What does section 487 of the Income Tax Act 2007 do for non-UK resident trustees?

Section 487 restricts the allowable expenses non-UK resident trustees can set against trust income under section 486. It excludes a proportion of those expenses matching the proportion of the trustees' total income that is untaxed due to their non-UK residence or a double taxation agreement treating them as resident outside the United Kingdom.

How is the proportion of excluded expenses calculated under section 487?

The excluded proportion equals the ratio of untaxed income to total income. For example, if trustees receive £100,000 total income and £30,000 is untaxed, 30% of allowable expenses are excluded. So from £10,000 of expenses, £3,000 would be disallowed, leaving £7,000 available under the section 486 calculation.

What counts as untaxed income for the purposes of section 487?

Income is untaxed if trustees have no UK income tax liability on it because they are non-UK resident or a double taxation agreement treats them as resident elsewhere. Disregarded income under Chapter 1 of Part 14 also counts as untaxed, unless income tax has already been deducted at source or treated as deducted or paid in respect of it.

Is disregarded income with tax deducted at source treated as untaxed under section 487?

No. If income tax has been deducted at source from disregarded income, or sums representing income tax have been treated as deducted or paid in respect of it, that income is not classified as untaxed. This exception ensures income that has already borne UK tax at source is not caught by the expense restriction.

Income Tax Act 2007 section 487

Non-UK resident trustees

Section 487 restricts the allowable expenses that non-UK resident trustees can set against trust income, by excluding a proportion of those expenses corresponding to the proportion of trust income that is untaxed.

Where some of the trustees' income is untaxed because they are non-UK resident or treated as resident outside the UK under a double taxation agreement, a matching proportion of their allowable expenses is excluded from the calculation under section 486.
The proportion of expenses excluded equals the proportion of the trustees' total income that is untaxed — so if 40% of income is untaxed, 40% of allowable expenses are disallowed.
Income counts as untaxed where the trustees have no liability to income tax on it (wholly or partly) because of their non-UK residence, and also where income is classed as "disregarded income" under the rules limiting non-UK residents' income tax liability (Chapter 1 of Part 14).
However, disregarded income is not treated as untaxed if income tax has already been deducted from it at source or sums representing income tax have been treated as deducted or paid in respect of it.

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