UK: Distributor and Non-distributor status funds post Finance Act 1998

Last Updated: 15 February 1999
Distributor and Non-distributor status funds post Finance Act 1998

The Finance Act 1998 brought about two changes to the Capital Gains Tax treatment of non resident trusts which particularly affect their investment strategy. The two changes were as follows:

i) The charge on a UK domiciled/resident settlor on gains made by the trustees of a non-resident trust, where the settlor's immediate family or closely controlled companies are beneficiaries, was extended to settlors of trusts made prior to 19 March 1991. Previously the settlor provisions only applied to trusts made, added to or exported on or after 19 March 1991.

ii) The second change was to extend the provisions which charge UK domiciled/resident beneficiaries on the gains made by non-resident trusts where they receive capital payments from such trusts to trusts whose settlor was domiciled outside the UK. Previously the rules only applied to beneficiaries of trusts whose settlor was domiciled and resident on the UK.

Distributor status funds are those approved by the Inland Revenue as having an acceptable income distribution policy and the gains on the disposal of which are taxed as capital gains. Non-distributor status funds are those which are not certified as having distributor status. The consequence is that any gain on a disposal is taxed as income with neither the benefit of indexation or taper relief nor the benefit of the capital gains tax annual exemption.

This note sets out below in broad terms the advantages and disadvantages of investing in distributor and non-distributor status funds in different circumstances.

V = preferred
X = to be avoided
- = arguments both ways

                                         DISTRIBUTOR            NON-DISTRIBUTOR
                                            STATUS                  STATUS

UK Domiciled Settlor                       i)  V                        X
Settlor/Spouse a Beneficiary 

UK Domiciled Settlor                           X                    ii) V
Settlor/Spouse not a Beneficiary 
"Settlor Class" are Beneficiaries  x)

UK Domiciled Settlor                     iii)
Settlor/Spouse not a Beneficiary          vi)
Settlor Class not Beneficiaries                -                          -

UK Domiciled Settlor                     v) iii)                     
Settlor/Spouse not a Beneficiary 
Settlor Class not Beneficiaries                -                          -
Section 740 not applicable

Non-UK Domiciled Settlor                   vi)
Settlor or Spouse a Beneficiary                V                          X

Non-UK Domiciled Settlor                 vii) iii) iv)
Settlor/Spouse not a Beneficiary 
Settlor Class are Beneficiaries                -                          -

Non-UK Domiciled Settlor                 vii) iii) iv)
Settlor/Spouse not a Beneficiary 
Settlor Class are not Beneficiaries            -                          -

Non-UK Domiciled Settlor                 ix) iii)
Settlor/Spouse not a Beneficiary 
Settlor Class not Beneficiaries                -                          - 
Section 740 not applicable


i) Distributor Status preferable: Indexation/taper relief and uplift on death of a life tenant. In either case assessed on an arising basis.

ii) Income gain not assessed on settlor under s.739 or Part XV ICTA as not a beneficiary. Settlor not assessed to CGT under s.86 TCGA. UK domiciled beneficiaries however taxed under s.762(2) ICTA on a receipts basis.

iii) UK domiciled/resident beneficiaries assessed on a receipts basis under s87 TCGA if distributor status and s.762(2) ICTA if non-distributor status. Balance loss of indexation/taper and tax free uplift on death of a life tenant against no supplementary charge.

iv) If there are non-UK domiciled beneficiaries distributor status may be better as s87 does not apply to non-UK domiciled beneficiaries whereas s740 may apply if remittance to UK or UK assets held by trustees (even though s.762(2) will not apply).

v) Analysis same as in (iii). Liability under s762(2) not dependent on s.740.

vi) Distributor status avoids settlor charge (but still Section 87 on UK domiciled beneficiaries) while non distributor status gains assessed on settlor if remitted.

vii) Settlor has no liability either way. Same analysis as in (iii) and (iv).

viii) Settlor has no liability either way. Same analysis as in (iii) and (iv).

ix) Settlor has no liability either way. Analysis same as in (iii).

x) Settlor Class is the class set out in TCGA 1992 Schedule 5 para 2(3) i.e., the settlor, the settlor's spouse, any child of the settlor or settlor's spouse, the spouse of any such child, a company controlled by any of the above persons, and a company associated with such a company. For settlements created or "tainted" on or after 17 March 1998 the class includes also any grandchild of the settlor or settlor's spouse, the spouse of any such grandchild, a company controlled by any of them and a company associated with such a company.

General Comment

This analysis assumes that the first priority is to avoid a charge on the settlor rather than a charge on beneficiaries receiving benefits, e.g., in preferring non-distributor status funds in note (ii) which will give rise to a potential liability on UK domiciled beneficiaries receiving benefits.

This note is intended to provide general information about some recent and anticipated developments which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained.

If you would like further information or specific advice, please contact one of the following partners: Robin Vos, John Conder, Michael Hayes, John Rhodes or Owen Clutton.

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