It has been a source of uncertainty and concern whether since April 2017, Offshore Income Gains (OIGs) of trustees are protected foreign source income in the case of a deemed domiciled settlor who would otherwise have become chargeable to income tax under the settlement provisions or Transfer of Assets Abroad regime. Why on earth not? They are obviously foreign (there is a clue in the name).
HMRC claim that Offshore Income Gains are not protected foreign source income under ITA 2007 s 721A and therefore not eligible for any protection. A strong body of opinion (set out in a note prepared by the CIOT/ICAEW/STEP of 1 February 2021) is that HMRC are simply wrong – or even if the legislation could be read as excluding OIGs, that was clearly not intended, and they should be treated as relevant foreign income on a purposive interpretation. The published reply by HMRC robustly defends their view with extensive reasoning.
In essence, HMRC argue that OIGs cannot be protected foreign source income because, as deemed income, it does not have a source; furthermore, OIGs are not included in the list of relevant income in ITTOIA 2005 s 830(2). Oh dear.
The issue has recently been examined by the FTT in Louwman v HMRC [2025] UKFTT 295 (TC) which, in a lengthy judgment, confirmed the HMRC view to be correct – adding that there is no clear indication that the exclusion was an accidental omission by the legislature.
To add to the confusion (or difficulty for anybody trying to understand all this), the Offshore Funds (Tax) Regulations, SI 2009/3001, provide for OIGs to be treated as relevant foreign income of non-doms.
This should, of course, have been updated in 2017 when the concept of deemed domicile was extended to income tax and capital gains tax – but it wasn’t. So it doesn’t apply to people who are deemed domiciled, and of course the protected income rules only apply where the settlor is deemed domiciled. So bad luck.
Given the importance of the matter, the case may go further – but (despite FTT decisions having no precedential or binding status), this is the position for the moment.
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Protected income and offshore income gains
OIGs are not protected foreign income.
It has been a source of uncertainty and concern whether since April 2017, Offshore Income Gains (OIGs) of trustees are protected foreign source income in the case of a deemed domiciled settlor who would otherwise have become chargeable to income tax under the settlement provisions or Transfer of Assets Abroad regime. Why on earth not? They are obviously foreign (there is a clue in the name).
HMRC claim that Offshore Income Gains are not protected foreign source income under ITA 2007 s 721A and therefore not eligible for any protection. A strong body of opinion (set out in a note prepared by the CIOT/ICAEW/STEP of 1 February 2021) is that HMRC are simply wrong – or even if the legislation could be read as excluding OIGs, that was clearly not intended, and they should be treated as relevant foreign income on a purposive interpretation. The published reply by HMRC robustly defends their view with extensive reasoning.
In essence, HMRC argue that OIGs cannot be protected foreign source income because, as deemed income, it does not have a source; furthermore, OIGs are not included in the list of relevant income in ITTOIA 2005 s 830(2). Oh dear.
The issue has recently been examined by the FTT in Louwman v HMRC [2025] UKFTT 295 (TC) which, in a lengthy judgment, confirmed the HMRC view to be correct – adding that there is no clear indication that the exclusion was an accidental omission by the legislature.
To add to the confusion (or difficulty for anybody trying to understand all this), the Offshore Funds (Tax) Regulations, SI 2009/3001, provide for OIGs to be treated as relevant foreign income of non-doms.
This should, of course, have been updated in 2017 when the concept of deemed domicile was extended to income tax and capital gains tax – but it wasn’t. So it doesn’t apply to people who are deemed domiciled, and of course the protected income rules only apply where the settlor is deemed domiciled. So bad luck.
Given the importance of the matter, the case may go further – but (despite FTT decisions having no precedential or binding status), this is the position for the moment.
