Readers’ forum: Large accumulation

/ 22 August 2017

Terry Jordan

Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query on the tax implications of a substantial accrual of undistributed trust income.


In 1990, an offshore discretionary trust was set up by a non-UK domiciliary. The terms are that the trustees are to hold the income on trust to pay or apply it for the maintenance, education, support or otherwise for the benefit of the beneficiaries in their absolute discretion. The main, discretionary, beneficiary is the settlor’s daughter who was non-UK domiciled, although UK resident for many years. She would be deemed UK domiciled under the proposed changes, but nevertheless is assessed on worldwide income. The other discretionary beneficiaries are the daughter’s spouse and her children, all of whom are UK resident.

No income has been distributed since 2007-08 and no capital has been distributed since 2000-01. Further, there are no immediate plans to make any distributions, although undistributed income is approaching £200,000. The accounts show that the income remains undistributed rather than accumulated. There are also offshore income gains as well as a capital gains pool and capital losses. I have three questions.

After such a long period of retention could HMRC argue that the income must be distributed or treated as such for tax purposes and assessed under ITA 2007, s 731 or can the trustees continue to retain the undistributed income without tax consequence? If HMRC can insist that the income must now be assessed, who would be assessable?

What difference would it make if the trustees decided to accumulate the undistributed income and turned it into capital?

I hope that readers can advise.

Query 19,029 – Big Daddy.

Reply by Terry ‘Lacuna’ Jordan, BKL

It is implicit in the query that the proper law of the 1990 offshore discretionary trust is that of a jurisdiction such as Jersey that allows the accumulation of income for longer than the periods that would have been available to an English or Welsh trust at that time. It is also implicit that the non-UK domiciled settlor has not been liable to income tax on the income as it has arisen.

Based on those assumptions, HMRC cannot argue that the income must be distributed or treated as such for tax purposes and assessed under ITA 2007, s 731 (the charge on non-transferors who receive a benefit under the transfer of assets abroad provisions).

The income would become taxable a UK resident beneficiary receives it. Before the current tax year, the remittance basis could have applied to a non-UK domiciled recipient subject to payment of the remittance basis charge as appropriate. The remittance basis might still apply to the daughter’s children if they are non-UK domiciled and not caught by the new 15 out of 20 years tax-resident rule, which is effective from 6 April 2017, subject to enactment of the Finance Bill due on 6 September. On the face of it, the children would have taken their domiciles of origin from their father.

If the trustees accumulate the income to capital and pay it out as such it should be taxed as capital following Stevenson v Wishart 59 TC 740 and the guidance in HMRC’s Trusts, Settlements and Estates Manual at TSEM 3781. They would then need to consider whether capital payments would bring stockpiled gains into charge to capital gains tax. Because no capital payments have been made since 2000-01, the trustees might make a rebasing election that could benefit non-domiciled recipients and pre-2008 gains would not be matched to post-2008 capital payments received by non-UK domiciles.

I assume that the trust assets are non-UK situs and, as such, outside the scope of inheritance tax.


The article is also available on the Taxation website.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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