Claim for relief on offshore trust distributions is out of time

In Murphy & Anor v HMRC [2021] EWHC 1914 (Admin), the High Court on judicial review ruled that UK source income distributed to UK resident beneficiaries of a Non-resident discretionary trust must be paid within six years if credit is to be given for UK Income Tax paid by the trustees.

Extra Statutory Concession (ESC) B18 has been amended several times since its inception in 1973. It provides:

• A UK beneficiary of a Non-resident trust may claim credit for tax actually paid by the trustees on the income out of which the payment is made as if the payments out of UK income were from a UK resident trust. 
  • Relief or exemption will be granted to the beneficiary on a claim made within six years of the end of the tax year in which they received the payment from the trust.

In 2018-19 the beneficiaries of a Guernsey resident Discretionary settlement received distributions out of UK source income from the trust of £9,652,320.

• Prior to the distributions the beneficiaries’ accountants wrote to HMRC for confirmation that UK tax paid more than six years before the payment of distributions out of UK source income would be creditable under ESC B18.
  • HMRC’s responded in the negative. The accountants sought reconsideration but in the meantime the distributions were made anyway.
• The beneficiaries claimed credit for around £4 million of UK income tax paid by the trustees.
  • HMRC allowed the claims from and including 2012-13 but rejected the claims in respect of tax paid by the trustees on UK source income arising in tax years before that date.
  • The beneficiaries appealed; on a strict interpretation ESC B18 in all it’s versions grants an extension of the credit mechanism applying to UK trusts which has no time limit, to UK resident beneficiaries of non-UK resident trusts,

The High Court agreed with HMRC and refused relief.

• The overall intention of the ESC was that the six year time limit applied.
• Even if there were ambiguities in the wording of the ESC, the authorities make clear that, because an extra-statutory concession relieves taxpayers of a liability imposed by the law, any ambiguity should be resolved in HMRC’s favour.

Useful guides on this topic

UK Trusts
What is a trust? What types of trust are there? How are UK trusts taxed?

Trusts & Tax planning
What is a trust? How can trusts be used in tax planning? What are the advantages and what are the pitfalls?

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?

Rectification of Trustee mistakes
What happens when trustees make mistakes? Can the court rectify them? When will they agree to rectification?

External link

Murphy & Anor v HMRC [2021] EWHC 1914 (Admin)