In the recent case of Murphy v HMRC, Chamberlain J agreed with HMRC’s interpretation of extra-statutory concession B18. He found that UK resident beneficiaries who receive discretionary payments from non-UK resident trusts are limited in the amount of relief for income tax paid which they can claim to the amounts of UK tax paid by the trustees on income that arose to them in the six years prior to the distribution being made.
What is ESC B18?
ESC B18 deals with payments out of discretionary trusts, both for UK resident trusts and non-UK resident trusts (although the latter was added in a later iteration).
In relation to UK resident trusts, ESC B18 provides an extension to the legislation to effectively allow non-resident beneficiaries who receive income distributions to “look through” to the sources of the trust income so they are effectively treated as receiving the trust income personally. This may in turn reduce the amount of UK tax payable based on the beneficiary’s non-resident status.
Explicitly the concession notes that relief will only be granted to the extent that the distribution is paid out of income which arose to the trustees not earlier than six years before the end of the year of assessment in which the payment was made. In addition, in order for it to apply certain conditions must be met, including:
- the trustees must have made trust returns giving details of all sources of trust income and payments made to beneficiaries for each and every year for which they are required;
- the trustees must have paid all tax due to HMRC from inception of the trust, and any interest, surcharges and penalties arising; and
- any relevant tax certificates must be made available for inspection.
ESC B18 then turns to non-UK resident trusts. First, as the usual legislation does not apply to non-UK trusts, the concession ensures that non-resident beneficiaries who receive an income distribution are able to claim a credit against UK tax actually paid by the trustees. Additionally, it allows the non-resident beneficiaries to be treated as though they have directly received the income as arising to the trustees in much the same way as for UK resident trusts.
As for UK resident beneficiaries of non-UK resident trusts, they may claim credit for UK tax actually paid by the trustees on the income out of which the payment is made, as if the payment were made from a UK resident trust. Again, the same conditions set out above apply, however there is no explicit reference made to the six year limit.
The case of Murphy
The case boiled down to whether the opening words of the concession for non-UK resident trusts (“A similar concession will operate…”) could be read as indicating that the relief granted is similar in its extent to that granted for UK resident trusts (i.e. it only applies to income arising to the trustees not more than six years earlier).
Ultimately Chamberlain J upheld HMRC’s interpretation of ESC B18 and, as such the six year limit is considered to apply to non-UK trusts with UK resident beneficiaries as well. This is a somewhat surprising result given that credit for tax paid by the trustees of a UK resident trust is not limited to tax paid in the last six years.
Interestingly, Chamberlain J noted that, even if he were incorrect, as ESC B18 is not clear or unambiguous, principle would resolve the claim in HMRC’s favour as it cannot be said that the Claimants’ case clearly falls within ESC B18 and so legitimate expectation was not a factor here.