The First-tier Tribunal (Tax Chamber) recently delivered its decision in Louwman v Revenue and Customs Commissioners ([2025] UKFTT 00295 (TC)), a case that examined the taxation of offshore income gains (OIGs) and accrued income profits (AIPs) in the hands of a UK-resident individual deemed domiciled in the UK. The case provides important insights into statutory interpretation regarding income tax liabilities for non-UK trusts and investments.
Background of the Case
Valesca Valentina Yvette Louwman, the appellant, challenged HMRC’s closure notices concerning tax years 2018/19, 2019/20, and 2020/21. The dispute arose from deemed income from offshore investments, including OIGs and AIPs, realized by trusts she had settled while she was non-UK domiciled. The main issue was whether these deemed income amounts constituted Protected Foreign Source Income (PFSI) under Section 721A of the Income Tax Act 2007 (ITA) and whether they should be subject to UK tax on an arising basis or only when remitted.
Key Issues Considered by the Tribunal
The Tribunal examined two main issues:
- Whether the OIGs and AIPs constituted “protected foreign source income” under ITA 2007, allowing them to be excluded from immediate UK taxation.
- Whether Section 721A of ITA 2007 should be rectified to align with Parliament’s intended policy, should it be found lacking in clarity.
HMRC’s Position
- HMRC argued that the OIGs and AIPs should be taxed as income on an arising basis, as they did not meet the statutory definition of PFSI.
- HMRC maintained that deemed income does not necessarily retain a foreign source and, therefore, could not benefit from PFSI treatment.
- They further contended that no statutory basis existed to treat OIGs and AIPs as “relevant foreign income” for a UK-domiciled individual.
The Appellant’s Position
- The taxpayer, represented by Amanda Hardy KC and Oliver Marre, argued that deemed income should be treated as having a foreign source, given that OIGs arose from offshore funds and AIPs related to foreign securities.
- They contended that UK tax law’s deeming provisions should be construed purposively, aligning with Parliament’s intention to protect pre-existing offshore structures of individuals transitioning from non-UK to deemed-UK domicile status.
- The appellant also argued that excluding such deemed income from PFSI would contradict the policy objective of the 2017 deemed domicile rules.
Tribunal’s Decision
After extensive statutory interpretation, the First-tier Tribunal ruled in favor of HMRC:
- OIGs and AIPs were not “protected foreign source income” under Section 721A of ITA 2007 because they did not meet the statutory definition of relevant foreign income applicable to a UK-domiciled individual.
- The Tribunal held that deemed income does not inherently carry a foreign source, making it taxable on an arising basis.
- The Tribunal rejected the appellant’s argument that the provisions should be rectified, finding no ambiguity or legislative error requiring correction.
Implications of the Decision
The ruling reinforces HMRC’s stance on offshore investment taxation for individuals who have become deemed domiciled in the UK. Key takeaways include:
- Deemed income from offshore sources is subject to UK tax on an arising basis unless explicitly exempted.
- Taxpayers relying on statutory protections for foreign income must ensure that the income qualifies under the specific wording of the legislation.
- This decision may encourage further challenges at the Upper Tribunal as it raises fundamental questions about the tax treatment of offshore structures under the UK’s deemed domicile regime.
Conclusion
The Louwman case serves as a crucial precedent for high-net-worth individuals with offshore structures, particularly those transitioning from non-UK domicile status. It underscores the need for careful planning and expert tax advice to navigate the complexities of UK tax law on offshore gains and income. Those affected should reassess their offshore structures and remittance strategies in light of this decision.