Non-resident trusts
The tax rules for non-resident trusts are very complicated. This introductory guide will help you understand the basic rules for trustees, settlors and beneficiaries of non-resident trusts and tell you where to get more detailed information.
Definition of key terms
In order to understand non-resident trusts it's useful to clarify a few terms:
for most types of trust, a 'trustee' is someone who holds, manages and makes the decisions about the assets (such as money, land or buildings) in the trust
a 'settlor' is someone who puts assets into the trust
a 'beneficiary' is someone who may receive income or capital from the trust
'domicile' usually refers to the country or legal jurisdiction (a state for example) where someone intends to make their permanent home - you can only have one place of domicile at any given time
'Residence' is a complicated subject - you should look at the guidance material available for a full definition.
The 'RDR1 - Residence, domicile and the remittance basis' guidance notes are a guide for residents and non-residents on the residence, domicile and remittance basis rules for tax years 2012-13 onwards. It replaces the booklet HMRC6.
The 'HMRC6 - Residence, domicile and the remittance basis' booklet should be used as a guide by residents or non-residents for information on rules affecting their tax liability in the UK up to the end of tax year 2012-13 only.
What 'non-resident trusts' means
Non-resident trusts are usually ones where:
- none of the trustees is resident in the UK for tax purposes
- only some of the trustees are resident in the UK and the settlor of the trust wasn't resident, ordinarily resident or domiciled in the UK when the trust was set up or funds added
Who to contact if you're setting up a non-resident trust
If you’re setting up a trust that you think may be non-resident, you'll need to contact HMRC and fill in form 41G(Trust). You will be asked for the name of the trust, trustee information and details of the assets in the trust.
Contact HMRC Trusts & Estates to discuss overseas tax or non-resident trusts issues.
Non-resident trusts and Income Tax
The tax rules for non-resident trusts are very complicated. This guide gives only a basic introduction. Although there are general rules that apply to all non-resident trusts, each trust is different and is treated separately depending on:
- whether it's a discretionary trust or an interest in possession trust
- the residence status of the settlors or beneficiaries
Guidance for trustees
Trustees of non-resident trusts don’t pay UK tax on foreign income they receive. For most discretionary or accumulation trusts trustees pay tax at:
- the standard rate on the first £1,000 of taxable income (follow the link below to the guide on discretionary/accumulation trusts to find out more about the standard rate tax band)
- 37.5 per cent on dividend income from stocks and shares
- 45 per cent on UK interest (including ‘free of tax to residents abroad’ securities) if a beneficiary - or someone who might become one - is resident in the UK
- 45 per cent on all other non-dividend income arising in the UK
- the dividend ordinary rate (10 per cent) on trust dividend income
- the basic rate (20 per cent) on all other types of income
Guidance for settlors
If you’re the settlor and you - or your spouse or civil partner - can benefit from the income or capital of a non-resident trust, then you’ll have to pay tax on the trust’s income as if it’s your own income.
The income of the trust is not treated as yours if you (or your spouse or civil partner) can't benefit from it. However, if the beneficiaries include your children and the trust makes any payments to children of yours who are unmarried and below the age of 18, you will also have to pay Income Tax as if the payment to your child was your own income.
You can claim relief for tax on income paid to your unmarried children aged under 18 if the trustees are non-resident. This relief is given under Extra Statutory Concession, ESC A93.
Guidance for beneficiaries
If you’re a UK resident beneficiary of a non-resident trust you may have to complete a Self Assessment tax return and the SA107 supplementary pages. The guidance notes for these pages give details as to how you should complete them.
If you’re a UK resident and get income from a non-resident discretionary trust, you can get some tax relief if the trustees have already paid tax on the income. This relief is given by Extra Statutory Concession, ESC B18
If you’re a non-resident beneficiary of a non-resident income in possession trust, you only need include income from a UK source on your tax return.
Non-resident trusts and Capital Gains Tax
Capital Gains Tax is a tax on the gain in the value of assets such as shares, land or buildings. A trust may have to pay Capital Gains Tax if assets are sold, given away or exchanged (disposed of) and they’ve gone up in value since being put into trust. The trust will only have to pay the tax if the assets have increased in value above a certain allowance known as the 'annual exempt amount'. Trustees are responsible for paying any Capital Gains Tax due.
If non-resident trustees replace UK resident trustees, they’ll have to pay Capital Gains Tax on gains made on the assets by the UK trustees up to the point at which the trustees change. This is because the trust is treated as selling and re-purchasing its assets at their market value on the changeover.
Otherwise non-resident trustees don’t pay UK Capital Gains Tax. Instead, the settlor or the beneficiaries may have to pay tax on gains made by the non-resident trustees.
Non-resident trusts and Inheritance Tax
Trusts, including non-resident trusts may have to pay Inheritance Tax on assets in the trust. Non-resident trusts will only have to pay it on assets situated outside the UK if the settlor was domiciled (or deemed domiciled) in the UK when the assets were put into the trust.
Depending on the value of the assets in the trust, Inheritance Tax may be due when:
- assets are put into the trust
- the trust reaches a ten-year anniversary
- assets are taken out of the trust or the trust ceases
Get professional help for your trust
Understanding trusts can be difficult so you may want to work with a solicitor or tax adviser. Remember though that the trustee is still legally responsible for the trust's tax affairs. You'll find some links below to professional organisations - although not all professionals are registered with them.
If you want HMRC to communicate with your agent or professional representative on Income Tax and Capital Gains Tax matters, you'll need to fill in form 64-8.
If you want HMRC to communicate with your agent or professional representative on Inheritance Tax issues you'll need to enter their details on form IHT100.