Offshore Structures and Onward Gifts

24 August 2022

The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.    

The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.  

“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”

Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.

Overview of the rules

The legislation is contained in Section 87I-M TCGA 1992 in relation to potential capital gains tax (CGT) charges (the stockpiled gains legislation), Section 643I-N ITTOIA 2005 (the settlements code) and Section 733B-E ITA 2007 (the transfer of assets abroad or TOAA code) to capture income tax charges. 

Tax liability

Going forward, where a distribution has been made (or a benefit provided) to a non-UK resident (or remittance basis user) from a non-UK trust or structure within the TOAA code which would theoretically be outside the charge to UK tax, then any gift or benefit deriving from that initial gift that is subsequently passed on to a UK resident within three years is treated as made to that UK recipient directly from the non-UK trust or structure. The ultimate UK recipient of the gift is then liable to income tax or CGT where the gift can be matched to offshore income or gains. 

Proof of intention

Although the legislation requires that there is an intention from the outset by the offshore recipient of the gift to pass it on, the prospect of using lack of intention to defeat any tax charge is scant given that Section 87I(8) TCGA 1992 creates a presumption of intention when an onward gift is made.

The burden of proof is therefore firmly on the donee to evidence that there was no intention at the time of receipt of the funds to pass them on; it is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.  

Payments to “close family”

In addition to taxing these “onward gifts” the new FA 2018 rules also operate to treat payments made to the “close family” (spouse/civil partner – or the unmarried equivalent – or minor child or step child) of a settlor as made to a UK-resident settlor in the event that there is income in the trust structure and the family member is either non-UK resident in the year of the payment or is a remittance basis user who keeps the payment outside the UK. The settlor then has an exercisable right to recover the tax paid from the beneficiary – it would be wise to obtain a certificate from HMRC to confirm the amount of tax paid.

Note that the settlor will not be taxed twice on the payment (although it may be that the settlor is taxed by virtue of another provision elsewhere).

Some quirks of the legislation

The rules for determining the amount or value of the gift upon which tax becomes due varies slightly depending on which part of the legislation is invoked, ie, stockpiled gains, settlements legislation or TOAA code. For CGT purposes, complicated rules set out how a gift is split into “slices” of taxed, potentially taxed and untaxed funds which are attributed in a particular order.

The operation of the technical detail of the legislation can produce some curious results; for example, if the ultimate recipient of an onward gift is a remittance basis user then depending upon which “slice” is attributed to them, they may either not be taxed at all, or be taxed only if funds are remitted in the tax year of receipt but they may not be taxable if the funds are brought to the UK in the following tax year. Similar oddities exist for income tax purposes. 

“There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties.”

The interaction with the TOAA code adds an additional layer of complexity to already complex legislation. Some onward gifts are taxable by the TOAA code in priority to and without the need to engage the new onward gifts rules. The consequence of this is that there may be situations where the original recipient (a remittance basis user) receives an income distribution from a trust (potentially taxable – but not actually taxed – on them directly) and makes an onward gift, but the onward gift rules are not actually triggered because they give way to the TOAA code. 

Note that as an additional tool in their armoury, in circumstances where these targeted anti-avoidance rules might be invoked, HMRC could also seek to apply the General Anti-Abuse Rule where arrangements “cannot reasonably be regarded as a reasonable course of action, having regard to all the circumstances”.

Tax traps for the unwary

There is no limit to the length of any chain of gifts that the rules can apply to where there are multiple gifts among many parties. In theory, this means that a UK recipient may have a tax obligation that they know nothing about and about which they have very little power to obtain the necessary information; namely, whether any gifted funds have been provided out of funds received from trusts or offshore structures within the last three years and the residence and tax status of every individual through whom the funds have passed.


HMRC is now looking at the third year of taxpayers’ returns filed since these new rules were introduced (the 2021 returns filed in January 2022) and advisers and taxpayers can expect intense HMRC scrutiny. The rules are complicated, broadly drafted, difficult to understand and apply, and operate on the assumption that the taxpayer has perfect information, which will not match reality for most taxpayers.

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