In Trustees of P Panayi A & M Settlements v HMRC (Case C-646/15) CJEU the European court held that if a trust was an entity under UK law the EU right to freedom of establishment would apply when it moved offshore.

  • A UK trust is resident according to the residence of its trustees.
  • Where UK trustees are replaced with offshore trustees the residency of the trust can change if the majority of the trustees are non UK resident or habitually resident and/or the general administration of the trust is undertaken outside of the UK.
  • In these circumstances the trust is held to have migrated offshore.
  • There is a deemed disposal by the trustees of all assets at market value and any resulting gains are subject to capital gains tax under s80 TCGA 1992.
  • In contrast gains made by Non-resident trusts are taxed in the UK under s87 TCGA 1992 only if and when capital payments are made (out of those gains) to UK resident beneficiaries. Tax is therefore deferred until payments are made to UK beneficiaries.

The settlor of the trusts was UK resident when the trusts were created in 1992.

  • The settlor and his wife could not benefit from the trusts, they were accumulation and maintenance trusts for the benefit of their children.
  • The trusts' assets comprised shares in a company owned by the settlor.
  • From commencement in 1992 until 2004 the trusts had only UK trustees; the settlor and his wife and a UK trust company.
  • In August 2004 the settlor and his wife were replaced by Cypriot resident trustees. The corporate trustee remained until December 2005.
  • Shortly after the resignation of the corporate trustee the trusts' assets (the shares) were sold.
  • UK self-assessments were filed which detailed the change in trustees and referred to the disposal of the shares but with no capital gains included because the trusts were non-resident at the date of the sale.
  • HMRC assessed the trusts under s80 in respect of the value of the shares on migration in August 2004.
  • The trustees brought proceedings before the First-tier Tribunal (FTT), challenging the compatibility of the CGT exit charge and the requirement for immediate payment, (as provided for by s80 TCGA and in contrast to the position under s87), with the fundamental freedoms of movement granted under EU law.
  • HMRC considered that, because of the status in law of a trust under the law of England & Wales:
  1. None of the freedoms of movement was applicable to the case and
  2. If any of those freedoms were to be held to be applicable, whilst the immediate payment of the exit taxation would constitute a restriction, it was one that was justifiable and proportionate to ensure balanced allocation of the powers of taxation.

The FTT referred the case to the European Court of Justice and requested a determination in respect of these points.

The EU Attorney General found that:

  • A trust can be regarded as a ‘company’ or ‘firm’ within the meaning of the relevant provisions of EU law which extend the freedom of establishment beyond individuals
  • The freedom of establishment was relevant to the case, but only if:
    • the trust acted in its own right and
    • the trust carried on an economic activity in Cyprus

and this was for the UK courts to decide.

  • The provisions of s80 did infringe upon this freedom but;
  • National legislation (to the extent it causes the powers of taxation retained by the Member State concerned to be entirely dependent on the discretion of the trustees and the beneficiaries (e.g. s87 TCGA)), cannot be seen as sufficient to preserve the powers of that Member State to tax capital gains accruing within its territory.
  • Therefore the s80 rules were accepted as within the grounds of public interest and the balanced allocation of powers of taxation and proportionality, however;
  • The requirement that the tax became payable immediately following the migration of the trust and could not be deferred until payments were made to beneficiaries was unjustifiable and contrary to the freedom of establishment.


This is the first time that a case involving the migration of a UK trust has found itself at the European court. It has interest not only in respect of the capital gains exit charge but also in respect of the application of EU freedoms to trusts in general. It will be interesting to see what the UK courts make of the questions posed by the Attorney General.

UPDATE: In response to this decision Finance Act 2019 introduces scheudle 3ZAA into TMA 1970 which allows the taxpayer to apply to HMRC to enter into a CGT exit charge payment plan (ECPP) with respect to all or part of the CGT due when a trust migrates to an EU member state. This may remain relevant for some years to come depending on what, if any, deal is done in respect of the UK leaving the EU.


UK trusts

Non-Resident Trusts

Trustees of P Panayi A & M Settlements v HMRC (Case C-646/15) CJEU


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