Non-Resident Trusts and UK Beneficiaries: The Tax on Payments Out

A UK-resident beneficiary of a non-resident trust is generally taxed on what comes out of the trust, not on what the trustees earn and accumulate inside it. A non-resident trust is one whose trustees are not UK resident for tax purposes. While the trust remains offshore, its foreign income and gains typically fall outside the immediate UK charge on the beneficiary. The UK tax event is the receipt: a capital payment, a distribution, or another benefit received by the UK resident.

When value flows out, HMRC uses a set of matching rules to decide the character and amount of the charge. Broadly, capital payments are matched first against the trust's accumulated capital gains and taxed as capital gains on the beneficiary. Benefits and income-type distributions are matched against the trust's accumulated income and taxed as income. These are separate codes that can apply to the same trust, so a single payment out may need to be tested under more than one set of rules.

The three principal charging regimes a UK beneficiary needs to understand are:

• Section 87 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992), which matches capital payments to the trust's stockpiled gains and charges capital gains tax, potentially with a supplementary charge.
• The transfer of assets abroad rules in the Income Tax Act 2007 (the benefits charge under section 731), which match benefits to the trust structure's relevant income and charge income tax.
• The settlements code in the Income Tax (Trading and Other Income) Act 2005, which can attribute trust income to a UK-resident settlor who retains an interest, or match benefits to available income.

From 6 April 2025 the UK moved from a domicile-based system to a residence-based one. The old protections for so-called protected settlements were removed, and whether a beneficiary pays now turns on UK residence and on eligibility for the new 4-year FIG regime rather than on domicile. The related guide on offshore-trusts-uk-tax covers the trustees' own position; this guide focuses on the beneficiary receiving the payment.

Under section 87 TCGA 1992, the trust's realised capital gains are pooled year by year into what practitioners call stockpiled gains (technically the section 1(3) amount, formerly the section 2(2) amount). A capital payment received by a UK-resident beneficiary is then matched against that pool. To the extent of the match, the gain is treated as accruing to the beneficiary and charged to capital gains tax on them, rather than on the trustees.

A capital payment is any payment or transfer of value that is not made for full consideration and is not otherwise chargeable to income tax on the recipient. It includes cash distributions, transfers of assets, loans on non-commercial terms, and the value of benefits such as the rent-free use of trust property. Where the pool of gains is smaller than the payments made, the gains are attributed to beneficiaries in proportion to the capital payments they received, and never exceed the payments received.

Key points a beneficiary should know:

• The amount matched is taxed as a capital gain of the beneficiary for the tax year of the payment, subject to the beneficiary's annual exempt amount and applicable capital gains tax rate.
• Capital payments made to non-UK-resident beneficiaries on or after 6 April 2018 are not matched against the pool, so those payments do not reduce the gains available to be matched to UK residents.
• If there are no stockpiled gains, a capital payment may fall to be tested instead under the transfer of assets abroad income rules described below.
• Gains matched under section 87, section 89(2) and Schedule 4C TCGA 1992 can qualify for relief under the 4-year FIG regime for a beneficiary in their first four years of UK residence.

The order of matching matters: HMRC's rules generally match capital payments and gains of the current year first, then earlier years taking the latest year first, but the detail is intricate and interacts with Schedule 4C where trusts have transferred value between settlements. Because the pool can span many years, a payment today may be matched against a gain the trustees realised long ago, which brings the supplementary charge into play.

The supplementary charge increases the capital gains tax due where a distribution of older gains has been delayed. It applies when a capital payment is matched to a gain of an earlier year and the payment is received more than one year after the year in which that gain accrued to the trustees. The charge exists to remove the cash-flow advantage of leaving gains to roll up inside an offshore trust before paying them out.

The mechanics, as set out in HMRC guidance, are:

• The tax otherwise payable is increased by 10% for each year of delay.
• The maximum is six years, so the largest possible uplift is 60% of the capital gains tax that would otherwise be due.
• The relevant period runs from broadly 1 December in the tax year after the trustees realised the gain, and ends on 30 November in the year following the year in which the capital payment is made.
• The uplift applies to the tax, not the gain. For example, if the underlying capital gains tax were 20% and the maximum uplift applied, the effective rate could rise to 32% (20% plus 60% of 20%).

The 20% figure above is illustrative of the mechanism only. The beneficiary's actual capital gains tax rate depends on the type of asset and the beneficiary's circumstances, so the effective rate after any supplementary charge should be calculated on the specific facts. One transitional point is worth noting: where a capital payment is designated under the Temporary Repatriation Facility for the 2025/26 to 2027/28 tax years, no further capital gains tax and therefore no supplementary charge arises on that designated payment. Otherwise, the practical takeaway is that long-accumulated gains distributed years later can be taxed materially more heavily than gains distributed promptly, which is why the timing and sequencing of distributions is a core planning point for offshore trusts.

Where a benefit or distribution is not matched to capital gains, it may be caught by the income tax rules that attribute trust income to a UK-resident recipient. Two codes are central here.

The transfer of assets abroad rules in Part 13 of the Income Tax Act 2007 are the main income charge for beneficiaries who are not the settlor. The benefits charge under section 731 applies where a UK resident receives a benefit as a result of a relevant transfer of assets to a person abroad, such as an offshore trust or an underlying company. The benefit is matched to the trust structure's relevant income (broadly the income that has arisen to the persons abroad) under the matching steps in section 735A, and the matched amount is treated as the recipient's income and taxed as such. This charge can apply to a wide range of value received, including the use of trust assets, and now applies by reference to whether the recipient is UK resident.

The settlements code in the Income Tax (Trading and Other Income) Act 2005 mainly targets the settlor rather than other beneficiaries. Under section 624, a UK-resident settlor who retains an interest in the trust is taxed on the trust's income as it arises. From 6 April 2025, a UK-resident settlor of a settlor-interested trust pays tax on all income arising under the settlement, including foreign income, on the arising basis, because the former protections were removed. Under section 643A, a benefit received by the settlor or a close family member can be treated as the settlor's income where there is available income to match. The settlor-interested position is covered in more depth in the related guide on settlor-interested-trusts-uk-tax.

Because a single distribution can potentially fall within more than one code, the legislation contains priority and interaction rules to prevent the same amount being taxed twice. Establishing the correct character of a payment, capital or income, and the correct code, is the crux of getting an offshore trust distribution right.

A benefit does not have to be a cash payment to be taxable. The rules deliberately capture value received in kind, because otherwise a trust could confer economic benefits on a UK resident without triggering any charge. Common examples of a taxable benefit from an offshore trust include:

• Rent-free or below-market occupation of a property owned by the trust or an underlying company.
• Interest-free or low-interest loans, or loans on otherwise non-commercial terms.
• The use of trust-owned assets such as a yacht, artwork, or a vehicle.
• Payment by the trust of expenses that the beneficiary would otherwise have to meet.

For capital gains purposes, such a benefit is generally treated as a capital payment measured by reference to its value, for example the market rent forgone or the official rate of interest on an interest-free loan. It is then matched to stockpiled gains under section 87 in the usual way. For income tax purposes, the same benefit can be matched to relevant income under the transfer of assets abroad benefits charge. The valuation of ongoing benefits, such as annual rent-free occupation, needs to be assessed for each tax year the benefit continues.

Beneficiaries frequently underestimate this area because no money changes hands. Living in a trust-owned home or drawing on a soft loan can create a recurring UK tax charge that must be reported. Keeping contemporaneous records of any use of trust assets is essential.

The abolition of the remittance basis and the domicile concept from 6 April 2025 reshaped how offshore trusts and their UK beneficiaries are taxed. The headline changes relevant to a beneficiary are:

• The move from domicile to residence. The charge on a UK beneficiary now turns on UK residence rather than domicile. The former domicile condition for the section 87 charge no longer governs who pays.
• Removal of trust protections. From 6 April 2025 the protections that previously sheltered foreign income and gains arising within settlor-interested offshore trusts were removed, so a UK-resident settlor with a retained interest is now taxed on that income and those gains on the arising basis.
• The 4-year FIG regime. A person in their first four years of UK residence, after at least ten consecutive tax years of non-UK residence, can claim 100% relief on qualifying foreign income and gains, including gains matched under section 87, 89(2) and Schedule 4C TCGA 1992. There is no cap on the amount that can be relieved in a qualifying year. The claim is made through Self Assessment and must be made by the first anniversary of 31 January following the tax year (for example, by 31 January 2028 for 2025/26).
• The Temporary Repatriation Facility (TRF). Individuals who previously used the remittance basis can designate pre-6 April 2025 foreign income and gains, and certain matched capital payments and benefits, at a reduced rate. The rate is 12% for 2025/26 and 2026/27, rising to 15% for 2027/28. The facility is available only for those three tax years.

For inheritance tax, the excluded property status of trust assets is now residence-based from 6 April 2025 rather than domicile-based. That IHT dimension is outside the scope of this guide but sits alongside the income and gains rules described here; the related residence-based-iht material addresses the connecting-factor change in detail.

Reporting for a beneficiary is through Self Assessment. Matched gains are reported on the capital gains pages (SA108), FIG-regime relief and residence details on the residence pages (SA109), and income-type benefits on the relevant foreign or trust pages. Given the overlap between section 87, the transfer of assets abroad rules, and the settlements code, and the transitional complexity of the 2025 reforms and the TRF, the treatment of any particular distribution should be confirmed with a specialist before it is reported.