The following information applies to chargeable event gains occurring on or after 6 April 1998 unless the trust was created, the Bond was in force and the settlor had died, prior to 17 March 1998, in which case the ‘dead settlor rule’ will apply.
How is the residency of the trust decided?
The residency of a trust will depend on the residency of the trustees and in some cases the residency or domicile of the settlor. The residency test for UK income tax will apply each tax year to determine the residency of the trust for UK income tax purposes.
- Where all of the trustees are resident in the UK, the trust is UK resident for UK income tax purposes.
- Where one or more of the trustees, but not all of them, are UK resident then the trust is UK resident for UK income tax purposes if the settlor was:
• resident in the UK, or
• ordinarily resident in the UK, or
• domiciled in the UK
at any relevant time. ‘Relevant time’ means any time a settlor made or is treated as making the trust and any time when a settlor adds property to the trust. Where the settlement arises on a settlor’s death, it means the time immediately before their death.
- Where all of the trustees are resident outside the UK, the trust is not UK resident for UK income tax purposes. The rules shown below will not apply to such a trust.
Tax assessment of UK resident discretionary trusts or interest in possession trusts
Discretionary trust
discretionary trust (Click image to enlarge)
Tax assessment of UK resident absolute (or bare) trusts
Absolute trust
absolute trust (Click image to enlarge)
The rules relating to the assessment of bonds which were owned by trustees changed as a result of the Finance Act 1998.
Before the change, chargeable events were assessed on the settlor of the trust if they were UK tax resident and alive. On the settlor's death, any chargeable events which occurred in the next or subsequent tax year which the Bond was held by the trustees there was no party liable to pay the tax. This was known as the dead settlor rule.
For trusts created prior to 17 March 1998 where the Bond commenced and the settlor died prior to 17 March 1998, chargeable events continue to not fall liable on the trustees or beneficiaries while held in trust, provided that the policy is not varied on or after 17 March 1998 to increase the benefit or extend the term of the Bond.
UK resident trusts created on or after 17 March 1998 are subject to assessment as described in the flowcharts above. Interest in possession trusts (such as Power of appointment trusts) would follow the same assessment as shown for discretionary trusts.
For details of chargeable events and how to calculate chargeable event, please see our articles 'UK taxation - chargeable events' and 'UK taxation - tax and reliefs for chargeable events'.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.