TRS and right of recovery of income tax

Trusts Discussion
1

If a non-taxable trust (because until now its only asset was an insurance bond) was required to reimburse the settlor under s 538 ITTOIA 2005 the income tax that the settlor had been charged on the trust’s chargeable event gain, is the trust required to become registered under Reg 45 as a taxpaying trust?

"S 538(1) This section applies if–

(a)immediately before a chargeable event the rights under the policy or contract, or the part of or share in them in question, were held on non-charitable trusts,

(b)an individual is liable for tax under this Chapter for the tax year on the gain from the event, and

(c)the income tax for which the individual is liable for the tax year, after any relief available in respect of the gain under section 535 (top slicing relief), exceeds that for which the individual would have been liable apart from the event.

538(2) The individual is entitled to recover that excess from the trustees…"

2

No:

“45(14) For the purposes of this regulation, a taxable relevant trust is a relevant trust in any year in which its trustees are liable to pay any of the following taxes in the United Kingdom in relation to assets or income of the trust—”

s.538 doesn’t impose a tax liability on the trustee. In my view, it would be far too much of a stretch to imply that the beneficiary’s right of recovery is a tax liability - e.g. it is not enforced as a tax liability, it is not accompanied by any of the panoply of tax mechanisms (penalties, appeals, enquiries etc), it is not owed to HMRC.