ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 89: Settlements: discretionary payments: provisions applying only to UK resident trustees: sections 493 and 497 and Schedule 2Part 10 (discretionary payments: trustees’ tax pool)
This change makes it explicit that the Chapter dealing with the taxation of discretionary payments by trustees applies only to payments made and tax suffered while the trustees are UK resident.
Section 687 of ICTA contains rules regarding the liabilities of the trustees and the beneficiary when the trustees make a payment to a beneficiary in the exercise of a discretion. The rules can only operate sensibly where the payment is chargeable on the beneficiary as an annual payment under Chapter 7 of Part 5 of ITTOIA and it is well established that those provisions only apply where the payment arises in the United Kingdom.
The question can arise as to whether that test is satisfied in cases where UK resident trustees exercise discretion abroad or non-UK resident trustees exercise discretion in the United Kingdom. The approach adopted in practice is that section 687 of ICTA applies only to payments by UK resident trustees. Accordingly, section 493 contains the condition that it only applies to UK resident trustees. It follows that where a payment is made by non-UK resident trustees:
	the payment does not carry any tax credit in the hands of the beneficiary; and
	the trustees are not liable for any tax in respect of the payment.
As a corollary to the provisions of section 687 of ICTA not applying to non-UK resident trustees, tax only enters the trustees’ tax pool if it is tax suffered on income arising while the trustees are UK resident – see section 497.
This change does not affect the operation of ESC B18, which enables UK resident beneficiaries who receive discretionary payments to have a credit for the tax paid by non-UK resident trustees on United Kingdom source income.