In Valesca Valentina Yvette Louwman v HMRC [2025] TC09445, the First Tier Tribunal (FTT) reluctantly ruled that the Transfer of Assets Abroad (ToAA) rules applied to Offshore Income Gains (OIGs) and Accrued Income Profits (AIPs) deemed to arise to a UK deemed domiciled taxpayer from non-resident trusts settled before the taxpayer became UK domiciled. The OIGs and AIPs were chargeable to Income Tax as they arose.
- The taxpayer, a UK resident and Deemed domiciled individual since 6 April 2018, was the settlor of four Non-resident trusts settled in March 2017.
- The trusts generated Offshore Income Gains (OIGs) and Accrued Income Profits (AIPs), which were disclosed in the taxpayer's 2018-19 to 2020-21 returns.
- HMRC opened an enquiry and issued Closure notices, determining that the taxpayer was subject to Income Tax on the OIGs and AIPs under the Transfer of Assets Abroad (ToAA) rules on an arising basis.
- The ToAA rules are anti-avoidance measures designed to prevent UK residents from transferring assets abroad to avoid UK Income Tax. They impose tax on income arising outside the UK due to the transfer of assets.
- The taxpayer Appealed, arguing that under a purposive construction, the OIGs and AIPs should be considered 'relevant foreign income' and fall within the definition of Protected Foreign Source Income (PFSI), meaning they should be taxed only when matched to a capital distribution or benefit (not on an arising basis).
- In addition, the taxpayer argued that the omission of OIGs and AIPs from the PFSI definition was a drafting error that required rectification, as it unfairly impacted individuals affected by the change in the law:
- Before 6 April 2018, under the ToAA regulations, as a UK resident and non-UK domiciled individual claiming the Remittance basis the taxpayer was taxed on OIGs and AIPs only when remitted to the UK, not as they arose.
- From 6 April 2018, the taxpayer became deemed UK domiciled under s.29(1) of the Finance Act (No. 2) 2017, which applied to individuals who had been UK residents for at least 15 of the last 20 tax years. This meant the OIGs and AIPs were subject to Income Tax on an arising basis under ToAA, as no equivalent provisions applied to UK domiciled individuals.
The First Tier Tribunal (FTT) found:
- The OIGs and AIPs were not ‘relevant foreign income’ for anyone other than a non-UK domicile individual claiming the remittance basis. OIGs and AIPs are not and never have been, 'relevant foreign income' for a UK domiciled individual.
- No purposive construction of the definition of PFSI can result in including income that is not 'relevant foreign income' for a UK domicile. Since the OIGs and AIFs would not have been 'relevant foreign income' for the taxpayer had they arisen to her, they were not PFSI when they arose in a trust.
- Applying Inco Europe Limited v First Choice Distribution [2000] 1 WLR 586, the circumstances did not support rectification of the definition of PFSI to include OIGs and AIPs. Although the omission of OIGs and AIPs may have been inadvertent, the strict requirements of the Inco test were not satisfied and rectification would encroach on Parliament’s legislative function.
The FTT dismissed the appeal.
Editor's comment
The FTT reached its decision reluctantly, acknowledging that the change in domicile status could affect the tax treatment of OIGs and AIPs but it was ultimately Parliament’s responsibility to address such issues, not the tribunal’s. It was not clear that Parliament intended for the definition of PFSI to include OIGs and AIPs.
Please note that the definition of 'relevant foreign income' under consideration was introduced by the Finance (No. 2) Act 2017.
From 6 April 2025, the current domicile-based regime will be replaced with a new residence-based regime, following the abolition of the non-UK domiciled rules. See Non-Domicile: Rules from 5 April 2025
Useful guides on this topic
SRT: Statutory Residence Test Toolkit
This is a freeview interactive tool to determine 'At a glance' whether you are UK resident or not in a tax year. A tax year in the UK runs 6 April to 5 April.
Transfer of Assets Abroad (ToAA)
What are the ToAA rules? When do they apply? How is the tax charge calculated? Is there any defence against the rules?
Non-resident trusts
When is a trust non-resident? What are the UK tax implications of a non-resident trust? What are the UK tax implications for any beneficiaries? What are the UK administrative requirements for a non-resident trust?
Non-Domicile & the Remittance Basis: At a glance
What is Domicile? Does it have tax advantages? What is the Remittance Basis. When does it apply for Non-Domiciled individuals?
Offshore Income Tax Toolkit
This toolkit provides an outline of the tax issues for UK resident individuals with offshore income and investments.
Non-Domicile: Rules from 5 April 2025
What are the changes to the 'non-dom' regime? What does this mean for non-doms currently using the remittance basis? How will Income Tax, Capital Gains Tax and Inheritance Tax be affected by the changes?
Closure notices
When does HMRC issue a Closure Notice? Can a taxpayer demand one? Are there appeal rights?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
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