident individual or company is an actual or potential beneficiary of the trust and if either condition A or B is fulfilled (respectively subsections (3) and (4)).
A the person is or will or may become entitled to some or all of any trust income;
B some or all of the income of the trust may be paid to or used for the benefit of the person in the exercise of a discretion conferred by the trust.
“Income” includes income which has been capitalised: subs(5).
“potential” beneficiary is not defined and its meaning can be contentious as regards HMRC. The correct view about a power to add a beneficiary is surely that no one is a beneficiary of any kind unless and until the power to add an identifiable person is exercised. Another issue concerns description-based class gifts and unborns; the argument here is that a person not yet born cannot be ascribed any determinable residence status and this is an additional argument as regards an unexercised power to add.
Trusts sometimes exclude a beneficiary from benefit while UK resident. In the absence of that HMRC may argue that anyone who could be added within scope of the power or could at any future time become eligible as a member of a class description is “potential”. A judge might see that fanciful interpretation as defeating a presumptive Parliamentary intention that the term should only relate to a trust at a time when any of its income could be paid to or used to benefit or a right to it granted to an identifiable livingi person who was both eligible to benefit and non-UK resident.
TSEM10215-10255 deal with non- resident trusts and income tax but 10215 which mentions a potential beneficiary offers no official clarification of its meaning. It is understood that HMRC can be difficult here but it is hard to see how a person who could be added or is unborn can be determined as having a residence for any tax purpose, certainly not for the SRT.
The better view is surely that a potential beneficiary is an identifiable person whom the trustees could choose to benefit who is living and has an identifiable tax resident status at any relevant time. That in turn is any time at which the trustees could pay income or use it to benefit or grant a right to it to him or her regardless when that income arose (which might have occurred at a time when he or she was not eligible).
S.811(5) and its inclusion of capitalised income would seem to imply that undistributed, unaccumulated income arising prior to eligibility is included in principle but only if it -and any such prior income capitalised—can be paid or used to benefit after eligibility adheres and while it subsists.
Jack Harper
