Tax News Transfer of assets abroad legislation

www.gov.uk/government/consultations/reform-of-an-anti-avoidance-provision-transfer-of-assets-abroad

The following paragraphs constitute an exposure draft of guidance which will ultimately replace the current guidance in HMRC's International Manual. The authors are currently working with internal stakeholders with the aim of making the guidance as clear, accessible and helpful to potential users as possible. In line with the wider policy for Open Government this guidance will be publically available. HMRC would therefore also welcome the views of external stakeholders on whether the draft guidance will help people understand how the legislation should be applied (recognising, however, that it is not possible to cover every potential circumstance specifically). In particular comments would be welcome on:

The content of the guidance; is it sufficiently comprehensive?
The level of detail it is intended to provide; is it too detailed or too superficial?
The intended structure of the guidance; is it logical and easy to follow?
Any particular areas where additional guidance could be provided?

This draft includes guidance on the current rules for calculating the amount of the benefits charge (the 'matching rules') in sections 733 ITA 2007 onwards. The Government is consulting on potential changes to these rules and, of course, the draft guidance will need to be amended to reflect any changes made to the legislation in light of consultation responses.

Chapter 6 of the document 'Reform of an anti-avoidance provision: Transfer of Assets Abroad' explains how to respond to the consultation

INTM600000 - Transfer of Assets: Introduction Contents

INTM600020	Introduction, Background and History
INTM600140	General Conditions All Cases
INTM600520	The Income Charge
INTM601400	The Benefits Charge
INTM601900	Non-domiciled Individuals
INTM602300	Other General Provisions
INTM602620	Exemptions from Charge
INTM603220	Information Powers
INTM603500	The Tribunal
INTM603700	History of the Legislation

INTM600020 Introduction, Background and History: contents

INTM600040	General Introduction
INTM600060	Structure of guidance
INTM600100	General anti abuse rule

INTM600040 – General Introduction

General Introduction

The transfer of assets abroad [anti-avoidance] legislation can be found in sections 714 to 751 of the Income Tax Act 2007 and provides for a charge to income tax on an individual who is resident in the United Kingdom where:

assets, that can include property or rights of any kind (see INTM600260), are transferred (see INTM600240) and

as a result of the transfer , and/or an operation associated with the transfer,

income becomes payable to a person abroad, and the individual (who will be charged to tax)

has the power to enjoy (see INTM600840) the income of the person abroad as a result of a relevant transaction, and the income would have been chargeable to income tax had it been the individual's income received in the United Kingdom, or

receives, or is entitled to receive, a capital sum the payment of, or entitlement to, which is in any way connected with a relevant transaction (see INTM600600); or

receives a benefit, provided out of assets which are available for the purpose, as a result of the relevant transaction and the individual is not liable to income tax under the alternatives above, nor otherwise liable to income tax on the benefit (see INTM601400).

The individual who has the 'power to enjoy the income' or who receives or is entitled to receive the capital sum must be the transferor for a charge to be made but a charge on the benefit only applies where the individual receiving it is not the person who made the transfer.

It should be noted that for periods up to 6 April 2013 the legislation applied only to individuals who where ordinarily resident in the United Kingdom, but from 6 April 2013 it applies to United Kingdom residents.

For the purposes of the legislation a relevant transaction can either be the transfer itself or an associated operation. An associated operation is an operation of any kind effected by any person at the time of the transfer or before or after is it (see INTM600300).

A person abroad can be an individual, a body of trustees, or a company resident, or in some circumstances domiciled, outside of the United Kingdom (see INTM 600360).

There are exemptions from the charge to income tax under the transfer of assets legislation where an individual satisfies an officer of HMRC that specific conditions are met (see INTM602620 onwards). In broad terms there will be no charge if:

it would be unreasonable to draw the conclusion, from all the circumstances of the case, that the avoiding of a liability to taxation was the purpose , or one of the purposes, for which the relevant transactions or any of them were effected; or (if that is not the case)

INTM600060 – Structure of guidance

Structure of guidance

The guidance on Transfer of Assets Abroad is structured around the three circumstances where there is a charge to income tax and the associated provisions that apply across the different charges or that address particular circumstances.

INTM600140+ - General Conditions All Cases

These sections explain concepts common to all three charges, including definitions of terms used in the legislation.

INTM600520+ - The income charge

These sections explain the two charges that arise on the individual who makes or is associated with the transfer.

INTM600840+ explains the charge arising from the individual's power to enjoy any income of the person abroad that arises out of the transfer.

INTM600990+ explains the charge arising from the individual's receipt of or entitlement to a capital sum that arises out of the transfer

INTM601400+ - The benefits charge

These sections explain the charge that arises on an individual who receives a benefit as a result of a transfer that has been made by another person.

INTM601700+ explains the matching of benefits received by the individual to the income of the person abroad to determine the amount of the income tax charge.

INTM601900+ - Non-domiciled individuals

These sections explain how a potential charge under the transfer of assets provisions is affected where the individual has non-UK domicile status.

INTM602300+ - Other general provisions

These sections explain a number of general provisions that apply to the transfer of assets legislation.

INTM602340+ explains provisions that prevent potential duplication of charge.

INTM602480 explains how to apportion the income of a person abroad where there is a choice of individuals in relation to whom the income may be taken into account.

INTM602520 explains what deductions and reliefs that may be taken into account.

INTM602540 explains what relief may be due where the individual is subject to a tax charge in the country of origin of the person abroad and in the UK in respect of the same income arising to the person abroad

INTM602600+ - Exemptions from charge

These sections explain the exemptions from the charge to income tax.

INTM602740+ explains the exemption where the transfer has no avoidance purpose.

INTM603080+ explains the exemption where the transfer is related to genuine transactions.

INTM603220+ - Information powers

These sections explain powers that may be used to obtain information required to consider liability under the income or benefits charge.

INTM603500+ - The Tribunal

These sections explain the jurisdiction of the Tribunal in relation to the transfer of assets abroad legislation.

INTM603700 – History of the legislation

This section explains the historical background of the transfer of assets abroad legislation.

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INTM600100 – Interaction with the general anti abuse rule

GAAR

The GAAR provides an additional means for HMRC to tackle abusive tax avoidance schemes. All forms of tax avoidance will continue to be challenged and counteracted using existing means, including the Transfer of Assets provisions. This includes both abusive tax avoidance to which GAAR may apply, and tax avoidance that does not fall within the meaning of abusive tax avoidance that is the target of the GAAR. The GAAR applies to abusive tax arrangements entered into on or after Royal Assent to Finance Act 2013 on 17 July 2013.

INTM600140 – General Conditions All Cases: Contents

INTM600160	General Conditions – Introduction
INTM600180	Relevant Transactions
INTM600320	Income becomes payable to person abroad
INTM600440	The Individual

INTM600160 - General Conditions All Cases: Introduction

Introduction

In very broad terms there are certain basic features which must be present before either an income or benefits charge can arise under the transfer of assets legislation-

There must be a relevant transaction.

1. There must be income that becomes payable to a person abroad as a result of the transfer (and/or one or more associated operations).

2. There must be an individual who is the subject of potential charge and who

3. up to 5 April 2013 was ordinarily resident in the United Kingdom (UK) in the year of charge or

4. from 6 April 2013 is resident in the UK.

Where these features are present and the detailed conditions for either an income or benefits charge are met the provisions impose a charge to income tax on the individual to whom income is treated as arising.

This Chapter looks at these basic features in more detail.

INTM600180 looks at relevant transactions.

INTM600320 looks at income becoming payable to a person abroad, and

INTM600440 looks at the individual who is subject to the charge.

INTM600180 - General Conditions All Cases: Relevant Transaction:

INTM600200	Relevant Transaction – introduction
INTM600220	Relevant Transfer
INTM600240	What is a transfer?
INTM600260	Assets
INTM600280	Location of assets
INTM600300	Associated operations

INTM600200 – General Conditions All Cases: Relevant Transaction: Introduction

Introducing a relevant transaction

The transfer of assets provisions impose a charge to income tax on individuals who have power to enjoy income, receive or are entitled to receive capital sums, or receive benefits as a result of a 'relevant transaction'.

The charges only apply if a relevant transfer occurs, and they operate by reference to income of a person abroad that is connected with the transfer or another relevant transaction.

A relevant transaction is defined in section 715 ITA 2007 as either a relevant transfer (INTM600220) or an associated operation (INTM600300).

INTM600220 – General Conditions All Cases: Relevant Transaction: Relevant transfer

What is a relevant transfer

Section 716 ITA 2007 explains what is meant by a relevant transfer.

A relevant transfer is one which:

is a transfer of assets, and

as a result of the transfer, one or more associated operations, or the transfer and one or more associated operations, income becomes payable to a person abroad.

The only meaning given to the word 'transfer' within the legislation is to the effect that in relation to rights it includes the creation of rights. In the absence any more specific meaning within the legislation itself the term 'transfer' takes its ordinary everyday meaning. A wide range of circumstances may therefore represent a 'transfer' and INTM600240 gives some illustrations.

The term 'assets' is given slightly more attention by the legislation and this is explained in INTM600260.

Paragraph INTM600300 sets out the detail of what is meant by an 'associated operation' and INTM600320 looks in more detail at income becomes payable to a person abroad.

Where a transfer of assets or any associated operation involves the creation of a settlement outside the UK it should be kept in mind that the Settlements legislation in Chapter 5 Part 5 of ITTOIA 2005 may also apply in relation to the transaction. Guidance on the application of the Settlements legislation can be found in the Trusts & Estates Manual at TSEM 4000 onwards.

INTM600240 - General Conditions All Cases: Relevant Transaction: What is a transfer?

Illustrations of what a transfer is

With a limited statutory explanation of what a transfer is there is obviously a wide range of actions that may amount to a transfer in the sense of to convey from one place, person, ownership, object group and so on to another. Some of the more common examples of actions that may amount to a transfer are suggested below.

Disposing of assets, such as shares, securities or other property.
Settling of money or other assets into a settlement.
Giving a gift – such as cash or other assets.
Making or receiving of a loan.
Subscribing for shares in a company.
Assigning the right to use goods or services.
Entering into an employment or consultancy agreement or contract.
The straightforward provision of a service by one party to another whether or not for consideration.
Creating any form of right – for example right to use name, trademark, property.
Arrangements that enable one party to own, hold or use assets, cash, goods or services of another.

This list is not intended to be exhaustive; neither is it intended to set any legal framework of the form of actions that may amount to a transfer. It simply aims to illustrate the breadth of circumstances that may amount to a transfer.

A transfer could involve a sale, purchase, gift or loan. It may involve entering into arrangements relating to goods, services or rights or the creation of rights. Essentially there will be an action to change ownership over some form of property, whether real tangible property or intangible property, from or by one person to another.

The fact that an individual may receive a payment or consideration in full for a movement of some form of property from one person to another does not preclude that action from being a transfer for the purposes of the transfer of assets rules. The point being that although a transfer may have taken place, that of itself will not be sufficient to bring the action within the scope of the transfer of assets provisions, other features will also need to be present.

INTM600260 - General Conditions All Cases: Relevant Transaction: Assets

What are assets?

The meaning of "asset" for the purposes of the legislation is at Section 717 ITA 2007. "Assets" is another term given a very wide meaning for the purpose of the transfer of assets provisions, including property or rights of any kind.

There is however some amplification in that reference to assets representing any assets, income or accumulation of income, includes references to:-

shares in or obligations of any company to which the assets, income or accumulations are or have been transferred, or
obligations of any other person to whom the assets, income or accumulations are or have been transferred.

Assets can be tangible, such as shares, securities or other forms of real property, or intangible, like the creation of rights such as the rights created by a service contract or contract of employment. An example of circumstances where rights under a contract were found to be assets is in CIR v Brackett (60 TC 134) in which rights under an employment contract were held to be assets for the purpose of the transfer of assets provisions.

INTM600280 - General Conditions All Cases: Relevant Transaction: Location of assets

Where are assets located and does it matter?

The location of assets either before or after a transfer does not affect the application of the provisions if one of the required outcomes of a transfer is present. Those outcomes are discussed in more detail elsewhere in this guide (see for example INTM600320).

The heading of Chapter 2 Part 13 ITA is 'Transfer of Assets Abroad' but in fact there is nothing within the legislation itself requiring that assets have to be located outside the UK or moved from the UK abroad. In his decision in the case of CIR v Willoughby (70 TC 57) at page 81 the Special Commissioner appears to share this view, saying, 'In my opinion, and so I hold, this language [what was section 739(1) ICTA] may be satisfied whether the assets are transferred from the UK to outside the UK, or being outside the UK they are transferred to a person outside the UK'.

INTM600300 - General Conditions All Cases: Relevant Transaction: Associated operations

Meaning and use of associated operation

The term 'associated operation' appears in the legislation in several places and in different contexts but always in conjunction with a transfer of assets. For example, a transaction is only a relevant transaction if it is a relevant transfer or an associated operation (INTM600220). The other contexts will be discussed elsewhere in this guide, see:-

INTM600320 income becomes payable

INTM600640 the power to enjoy income

INTM601540 receives a benefit, and

INTM602600 exemption from charge

Although there may be different contexts, 'associated operation' has a single meaning. The fact that the term is always found in conjunction with transfer of assets underlines the relationship between them. This becomes clear from the formal definition which can be found at section 719 ITA 2007.

An 'associated operation', in relation to a transfer of assets, is an operation of any kind effected by any person in relation to

a. any of the assets transferred

b. any assets directly or indirectly representing any of the assets transferred,

c. the income arising from any assets within (a) or (b), or

d. any assets directly or indirectly representing the accumulations of income arising from any assets within (a) or (b).

An operation effected by someone other than the transferor can be an associated operation as the legislation states it can be effected by any person. This is demonstrated in a number of tax cases. Corbett's Executrices v CIR 25 TC 305 involved the transfer of an interest in an estate to a UK resident company which subsequently sold some of the investments transferred to a company resident overseas. It was held that the transfer to the overseas company was associated with the transfer to the UK resident company. In Herdman v CIR 45 TC 394 it was held that following a transfer to a company the accumulation of income by that company and the management of the assets transferred was an operation associated with the original transfer.

With effect from 6 December 2005 the words "It does not matter whether the operation is effected before, after or at the same time as the transfer" were added after the definition making clearer the fact that to be an associated operation the action does not have to chronologically follow a transfer of assets.

The same associated operations do not have to be taken into account in every context where it is necessary to consider 'associated operations'. For example, a transfer together with an associated operation may result in income becoming payable to a person abroad, but it may be a quite different associated operation in relation to a transfer that results in the power to enjoy that income.

INTM600320 - General Conditions All cases: Income becomes payable to person abroad: Contents

INTM600340	Income becomes payable to person abroad - Introduction
INTM600360	Person abroad
INTM600380	Examples of persons abroad
INTM600400	Income
INTM600420	Becomes payable

INTM600340 - General Conditions All cases: Income becomes payable to person abroad: introduction

Overview of relevance of income becomes payable to person abroad

For there to be a transfer of assets charge income must become payable to a person abroad as a result of the transfer of assets alone, one or more associated operations, or the transfer and one or more associated operations.

This section looks at:-

INTM600360 person abroad

INTM600380 examples of a person abroad

INTM600400 what is income

INTM600420 what is meant by becomes payable

INTM600360- General Conditions All cases: Income becomes payable to person abroad: person abroad

Who or what is a person abroad?

The Interpretation Act 1978 indicates that 'person' includes a body of persons corporate or unincorporated. Therefore a person abroad could, for example, be an individual, a body of trustees, or a company. Additional comments on this are at INTM600380.

In the case of an individual, for the purpose of these provisions 'person abroad' means an individual who is resident or domiciled outside the UK. From 6 April 2012, a company is only a 'person abroad' if it is resident outside the UK.

Whether an entity established outside the UK is a 'person' has to be discerned from the facts and having regard to the general or commercial law of the jurisdiction in which the entity is established as well as the internal constitution of the entity. How it is regarded for tax purposes in any other country is not likely to be relevant in this context.

The position of an 'entity' can perhaps be illustrated by an example. In the UK a partnership, although formed under law, is not of itself considered to have independent personality or status apart from its members and so is not regarded as a person. The members of a partnership may however be persons. In jurisdictions that follow English law a partnership formed in that jurisdiction is likely to be viewed in a similar way. However in some jurisdictions a partnership formed under the law of that country may be regarded as having legal standing or personality independent of its members, in the way that an incorporated company does, and so in that instance may be a 'person' for these purposes.

There are certain specified persons who although they may not actually be resident outside the UK are nevertheless regarded as a person abroad for the purpose of this legislation. These are listed at Section 718 ITA 2007 and include:-

a company that is incorporated outside the UK, whether it is resident outside the UK, or not, is regarded as a person abroad for periods up to 5 April 2012; however from 6 April 2012 a company is a person abroad only if it is resident outside the UK.

trustees of certain settlements treated as non-UK resident (or prior to 6 April 2013 treated as neither UK resident nor ordinarily UK resident) under the residence of trustees provisions in the settlements legislation (Chapter 2 Part 9 ITA 2007).
certain personal representatives of a deceased person who are treated as non UK resident by the residence of personal representatives provisions under section 834(4) ITA 2007.

INTM600380 - General Conditions All cases: Income becomes payable to person abroad: person abroad - examples

Examples of whom or what is a person abroad

A person abroad can take many forms, for example, an individual, a body of trustees, or an incorporated company (INTM600360).

Whether an entity established outside the UK is a 'person abroad' is a matter that has to be determined from the particular facts including a consideration of the relevant foreign commercial law under which the entity is formed and the internal constitution of the entity. The approach to be taken and potential factors to be considered in deciding whether an entity is a 'person abroad' are likely to be similar to those described at INTM180000.

Broadly speaking any entity that is seen as fiscally opaque for UK tax is likely to be regarded as a 'person' for the purpose of these provisions, and similarly where an entity is considered fiscally transparent for UK tax it is likely that it should not be regarded as a 'person' for these purposes.

Where an entity is regarded as being a legal person within the law of the territory in which it is established, even though it is not of a form that has an immediately recognisable UK equivalent, it is likely that it would be accepted as a person abroad for the purpose of these provisions. Two examples are mentioned below.

The most common forms of foreign entity seen in transfer of assets cases are companies and trusts. A company is a person as is the body of trustees of a trust. Perhaps the next most common form of entity is an Anstalt (Establishment) or Stiftung (Foundation). Generally we treat an Anstalt like a company and a Stiftung like a discretionary trust. These are both normally regarded as persons for the purpose of the transfer of assets provisions.

INTM600400 - General Conditions All cases: Income becomes payable to person abroad: Income

What is income for this legislation?

Before any charge can arise under either the income or benefits charge, income has to become payable to a person abroad as a result of the transfer, one or more associated operations, or the transfer and one or more associated operations. No specific meaning is however given to 'income' for this purpose within the provisions.

Income therefore has to be given its ordinary meaning. It is not confined to the income of the person abroad to whom a transfer of assets is made; there may be other persons to whom income arises as a result of associated operations. Regard must be had to income of each person abroad that is connected with the transfer or another relevant transaction. All forms of income are included as well as certain items treated as income, like offshore income gains, chargeable event gains on certain life assurance policies and accrued income scheme charges.

More detail on these and other types of specific income can be found in paragraph INTM601100 onwards. Income includes both trading and investment income.

In general, income will only be considered as 'income' for transfer of assets purposes if it is of a type that would otherwise be income for income tax purposes. This is because the charge to tax is a charge to income tax so the context suggests that income must refer to items that would be income for that purpose.

As well as items that are specifically treated as income there are also items treated as income for some income tax purposes but which may not be income of a person abroad for the purpose of transfer of assets. In considering whether any item is income it is relevant to consider its character in the hands of the person who actually receives it. In the absence of a specific provision that identifies a particular item as income for all UK tax purposes or specifically for the purpose of the transfer of assets legislation, if it is not income in the hands of the person abroad who actually receives it then it is unlikely to be income for the purpose of transfer of assets.

An example of this is a scrip or stock dividend paid by a United Kingdom company. See INTM601160

INTM600420- General Conditions All cases: Income becomes payable to person abroad: becomes payable

What does becomes payable mean?

Whether or not there is income that becomes payable as a result of a relevant transaction is essentially a matter of fact.

In some circumstances the situation may be quite clear. For example cash may be transferred into an offshore company and then placed on deposit with interest being credited to the account in the company name. In this case, the interest credited to the account is clearly income that becomes payable.

For income tax purposes interest that has accrued would not normally be considered as income until it is paid or credited to the account (but see accrued income scheme charges – INTM601180) Apart from situations where the accrued income scheme applies an accrual is unlikely in most cases to be income that becomes payable.

In the first scenario above the company had become entitled to income when it was credited to the company's account, in the second scenario no entitlement had arisen. Generally where a person is entitled to receive income, that income will usually be considered as income that becomes payable for the purposes of the transfer of assets provisions. For example, in Latilla v CIR (25 TC 107) under a partnership agreement a foreign company was entitled to a share of partnership profits and that entitlement was held to be income payable to the company. In commenting on 'payable' Lord Porter said it was not a term of art, and "he has at his disposal the means whereby he can ensure that his share reaches his hands" and that "in the circumstances it seems to me that the term accurately conveys the process by which income finds its way into the pocket of the individual".

The finding of Hoffmann J in CIR v Brackett (60 TC 134) carries this interpretation further to embrace "not only the case in which the payment to the non-resident has in itself the quality of income but also the case of payments to a non-resident trader from which, after deduction of expenses, the income will arise". Entitlement to trading receipts can therefore be taken to be indication that income becomes payable.

Apart from where a specific provision regards an item as income that becomes payable to a person abroad (see INTM600400) the transfer of assets provisions in general will only apply to actual income of the person abroad rather than 'deemed' income.

INTM600440 - General Conditions All Cases: The Individual: Contents

INTM600460	The Individual
INTM600480	Husbands, wives and civil partners
INTM600500	Residence status

INTM600460 – General Conditions All Cases: The Individual: Introduction

The individual to whom the legislation is directed

The transfer of assets provisions apply to charge individuals only. In order to be chargeable under either the income or benefits charge for periods up to 5 April 2013 the individual must have been ordinarily resident in the United Kingdom for the tax year of charge. For periods from 6 April 2013 the individual must be resident in the United Kingdom in the tax year of charge.

It will be necessary to look in more detail at the individual in the context of the separate income and benefits charges. But in each instance the provisions are concerned with the individual who is potentially subject to the tax charge for the particular tax year.

For the purposes of the transfer of assets provisions reference throughout the legislation to an 'individual' includes their spouse or civil partner. This widespread definition was first introduced before the advent of Independent Taxation and at a time when husbands and wives were broadly considered as one for tax purposes.

HMRC gave some comment on this aspect in April 1999 in a published Tax Bulletin article which said:

"Unless transactions are part of a wider arrangement, Revenue practice is not to seek to assess a UK domiciled individual on the income of a non-UK domiciled spouse, where that income arises from a transfer of assets by that spouse and would be outside the charge to tax under section 739 [ICTA 1988] by virtue of the provisions of section 743(3) [ICTA 1988]."

This statement indicates broadly the approach that will be taken to individuals and their spouses or civil partners in relation to the application of these provisions. In general (unless there are wider arrangements) HMRC will not use transfer of assets to charge tax on one spouse or civil partner in respect of income arising to the other spouse or civil partner, where that spouse or civil

partner has made a transfer of assets but is, for example, outside the charge because say of the application of non-UK domicile provisions. In effect, the general approach will be to apply the word individual (where the individual has a spouse or civil partner) in a way that is consistent with the individual who has the power to enjoy income of a person abroad, entitlement to capital sums or who receives benefits as a result of relevant transactions. But it may be equally valid in this context to use the term in a way that is consistent with an individual who, by means of relevant transactions, seeks to avoid a liability to income tax. Where spouses or civil partners are therefore in some way connected with relevant transactions and the results of such transactions, regard will be had to the particular facts where the extended meaning of individual may impact upon the potential charge.

INTM600500– General Conditions All Cases: The Individual: residence status

Residence Status: Introduction

Until 5 April 2013 an individual had to be ordinarily resident in the UK for the tax year if he or she was to be chargeable in respect of the income or benefits charge for that year. With effect from 6 April 2013 the concept of ordinary residence was essentially 'abolished' and an individual has instead to be resident in the UK for a tax year if he or she is to be chargeable in respect of the income and benefits charge for the years 2013-14 onwards.

Ordinarily resident

For the tax years up to and including 2012-13 an individual had to be ordinarily resident in the UK for the tax year if he or she was to be chargeable in respect of the income or benefits charge for that year.

It is the status of the individual for the tax year in which a potential charge arises that is material, not that individual's status at any other time, for example see INTM600700.

Guidance on whether an individual was ordinarily resident in the United Kingdom can be found in the Residence, Domicile and Remittance Basis Manual (www.hmrc.gov.uk/manuals/rdrmmanual/index.htm) and publication [HMRC6] (www.hmrc.gov.uk/cnr/hmrc6.pdf).

With the introduction of the new statutory residence test and the 'abolition' of the ordinary residence concept from 6 April 2013 an individual has to be resident in the UK for the tax year if he or she is to be chargeable in respect of the income or benefits charge for that year.

For the purposes of the transfer of assets legislation there are transitional provisions for individuals who were resident in the UK for 2012-13, but who were not ordinarily resident at the end of that tax year. The transitional provisions apply to an individual who:-

was resident for 2010-11 and 2011-12 as well as 2012-13
was not resident in 2010-11, but was resident in 2011-12 as well as 2012-13
was not resident in further 2010-11 or 2011-12, but was resident in 2012-13

If the individual meets the criteria in the first bullet point above then for the tax year 2013-14 the references in the transfer of assets provisions to being UK resident for that year are replaced by references to being ordinarily resident in the United Kingdom. If the individual meets the criteria in the second bullet point above then for the tax years 2013-14 and 2014-15 the references in the transfer of assets provisions to being UK resident for the years concerned is replaced by references to being ordinarily resident in the UK.

If the individual meets the criteria in the third bullet point above then for the tax years 2013-14, 2014-15 and 2015-16 the reference in the transfer of assets provisions to being UK resident for the tax years concerned is replaced by references to being ordinarily resident in the UK.

The transitional provisions effectively retain the concept of ordinary residence for 2013-14 and 2014-15 in the limited situations set out above.

INTM600520 - Transfer of assets: The Income Charge

INTM600540	Introduction
INTM600600	General Conditions
INTM600740	The Individual
INTM600820	The Transferor
INTM600840	Power to Enjoy
INTM600990	Capital Sum
INTM601080	Measure of Income
INTM601300	Interaction between the income charge and the benefits charge

INTM600540 - The Income Charge: Introduction: Contents

INTM600560	Introduction
INTM600580	The Transfer

INTM600560 – The Income Charge: Introduction

Introduction

There are two separate transfer of assets income charges, which this guidance refers to as:

income charge – power to enjoy; and
income charge – receipt of/entitlement to capital sums.

Or, collectively, as 'the income charge' as both broadly lead to the same result.

This chapter proceeds as follows:

INTM600600 Describes the general conditions for each income charge.

INTM600740 Discusses the individual who is subject to the charge.

INTM600820 Considers who are transferors

INTM600840 Looks in detail at the meaning of power to enjoy income.

INTM601040 Considers what is meant by capital sums.

INTM601080 Considers how income is measured for the income charge

INTM601300 Considers the interaction between the income charge and benefits charge

INTM600580 - The income charge

The transfer

The meaning of the term 'relevant transfer' for the purpose of the transfer of assets provisions was discussed at INTM600220. That same description applies to the income charge where that term is used. This section considers the link between relevant transfers and the individual who is potentially avoiding liability to income tax by means of relevant transfers. That individual is the individual who is potentially liable for any tax charged under the income charge and to whom the income is treated as arising. However, there is nothing in the income charge provisions to say that individual must also be the person who has undertaken the transactions that have resulted in income becoming payable to a person abroad.

However, the general approach is that an income charge will only apply where the individual who is subject to the charge is also the person who has made or is associated with the transfer of assets. It is the benefits charge that is more likely to apply where the person who is treated as having income arising to them is not the person who has made the transfer of assets (INTM601400). This link between transfer and the individual who is potentially subject to tax under the income charge effectively comes from the interpretation placed upon the income charge by the Courts.

The leading case in this respect is Vestey v CIR (54 TC 503), in which Lord Wilberforce says (pages 583 and 584) :

'There are undoubtedly two possible interpretations of (what became section 739 ICTA), particularly having regard to the preamble. The first is to regard it has having a limited effect; to be directed against persons who transfer assets abroad; who by means of such transfers avoid tax, and who yet manage when resident in the United Kingdom to obtain or to be in a position to obtain benefits from those assets. For myself I regard this as being the natural meaning of the section.....The second is to give the whole section an extended meaning, so as to embrace all persons, born or unborn, who in any way may benefit from assets transferred abroad by others...This I regard as a possible but less natural meaning of the section.'

He later added (page 587) that 'the section (what became section 739) (should be) interpreted as applying only where the person sought to be charged made, or may be, was associated with, the transfer.'

In most cases determining whether the individual has made a transfer of assets will be relatively straightforward, but what is meant by 'or may be, was associated with' the transfer? This is likely to depend on the facts and circumstances of the matter. For example, an individual may wholly own and direct a company. If the company makes a relevant transfer which results in the individual who owns the company having power to enjoy the income of a person abroad, even though the individual has not made the transfer, by virtue of his position HMRC would take the view that he, may be, was associated with it and thus that the individual can be regarded as having made the transfer such that the connection is made and the income charge applies. Equally if an individual in someway 'procured' a transfer to be made HMRC may regard the relevant connection as made. In the case of Congreve v CIR (30 TC 163 at page 197) Cohen LJ observes:

"But even if we were prepared to accede to the argument that the preamble connoted activity by the person concerned, we think this condition would be fulfilled if the execution of the transfer were procured by the individual concerned, even though it was not actually executed by him or his agent."

In this context 'procured' is considered to include 'organised, engineered or brought about' as indicated by the views of Lord Wilberforce in the Vestey case at page 583 where he speaks of the individual as having 'organised or engineered transfers' and in the same case at page 602, Lord Keith speaks of transfers 'organised or brought about 'by the individual.

Features which may need to be considered in determining whether the individual is, may be, associated with a transfer of assets or has procured a transfer of assets are factors such as:-

whether the individual had any bargaining power with the person who actually makes the transfer;
whether there was a contractual connection between the individual and the actual person making the transfer; and
whether the individual had any proprietary interest, actual or potential, in the assets transferred.

This list is not intended to be exhaustive and it will be relevant to consider all of the facts and circumstances of the matter if there is doubt about whether there is an appropriate connection for an income charge to be made.

If more than one individual appears to have effected, procured or is, may be, associated with a transfer of assets, then see INTM600800

If after consideration of the facts doubt remains about whether the appropriate connection exists such that an income charge applies the views of Trusts & Estates Technical Bootle should be sought before any charge to tax is raised.

In the event that there is more than one individual who may be the subject of an income charge see INTM602400

INTM600600 - The Income charge: General conditions

INTM600620	The income charge: General conditions: Introduction
INTM600640	The income charge: General condition: power to enjoy
INTM600660	The income charge: General conditions: entitlement to capital sum
INTM600680	Which charge applies?
INTM600700	Legislative purpose
INTM600720	Reduction where controlled foreign company involved

INTM600620 - The Income Charge: General conditions

Introduction

Prior to 6 April 2007 the income charge was wholly contained in section 739 ICTA 1988 with subsections (2) and (3) introducing the respective charges. Those charges are now headed, "Charge where power to enjoy income" in sections 720 – 726 ITA 2007 and "Charge where capital sums received" in sections 727 – 730 ITA 2007.

For each of the charges:-

Up until 5 April 2013 the charge applies for the purpose of preventing the avoiding of liability to income tax by individuals who are ordinarily resident in the UK by means of relevant transfers (INTM600220). After 6 April 2013 it applies where such individuals are resident in the UK, It does not however require the purpose of the transfer to be avoiding liability to income tax. In other words, an outcome of a transfer may be that income tax liability is avoided but the transaction may have taken place for some other purpose, for example avoiding a liability to capital gains tax, nevertheless the transaction is caught within the transfer of assets provisions. More about this 'legislative purpose' is at INTM600700.

Income tax is charged on the amount of income treated as arising to such an individual (see INTM600760) by the provisions.

The person who is liable to the charge is the individual to whom the income is treated as arising.

Where the 'controlled foreign companies' provisions apply in relation to the income the amount chargeable may be reduced accordingly INTM600720.

An exemption from tax is provided where the conditions are met (see INTM602620).

In charging any tax the same deductions and reliefs are allowed as would have been allowed if the income treated as arising to the individual had actually been received by them (see INTM602240).

INTM600640 - The income charge: General conditions

Income charge - power to enjoy

The basic ingredients required for there to be the possibility of an income charge under this heading can perhaps be summarised diagrammatically by the pieces of a small jigsaw puzzle:-

Fig 1 – Basic pieces for an income charge – power to enjoy

In essence each piece will need to be present and put together in an appropriate way making the whole before a potential charge can arise. The edge pieces of the jigsaw form the essential conditions with the centrepiece being the legislative purpose INTM600700 around which the framework is built.

The essential conditions which are required for the operation of the income charge – power to enjoy, may, in broad terms, be summarised as follows:-

There is a transfer of assets (see 600220);
An individual who (or whose spouse or civil partner) is resident in the UK in the year of potential charge has made or has been associated with such a transfer (see INTM600460) (Until 6 April 2013 an individual had only to be ordinarily resident in the UK);
As a result of the transfer, by itself or in conjunction with associated operations, income becomes payable to persons resident or, in the case of an individual, domiciled outside the UK (see INTM600320);
The individual (spouse or civil partner) who is the subject of the potential charge must have power, in the tax year, to enjoy now or later income of a person abroad as a result of the transfer alone or together with associated operations (see INTM600840)

A further condition for this charge is that the income in question is such that it would be chargeable to income tax if it were the individual's and received by the individual in the UK.

If the individual who is subject to the income charge is non-UK domiciled for the tax year see INTM601940 for the effect this may have on liability to income tax on the income treated as arising under the income charge.

The amount on which liability to the income charge may arise may also be affected by section 724 ITA 2007 which limits the charge when a benefit is provided to the individual out of the income of the person abroad. This is considered further in INTM600980.

INTM600660- The income charge: General conditions

Income charge – receipt of/entitlement to capital sum

Like the income charge – power to enjoy, the basic conditions required for there to be an income charge under this heading can perhaps be summarised diagrammatically by the pieces of a small jigsaw puzzle:-

Fig 2 – basic pieces for an income charge – entitlement to capital sum

In essence each piece will need to be present and put together in an appropriate way making the whole before a potential charge can arise. The edge pieces of the jigsaw form the essential ingredients with the centrepiece being the legislative purpose INTM600700 around which the framework is built.

The essential conditions which are required for the operation of the income charge – entitlement to capital sum, may, in broad terms, be summarised as follows:-

There is a transfer of assets (see INTM600220);
An individual who (or whose spouse or civil partner) is resident in the United Kingdom in the year of potential charge has made or has been associated with such a transfer "(see INTM600460)" (Until 6 April 2013 an individual had only to be ordinarily resident in the United Kingdom);
As a result of a relevant transfer (INTM600220), one or more associated operations (INTM600300), or a relevant transfer and one or more associated operations, income has become the income of a person abroad;
The capital receipt conditions are met in respect of the individual in the tax year "(see INTM600990)"

There is no equivalent in the provisions for this charge to the condition in the power to enjoy charge that the income would be chargeable to income tax if it were the individual's and received by the individual in the UK. The power to enjoy provision is referred to in INTM600640.

This charge operates without regard to the criteria of 'power to enjoy'. All the tests in the 'income charge – power to enjoy' relate to what is happening, or what might happen now or in the future, to the income. Here, the test of liability is whether the individual receives or is entitled to receive any 'capital sum', the payment of which is in any way connected with the transfer or any associated operation (the capital receipt condition INTM600990).

It should be noted that no liability can arise under this charge for a tax year before receipt or entitlement to a capital sum. But where there is such a receipt or entitlement liability continues for any subsequent year for which there is income (there need be no further receipt of a capital sum). If, however, entitlement to a capital sum completely ends, and there are no other grounds for an income charge, liability under this charge will not normally be extended beyond the tax year in which that entitlement ceases.

Where this charge applies for the first time it is the whole of any income of the tax year that is potentially chargeable not merely income arising from the date of receipt or entitlement to the capital sum. This is also the case for any tax year where the entitlement to the capital sum ends; the whole of any income of the tax year is potentially chargeable.

If the individual who is subject to the income charge is non-UK domiciled for the tax year see INTM601940 for the effect this may have on liability to income tax.

INTM600680 - The income charge: General conditions

Which charge applies?

It is possible that for the same tax year an individual could meet the conditions to be potentially chargeable under either of the income charge provisions. The 'no duplication of charge' provisions described at INTM602360 ensure that the same income cannot be taken into account more than once for the purpose of an income charge. The result would be that if the conditions for both charges were in fact met, only one charge would be made.

INTM600700 - The income charge: General conditions

Legislative purpose

Although there is no explicit condition to be met that tax avoidance must be involved before an income charge can arise, this legislation was introduced as an 'anti-avoidance' measure (INTM600040) and the preamble to the charging provisions sets out the purpose for which the provisions apply, preventing the avoiding of liability to income tax by individuals who are UK resident by means of relevant transfers. Note that from 6 April 2013 an individual only has to be resident in the UK for the legislation to apply.

However, the preamble also has important direct links to the income charge. For example, in the pre-ITA 2007 legislation each income charge provision referred to 'such transfer', being a transfer of a type described in the preamble, that has now effectively become a reference to 'relevant transfer' in the preamble to the ITA 2007 provisions. Also, both before and after ITA 2007, the income charges make reference to 'such an individual' being an individual of the kind described by the preamble. More is said about 'such an individual' in (INTM600760).

So, whilst it is clear that the preamble sets the purpose of the legislation; as Lord Browne-Wilkinson says in the McGuckian case (69 TC 1 at page 76), "...the words quoted (section 739(1) ICTA) refer not to the intention of the transferor of the assets ... but to the intention of Parliament in enacting the section" and in the same case Lord Clyde (at page 85) affirms that, "The opening few lines of that section set out the purpose to be served by the enactment. That purpose is the prevention of avoidance by individuals ordinarily resident in the United Kingdom of liability to income tax by means of certain kinds of transaction"; because of the links to the income charges it does much more, forming an integral part in construing the section as Lord-Browne Wilkinson goes on to say, "That Parliamentary intention is certainly relevant in construing the section".

However these provisions are not only aimed at transactions whose purpose is avoiding income tax. The first bullet of INTM600620 makes clear that it does not matter whether the avoiding liability to income tax is a purpose for which the transfer is effected. Clarification to this effect was first inserted into the legislation in Finance Act 1997 and applying irrespective of when the transfer or associated operations took place but only in relation to income arising on or after 26 November 1996.

The Budget Press Release in relation to the amendment introduced in Finance Act 1997 records:

"The existing provisions which prevent individuals ordinarily resident in the United Kingdom avoiding income tax by the transfer of assets abroad will be amended to clarify their application and ensure that they work effectively. The changes will confirm long-standing practice in this area.

The amendments will ensure that, for income arising on or after today, the legislation applies:

- where a purpose of the transfer is to avoid any form of direct taxation.

The new measure will have the effect of removing any possible implication in the legislation that the provisions only apply if:

the avoiding of income tax is the purpose, or one of the purposes, for which the transfer is effected."

The provision appears to reflect exactly the sentiments of Lord Clyde in McGuckian expressed in his judgement in June 1997 where he says, continuing on from the quotation above, "It is not required that the transaction should be carried out with that purpose".

Further affirmation of the nature of these introductory words can be gleaned from the speech of Lord Steyn in the McGuckian case, at page 82 where he comments, "I would reject the argument that it is a condition precedent to [what became section 739 ICTA] applying that there must be proof of actual avoidance of tax liability. Such a construction treats [section 739 ICTA] as a power of last resort and it substantially emasculates the effectiveness of the power under [section 739 ICTA]. Nothing in the language or purpose of [section 739 ICTA] compels such a construction. Properly construed the opening words of [the section] merely provide that there must be an intention to avoid liability for tax. The sensible construction is that [section 739 ICTA] can be applied even if there are other provisions which could be invoked to prevent the avoidance of tax. That the revenue authorities should have overlapping taxation powers is an unremarkable consequence. And such a construction cannot cause any unfairness to the taxpayer since he cannot be taxed twice in respect of the same income."

These words should not however be taken to suggest that the income charge provisions apply to any and every transaction that may be a relevant transfer. The provisions remain for preventing the avoiding of liability to income tax. And thus at the heart of the jigsaw puzzle remains the need to identify that there is or would be avoidance of UK income tax before the provisions can be applied.

The preamble not only therefore establishes the purpose of the legislation but is also used in identifying the individual who is subject to the charge (INTM600760) and the transactions which are the target of the legislation (INTM600200).

INTM600720 - The income charge: General conditions

Reduction in income charge where controlled foreign company involved

A potential income charge may be reduced by section 725 ITA 2007 where a controlled foreign company (CFC) is involved. New legislation regarding the taxation of CFCs was introduced by the Finance Act of 2012. This may affect how a CFC's profits are taxed in the UK for accounting periods beginning on or after 1 January 2013, but it does not affect how the transfer of assets income charge is reduced as section 725 ITA 2007 acts to reduce the income subject the charge by a proportion of the controlled foreign company's profits. This guidance refers to the new legislation which is contained in Taxation (International and Other Provisions) Act 2010 (TIOPA 2010), but the formula referred to later in this paragraph applies equally to periods covered by the old CFC rules in Chapter 4 of Part 17 ICTA 1988.

The income charge falling on an individual may be reduced if the following conditions are met:

Under Part 9A TIOPA 2010 (controlled foreign companies) the CFC is charged in relation to the CFC accounting period.
An amount of income is treated as arising to an individual under section 721 for a tax year, and
The income mentioned in section 721 (2) is or includes a sum forming part of the CFC's chargeable profits for the accounting period. Apart from this provision the amount of income treated as arising to an individual under the income charge for a tax year would be or include a sum forming part of the CFC's chargeable profits for that accounting period.

Where the above conditions are met the amount that would otherwise be chargeable under the income charge is reduced by:

S x CA/CP

Where:–

S - is the sum forming part of the controlled foreign company's chargeable profits for that accounting period,

CA - is the chargeable amount, and

CP - is the controlled foreign company's chargeable profits for that accounting period.

Example

An individual is treated as having income of £500,000 which is chargeable under the income charge. Of this amount £100,000 represents profits of an offshore company of which £50,000 has been apportioned to a UK resident company under the CFC provisions.

The income charge is reduced as follows:

£100,000 (S) x £50,000(CA) / £100,000(CP) = £50,000

The income charge will therefore be on income of £500,000 - £50,000 = £450,000

Finance Act of 2013 introduced a similar rule to allow for a reduction in the amount of the income charge where a CFC is involved and the special rules in section 724 ITA 2007 apply (that is, where a benefit is provided out of the income of a person abroad). The legislation had previously only provided for a reduction in the amount of an income charge under where the charge was under section 721 ITA 2007 (charge where there is power to enjoy income) (INTM600860 onwards). This amendment takes effect for the tax year 2013-14 and subsequent years. Where the above conditions are met the amount that would otherwise be chargeable under the income charge in section 724 ITA 2007 is reduced by reference to a percentage (X%) of S in the above formula. X% is determined as follows:

100% x A/I

Where

A is the amount on which the individual is liable as determined under section 724(2) ITA 2007, and

I is the amount of the income mentioned in section 721(2)

Example

An offshore company has profits of £100,000 of which £50,000 has been apportioned to a UK resident company under the CFC provisions. An individual has power to enjoy the income of the offshore company because he receives a benefit of £50,000 provided out of the income of the company. It is held that section 724 ITA 2007 applies in the circumstances.

The income charge is reduced as follows:

100% x £50,000 (A) / £100,000 (I) = 50%

S = £50,000 x 50% = £25,000

The income charge is reduced as follows

£25,000 (X% of S) x £50,000 (CA) /£100,000 (CP) =£12,500

The income charge will therefore be on income of £50,000 - £12,500 = £37,500

INTM600740- The income charge - individual liable to charge

INTM600760	Such an individual
INTM600780	Residence position
INTM600800	Multiple income charges

INTM600760 - The income charge

Such an individual

The person who is liable for any tax charged under the income charge is the individual to whom the income is treated as arising (INTM600620 bullet 3). That individual is described as 'such an individual'. This is not just any individual but specifically the individual described in the preamble (INTM600700).

The importance of the phrase 'such an individual', which also appeared in the earlier legislation, is evidenced by the consideration that the courts have given to it over the years. For example Lord Nolan records in the case of Willoughby v CIR

(70 TC at page 114), "The crucial words, as it seems to me, are those in subsection (1) which state that the section is to 'have effect for the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets', coupled with the identification, in subsection (2), of "such an individual" as the subject of liability. What can the words "such an individual" refer to save for an individual of the kind described in subsection (1), that is an individual ordinarily resident in the United Kingdom seeking to avoid liability by means of transfers of assets?"

In context, Lord Nolan was considering here the issue of ordinary residence, see INTM600780, but what is clear is the special significance of the phrase and the fact that it encompasses far more than just any individual. As the Special Commissioner observes in CIR v Botnar (72 TC at page 239) "it therefore follows that "such an individual" is an individual ordinarily resident in the United Kingdom who, by means of a transfer of assets in consequence of which income becomes payable to a non-resident, avoids liability to income tax apart from the operation of these provisions"

Whilst it may therefore be the case that there is no 'condition precedent' that there must be actual avoidance of tax liability for an income charge to arise to such an individual, it must be the case that an outcome of the transactions is that, absent the income charge, a liability to income tax would be avoided. And that the individual who is the subject of charge is the one who would, without the income charge, have avoided income tax as a result of relevant transactions. Where, therefore, there is no avoiding of liability to income tax, or otherwise the relevant conditions are not met, there can be no application of the income charge, there being no 'such an individual' as is chargeable by the provisions

A very simple example may illustrate the situation.

Example

Two UK resident individuals each plan to invest in an offshore bank deposit account. The first individual invests directly in the account and receives interest which is part of his income and on which he pays tax through his self assessment. Even though on the face of it there is a relevant transfer he is not 'such an individual' as the income charge applies to as there is no avoiding of a liability to income tax. The transfer of assets provisions therefore do not apply.

By contrast the second individual sets up an offshore entity in a territory where it will not be charged to tax on its income. This entity places the money on deposit and receives the income. The income that arises to the entity cannot be charged directly on the individual. In this context the individual is 'such an individual' as would avoid liability to income tax apart from the operation of these provisions. Therefore, the transfer of assets income charge applies to prevent the avoiding of liability to income tax if all other conditions are also met.

INTM600780 - The income charge

Residence Position

In order to be chargeable under the income charge for a particular tax year, for the years up to and including 2012-13, the individual must be ordinarily resident in the UK for the year in question. Following changes made by the Finance Act of 2013, for years from 2013-14 onwards, with exception of individuals affected by the transitional rules (see INTM600500); an individual will be chargeable under the income charge for a particular tax year if they are resident in the UK in that year.

The issue of ordinary residence is covered in more detail at INTM600500.

There is however one important additional point about ordinary residence/residence that affects the income charge. The individual does not have to have been ordinarily resident /resident in the UK when the transfer of assets or associated operations took place.

This was clarified by an amendment to the income charge by section 81 FA 1997 and it applies irrespective of when the transfer or associated operations took place but only in relation to income arising on or after 26th November 1996.

What this means is that where the individual was not ordinarily resident in the UK at the time when the relevant transfers were made only income arising on or after 26 November 1996 can be taken into account in arriving at the income charge.

The tax position for tax years 2013-14 onwards will be different in that an individual has to be resident in the UK for the particular tax year for the income charge to apply.

If an individual is outside the scope of the income charge in respect of income arising before 26th November 1996 because of not being ordinarily resident in the UK at the time the relevant transfer was made, that individual will not be charged under the benefits charge. This was the effect of a statement first published by HMRC in April 1999 in Tax Bulletin 40. However others who benefit may be subject to the benefits charge (see INTM601400).

INTM600800 - The income charge: power to enjoy – Multiple Income charges

Multiple Transferors

Where there is a choice of persons who may be taken into account in charging the income then the income is apportioned on a "just and reasonable" basis as referred to in section 743 (2) 2007.

This has not always been the case. In CIR v Pratt (1982) 57TC 1 the Respondents (in 1964) owned 29% of a company's shares between them. There were 15 other shareholders and 5 other directors. An avoidance scheme was set up which included a number of offshore companies and two offshore trusts, one of which was a family discretionary trust. The Respondents each received loans of £2,000 which were assessed to tax under what was then section 412 ITA 1952 (now section 720 ITA 2007). Walton J dismissed the Revenue's appeal on the basis that it was not possible to do otherwise in this case as there was a plurality of transferors whose respective interests could not be separated out.

He accepted that the House of Lords decision in the case of Vestey (1979) 3 WLR915 did not preclude a person, who was not the transferor, from being liable under section 412 ITA 1952 (now section 720 ITA 2007) if he "procured" the transfer. He also accepted that there could be multiple quasi-transferors, but only to the extent that an identifiable portion of the asset transferred could be attributed to a particular transferor. In the absence of such identifiable portions section 412 ITA 1952 did not provide the means to arrive at an apportionment, or the authority to tax it, and in the absence of any legal basis for such action the section could not apply.

Section 45 Finance Act 1981 was enacted to provide for the apportionment of income.

HMRC's practice (Tax Bulletin 40 and RI 201) where the same assets are transferred by several individuals is to assess the transferors in proportion to their share of the assets transferred. For example, where the shares of a UK company are held by three individuals in the proportions of 40%, 40% and 20% and there is a liability under section 720 ITA 207 in respect of the income of an overseas person to which the shares are transferred, the liability is assessed on each of the three individuals in proportion to their respective holdings.

An officer of Revenue and Customs must be satisfied that the apportionment of income to be taken into account between individuals is on a "just and reasonable" basis (section 743 (2) ITA 2007). Of course, taxpayers have the usual rights of appeal against decisions on this point, which are the jurisdiction of the Tax Tribunal (section 751 ITA 2007

INTM600820 - The income charge: Transferors

The transfer

A 'relevant transfer' for the purpose of the transfer of assets provisions is described at INTM600220. This section considers the link between relevant transfers and the individual who is potentially avoiding liability to income tax by means of relevant transfers. It is the individual who is avoiding liability to income tax who is potentially liable for any tax charged under the income charge and to whom the income is treated as arising. However, there is nothing directly within the income charge provisions to say that individual must also be the person who has undertaken the transactions that have resulted in income becoming payable to a person abroad.

Notwithstanding this, the general approach is that an income charge will only apply where the individual who is subject to the charge is also the person who has made, or is associated with, the transfer of assets. Where a person other than the individual who made the transfer is treated as having income arising to them then it is the benefits charge that may be in point (see INTM601400 onwards). This link between the transfer and the individual who is potentially subject to tax under the income charge effectively comes from the interpretation placed upon the income charge by the courts.

The leading case in this respect is Vestey v CIR (54 TC 503), in which Lord Wilberforce says (pages 583 and 584):

'There are undoubtedly two possible interpretations of (what became section 739 ICTA), particularly having regard to the preamble. The first is to regard it has having a limited effect; to be directed against persons who transfer assets abroad; who by means of such transfers avoid tax, and who yet manage when resident in the United Kingdom to obtain or to be in a position to obtain benefits from those assets. For myself I regard this as being the natural meaning of the section.....The second is to give the whole section an extended meaning, so as to embrace all persons, born or unborn, who in any way may benefit from assets transferred abroad by others...This I regard as a possible but less natural meaning of the section.'

In most cases determining whether the individual has made a transfer of assets will be relatively straightforward, but what is meant by 'or may be associated with' the transfer? This is likely to depend on the facts and circumstances of the matter. For example, an individual may wholly own and direct a company. If the company makes a relevant transfer which results in the shareholder having power to enjoy the income of a person abroad, even though the individual has not made the transfer, HMRC would take the view that he, maybe, was associated with it by virtue of his position. The individual can therefore be regarded as having made the transfer such that the connection is made and the income charge applies. Equally if an individual in someway 'procured' a transfer to be made HMRC may regard the relevant connection as made. In the case of Congreve v CIR (30 TC 163 at page 197) Cohen LJ observes:

"But even if we were prepared to accede to the argument that the preamble connoted activity by the person concerned, we think this condition would be fulfilled if the execution of the transfer were procured by the individual concerned, even though it was not actually executed by him or his agent."

Factors which may need to be considered in determining whether the individual is or may be associated with a transfer of assets or has procured a transfer of assets include:-

whether the individual had any bargaining power with the person who actually makes the transfer;
whether there was a contractual connection between the individual and the actual person making the transfer; and
whether the individual had any proprietary interest, actual or potential, in the assets transferred.

If more than one individual appears to have effected, procured or is, may be, associated with a transfer of assets, then see INTM600800.

If after consideration of the facts doubt remains about whether the appropriate connection exists such that an income charge applies the views of Trusts & estates Technical, Bootle should be sought before any charge to tax is raised.

In the event that there is more than one individual who may be the subject of any income charge see (INTM602400).

INTM600840 - The income charge: power to enjoy - Contents

INTM600860	The Income Charge- Power to enjoy- Introduction
INTM600880	The income charge- Power to enjoy- Condition A
INTM600900	The income charge – Power to enjoy – Condition B
INTM600920	The income charge- Power to enjoy – Condition C
INTM600940	The income charge – Power to enjoy – Condition D
INTM600960	The income charge – Power to enjoy – Condition E
INTM600980	The income charge- Power to enjoy – Special rule relating to benefits

INTM600860 -The income charge: power to enjoy: Introduction

Introduction

In order for there to be an income charge 'such an individual' (INTM600760) must have, for the tax year in question, the power to enjoy any income of a person abroad either at that time or in the future and that power to enjoy must come from the transfer of assets either alone or in conjunction with associated operations. When an individual has power to enjoy the income of the person abroad is set out in section 722 ITA 2007.

The provisions go on to describe a number of circumstances in which an individual, for the purpose of the income charge, is considered to satisfy the conditions to have power to enjoy income. This section will look at each of those tests, described in the current legislation at section 723 ITA 2007 as Conditions A to E, separately.

The 'power to enjoy' conditions are very wide ranging. And in many instances the individual may have power to enjoy income under several (or indeed all) of the conditions. In determining whether an individual has power to enjoy income within the meaning of Conditions A to E, regard must be had to the substantial result and effect of the transfer and any associated operations. All benefits which may at any time accrue to the individual as a result of the transfer and any associated operations, irrespective of their nature or form and regardless of whether or not the individual has legal or equitable rights in respect of the benefits, shall be taken into account. This supplemental provision confirms the very wide-ranging circumstances that result in an individual being considered to have the power to enjoy income. A point made by Mr Justice Walton in his judgement in Vestey (54 TC 503 at page 553) in commenting on the provision that is now at section 722(3) and (4) when he says, "It therefore appears to me that the only effect which [what was then] subs (6) could possibly have as the law now stands is to enlarge - never to restrict – the circumstances under which the individual has power to enjoy income".

Where the power to enjoy condition is met any income of a person abroad that the individual has power to enjoy is income that is deemed to be income of that individual for income tax purposes. It is not the case, however, that the income which the individual has power to enjoy and the income that becomes payable to a person abroad have to be the income of the same foreign person.

It is possible for more than one individual to have power to enjoy income of a person abroad. When this happens the income that is deemed to be income of each individual may depend to some extent on precisely what it is that the individual has power to enjoy in consequence of any transfer which they have made (together with associated operations). In most cases however any conflict will be resolved by the 'no duplication of charges' provisions described at (INTM602180).

INTM600880 - Transfer of assets: the income charge: power to enjoy - condition A

Condition A (section 723 (1) ITA 2007) is "that the income is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of the individual whether in the form of income or not".

To meet this condition the income must be for the benefit of the particular individual who is potentially subject to the charge. It will not be sufficient that the income is calculated to enure for a group of individuals.

The condition was considered in some detail in the case of CIR v Botnar (72 TC 205) where in relation to particularly intricate facts this power to enjoy was considered to be satisfied because the possibility existed of transfers between trusts, from a trust in which the individual was excluded from benefit to one where he or his wife could benefit. The case demonstrates once more the importance of a very careful consideration of all of the facts in relation to a particular matter, especially where intricate or complex arrangements are involved.

The condition is designed to cover situations in which the income of a person abroad is accumulated and the circumstances are such that the individual can be seen as the future beneficiary of the accumulation of income. For example, in a foreign company where the individual can, by say redeeming debentures, receive the income at a later date; or in a foreign trust, the future beneficiary of which is the individual. In either scenario the condition may be considered as satisfied.

The transaction may be carried out by any person. It must, however, actually be carried out – the need for a finding of this fact was mentioned by Lord Simonds in Lord Vestey's Executors v CIR (31 TC 1 at page 85) where he observes, "the opening words of the paragraph emphatically indicate that the question is one of that "the income is in fact so dealt with", etc. If therefore reliance is placed upon it there should be an explicit finding of fact". It is unlikely to be sufficient that the income may be calculated to be so dealt with in the future.

The meaning of the word 'calculated' in this test was considered briefly by Mr Justice Walton in Vestey v CIR (54 TC 503 at page 555) where he observes "that it was submitted to me that "calculated" ... meant "likely". This is, of course, one of its possible meanings, although a glance at the Shorter Oxford English Dictionary makes it quite clear that this is not a precise translation of the word "calculated". On the other hand, its primary meaning is "reckoned, estimated, or thought out", and I would think that this is the meaning which is intended here." Walton J went on to say that he thought a stricter interpretation than "likely" is called for. And that is the approach which HMRC have continued to follow in relation to this test.

The benefit may be present or future. It may be in the form of income or not, and may include a payment of any kind (prior to April 2007 the transfer of assets legislation Chapter included a meaning of 'benefit' for the purposes of the Chapter saying - "benefit" includes a payment of any kind). Therefore provided some benefit enures to the individual it need not be a money payment at all. In this context 'enure' means to take, or have effect or serve to the use, benefit, or advantage of a person.

Some examples taken from Case Law illustrate this point.

In Latilla v CIR (25 TC 116), a non-UK company paid over income to the individual by repaying debentures held by her. Such a capital payment, if it results from dealing with the income of the person abroad, may come within this test. A capital payment may also trigger the income charge - receipt of/entitlement to capital sums further dealt with at (INTM600990).

In Lord Chetwode v CIR (51 TC 647) the whole share capital of a Bahamas company was held by the Bahamas trustee of a settlement for the benefit of Lord Chetwode and his family. Lord Chetwode had a life interest in the trust fund and had very wide powers, including power to remove or appoint trustees, and to re-vest in himself the title to the trust fund. The House of Lords said in their Judgement that, in view of the terms of the settlement, in addition to power to enjoy under other conditions, the income of the underlying company was so dealt with as to be calculated to enure for Lord Chetwode's benefit, and thus he had power to enjoy under this condition.

INTM600900 - Transfer of assets: the income charge: power to enjoy - condition B

Condition B (section 723 (2) ITA 2007) is "that the receipt or accrual of the income operates to increase the value to the individual -

(a) of any assets the individual holds, or

(b) of any assets held for the individual's benefit."

In this context, 'assets' carries the same meaning described at INTM600260.

This heading covers, for example, situations where:-

a. the individual holds shares in a foreign company, and the accrued income or profits of the company increase the value of its shares;

b. the individual receives debentures in exchange for transferred assets (see Howard de Walden v CIR 25 TC 121);

c. the consideration for the transferred assets is left as a debt owing to the individual by the company (see Ramsden v CIR 37 TC 627).

In these examples the receipt of income by the foreign company increases the value of the shares, debenture or debt, so income need not be remitted, nor even accumulated, for the benefit of the individual. If in fact the income is received by, or accrues due to, the person abroad, and operates to increase the value of any assets held by or for the benefit of the individual, then the test may be considered met for the purpose of applying the income charge.

In the Howard de Walden (25 TC 121) case mentioned above, assets had been transferred by a series of transactions to companies resident abroad, and in exchange the individual had effectively received a series of promissory notes. The Court of Appeal held that the income of the non-resident companies increased the value of the promissory notes by increasing the general assets of the companies issuing them and therefore that the test was met for the purpose of the income charge.

In the Ramsden case (37 TC 619) an individual transferred assets to a foreign company and left the cost of the assets credited to his account. Although it was held that the income charge - receipt of/entitlement to capital sums did not apply as the unpaid purchase money was not a loan nevertheless the power to enjoy condition was met under this heading and so an income charge arose. The individual's right to recover his debt was an asset held by him, and the value of that right was increased by anything tending to increase the value of the company's assets (that is by the company's receipt of income). Under this heading therefore the individual would have "power to enjoy" income of the company while the debt remained unpaid.

In the Lord Chetwode case (51 TC 647) a trust for the benefit of Lord Chetwode held shares in a non-UK resident company which received dividends. The House of Lords found that in the circumstances of that case the receipt of dividends by the underlying company operated to increase the value to Lord Chetwode of the assets held by the trustees for his benefit, and he therefore had power to enjoy within this heading as well as within other heads of the test.

INTM600920 - Transfer of assets: the income charge: power to enjoy - condition C

Condition C (section 723 (3) ITA 2007) is "that the individual receives or is entitled to receive at any time any benefit provided or to be provided out of the income or related money."

For the purpose of this condition the term "related money" is further defined as, "money which is or will be available for the purpose of providing the benefit as a result of the effect or successive effects –

on the income, and
on any assets which directly or indirectly represent the income,
of the associated operations referred to in section 721(2)."

This test is designed to cover, for example, the individual who holds redeemable debentures; or who is entitled to other capital payments, where these are satisfied out of income or out of assets representing income; and also cases where a chain of companies is involved or a shareholder is entitled to receive dividends.

In one example the Special Commissioners took the view that a capital sum payable to an individual by annual instalments in consideration for the transfer of assets to a foreign company met this condition and gave a power to enjoy income, as the test was not confined to payments which left the company as income. The test includes a sum received as capital as well as any income received. In such a case the income charge - receipt of/entitlement to capital sums provision may also apply.

Another example is the case of Earl Beatty's Executors v CIR (23 TC 574). Assets were transferred by a series of transactions to a non-resident company in consideration for the issue of debentures repayable in successive years without interest. It was argued that, since these debentures were to be repayable only to the extent of the value of the assets transferred to the company, the individual was getting back nothing but his capital; that is he was receiving no benefit from the income derived from the assets transferred. It was held that since the debentures were charged on both the income and capital of the issuing company, the individual must be deemed to be entitled to a benefit provided out of income within the meaning of this condition. This decision was approved in Howard de Walden v CIR (25 TC 121). In that case the individual had a life interest in certain promissory notes issued by a non-resident company, and also had an interest in certain sums of cash on deposit with the company and repayable on demand. It was held that the payments made, and to be made, in respect of the notes and deposits were benefits provided out of the income of the company, the whole of which income could be traced to the assets originally transferred.

And a final example of where this condition applies is that of an individual who is a shareholder of a non-UK resident company. In Lee v CIR 24 TC 207, the individual, as a result of a transfer of assets, held shares in a non-resident company which because of the rights attached to them entitled him to receive a dividend out of the income of the company. This was held to be a benefit provided, or to be provided, out of the income of company within this condition. Similarly in the Lord Chetwode case (51 TC 647) the House of Lords found that the terms of the deed of settlement entitled Lord Chetwode to receive a benefit out of the income received by the underlying company, and thus he had power to enjoy within this condition as well as within other heads of the power to enjoy provisions.

In some circumstances where power to enjoy is satisfied because of the receipt of a benefit the extent of the income charge may be affected by the amount or value of that benefit. More details on this are at INTM600980.

INTM600940 - Transfer of assets: the income charge: power to enjoy - condition D

Condition D (section 723 (5) ITA 2007) is "that the individual may become entitled to the beneficial enjoyment of the income if one or more powers are exercised or successively exercised".

For the purpose of this test, "it does not matter –

who may exercise the powers, or
whether they are exercisable with or without the consent of another person."

This definition of the power to enjoy was amended by the Finance Act 1981 and these notes cover only the position after that amendment.

This test includes the case in which the power to enjoy depends on the exercise of some joint power.

Perhaps the most common example of where this test may apply is to the income of a company underlying a settlement whose shares are acquired by the settlement trustees. The individual who made the settlement remains a beneficiary and as such has power to enjoy the income of such a company by becoming entitled to its beneficial enjoyment through the successive exercise of powers, for example, the declaration of a dividend by the company of which the trustees are shareholders, followed by an exercise of discretion as to the application of the dividend, by the trustees.

This power to enjoy and with it the income charge can apply notwithstanding that income arising to the trustees of a settlement may be caught under the settlements provisions (Chapter 5, Part 5 IT (Trading and Other Income) Act 2005) and deemed to be that of the settlor. See INTM602360 where more than one set of charging provisions may appear to apply in relation to the same income.

In another example (CIR v Botnar (72 TC 205)) the individual's counsel argued that even if the individual did become entitled to the beneficial enjoyment of income which could be traced to the companies underlying the settlement involved it had not been the income of those companies when it was beneficially enjoyed. The HMRC argument, which was accepted by the Court of Appeal, was that the income which the individual beneficially enjoyed had simply to have been the income of the companies at some earlier stage. It was not necessary that it still possessed the characteristics of being income of the underlying companies when it was beneficially enjoyed. What this condition is concerned with is the beneficial enjoyment in the future of what in the past was the income of the companies.

INTM600960 - Transfer of assets: the income charge: power to enjoy - condition E

Condition E (section 723 (7) ITA 2007) is "that the individual is able in any manner to control directly or indirectly the application of the income".

This test covers, amongst other things, the situation where the individual has a controlling interest in a foreign company, either by controlling the voting rights or other rights under company's Articles of Association.

An example of indirect control is found in the case of Lee v CIR (24 TC 207). In that case an individual transferred shares to a Canadian company in exchange for the issue to him of shares in the company. The individual was not a director but under the company's bye-laws he had power to elect and remove its directors, and his consent was necessary for any amendment to the bye-laws and for the allotment and transfer of shares. It was decided that the individual had power to control the application of the income of the Canadian company within the meaning of this test because of his power to appoint or remove the company's' directors (who in turn were able to control the company's income).The fact that control was indirect was immaterial.

In Lord Chetwode v CIR (51 TC 647) the House of Lords found that, because Lord Chetwode retained extensive powers over the assets of a foreign settlement in which he had a life interest, he had power to enjoy within this condition because he could control the application of the income of the foreign underlying company whose shares were held by the trustees.

It may sometimes be thought that an individual who has transferred assets to a non-UK settlement for example, or who is associated with such a transfer, continues to have power to enjoy the income of the structure by virtue of this condition because of powers expressed in the settlement deed, with or without associated arrangements, such as, for example, a 'letter of wishes' or being a 'protector' in relation to the settlement.

However the Special Commissioners decided in the case of CIR v Schroder (57 TC 94) that on the particular facts in that case the test was not met. They found that 'Mr Schroder was able to appoint trustees who...could be expected to deal with the trust income in accordance with his wishes: but he could not compel them to do so and there is no suggestion that any of them would have acted in breach of their fiduciary duties under the settlements.' In dismissing HMRC's appeal against the Commissioners' decision The High Court appears in effect to have distinguished a position of influence from a position of control. Vinelott J said (page 125):

'But the question in the instant case is not whether the settlor was likely to be able to influence or even to exercise a decisive influence over the exercise by the trustees of their fiduciary powers. The question is whether he was able to control the application of the income, and to answer that question affirmatively it must in my judgement be possible to say at least that he was in a position to ensure that the trustees would act in accordance with his wishes without themselves giving any independent consideration and accordingly to act in disregard of their fiduciary duty.'

As Mr Schroder was within the category of persons defined as excluded from benefit under the settlements, so there was no possibility of establishing a power to enjoy by any of the other tests in the particular circumstances of the case.

The test does not however require that the individual is able to derive personal benefit from the power of control. If in fact therefore a settlor of a settlement, for example, does continue to have power to direct the application of income for the benefit of others, even though he himself may be specifically excluded from benefit, this power to enjoy condition may well be met.

In most cases it is unlikely that satisfaction of the power to enjoy test will rest on the basis of this condition alone.

INTM600980 - The income charge: Power to enjoy: Special rule relating to benefits

Special rule where benefit provided out of income of person abroad

Section 724 ITA 2007 provides for a special rule if an individual who would otherwise be subject to the income charge – power to enjoy, has the power to enjoy income of a person abroad because of receiving any such benefit as is referred to in Condition C (INTM600920) (benefit provided out of income of person abroad), the normal income charge is displaced. Instead the individual is liable to income tax under the income charge for the tax year in which the benefit is received on the whole of the amount or value of that benefit.

This provision does not apply if it is shown that the benefit derives directly or indirectly from income on which the individual has already been charged to income tax for that tax year or a previous tax year.

This provision was considered in the case of CIR v Botnar (72 TC 205). Although it did not affect the outcome in that case, there is some helpful comment on it. The views expressed there appear to confirm that in the case of actual receipt of a benefit (as opposed to mere entitlement to receive) the provision is determinative of the charge to tax which could produce a radically different result than what might otherwise be the charge under the income charge. Further that where the power to enjoy arises on this basis the tax is charged not on the income which the individual has power to enjoy but on the value of the benefit. This may bear no relationship whatsoever to the income of the person abroad as long as it originated from it even indirectly. The Commissioner rejected the view that the provision only operates where the benefit received in a year exceeds the income of the person abroad. From this it seems clear that where the conditions are met the provision could have the effect of either extending the amount of charge for the tax year beyond the actual income of the person abroad of that year or of limiting the amount of the charge to the amount or value of the benefit where that is less than the income of the person abroad of the tax year.

INTM600990 - Transfer of income: the income charge: capital receipt condition: Contents

INTM601020	The income charge – capital receipt condition
INTM601040	The income charge – Meaning of capital sum
INTM601060	The income charge – Examples of capital sum

INTM601020 - Transfer of income: the income charge: capital receipt condition

This section describes the capital receipt condition (4^th bullet of INTM600660) for the purpose of the income charge – receipt of/entitlement to capital sums.

The capital receipt conditions are set out in section 729 ITA 2007 are met in respect of the individual in a tax year if –

a. either -

(i) in the tax year the individual receives or is entitled to receive any capital sum, whether before or after the relevant transfer (see INTM600220), or

(ii) in any earlier tax year the individual has received any capital sum, whether before or after the relevant transfer,

and

b. the payment of that sum is (or, in the case of entitlement, would be) in any way connected with any relevant transactions (see INTM600200

What is meant by 'capital sum' is described at INTM601040 and INTM601060 gives examples relating to this condition.

As explained in INTM600660 once the capital receipt condition is met liability can continue under this charge for any tax year in which income arises which has the appropriate connection with the relevant transfer, one or more associated operations, or a relevant transfer and one or more associated operations.

INTM601040- Transfer of assets: the income charge: meaning of 'capital sum'

Meaning of 'capital sum'

For the purpose of the income charge – receipt of/entitlement to capital sums the term 'capital sum' is specifically defined in section 729 (3) ITA 2007, and means:-

a. any sum paid or payable by way of a loan or repayment of a loan, and

b. any other sum paid or payable -

i. otherwise than as income, and

ii. not for full consideration in money or money's worth.

Where the capital sum is receipt of a loan, condition (a)(ii) in INTM601020 is not met merely because of that receipt if the loan is wholly repaid before the relevant year begins. The 'relevant year' is a tax year; that is a tax year for which liability would otherwise arise.

Example

In years 1 to 4 income arises to a person abroad as a result of a relevant transfer by an individual A. The individual does not have any power to enjoy the income or entitlement to a capital sum; but in year 2 receives a loan. In year 3 the loan is repaid in full and there is no ongoing entitlement to further loans or other capital sums. In these circumstances there would be an income charge in years 2 and 3. There would also be ongoing charge for year 4 because of the terms of (a)(ii) in INTM601020 but for the proviso above relating to repayment of a loan where that is in effect the only feature that triggers the income charge - receipt of/entitlement to capital sums.

In addition a sum is treated as a capital sum which the individual receives or is entitled to receive, if another person receives or is entitled to receive it at the individual's direction or as a result of the assignment by the individual of his right to receive it.

This might include, for example, a situation whereby an individual is able to direct an overseas person to make a payment to one of his creditors; or, is able to direct that a loan be made to a third party. The payments being 'capital' in nature may amount to a capital sum for the purpose of this test.

Not only is the receipt of a loan by the individual a capital sum, the making of a loan by the individual to a person abroad can also satisfy this meaning, carrying as it does an entitlement to repayment. That entitlement would be entitlement to a capital sum and thus the condition would be met from the time that the loan is made to the person abroad. Any repayment of such a loan would itself be a capital sum, it is not however itself a loan and thus will not stop the income charge from running under the proviso described in the first paragraph above. In order to stop this income charge from continuing the individual would need to demonstrate that there was no ongoing entitlement of any description to a capital sum.

INTM601060 - Transfer of asset: the income charge: examples of capital sum

Some examples of items that are a capital sum have already been seen in the previous paragraphs, for example:-

a. A loan received by an individual.

b. A loan made by an individual.

c. The repayment of a loan to an individual.

d. A capital sum received by a third person at the direction of an individual or by assignment of the individual's right to receive it.

Other examples might include:-

e. The situation where an asset is transferred to a person abroad at an inflated price. Where an individual transfers an asset and receives full consideration in money or money's worth even though by general nature that consideration may be a 'capital' receipt it would not be a 'capital sum' for the purpose of these provisions because of the specific wording in the legislation defining the meaning of the term for this purpose. Hence it is only where an inflated price is received that there could be a capital sum for this purpose.

f. A capital distribution from a foreign company. A foreign company may, under the law of the jurisdiction in which it is established, be able to make a so-called 'capital distribution'. Where such a distribution received by the individual is found in fact not to be an income receipt, and so satisfies the condition to be any other sum payable otherwise than as income, it can be a capital sum for this purpose. In considering whether any such payment or entitlement from a 'foreign possession' (the share holding that results in the payment) is a capital sum due regard must be had to United Kingdom tax law dealing with 'income' from foreign possessions.

The following are examples of situations where there may not be a capital sum for the purpose of this charge.

g. If an individual transfers assets to a person abroad for full consideration and leaves the cost of the assets credited to his account with that person, the unpaid purchase money will not normally be regarded as a loan following the decision in Ramsden v CIR (37 TC 619).

However although the capital sum test may not be met for the purpose of this income charge, the presence of an account with a person abroad to which sums are credited may be indicative of that individual having the power to enjoy income for example (as in the Ramsden case) through Condition B in INTM600900.

h. Where promissory notes or debentures payable on demand are issued to the individual as part of the consideration for the transfer of assets the amount payable under the notes, not being payable by way of loan, and being payable for full consideration is unlikely to be a capital sum for this purpose, as was found in the case of Lee v CIR (24 TC 207).

However as discussed at INTM600900 such an issue of promissory notes may give rise to a power to enjoy the income of the person abroad and bring the individual within that income charge.

INTM601080 - Transfer of assets: the income charge: what is the measure of income: Contents

INTM601100	What is the measure of income: Introduction
INTM601120	What is the measure of income: Trading Companies
INTM601140	What is the Measure of Income: Investment Companies
INTM601160	What is the measure of Income: Stock dividends and scrip dividends
INTM601180	What is the measure of income: Accrued income scheme
INTM601200	What is the measure of Income: offshore income gains
INTM601220	What is the measure of income: Chargeable events
INTM601240	What is the measure of income: Dividends
INTM601260	What is the measure of income: Profit on exchange
INTM601280	What is the measure of income: Income from property

INTM601100 - Transfer of assets: the income charge: what is the measure of income: Introduction

Introduction

An individual is subject to an income charge calculated by reference to the income of a person abroad if the conditions referred to in INTM600640 and/or INTM600660 are met. Income is not defined in the legislation and is given its general meaning. (This is more fully described in INTM600400)

The income charge applies to income of a person abroad which, if it were the individual's income and received by the individual in the UK, would be chargeable to income tax. In order to quantify the income of a person abroad it is first therefore necessary to establish the character of the income in the hands of the person abroad and to consider whether the particular type of income would be chargeable by applying UK tax principles, and by allowing deductions in accordance with the UK tax code, to arrive at the amount subject to the income charge,

This principle was established in the case Lord Chetwode v CIR 51TC 647 (1974-1977), where Lord Wilberforce found that, because there was no definition of income in the UK tax code "what as income is chargeable within income tax is left to be determined according to particular heads of charge under the Schedules"

The person abroad may for example be a trading company, an investment company, a mixed trading / investment company or a trust. Note however that the provisions do not apply to income assessable under the controlled foreign companies' legislation. (CFCs) (INTM600720)

In considering whether the income charge is applicable in respect of a particular item consideration needs to be given as to whether it is income for all the purposes of the Taxes Acts and not just for the purpose of a particular taxing provision.

The following paragraphs set out below give examples of particular types of income and how we treat them for the purpose of the income charge. The list is not exhaustive.

INTM601120. Trading companies

INTM601140. Investment companies

INTM601160. Stock dividends and scrip dividends

INTM601180. Accrued income scheme

INTM601200. Offshore income gains

INTM601220 Chargeable events

INTM601240. Dividends

INTM601260. Profit on exchange

INTM601280. Income from property.

INTM601120- Transfer of assets: the income charge: trading companies

Trading companies

The income of a trading company which is to be taken into account for the purposes of the income charge is generally the balance of profits that would be chargeable to tax in the UK. Therefore in arriving at this amount regard should be had to the provisions in Part 2 ITTOIA 2005.

It may be that deductions are claimed in respect of emoluments paid by a company to the individual who is subject to the income charge. If a deduction is allowable under 'normal principles' as above then, although the amount within the income charge is effectively reduced, emoluments are within the direct income tax charging rules.

In circumstances where an offshore company's trading expenses exceed its income the result will be a loss. The transfer of assets provisions are charging provisions only and, specifically, charge income treated as being that of the individual. There is no provision for treating such a loss as that of the individual.

However it is HMRC's practice to allow an offshore company's trading losses to be carried forward and to be set off against the future profits of the company. They cannot be offset against the company's investment income of the same, previous or future years.

Where the person abroad is a mixed trading / investment company, then the company's transactions in securities, property etc may sometimes lead to difficulties in deciding whether it should properly be treated as an investment company or a dealing (trading) company. This question may be of considerable importance in deciding whether large gains should be included as income of the company or regarded as capital gains. The judgement in Marson v Morton (59 TC 381) gives guidance on what might indicate a trading activity.

It should be noted that forex and loan relationship rules apply for Corporation Tax purposes only.

INTM601140- Transfer of assets: the income charge: companies with investment business

Companies with investment business

The income of companies with investment business ('investment companies') can include a variety of sources, and it is the effect of applying UK tax codes to each particular source that determines which, if any, deductions are to be made in arriving at the amount of the income charge.

Expenses of management of a company's investment business are allowed as a deduction from the company's total profits (CTA2009/S1219). No deduction for expenses of management of a company's investment business is made in arriving at the amount of the income charge (see Lord Chetwode v CIR 51 TC647).

INTM601160- Transfer of assets: the income charge: what is the measure of income: stock or scrip dividends

Stock or scrip dividends

Where an individual owns shares in a UK resident company that makes a stock or scrip dividend payment (see CTM17005), in respect of those shares, that individual is treated for UK income tax as having received an amount of income equal to the appropriate amount in cash. The amount is however only regarded as the income of the individual and is not regarded as income for all purposes of the Taxes Acts. Thus if the person abroad is, for example, a company, that stock dividend from a UK company would not on the face of it be income in the company's hands. As such it would not be taken into account as income that becomes payable to a person abroad for the purposes of transfer of assets.

The position for a stock dividend from a foreign company may however be different. The provisions relating to stock dividends in Chapter 5 Part 4 ITTOIA only apply in respect of stock dividends from UK companies. In considering such an item received from a foreign company regard would need to be taken of the relevant foreign law as well as the character in the hands of the receiver. If it is not income in the hands of the person abroad or otherwise specifically treated as income it will fall outside the transfer of assets provisions.

INTM601180- Transfer of assets: the income charge: what is the measure of income: accrued income scheme

Accrued income scheme

Amounts corresponding to accrued income profits and related interest are within the transfer of assets provisions.

The legislation came into effect on 28 February 1986, and is now at section 747 ITA 2007. These provisions were introduced to counteract the loss of tax to HMRC via bond washing whereby funds that would have otherwise have been received as income were converted into capital thereby reducing or removing a liability to tax.

A person abroad might hold securities which are such that if it had been UK resident would have suffered an accrued income charge. The provisions provide for the accrued income charge to be treated as income becoming payable to the person abroad and so to be taken into account in arriving at the amount subject to the income charge.

INTM601200- Transfer of assets: the income charge: what is the measure of income: offshore income gains

Offshore income gains

If the person abroad makes investments in offshore funds, which are 'non-distributing funds', and on disposal of their interest in such funds makes a profit, the profit is regarded as income.

Although there may not be income tax due from the person abroad in respect of the above, the profit is regarded as income becoming payable to the person abroad and to be taken into account in considering amount subject to the income charge.

INTM601220 - Transfer of assets: the income charge: what is the measure of income: chargeable events

Chargeable events

If a profit is made on a disposal by a person abroad of an insurance policy or contract, then the profit is regarded as income becoming payable to the person abroad and is taken into account in arriving at the amount of the income charge.

INTM601240- Transfer of assets: the income charge: what is the measure of income: dividends

Dividends

Income tax is charged on dividends and other distributions from UK companies under section 383 ITTOIA 2005. If the income of the person abroad is dividend income it is unlikely that the person abroad will be entitled to a tax credit on the dividend and the amount included in the accounts is likely to be the net dividend. Where the income charge applies to this see (INTM602520)

In arriving at the amount of UK source dividends to be taken into account in the amount of income charge, the net dividend should be grossed up by reference to the tax credit and the gross dividend taken into account. Such income is treated as arising to the individual, and being ordinarily resident in the UK, would be entitled to the tax credit.

INTM601260- Transfer of assets: the income charge: what is the measure of income: profit on exchange

Profit on exchange

If the accounts of a person abroad show a profit on exchange, this should not be treated as income of the person abroad for the purposes of the income charge. The profit usually derives from a difference between the exchange rates in force when the income is credited in the accounts of the person abroad and the rates ruling:

when that income is actually remitted to the person abroad, or
if not remitted, at the date to which the accounts are made up.

The income as it arises to the person abroad is to be deemed to be that of the individual (Lord Chetwode v CIR, 51 TC 647) and we are therefore concerned only with the exchange rates in force at the time when the income is receivable by the person abroad. A profit on exchange is merely a book-keeping entry necessary to ensure that the cash position of the person abroad tallies with the income actually remitted, or which could be remitted at the date at which the accounts are made up.

On the same basis, any loss on exchange should not reduce the income of person abroad in arriving at the income charge.

INTM601280 - Transfer of assets: the income charge: what is the measure of income: income from property

Income from property

Where there is rental income, any profits should be arrived at in accordance with the rules in Part 3 ITTOIA 2005 [and Part 4 Corporation Tax Act 2009?].

Where a person abroad is in receipt of rental income from the UK there are various provisions for taxing the income including the Non Resident Company Landlord Scheme. Where an individual is chargeable to the income charge the amount of any tax paid (and not repaid) will need to be ascertained to prevent any double charging.

Where there are disposals of land or property section 776 ICTA may be in point if it appears that transactions are artificially creating a capital gains tax charge rather than an income charge.

INTM601300 - Transfer of assets: the income charge: interaction between the income charge and benefits charge

It is possible for the income of a person abroad to be treated as that of an individual who is subject to the income charge as a result and also for another UK resident individual to receive a benefit so that a 'benefits charge' (INTM601400) may need to be considered. By taking into account the same amount of income in arriving at both charges, there could effectively be a duplication of charge.

In such circumstances, refer to INTM602200.

INTM601400- Transfer of assets: the benefits charge: contents

Contents page

INTM601420	Introduction
INTM601440	Background
INTM601460	General provisions
INTM601480	General conditions
INTM601500	Which charge applies
INTM601520	Interaction with CGT
INTM601540	Receives a benefit
INTM601560	What is a benefit
INTM601580	What is the amount or value of the benefit
INTM601600	Examples of the amount or value of a benefit
INTM601620	Examples of the amount or value of a loan
INTM601640	Persons chargeable
INTM601680	Relevant income
INTM601700	The measure of the benefits charge
INTM601720	The six steps
INTM601740	Modification of the step formula
INTM601760	Example
INTM601780	Example where modifications apply
INTM601800	Computation of income before April 2007

INTM601420- Transfer of assets: the benefits charge: introduction

Introduction

The benefits charge introduces a charge to income tax for individuals who receive a benefit as a result of a transfer of assets made by another person.

Throughout this guide the expression 'the benefits charge' is used to describe the charge that flows from section 731 ITA 2007, previously section 740 ICTA 1988.

This chapter proceeds as follows:

INTM601440 Looks at the background to the benefits charge.

INTM601460 Describes the general provisions for the benefits charge to apply.

INTM601480 Considers what a benefit is.

INTM601500 Discusses the individual who is subject to the charge.

INTM601520 Considers what relevant income is.

INTM601540 Considers the measure of the benefits charge

INTM601440- Transfer of assets: the benefits charge: background

A separate charge, which for the purpose of this guide we have called 'the benefits charge', was introduced to the transfer of assets provisions for individuals who receive benefits as a result of a transfer of assets made by another person, in 1981 (INTM600080). This followed from the House of Lords taking the view that the existing income charge could only charge tax where the individual who was potentially chargeable had themselves made or been associated with the transfer of assets. The income charge is described in paragraphs INTM600520 onwards.

As a result, in broad terms, from 10 March 1981, where income that arises to a person abroad as a result of a relevant transfer can be used, directly or indirectly, to provide a benefit for an individual who is ordinarily resident (or, from 6 April 2013, resident) in the UK that individual is potentially chargeable to income tax under the benefits charge where a benefit is received (INTM601540) if the individual is not already chargeable to income tax on the income under the income charge

Although the benefits charge only applies from 10 March 1981, the charge applies irrespective of when the transfer or associated operations took place.

INTM601460- Transfer of assets: The benefits charge: General provisions

Prior to 6 April 2007 the benefits charge legislation was in section 740 ICTA 1988 with subsection 740(2) introducing the charge by treating an amount as income of the individual for the particular tax year for which the provisions treat income as arising and charging that amount to income tax for that year. The charge is now headed, "Charge where benefit received" and is contained in sections 731 – 735A ITA 2007.

Under these provisions:-

Income tax is charged on income treated as arising to an individual by the provisions INTM601480
Tax is charged on the amount of income treated as arising for the tax year INTM601720
The person who is liable to the charge is the individual to whom the income is treated as arising INTM601660. An exemption from tax is provided where conditions are met see INTM602620

For the benefits charge there is no equivalent to the 'same deductions and reliefs' clause that operates for the income charge (see sixth bullet of INTM600620)

INTM601480 - Transfer of assets: The benefits charge: General conditions

The basic ingredients required for there to be the possibility of a 'benefits charge' under this heading can perhaps be summarised diagrammatically by the pieces of a jigsaw puzzle:-

Fig 3 – Basic pieces for a benefits charge

With the "abolition" of the concept of ordinary residence from 6 April 2013, from 2013-14 onwards an individual [only?] has to be resident in the United Kingdom.

In essence each piece will need to be present and put together in an appropriate way making the whole before a potential charge can arise. The main difference between the benefits charge and the income charges being the swap of 'receives a benefit' in place of 'power to enjoy income' or 'entitlement to capital sums'.

There is however one further important difference from the income charge to consider before looking at the essential conditions required for the operation of the benefits charge. In the benefits charge there is nothing similar to the 'preamble' to the income charge (INTM600700). In other words there is nothing directly indicating a legislative purpose 'of preventing the avoiding of liability to income tax'. Consequently there is no condition for the application of the benefits charge that avoidance of tax needs to be found before a potential charge can arise. However as any potential charge is subject to an exemption test it will be necessary at the heart of a consideration of whether there is a charge to examine the purpose of the transactions that have resulted in the potential application of the benefits charge. More is said about this in the section on the exemption (INTM602960).

The essential conditions which are required for the operation of the benefits charge may, in broad terms, be summarised as follows:-

There is a relevant transfer (INTM600220)

An individual who for the years up to and including 2012-13 is ordinarily resident in the United Kingdom receives a benefit, or for the years from 2013-14 an individual who is resident in the United Kingdom receives a benefit (INTM601660).

The benefit is provided out of assets which are available for the purpose as a result of the transfer or one or more associated operations. These need not be the same associated operations as any included in a 'relevant transfer' (INTM601640).

The individual is not liable to an 'income charge' (INTM600640 and INTM600660) by reference to the transfer or, if the individual is not domiciled in the United Kingdom, would not be liable to the 'income charge' if any effect on that charge of his non-domicile status is ignored.

The individual is not liable to income tax on the amount or value of the benefit apart from through the benefits charge.

Where the conditions for charge are met the charge is on an amount of income treated as arising to that individual. That amount is determined from a comparison over a period of time of benefits (INTM601560) and 'relevant income' (INTM601680) it is neither a charge on a 'benefits' nor a charge on the income of the person abroad, even though it may be calculated by reference to both. How the amount that is treated as income is calculated is described at INTM601700.

Where the benefit received by the individual has come to that individual as a result of being the beneficiary of a non-resident trust the benefit could potentially give rise to a chargeable capital gain (see INTM601520). A charge under the benefits charge will normally fall to be considered first.

If the individual receiving a benefit is non-United Kingdom domiciled for the year of charge, see (INTM602080) for the effect this may have on any liability to income tax under the benefits charge.

Where more than one individual receives a benefit and is potentially subject to income tax under the benefits charge application of Step 5 at INTM601720 should result in relevant income only being taken into account once for the purpose of the benefits charge.

INTM601500 - Transfer of assets: the benefits charge: which charge applies?

It is possible that for the same tax year an individual could appear to meet the conditions to be potentially chargeable under both the income charge and the benefits charge. However, section 732(1)ITA 2007 makes it clear that an essential condition for the benefits charge is that the individual is not liable to an income charge by reference to the transfer. In effect, therefore, if it appeared that either charge may apply, the income charge will take precedence.

If there is more than one individual who receives a benefit and is thus potentially chargeable under the benefits charge see INTM601720.

If there is one individual who is chargeable by reference to the transfer under the income charge and one or more individuals who receive benefits and are thus potentially chargeable under the benefits charge the computation of the amount chargeable under the benefits charge should resolve any conflict by effectively applying the 'no duplication of charges' rule (INTM602380). The computation of the amount chargeable under the benefits charge is dealt with at INTM601700.

Where the receipt of a benefit gives rise to a potential capital gains tax charge and an income tax benefits charge see INTM601520.

INTM601520- Transfer of assets: The benefits charge: Interaction with capital gains tax charge

Where the whole or part of a benefit received in a tax year also satisfies the meaning of 'capital payment' (see section 97(1) TCGA 1992) for certain capital gains tax purposes, in particular it is a capital payment to which sections 87 or 89(2) of, or paragraph 8 of Schedule 4C to, TCGA 1992 applies, it may result in a charge to capital gains tax. For further information on the capital gains tax charges arising on beneficiaries of non-resident trusts see CG38210 onwards of the Capital Gains Manual.

If, as a result of the receipt of a benefit payment, chargeable gains are treated as accruing to that individual in the year of receipt or a subsequent year then in any subsequent application of the benefits charge to that individual a reduction in the amount that may otherwise be charged under the benefits charge is provided for in section 734 ITA 2007. In particular in the 'Steps' computation described at INTM601700 the 'total untaxed benefits' in that computation are reduced by the amount of those chargeable gains. This is explained and illustrated further at INTM601700.

Where a benefit received is fully taken into account for income tax in computing a benefits charge for the individual, it will not normally also be taken into account for the purpose of determining chargeable gains, under the provisions mentioned above, for that or any subsequent year for that individual.

The following scenarios appear possible in relation to the benefits charge where the benefit received also appears to satisfy the meaning of capital payment for the purpose of chargeable capital gains:-

The benefit received can be fully matched with relevant income in the year it is received and as a result an income tax benefits charge equivalent in amount to the benefits received arises.

In this case the benefit will not normally be taken into account for that individual for capital gains purposes for that or any subsequent tax year.

There is no relevant income against which a benefit received can be matched.

The benefit received is carried forward and can be matched against subsequent relevant income. It can also be taken into account for capital gains tax purposes if the non-resident trustees have capital gains against which the benefit can be matched. The benefit will be matched against any gains arising in the year the benefit was received. If there is still unmatched benefit then it can be matched against any gains of earlier years with the benefit set off against the gains of the latest year first. To the extent that the benefit remains unmatched it can also be matched against any capital gains arising in subsequent years. Where it is so taken into account the amount of benefit taken into account in any subsequent application of the benefits charge will be reduced accordingly.

The benefit received exceeds relevant income to date as a result the benefits charge is limited to the amount of relevant income.

The excess benefit received over relevant income is carried forward and can be matched against subsequent relevant income. It can also be taken into account for capital gains tax purposes if the non-resident trustees have capital gains against which the benefit can be matched. The benefit will be matched against any gains arising in the year the benefit was received. If there is still unmatched benefit then it can be matched against any gains of earlier years with the benefit set off against the gains of the latest year first. To the extent that the benefit remains unmatched against any capital gains arising in subsequent years. Where it is so taken into account the amount of benefit taken into account in any subsequent application of the benefits charge will be reduced accordingly.

INTM601540 - Transfer of assets: The benefits charge: Receives a benefit

One of the conditions for the benefits charge is that the individual receives a benefit INTM601480). However 'benefit' is not defined for the purpose of this charge although prior to April 2007 it was said to include 'a payment of any kind'.

If however the individual is, apart from the benefits charge, otherwise chargeable to income tax on the amount or value of the benefit then the benefits charge cannot apply (section 732 (1) (e) ITA 2007).

Not only is there no definition given to the term 'benefit' there is also no guidance within the legislation on what is the 'amount or value' of a benefit for the purpose of calculating the amount of a benefits charge.

Paragraph INTM601560 considers what is a 'benefit' and INTM601580 considers what is the amount or value of a benefit for the purpose of the benefits charge.

There must however be an individual who receives a benefit. More is said about the individual at INTM601660. No charge can arise under these provisions because an individual may at some future date become entitled to receive a benefit. It may however be the case that an individual receives a benefit even though nothing has, at first glance, been received directly. Whether a benefit is received is a question of fact. Examples of an indirect benefit are where a debt of the individual is settled by the person abroad or alternatively where the person abroad settles expenses on the individual's behalf. This is typically seen were the trustees of a trust pay a child's school fees on behalf of the individual or pay the individual's rent. In more sophisticated arrangements benefits may be disguised, or provided by circuitous routes to conceal the fact.

There are several areas of tax legislation where the receipt of a benefit can result in a tax charge, for example employment income legislation and certain capital gains provisions (like defining a 'capital payment' in section 97 TCGA 1992 mentioned at INTM601520). Where a benefit is received it will be appropriate to have regard to any other provisions that may result in a tax charge from the receipt of such a benefit. For example, where a benefit is provided by a foreign company it may be appropriate to consider whether the individual can be regarded as a 'shadow director' of that company and as a result chargeable to income tax under Employment Income rules in respect of any benefit received.

However there is no direct correlation between what is a benefit for one purpose with what may be a benefit for the purpose of the benefits charge. It is however likely that where a benefit would be considered to arise for one purpose, unless it is by specific legislation deeming a benefit to arise for that purpose, similar circumstances would also give rise to a benefit for the purpose of the benefits charge.

It is also likely that in determining the amount or value of a benefit, similar considerations will be applied in relation to the benefits charge as may apply in other areas of tax legislation. For example, if a benefit would amount to a capital payment for capital gains tax purposes as described above, the capital gains tax rules may provide a specific means of determining the amount of the benefit for those purposes. In such circumstances it is unlikely that a different measure would be applied for the purpose of the benefits charge.

INTM601560 - Transfer of assets: The benefits charge: What is a benefit?

In most instances whether a benefit has been received by an individual and what that benefit is will be obvious. For example the individual has received money, an asset is made available for the use of an individual, or a personal liability of the individual has been met by a third party on behalf of the individual. The breadth of the ordinary meaning of the term 'benefit' suggests something of the potential wide ranging nature of the expression.

Some common examples of items that may be considered a benefit are:

a. Money (cash), whether received in sterling or a foreign currency. Where foreign currency is received for United Kingdom income tax that will normally fall to be converted into sterling at the appropriate exchange rate applying at the date the money was received.

b. An asset provided (or given) to the individual or made available for the use of the individual, such as a home, a car, a holiday apartment, a collection of jewellery or artwork.

c. The meeting of an individual's personal liability such as satisfying a debt, meeting a payment (like school fees), or providing and/or settling a credit card.

Another common example where a benefit may arise is if an individual receives a loan or advance or arrangements are made whereby an individual is able to secure a loan or advance. A loan could be on terms that provide for repayment on demand but charge no or negligible interest, or on terms that provide for repayment and interest. Depending on the precise terms of the loan either situation may give rise to a benefit. Again, depending on precise terms, the benefit may simply be advantageous terms for repayment of or interest on the loan or in some cases possibly the amount of the loan money received including any advantage received from the way in which the loan has been applied. Where loans or advances are involved it will usually be appropriate, apart from in the most straightforward of circumstances, to consider all relevant facts indicating the terms and use of the loan to determine whether a benefit has been received and what the extent of that benefit is.

The above are just some examples of items that may give rise to a benefit. The list is not exhaustive nor is it intended in any way to limit the scope of the term.

INTM601580 - Transfer of assets: the benefits charge: what is the amount or value of a benefit?

In determining what amount is to be treated as income arising to an individual under the benefits charge 'the amount or value' of benefits received by the individual in question has to be taken into account. The amount or value of the benefit has to be determined from all of the relevant facts in the absence of a specific meaning to the term.

Before any amount or value can be considered it is first necessary to identify exactly what benefit the individual has received, and therefore what it is that must be valued.

In many cases it will be obvious and straightforward what the benefit is, for example where the individual receives a one-off payment of money in sterling. In other cases there may be no immediately obvious measure of the amount or value of the benefit, this might occur for example where an individual has the use of an asset owned by a person abroad. In cases where the amount or value of a benefit is not obvious or needs to be checked, help may be available from HMRC, Specialist PT (Shares and Assets Valuation) or in cases involving properties from Valuation Office Agency

INTM601600 looks at a few of the more common forms of benefit received which may help to indicate the considerations needed to determine the amount or value of the benefit.

INTM601600- Transfer of assets: The benefits charge: examples of the amount or value of a benefit

All of the examples given below are on the basis that the benefit is provided out of the assets available for the purpose as a result of the transfer, or one or more associated operations and that all other conditions for a benefits charge are met.

a. Receipt of a monetary payment: where the benefit received is money, generally speaking the amount or value of the benefit is likely to be the amount received. As INTM601560 explains where the payment is received in foreign currency the amount or value will generally be determined by applying the appropriate sterling exchange rate at the date of receipt.

b. Rent free accommodation: where the benefit received is the provision of accommodation without charge to the individual the amount or value of the benefit is likely to be determined from a consideration of the market rental that the property may have fetched at the time the benefit is received.

However, it must be kept in mind that the language of the provision is of an individual who 'receives' a benefit. Therefore where, as in the case of rent free accommodation, the individual goes on receiving the benefit by continuous occupation of the property there is in effect an ongoing and continuous benefit. As taxation of a benefits charge is for a tax year it will generally be appropriate to consider the amount or value of the benefit for that entire period where there is a continuous provision of a benefit for the whole or part of that period. It will therefore be appropriate in such instances to consider the 'annual value', or appropriate proportion thereof, of the benefit received not merely any value at the point of first receipt. Thus in the case of rent free accommodation it will not only be appropriate to consider the amount or value of the benefit during the particular tax year, but if that benefit continues to be provided to consider its value for each subsequent period during which there is continuing provision and to have regard to any changes that may occur in the value of the benefit (for example because of changes in market place for rental values). These principles of continuous provision are likely to apply to most situations where an asset is made available for use over a period of time (see (c) below).

c. Asset made available for use: the principles to be applied where an asset is made available for use by an individual are likely to be similar to those described above for rent free accommodation. Where the benefit provided is on an ongoing and continuous basis it will generally be appropriate to look at the tax year as a whole and consider the 'annual value' of the use of the asset in relation to that tax year (or part thereof) together with any ongoing costs to the person providing the benefit of its provision for use by the individual. Subject to obtaining any necessary professional valuation advice, as a rule of thumb it might be appropriate to adopt methodology for the benefits charge in this area similar to that which may apply in the employment related benefits field where an asset is made available for use (see for example section 205 ITEPA 2003).

d. Asset passed to the individual: where the benefit received is in the form of an asset, other than cash, and the ownership of that asset actually passes to the individual, as opposed to an asset being made available for use which remains in the ownership of the provider, the amount or value of the benefit is likely to be determined by reference to the value of the asset at the point in time when it is received by the individual. In most cases this is likely to be similar to the approach that may be adopted for capital gains purposes where it may be appropriate to determine the open market acquisition value of the asset to the individual.

e. Satisfying a debt: where the benefit received takes the form of a personal debt or liability of the individual being settled on the individual's behalf, the amount or value of the benefit is likely to be determined as if the individual had received an equivalent amount of money. There are a variety of circumstances that may come under this heading from the provision of credit or debit cards, making direct payments to a third party service provider (such as for children's school fees), or the settling of an outstanding personal liability (such as a utility bill, or personal tax liability for example).

f. Loans: INTM601620 gives examples where loans are involved.

If the individual receiving a benefit makes any contribution towards that benefit the contribution will normally be taken into account in determining the amount or value of the benefit. For example, an individual is provided with accommodation that is a benefit for the purpose of the benefits charge. It is agreed that the value of the use of the accommodation based on rental is £10,000 for the tax year. In that year the individual pays a rental of £5,000. It will normally be appropriate to take account of the contribution such that the amount or value of the benefit is regarded as £5,000.

INTM601620 - Transfer of assets: The benefit charge: Examples of the amount or value of a loan

One of the most common examples of a benefit involves loans of one form or another. These loans can take the following forms:

interest free loans

loans made charging interest at a rate below commercial rates

loans made charging interest at a commercial rate

loans made charging interest which remains unpaid

back to back arrangements.

Interest free loans are considered to be within the provisions, the charge being calculated by reference to the amount of interest forgone by the lender. This position was challenged in the courts where it was argued that in effect where a loan was payable on demand there was no benefit. The judges disagreed with this and said that the focus needed to be not on the making of the loan but on the Trustees successive acts in not calling the loan in. (Cooper v Billingham and Fisher v Edwards 54 TC 139) Similarly where there are loans at interest rates lower than those that would be charged by banks or other commercial lenders a benefit may arise.

In the case of an interest free loan made to the individual, the amount of the benefit would normally be considered to be equivalent to the interest payable at a commercial rate on a similar loan from an unconnected third party. For this purpose we treat the 'official rate' of interest as being the appropriate rate to use. Where interest is paid but at less than commercial rates, the amount of the benefit will be that interest payable at a commercial rate less the interest paid.

A loan made to an individual for full commercial consideration, is a 'benefit' but such a loan would in practice normally be regarded as a nil benefit, and therefore have no taxable value. If the interest payable on the loan is not paid, consideration should be given as to whether the 'unpaid' interest in each year should be the amount of benefit in each year. Regard should be had to the circumstances under which the interest is unpaid. For example, has the payment of interest been waived? If repayment of interest (or capital) is waived then this will be regarded as a benefit received by the individual for the year in which waiver takes place.

There may be instances of so called 'back to back' arrangements which should be carefully considered. For example, an individual who is a beneficiary of a trust may borrow money from a bank at commercial rates of interest. The trustees may deposit substantial funds with the bank (lender) as collateral for the loan. The arrangements may mean that repayments of capital and interest on the bank loan are rolled up and on maturity the loans are either renegotiated or replaced by larger loans from other banks. The end result is that the individual, although legally responsible for the repayments of capital and interest payments, has had, perhaps for many years, the benefit of substantial loans without a cost. In such circumstances, the value of the benefit may be considered on the basis that the loans were interest free and the benefit arrived at as referred to above.

The above assumes that monies made available to the individual were in fact by way of loan and, in appropriate cases, evidence of a loan having been made, should be obtained. If, on enquiry, it transpires that the payment was not a loan, or if a loan there is little likelihood of a demand for repayment (Williams v CIR 54 TC 257), then the payment should be treated as a cash payment, as referred to earlier.

INTM601640- Transfer of assets: The benefits charge: Benefits provided out of assets

Section 732 (1)(c) ITA 2007 makes it clear that the benefit which the individual receives must be one which is provided out of assets which are available for the purpose as a result of the transfer, or one or more associated operations. This effectively links the benefit with the relevant transfer. For example, the provisions can apply where a beneficiary of a non-resident trust receives a payment out of the capital of the trust, or if the assets of the trust included a property and a beneficiary receives a benefit by virtue of their occupation of the property on less than commercial terms.

INTM601660- Transfer of assets: The benefits charge: Person chargeable

For tax years up to and including 2012-13 the persons chargeable to the benefits charge are those individuals who receive benefits in a tax year for which they are ordinarily resident in the United Kingdom, and where such benefits have been provided out of assets available for the purpose as a result of relevant transactions.

For tax years from 2013-14 onwards, following the changes made in the Finance Act of 2013, the persons chargeable to the benefits charge are those individuals who receive a benefit in a tax year for which they are resident in the United Kingdom, and where such benefits have been provided out of assets available for the purpose as a result of relevant transactions.

The individual must not have made, or have been associated with, the relevant transactions (INTM600180), nor be otherwise chargeable to income tax on the benefit (section 732 (1) (e) ITA 2007).

The person liable for any tax charged under the benefits charge is the individual to whom the income is treated as arising (INTM601700). That individual will be an individual who, for the years up to and including 2012-13 is ordinarily resident in the United Kingdom and for the years from 2013-14 is resident in the United Kingdom, and who receives a benefit of a kind to which these provisions apply (INTM601560)

If the individual is not domiciled in the United Kingdom, see (INTM601900) for the effect this may have on any liability to income tax under the benefits charge.

INTM601680- Transfer of assets: the benefits charge: relevant income

The general conditions required for there to be a benefits charge are set out in INTM601480 and the amount to be treated as income arising to the individual is arrived at by comparing the benefits received with the available relevant income. To arrive at the available relevant income figure steps 3 to 5 of section 732 (1) ITA 2007 must be worked through. The steps and the calculation of the income arising are considered further in INTM601720 which considers the calculation of the benefits charge. The relevant income arising for each tax year is the amount of any income which arises in the tax year to a person abroad, and as a result of the relevant transfer (INTM600220) or associated operations (INTM600300) can be used directly or indirectly for providing a benefit for the individual.

There is however no further definition within the legislation of what is income that can be used directly or indirectly for providing a benefit (section 733 ITA 2007). It must however be income that can be so used as a result of the relevant transfer or associated operations. This section looks at the approach taken to determining income that can be used directly or indirectly for providing a benefit.

What is income will broadly follow the description at INTM600400, and person abroad is described at INTM600360. The income of a person abroad that can be taken into account is however limited by the extent to which it is income that can be used as a result of the actions described for providing a benefit for the individual. It is not however limited to the income of the provider of the benefit. It is any income which arises in the tax year to a person abroad providing it can be so used as a result of the particular actions. The income does not have to be used for providing the benefit it is enough that it can be used directly or indirectly.

Only income arising on or after 10 March 1981 can be taken into account as relevant income as the benefits charge only applied from that date (INTM601440).

The different language of the benefits charge highlights the fact that what is taken into account as relevant income for the benefits charge may be somewhat different to the measure of income that may fall to be taken into account for the income charge. As it is only income that can be used which is taken into account it will be appropriate to look in most cases at any factors that may prevent income being so used. For example, any part of the income that has been genuinely paid away may not be capable of being termed as income that can be used for providing a benefit.

It should however be kept in mind that relevant income has to be considered on a tax year by tax year basis so that once an amount has been determined as being relevant income of a tax year it will fall to be taken into account as relevant income in any subsequent years benefits charge calculation. It cannot be amended by, for example, a subsequent disbursement, neither will it cease to be relevant income if, for example, it ceases to be regarded as income within the structure perhaps because it has been capitalised.

In considering whether any part of the income has been genuinely paid away in a manner such as it could not be regarded as income that can be used for providing a benefit, there are three broad categories of disbursements that will generally be taken into account:-

income genuinely paid away in meeting legitimate expenses;

income distributions paid out of income;

taxes paid by the person abroad out of income.

It is likely to be largely a question of fact whether income can be used for providing a benefit, and regard should be had, where necessary, to relevant constituting documentation of the person abroad as well as any applicable foreign law that my have a bearing on the way the person abroad acts and operates.

The following examples may help to illustrate how relevant income will generally be determined.

Example 1

A foreign company with investment business has interest income of £100,000 for a tax year. It pays costs for management of the company of £25,000 out of its income. Assuming all other conditions for a benefits charge are met, the relevant income of this company for that purpose would be considered to be £75,000, the amount that can be used for providing a benefit.

It is worth noting that if the income of this company fell to be taken into account for the purpose of the income charge the amount of the income for that purpose would be considered to be £100,000.

Example 2

If in the above example the company also paid a distribution out of its income by way of dividend of say £50,000, the amount of income that can be used for providing a benefit, and so would fall to be treated as relevant income, would be £25,000.

Example 3

The same company decides at the end of the tax year to add its 'net profit' of £75,000 to its reserves. Two years later it makes a payment of £50,000 and contends this reduces relevant income. As relevant income has to be considered on a tax year by tax year basis HMRC would take the view that relevant income of the tax year remained £75,000 as in Example 1 above.

Example 4

A foreign trust has no income of its own, but owns a foreign company which has rental income of £100,000. The trustees make a payment out of trust capital to a beneficiary of £30,000. In considering what is relevant income for the purposes of the benefits charge the income of both the company and the trustees is taken into account. The relevant income will thus be £100,000 as it is income that can indirectly be used for providing a benefit. The payment out of the trust does not impact that.

INTM601700- Transfer of assets: The benefits charge: The measure of the benefits charge

The benefits charge is a charge on 'income treated as arising' to the individual and it is a charge by reference to the amount treated as arising. Whether income is treated as arising and if so the amount of it is determined by application of a formulaic approach which, in effect, compares benefits received by the individual with the income of a person abroad that can be used for providing a benefit (the relevant income of the tax year). This is not a charge on the actual income of the person abroad nor on the benefits received rather an amount determined by comparison of both elements over time.

This formulaic approach is described as a series of 'Steps' which determine both whether an amount of income is treated as arising and if so the amount of that income for any tax year (section 733 ITA 2007). The formula consists of six 'Steps' to arrive at the amount of income to be treated as arising to the individual. Such an amount can be for any tax year for which the computation provides that income is treated as arising, it will not necessarily be the year in which the benefit is actually received by the individual and neither will it necessarily be in the year in which the relevant income arose.

Where the Steps approach is being applied for a tax year it will cover all years that fall to be taken into account in making that calculation, not just those from April 2007.

INTM601720 sets out details of the six 'Steps', INTM601740 a modification to the Steps formula, INTM601760 contains an example based on the Steps formula and INTM601780 an example including modifications. INTM601800 looks back to the situation prior to April 2007 and seeks to show that although the methodology that existed was not the series of 'Steps' introduced by ITA 2007 its effect was broadly the same.

INTM601720 - Transfer of assets: The benefits charge: The six steps

To find the amount, if any, of the income treated as arising for the purpose of the benefits charge for any tax year in respect of benefits provided to which the provisions apply the following 'Steps' as set out in section 733 ITA 2007 are taken:

Step 1 – 'the total benefits'

Identify the amount or value of such benefits received by the individual in the tax year and in any earlier tax year in which benefits charge could or has applied. The benefits of an earlier year to be taken into account are those of a tax year in which there has previously been a benefits charge, or in which there would have been a benefits charge but for an insufficiency of relevant income to match against benefits received. The sum of these two is 'the total benefits'.

Step 2 – 'the total untaxed benefits'

Deduct from the total benefits the total amount of income treated as arising to the individual under the benefits charge in any earlier tax years, as a result of the relevant transfer or associated operations. This is 'the total untaxed benefits'.

Step 3 – 'the relevant income of the tax year'

This identifies the amount of any income which arises in the tax year to a person abroad, and as a result of the relevant transfer or associated operations can be used directly or indirectly for providing a benefit for the individual. That amount is 'the relevant income of the tax year' in relation to the individual and the tax year.

Step 4 – 'total relevant income'

Add together the relevant income of the tax year and the relevant income of earlier tax years (determined on the same basis as for Step 3) in relation to the individual. This is the 'total relevant income'.

Step 5 – 'the available relevant income'

From the total relevant income, deduct:

The amount deducted at Step 2, and

Any other amount which may not be taken into account because of the no duplication of charges provisions (INTM602180)

The result is 'the available relevant income'.

Step 6 – 'income treated as arising'.

Compare the total untaxed benefits and the available relevant income (Steps 2 & 5).

The amount of income treated as arising for the purpose of the benefits charge for any tax year is the total untaxed benefits or the available relevant income, whichever is the lower.

The above steps are subject to two specific points:-

The reduction in amount charged where there has been a previous capital gains tax charge as a result of the receipt of the benefits, see INTM601520 second paragraph. Where any element of a benefit has resulted in chargeable gains accruing to the individual that amount should be deducted from 'the total untaxed benefits' in Step 2 in any subsequent application of the Steps formula.

Modifications are required where there have been relevant transactions before 5 December 2005 and transactions after 4 December 2005 and exemptions under these provisions (INTM602860) cease to apply, see INTM601740.

INTM601740 - Transfer of assets: The benefits charge: Modification of the step formula

The Steps formula is specifically modified where relevant transactions include both pre-5 December 2005 transactions and post-4 December 2005 transactions where the provisions at (INTM602860) apply.

The modifications where the conditions apply are:-

In determining the relevant income of an earlier tax year for Step 4 it does not matter whether that year was a year for which the individual was not liable to a benefits charge because of an exemption. In other words the relevant income of that year is taken into account.

For the purpose of Step 1 a benefit received by the individual in or before the tax year 2005-06 is to be left out of account.

But in the case of a benefit received in the tax year 2005-06 the preceding bullet only applies to so much of the benefit as, on a time apportionment basis, fell to be enjoyed in any part of the year that fell before 5 December 2005.

The example in INTM601780 includes the operation of this modification.

INTM601760 - Transfer of assets: The benefits charge: Example

This example assumes all years are after April 2007 but before April 2013 and that all of the conditions necessary for a benefits charge to apply are met.

A transfer of assets is made in Year 1 as a result of which income arises to a person abroad. An individual who is resident in the United Kingdom and who did not make the transfer receives cash benefits, as set out below, out of assets which are available for the purpose as a result of the transfer and associated operations. The benefits are not otherwise liable to income tax and the individual is not liable to an income charge.

Year	Relevant income	Benefits received
1	£10,000	£5,000
2	£20,000	£10,000
3	£10,000	£10,000
4	£10,000	£5,000
5	£50,000	£100,000

To determine whether there is income treated as arising to the individual in Year 5 and if so what amount apply the Steps formula. Assume for this that the formula was also applied in Years 1 – 4 and resulted in income being treated as arising of £5,000 Year 1, £10,000 Year 2, £10,000 Year 3, and £5,000 Year 4.

Step 1 – 'the total benefits'

Add together the benefits received in the tax year (Year 5) and in any earlier year in which benefits charge could or has applied. The earlier years to take into account are Years 1 – 4.

Year 5	Benefit	£100,000
Years 1 – 4	Benefits	£30,000
The total benefits		£130,000

Step 2 – 'the total untaxed benefits'

Deduct from the total benefits, the amount of income treated as arising to the individual in any earlier tax years:

The total benefits		£130,000
Income for benefits charge	Years 1 - 4	£30,000
The total untaxed benefits		£100,000

Step 3 – 'the relevant income of the tax year'

The income of year 5 which can be used for providing a benefit for the individual is £50,000, which is 'the relevant income of the tax year'.

Step 4 –'total relevant income'

Add together the relevant income of year 5 and the relevant income of years 1-4.

Relevant income of year 5		£50,000
Relevant income of yr 1-4		£50,000
Total relevant income		£100,000

Step 5 – 'the available relevant income'

Deduct from the total relevant income, the amount deducted at Step 2. In this example there are no other deductions to be taken into account.

Total relevant income		£100,000
Deducted at Step 2		£30,000
The available relevant income		£70,000

Step 6 – the amount of income treated as arising for the tax year

Compare the result of Step 2 with the result of Step 5:

Total untaxed benefits		£100,000
Available relevant income		£70,000
The lower of the two is		£70,000

The amount treated as income arising to the individual in year 5 is therefore £70,000. This is neither the relevant income of that year nor the benefits received in that year.

It may be noted that there are still £30,000 of benefits unmatched in this example therefore if for example there was further relevant income in a subsequent year a further Steps calculation would be made for that year.

INTM601780- Transfer of assets: The benefits charge: Example - where modifications apply

The income and benefits set out in the table below result from a transfer of assets in 2000-01. It is agreed that an exemption applies to the transfer such that there is no income or benefits charge. Following the death of the transferor a transaction is undertaken in 2007-08 in relation to the assets of the fund, designed for the purpose of tax avoidance. It is agreed no exemption applies to prevent a potential benefits charge for 2007-08. What is the benefits charge for that year?

Year	Relevant income	Benefits received
2000-01	£50,000	£10,000
2001-02	£50,000	£10,000
2002-03	£50,000	£10,000
2003-04	£50,000	£10,000
2004-05	£50,000	£10,000
2005-06	£50,000	£10,000
2006-07	£50,000	£10,000
2007-08	£5,000	£10,000

First there is no charge under either the income or benefits charge for 2000-01 to 2006-07 as an exemption applies in relation to the original transfer

For 2007-08 there would be no benefits charge if an exemption applies.

As there are both pre-5 December 2005 and post-4 December 2005 transactions, the relevant exemption is in section 740 ITA 2007. (see INTM602840).

As the transaction after 4 December 2005 does not meet the conditions for exemption section 740(3) requires the modifications described at INTM601740 to apply for the purpose of the benefits charge.

To determine the amount of income (if any) to be treated as arising to the individual for 2007-08 the Steps approach has to be applied and with the specified modifications (INTM601720).

Step 1 – 'the total benefits'

Add together the benefits received in the tax year (2007-08) and in any earlier year in which benefits charge could or has applied.

In this example there are two possible approaches to 'earlier years'. Either that there are no earlier years to be taken into account under this Step as there was an exemption and thus the provisions did not apply (all earlier years were pre-ITA 2007). Or that the benefits of all earlier years have to be taken into account and that the modifications provided by section 740(6)-(7) ITA 2007 apply to this Step. The modification if applied in this way would seem to require 2000-01 – 2004-5 benefits to be left out and that for 2005-06 to be time apportioned. If applied in this way the benefit received in 2006-07 would also be taken into account so that "the total benefits" would then become £10,000 + £10,000 plus £3,333 (4/12 * £10,000). Such an approach would not seem to be consistent with an exemption applying for 2006-07, as it would in effect bring those benefits back into the calculation in 2007-08 and result in an equivalent amount of income being charged. HMRC take the view that the apportionment required by section 740(7) will only be relevant where there are transactions in 2005-06 post-4 December, with a pre-5 December transaction in that or an earlier year. In this example therefore there are no earlier years to take into account in this Step as there are no earlier years to which a benefits charge applied, or to which a benefits charge would have applied but for an insufficiency of relevant income to match against benefits.

2007-08	Benefit	£10,000
2000-01 to 2006-07	Exemption for all yrs	£0
The total benefits		£10,000

Step 2 – 'the total untaxed benefits'

Deduct from the total benefits, the amount of income treated as arising to the individual in any earlier tax years:

The total benefits		£10,000
Income for benefits charge	2000-01 – 2006-07	£0
The total untaxed benefits		£10,000

Step 3 – 'the relevant income of the tax year'

The income of 2007-08 which can be used for providing a benefit for the individual is £5,000, which is 'the relevant income of the tax year'.

Step 4 –'total relevant income'

Add together the relevant income of 2007-08 and the relevant income of years 2000-01 – 2006-07. The modification provided by section 740(5) requires the earlier years' income be taken into account even though there was an exemption.

Relevant income of 2007-08		£5,000
Relevant income of 2000-1 to 2006-07		£350,000
Total relevant income		£355,000

Step 5 – 'the available relevant income'

Deduct from the total relevant income, the amount deducted at Step 2. In this example there are no other deductions to be taken into account.

Total relevant income		£355,000
Deducted at Step 2		£0
The available relevant income		£355,000

Step 6 – the amount of income treated as arising for the tax year

Compare the result of Step 2 with the result of Step 5:

Total untaxed benefits		£10,000
Available relevant income		£355,000
The lower of the two is		£10,000

The amount treated as income arising to the individual in 2007-08 is therefore £10,000.

If in this example the 'tainting' transaction had taken place after 4 December 2005 and before 5 April 2006, then even though the ITA 2007 Steps approach did not apply for that year (see INTM601800) the effect would have been the same and applying the 'modifications' would have resulted in a comparison of time apportioned benefits of 2005-06 with relevant income of that and all earlier years. If the facts above for 2007-08 had been those of 2005-06 the result would have been a benefits charge of £3,333 for 2005-06 regardless of when after 4 December 2005 (and before 5 April 2006) the tainting transaction took place.

INTM601800- Transfer of assets: The benefits charge: Computation of income before April 2007

As INTM601780 indicates the Steps computation is not without difficulties in some areas. This section however seeks to show how the approach being taken to the Steps methodology is consistent with the way in which the benefits charge operated prior to April 2007.

Looking at the example in INTM601780 above as if all of the years 1 – 8 were before 6 April 2005 the application of the former provisions under section 740 ICTA 1988 would be as follows:-

1. For years 1 – 7 there would be no benefits charge as an exemption applied in relation to the original transfer. The exemption provisions at that time said that where the conditions for exemption are met, "section 740... shall not apply".

2. For year 8 the new 'associated operation' taints the exemption, and as the conditions for section 740(1) ICTA to apply are met a potential benefits charge arises.

To arrive at the amount subject to the benefits charge, a comparison is made of the amount or value of the benefit (received in that year) with the relevant income of tax years up to and including the tax year in which the benefit is received. If there was a surplus of unmatched benefit in an earlier year, that surplus benefit is matched with relevant income of a subsequent year before that income is compared to benefits received in that year. In effect the surplus benefits are held in abeyance until they can be matched to subsequent year's relevant income.

3. A question could arise in this example in applying section 740(2) ICTA as to whether 'any such benefit as is mentioned in subsection (1)' brings into consideration all benefits received provided out of assets which are available for the purpose by virtue or in consequence of the transfer or of any associated operations. However such a wide view could counter the effective exemption for earlier years. So in applying section 740(2) (a) ICTA in this example the amount to be charged in the tax year in which the benefit is received is found by comparing the amount or value of the benefit received in that year only (£10,000) with 'the relevant income of years of assessment up to and including the year of assessment in which the benefit is received' (as all earlier years were covered by an exemption). It is only if there is a surplus of unmatched benefit that section 740(2) (b) comes into play to match that surplus benefit with relevant income of a subsequent tax year. Where a year is covered by an exemption, there is no chargeable benefit (as the provision of section 740 'shall not apply') and so the provision of section 740(2) (b) cannot apply to carry it forward if unmatched. In this case there is no benefit of an earlier year that could fit within section 740(2) (b) and therefore nothing that falls to be added to the benefit of the year in the comparison.

The result in this example is that the benefit received in year 8 is £10,000, the relevant income of all years up to and including year 8 is £355,000 and therefore £10,000 is treated as income of the individual for that year.

As the benefit does not exceed the relevant income there is no surplus benefit to carry forward under section 740(2) (b). If there were a subsequent year under the same rules, for the next year the relevant income to be matched of £355,000 would be reduced by the extent of the amount treated as income in year 8 of £10,000 and would then have added to it any new amount of relevant income of that subsequent year.

The past position can effectively be put into a diagram like a series of steps, starting from the top.

INTM601900 - Transfer of assets: Non-domiciled individuals: Contents

INTM601920	Background
INTM601940	The income charge
INTM602100	The benefits charge

INTM601920- Transfer of assets: Non-domiciled individuals: Background

Background

Before Finance Act 1981 domicile status made no difference to tax charges under the transfer of assets legislation. In effect this meant that individuals were chargeable on the whole of the income of the person abroad where they met the criteria for the legislation to apply regardless of their domicile status.

This contrasted with the situation for individuals who received income directly. In particular such individuals who were resident in the United Kingdom but regarded as non-UK domiciled could benefit from the 'remittance basis' of taxation in respect of foreign source income.

The transfer of assets legislation was therefore changed to bring it more into line with the direct charging provisions relating to the income of individuals ordinarily resident but not domiciled in, the UK.

Those provisions relating to non-UK domiciled individuals within the transfer of assets legislation then remained largely unchanged over the years until the tax law rewrite which became Income Tax Trading and Other Income Act 2005 (ITTOIA). The provisions for transfer of assets were then further changed with Finance Act 2008 introducing a full 'remittance basis' for transfer of assets in line with major changes to remittance basis for direct personal income introduced in that Finance Act.

The current provisions that affect transfer of assets charges are now within ITA 2007, and there are three sections as follows:-

Provisions affecting the income charge:

section 726 ITA 2007 (where power to enjoy)

section 730 ITA 2007 (receipt of a capital sum)

Provisions affecting the benefits charge:

sections 735 and 735A ITA 2007 (receipt of benefits)

These sections were amended or introduced by Finance Act 2008 and the revised terms apply for the tax years 2008-09 onwards.

INTM601940 Transfer of assets: non-domiciled individuals: the income charge: Contents

INTM601960	Introduction
INTM601980	The position up to 5 April 2005 under section 739 ICTA 1988
INTM602000	The position between 6 April 2005 and 5 April 2008
INTM602020	The position from 6 April 2008

INTM601960 Transfer of assets: non-domiciled individuals: the income charge: Introduction

Introduction

The basic rules for the income charge are in INTM600520 onwards.

This section explains the possible effect on that charge if the individual is non-UK domiciled.

This section looks at the effect of being non-UK domiciled on the income charge in three stages:-

The position up to 5 April 2005 under section 739 ICTA 1988 (before the introduction of the Income Tax Trading and Other Income Act 2005 (ITTOIA)).

The position between 6 April 2005 and 5 April 2008 under section 739 ICTA (after the introduction of ITTOIA) and the effect of the introduction of Income Tax Act 2007.

The position from 6 April 2008 under sections 726 and 730 ITA 2007 after changes brought in by the Finance Act 2008.

Any issues concerning whether an individual is resident or domiciled in the United Kingdom should be determined from the separate guidance on those subjects or by consulting the relevant specialist in Specialist Personal Tax (Personal Tax International).

INTM601980 - Transfer of assets: Non-domiciled individuals: The position up to 5 April 2005

For non-UK domicile status to have any effect on the income charge an individual must show that he would not, by reason of his being so domiciled, have been chargeable to tax in respect of the income if it had in fact been his income (section 743(3) ICTA 1988).

The only circumstances in which an individual ordinarily resident in the United Kingdom would not have been chargeable to tax in respect of the income if received by him, on the basis of domicile status alone, would have been if the income were foreign source income not received in the United Kingdom.

In other words, it is income that, if received by him, would have been charged to tax under Case V of Schedule D on the basis of sums received in the United Kingdom, described in section 65(5) ICTA 1988.

Where the condition is met then the individual is not chargeable (under the income charge) by reference to so much of the income treated as his as satisfies this condition. This can be illustrated by some straightforward examples:-

Example 1

An ordinarily resident but non-UK domiciled individual is potentially chargeable to tax under the income charge in respect of income of 1000, comprised of 500 UK source and 500 foreign source income, all arising to a person abroad. The foreign source income is not received in the United Kingdom.

If the income were in fact the individual's the rules in what were Cases IV and V of Schedule D (S65 ICTA 1988) would, for a non-UK domiciled individual, only charge the foreign income to the extent that sums in respect of it were received in the United Kingdom. On the basis that the 500 foreign source income is not received in the UK that amount is excluded from the transfer of assets income charge and the maximum charge for the year is 500.

Example 2

As above, but sums of 800 in respect of the income of the person abroad are received in the United Kingdom. In this scenario, the potential charge on the individual is 1000 but a maximum of 200 may potentially be excluded by the non-UK domiciled provision leaving a minimum charge of 800.

This manual does not provide detailed guidance as to when a sum is received in the United Kingdom. However for the purpose of the income charge under transfer of assets the same approach will generally be taken as is taken for direct income chargeable under what was Cases IV or V of Schedule D.

INTM602000 - Transfer of assets: Non-UK domiciled individuals: The position between 6 April 2005 and 5 April 2008

Following the tax law rewrite new and separate charging provisions were introduced for all types of foreign income replacing the general charge under what was Cases IV or V of Schedule D. The new provisions, included in the Income Tax Trading and Other Income Act 2005 (ITTOIA), also provided, on a claim, an alternative basis for calculating certain income categorised as 'relevant foreign income' and the amount on which an individual would be taxed.

From the introduction of ITTOIA non-UK domicile status could impact this relevant foreign income and broadly speaking resulted in the income subject to the claim being taxed only when received in the UK.

When the transfer of assets provisions were themselves rewritten into the Income Tax Act 2007 the post April 2005 position was maintained through two new sections (sections 726 and 730 ITA 2007) one for each of two possible income charges.

The new provisions enabled otherwise chargeable income to be excluded if two conditions, called Condition A and Condition B, are met.

1. Condition A is that the individual is domiciled outside the UK.

2. Condition B is that if the income had in fact been the individual's income the individual would not have been chargeable to income tax in respect of it because of domicile status alone.

The approach that will therefore be taken in this period will generally be that described in Examples 1 and 2 at INTM601980

INTM602020 - Transfer of assets: Non- domiciled individuals: The income charge: The position from 6 April 2008

Finance Act 2008 introduced major changes to the way in which a potential income charge under the transfer of assets provisions is affected by domicile status. These changes bring the position for income treated as arising to the individual under the transfer of assets provisions fully into line with the provisions that apply for the individual if the income were actually received directly by the individual.

The new rules are contained in sections 726 and 730 ITA 2007 and are identical for each of the two income charging provisions.

Unlike the old rule the FA2008 provisions do not provide for any income to be excluded. Rather it sets a 'ring fence' around amounts that are affected by domicile status and which would otherwise be charged to tax in the year that the income arises to the person abroad and allows those amounts to be taxed only when there is a relevant amount remitted to the United Kingdom.

The new provisions apply if two conditions are met:-

the individual is not domiciled in the United Kingdom in the year (that is the year for which an income charge would otherwise arise);

the 'remittance basis' applies to the individual for that year.

For details of when the 'remittance basis' applies see the separate Remittance Basis Handbook.

The way in which the new provision works is:-

all of the income that would otherwise be taxed under the income charge is considered;

that income is designated as 'foreign' if, and to the extent that, it would be 'relevant foreign income' if it were the individual's;

the amount of 'foreign deemed income' so determined is then treated as if it were relevant foreign income;

The result of this is that the ring fenced amount regarded as 'relevant foreign income' is then charged to tax under the rules contained in Part 8 ITTOIA and not under the transfer of assets income charge. The Part 8 rule charges tax for any tax year in which the individual is resident in the United Kingdom and, during which, any of the relevant foreign income is remitted to the United Kingdom. It does not matter whether the source from which the income arose exists when the income is remitted.

Detailed guidance on the operation of Part 8 ITTOIA is contained in the Remittance Basis Handbook and what is meant by 'relevant foreign income' is also determined from Part 8 ITTOIA (section 830 ITTOIA).

To ensure that the remittance basis rules work as they should in relation to ring fenced amounts the new transfer of assets provisions treat so much of the income arising to the person abroad that would be chargeable under the income charge and which would be relevant foreign income if it were the individual's as deriving from the 'foreign deemed income' in applying the remittance basis rules in Chapter A1 of Part 14 ITA 2007.

Detailed guidance on whether any relevant foreign income is remitted to the United Kingdom and on what remitted to the United Kingdom means for the purpose of applying the remittance basis can be found in the Remittance Basis Handbook.

The position is summarised by the following example.

Example 3

In year 1 a resident but non-UK domiciled individual is potentially chargeable to tax under the income charge in respect of income of 1000, comprised of 500 UK source and 500 foreign source income, all arising in the year to a person abroad. The foreign income is not received in the UK. The remittance basis applies for that year. In year 3, there is a remittance to the UK of 800.

In year 1 there is a potential charge under the transfer of assets income charge of 1000. However as the remittance basis applies and part of the actual income would be relevant foreign income if received by the individual the actual transfer of assets income charge is 500 and 500 is 'ring fenced' for charge under Part 8 ITTOIA. Where any amount is remitted to the UK during the year which is a remittance for Chapter A1 Part 14 ITA 2007 (the Remittance Basis) then part or all of the ring fenced amount may be charged under Part 8 ITTOIA in that year. Any untaxed amount remains until and unless there is a further amount remitted to the United Kingdom within Chapter A1 Part 14 ITA 2007 that may trigger a charge under Part 8 ITTOIA in the tax year in which a remittance occurs. Here one would have to consider whether there has been a remittance to the UK in year 1 and also year 3 if any of the ring fenced amount remained untaxed at the end of year 1. Note for the purpose of the example we are assuming that all the years concerned are after 2013-14 and therefore an individual is potentially liable to the income charge if they are resident in the United Kingdom

For the benefits charge on individuals who are non-UK domiciled see INTM602080

INTM602040 - Transfer of assets: Non-domiciled individual: Transition

The provisions described in INTM602020 have effect for the tax year 2008-09 and subsequent years. There are no specific transitional arrangements for the introduction of the new provisions. As the income charge only looks at income arising to the person abroad in the tax year it should not be necessary to have regard to income of earlier years in determining whether there is an amount that is to be regarded as foreign deemed income. However if there is foreign deemed income then in considering any possible charge under Part 8 ITTOIA it will be appropriate to consider all sums remitted to the United Kingdom in the tax year even if they arise, for example, from income of periods prior to the introduction of these provisions. Those remittances will fall to be tested against the rules in Chapter A1 Part 14 ITA 2007 as to whether they are taxable remittances

INTM602060 - Transfer of assets: non-UK domiciled individuals: the income affected by domicile status

For the purpose of the transfer of assets income charge domicile status can only affect foreign income, and then only where that income is not received in or remitted to the United Kingdom.

Whether income is or is not foreign income is a matter to be discerned from the facts, and any relevant law, and will usually be a consideration before applying the transfer of assets legislation. But the type or category of income of the person abroad need only be considered where domicile status is claimed to make a difference to the amount that would otherwise be charged under the transfer of assets provisions.

In considering, where it is relevant to do so, what the type of income is you must look at the income in the hands of the person whose income it actually is; that is in the hands of the person abroad.

INTM602080- Transfer of assets: Non-domiciled individuals: The benefits charge: Contents

INTM602100	Introduction
INTM602120	The position up to 5 April 2005
INTM602140	The position between 6 April 2005 and 5 April 2008
INTM602160	The position from 6 April 2008
INTM602180	Relevant income and benefits relating to foreign deemed income
INTM602240	Transition

INTM602100 - Transfer of assets: non-domiciled individual: The benefits charge: Introduction

Introduction

The basic rules to determine whether an individual is liable to a benefits charge are set out in INTM601400 onwards.

This section considers the possible effect on a benefits charge if the individual is not domiciled in the UK.

This section looks at the effect of being non-UK domiciled on the benefits charge in three stages:-

The position up to 5 April 2005 under section 740 ICTA 1988 before the introduction of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA)).

The position between 6 April 2005 and 5 April 2008 under section 740 ICTA after the introduction of ITTOIA and the effect of the introduction of Income Tax Act 2007.

The position from 6 April 2008 under section 735 ITA 2007 after changes brought in by Finance Act 2008.

Any issues concerning whether an individual is resident or domiciled in the UK should be determined from the separate guidance on those subjects or by consulting the relevant specialist in Specialist Personal Tax (Personal Tax International).

INTM602120 - Transfer of assets: non-domiciled individuals: the position up to 5 April 2005

For non-UK domicile status to have any effect upon the benefits charge two conditions must be met:-

The benefit received that triggers the potential charge must not be received in the UK.

The relevant income taken into account must be such that if the individual had received it he would not, by reason of being non-UK domiciled alone, have been chargeable to tax in respect of it. (Section 740(5) ICTA 1988).

The only circumstances in which an individual ordinarily resident in the UK would not have been chargeable to tax in respect of income if received by him, on the basis of domicile status alone, would have been if the income were foreign source income not received in the UK.

In other words, it is income, which, if received by the individual, would have been charged to tax under Cases IV and V of Schedule D on the basis of sums received in the UK, described in section 65(5) ICTA 1988.

Where the conditions are met then the individual is not chargeable under the benefits charge by reference to so much of the relevant income as satisfies the second condition (section 740(5) ICTA 1988). This can be illustrated by some straightforward examples:-

Example 4

An ordinarily resident individual receives a benefit of 750 outside the UK from an offshore structure in which income of 1000 arises. The income comprises 500 UK source and 500 foreign source income not received in the UK. It is agreed that the provisions for a charge under S740 are met, and the potential charge is 750. However as part of the relevant income is foreign income not received in the UK that amount is excluded from the comparison of relevant income and benefits. The maximum charge for the year is therefore 500 (lower of the benefits received or relevant income after exclusion).

Example 5

As above, but the benefit is 400 received outside the UK. In this case the charge for the year is on 400 (being the lower of the benefits received or the relevant income after exclusion).

Example 6

As Example 4, but 200 in respect of the foreign income is received in the UK. In this example only 300 of the relevant income can be said to derive from income that would not have been chargeable on the basis of domicile alone, and so only 300 of the 1000 relevant income is excluded, leaving 700. The charge is therefore 700 (being the lower of the benefits received or relevant income after exclusion).

Example 7

As example 4 but in a later year 200 is received in the UK. Here the charge for the year is 500 as for Example 4. There is nothing chargeable in the later year as the basic conditions for a charge do not exist.

Example 8

As in Example 4 but in a later year there is further relevant income 100, which is all foreign income not received in the UK. In that same year a sum of 200 in respect of past income is received in the UK.

In the first year there is a charge of 500 as in Example 4. A benefit received of 250 is rolled forward as it has not been matched with relevant income. As there is relevant income in the later year a potential charge arises. The relevant income is now 1100 of which only 400 can be excluded on the basis of domicile, 500 has already been matched to benefits in an earlier year leaving 200 to compare with the benefit of 250. The charge for this later year is thus 200 (being the lower of the benefits received or relevant income after exclusions).

If in these examples the benefit had been received in the United Kingdom there would be no potential exclusion on the basis of domicile.

Broadly in considering what relevant income may be excluded similar considerations apply for what is regarded as 'received in the United Kingdom' as would apply for the purpose of old Cases IV and V of Schedule D in section 65(5) – (9) ICTA including the special provisions there relating to UK linked loans. More detail on when sums are regarded as received in the United Kingdom for this purpose can be found in the Residence, Domicile & Remittance Basis Guide [HMRC6].

INTM602140 - Transfer of assets: Non-domiciled individuals: The position between 6 April 2005 and 5 April 2008

Following the tax law rewrite new and separate charging provisions were introduced for all types of foreign income replacing the general charge under what were Cases IV and V of Schedule D. The new provisions, included in the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), also provided, on a claim, an alternative basis for calculating certain income categorised as 'relevant foreign income' and the amount on which an individual would be taxed.

From the introduction of ITTOIA non-UK domicile status could impact this relevant foreign income and resulted broadly speaking in the income subject to the claim being taxed only when received in the United Kingdom.

Apart from minor adjustments consequential upon the introduction of ITTOIA the transfer of assets provisions giving exclusion from charge for certain benefits of non-UK domiciled individuals remained largely unchanged. However the exclusion from relevant income was only for income that would not be chargeable to tax on the basis of domicile status alone. The introduction of ITTOIA was not intended to change the law under transfer of assets and HMRC continues to operate the benefits charge provisions in this interim period in the same way that they were operated prior to April 2005 as set out in Examples 4 – 8 in INTM602140, When the transfer of assets provisions were themselves rewritten into the Income Tax Act 2007 the post April 2005 position was maintained through the new section 735 ITA 2007. It could therefore also be argued under this provision that there is no reduction to the otherwise chargeable amount by virtue of non-UK domicile status.

The new ITA provision takes a slightly different approach to the previous provision in ICTA 1988 in that it requires a chargeable amount to be calculated and then allows the otherwise chargeable amount to be reduced if, and in proportion to, the extent that the relevant income by reference to which it is determined includes amounts that would not have been charged because of domicile In effect if the relevant income includes foreign income not received in the United Kingdom the amount chargeable is reduced by reference to the proportion that amount has to the total. The provision applies if there is an amount which apart from the non domicile provision would have been chargeable under the transfer of assets benefit charge, and three conditions are met:-

1. Condition A is that the individual is domiciled outside the UK.

2. Condition B is that the benefit is not received in the UK.

3. Condition C is that if the individual had received any of the relevant income by reference to which the potential chargeable amount is determined the individual would not have been chargeable to income tax in respect of it because of domicile status alone.

Where the conditions are met then the individual is not chargeable under the benefits charge by reference to so much of the chargeable amount determined by reference to the relevant income to which Condition C applies.

In applying Condition C the same approach to foreign income will be taken for this purpose as operated before the introduction of ITTOIA.

Example 9

As Example 4 in INTM602120. Applying the Steps approach in ITA 2007 the 'chargeable amount' would be 750 (total relevant income 1000 compared with benefits provided received outside the UK of 750). As the foreign income of 500 is not received in the UK take that amount to satisfy Condition C.

In the absence of a provision that says that the chargeable amount is determined by reference to one type of income in preference to another it might be reasonable to take the view that the reduction in the chargeable amount given by section 735 is the ratio that the income that satisfies Condition C has to the total. That is a reduction of 375. Such an approach could however lead to extreme and anomalous results and as neither the introduction of ITTOIA nor ITA 2007 were intended to change the law under transfer of assets HMRC will continue to operate the provisions in a way that is consistent with the former provisions in this interim period. This is subject to cases where there appears to be manipulation of the interaction of the new provisions. Where you identify a case that appears to involve manipulation refer it to the Transfer of Assets Technical Adviser in SPT (Trust & Estates Technical Team).

Taking this approach the individual is not chargeable by reference to 250 of the relevant income to which Condition C applies, which leaves a charge under transfer of assets of 500.

INTM602160 - Transfer of assets: Non-domiciled individuals: The position from 6 April 2008

Finance Act 2008 introduced major changes to the way in which a potential benefits charge under the transfer of assets provisions is affected by domicile status. These changes bring the position for amounts deemed as income arising to the individual under the transfer of assets provisions fully into line with the provisions that would apply for the individual if the deemed amount were actually income received directly by the individual.

The new rules are in revised section 735 ITA 2007.

Unlike the old rule this legislation does not provide for either relevant income or chargeable amounts to be excluded. Rather it sets a 'ring fence' around amounts that could be affected by domicile status and which would otherwise be charged to tax, in the year that income is deemed to arise to the individual, and allows those amounts to be taxed only when there is a relevant amount remitted to the UK. The effect is the same as if a corresponding amount of actual income had arisen directly to an individual to whom the remittance basis of taxation applies.

The new provisions apply if three conditions are met:-

income is treated as arising to an individual under the transfer of assets benefits charge.

the 'remittance basis' applies to the individual for that year

the individual is not domiciled in the United Kingdom in the year (that is the year for which a benefits charge would otherwise arise);

For details of when the 'remittance basis' applies see the separate Residence, Domicile & Remittance Basis Guide [HMRC6].

The way in which the new provision works is:-

all of the amounts that would otherwise be taxed under the benefits charge are considered;

that deemed income is designated as 'foreign' if, and to the extent that, the relevant income to which it relates would be 'relevant foreign income' if it were the individual's;

the amount of 'foreign deemed income' so determined is then treated as if it were relevant foreign income.

The result of this is to create a ring fenced amount regarded as 'relevant foreign income' which can then be charged to tax under the rules contained in Part 8 ITTOIA and not under the transfer of assets benefits charge. The Part 8 rule charges tax for any tax year in which the individual is resident in the UK and, during which any of the relevant foreign income is remitted to the UK. It does not matter whether the source from which the income arose exists when the income is remitted.

Detailed guidance on the operation of Part 8 ITTOIA is contained in the Residence, Domicile & Remittance Basis Guide and what is meant by 'relevant foreign income' is also determined from Part 8 ITTOIA (S830 ITTOIA).

To ensure that the remittance basis rules work as they should in relation to ring fenced amounts the new transfer of assets provisions treat relevant income, or a benefit, that relates to any part of the foreign deemed income as deriving from that part of the foreign deemed income for the purpose of applying the remittance basis rules in Chapter A1 of Part 14 ITA 2007.

Detailed guidance on applying the remittance basis can be found in the Residence, Domicile & Remittance Basis Guide. In applying that guidance in the context of transfer of assets benefits charge it is necessary to consider both the benefits and underlying income to determine whether and when any of the 'relevant foreign income' is regarded as remitted to the UK.

A detailed example on this provision is at INTM602220.

INTM602180- Transfer of assets: non-domiciled individuals: Relevant income and benefits relating to foreign deemed income

As the benefits charge is effectively a cumulative charge, potentially looking at relevant income and benefits over a period of time, for the purpose of applying the provisions in section 735 it is necessary to have an ordering rule to work out how much of any amount that would otherwise be taxable in the year the potential charge arises can be regarded as foreign deemed income and can thus be 'ring fenced' to be charged to tax as and when remitted to the UK.

The new provision is at section 735A and only applies to the operation of the rule described in INTM602160. In other words it only applies for the purpose of section 735 ITA 2007.

The approach that the new provision takes is to look at all of the items taken into account in arriving at the potential amount that would otherwise be chargeable under the benefits charge. It then lines up relevant income and benefits in tax year order on a first in first out basis and taking each item separately. If there is more than one benefit received each would be taken into account in order with the earliest benefit first. In relation to income the rule takes UK income first for each year and then foreign income of each year. So if, say, one item of foreign income arose on 30 September in a tax year and another item of foreign income arose on 31 December they would be taken into account by reference to the September item first and then the December item.

In the event that income arises over a period it is treated for the purpose of this provision as arising immediately before the end of the period. For example, business profits accrue over an accounting period to say 31 December so for the purpose of this provision the income would be treated as arising on 31 December. Therefore if in a tax year there was say interest income arising on 30 September and business profits accruing over an accounting period to 31 December, for the purpose of this provision they would be placed in the order interest first and profits second.

An amount that is a potentially chargeable amount under the benefits charge is then regarded as foreign deemed income if and to the extent that the relevant income to which it relates would be relevant foreign income if it were the individual's as described in INTM602160. This example illustrates how this ordering works.

Example 10

		Relevant Income
Year	Date	UK Income	Foreign Income	Benefits
1	30 Sept	500
1	31 Dec		500
2	31 Dec		1000	750
3	30 Sept		500
3	31 Dec	500
4	30 Sept		500
4	31 Dec	500		750

There are potential transfer of assets benefits charges in year 2 of 750 and year 4 of 750. In year 2 250 will be foreign deemed income and ring fenced to be charged under Part 8 ITTOIA as and when there is an amount remitted to the UK. 500 is charged under transfer of assets. In year 4 the whole 750 will be deemed foreign income. If, however, the benefit in year 4 was 1500 then only 1250 would be ring fenced as foreign deemed income and 250 would be charged under transfer of assets.

INTM602200 - Transfer of assets: non-domiciled individuals: relevant income and benefit relating to foreign deemed income

This paragraph gives the detail of how the new ordering rule outlined in INTM602180 works. It proceeds by looking at relevant income and benefits determined for the purpose of the 'Steps' taken in arriving at the potential total chargeable amount (see INTM601780). There are six parts to the new rule as follows.

First, all the benefits mentioned in Step 1 are placed in the order in which they were received by the individual starting with the earliest received.

From the benefits deduct any benefit that gives rise to a charge in respect of capital gains or offshore income gains as described in section 734(1)(b) and (d) ITA 2007 (see INTM601520).

Take the relevant income of each tax year starting with the earliest tax year and place the income in date order. In doing this, first take income that is not foreign income and then repeat with foreign income. The order will be the earliest income first. Income is 'foreign' for this purpose if it would be relevant foreign income if it were the individual's. In repeating this exercise for each year relevant income of the earliest tax year will be relevant income of the first tax year after the last tax year in relation to which the calculation was performed. These may not be consecutive years.

Deduct from the income any income that has already been taken into account for the transfer of assets provisions. These amounts may not be taken into account because of the 'no duplication of charges' provisions in section 743(1) or (2) ITA 2007 (see INTM602360). But any income charged to income tax under the benefits provisions on the individual is not deducted.

Next, place any income treated as arising to the individual under the transfer of assets benefits charge in the order in which it is treated as arising starting with the earliest.

Finally, treat the income listed in (e) as related to the benefits and relevant income by matching that income with the benefits and the relevant income in the orders mentioned in (a), (c) and (e) above.

An example illustrating the provisions and methodology described in INTM602160 – INTM602200 is set out in INTM602220 below.

INTM602220 - Transfer of assets: non-domiciled individuals: Relevant income and benefits relating to foreign deemed income.

The example in this paragraph illustrates the principles and methodology described in INTM602160 – INTM602200

Example 11

An individual who is resident, but not domiciled, in the United Kingdom has received cash benefits from an offshore structure in circumstances where the conditions for the transfer of assets provisions to apply are met. The 'remittance basis' of taxation applies for each year.

Year	Date arises	UK income	Foreign income	Benefits received	Benefit received in UK
1	30 Sept	500
1	31 Mar		800	1000	0
2	31 Mar	100	1000	1400	0
3	31 Mar	500	500
4	30 Sept	200		1000	0
4	31 Mar		500
5	30 Sept	500	100	600	600
5	31 Mar		400

Year 1

The potential benefits charge is 1000 (being lesser of 1300 relevant income and 1000 benefits received INTM601720

As all of the conditions for section 735 to apply are met, consider whether any of the potential charge is foreign deemed income. The principles in section 735A are used for this purpose (INTM602200).

First match the 1000 with the UK income of 500. As this income cannot be relevant foreign income then 500 cannot be foreign deemed income and thus is charged under the transfer of assets benefits charge.

The remaining benefit is then matched with the foreign income of 800 this income would be relevant foreign income if it was the individual's and thus 500 of the deemed amount is foreign deemed income. This is treated as relevant foreign income and becomes potentially chargeable under Part 8 ITTIOA 2005.

There is a balance of 300 relevant income that remains unmatched.

Where any amount is remitted to the UK during that or any subsequent year which is a remittance for Chapter A1 Part 14 ITA 2007 (the Remittance Basis) then part or all of the ring fenced amount may be charged under Part 8 ITTOIA in the year of remittance, subject as appropriate to the rules on remittances from mixed funds (see the Residence, Domicile & Remittance Basis Guide [HMRC6].

The total taxable amount for the year under transfer of assets benefits charge is therefore 500.

Year 2

The potential benefits charge is 1400 (being the lesser of the total relevant income 2400 and the total benefits 2400 less 1000 already charged).

Calculate how much of the total potential charge can be regarded as foreign deemed income applying section 735A.

The potential chargeable amount is in effect matched with-

300 of foreign income from year 1. This gives foreign deemed income of 300 chargeable under Part 8.

100 UK income of year 2. As this income cannot be relevant foreign income this amount of 100 remains chargeable under the transfer of assets benefits charge

The foreign income of year 2 of 1000. As this would be relevant foreign income if it were the individual's this amount can be regarded as foreign deemed income and so chargeable under Part 8.

The result is that of the potential charge of 1400, 100 is charged under transfer of assets benefits charge and 1300 is ring fenced and treated as relevant foreign income chargeable under Part 8 ITTOIA.

The total charge under the transfer of assets benefits charge is therefore 100.

Where any amount is remitted to the UK during that or any subsequent year which is a remittance for Chapter A1 Part 14 ITA 2007 (the Remittance Basis) then part or all of the ring fenced amount may be charged under Part 8 ITTOIA in the year of remittance, subject as appropriate to the rules on remittances from mixed funds (see the Residence, Domicile & Remittance Basis Guide [HMRC6].

Year 3

Although there is further relevant income in this year there are no unmatched benefits so there can be no potential charge under transfer of assets benefits charge so section 735 is not applicable.

Year 4

The potential charge is 1000 (being the lesser of the total relevant income 4100 and the total benefits 3400 less 2400 already charged).

Work out the deemed foreign income applying section 735A-

The potential chargeable amount is in effect matched with

The UK relevant income 500 from year 3.

The foreign income of 500 from year 3.

The total amount charged under the transfer of assets benefits charge is therefore 500.

500 is ring fenced as foreign deemed income and treated as relevant foreign income.

There is 700 of unmatched relevant income to take forward.

Year 5

The potential charge is 600 (being the lesser of the total relevant income 5100 and the total benefits 4000 less 3400 already charged).

Work out the deemed foreign income applying Section 735A-

The potential chargeable amount is in effect matched with

The UK relevant income 200 from year 4.

400 of the foreign relevant income from year 4.

The total amount charged under the transfer of assets benefits charge is therefore 200.

400 is ring fenced as foreign deemed income and treated as relevant foreign income.

As the benefit was received in the United Kingdom a minimum of the ring fenced amount of this year will be charged under Part 8 ITTOIA and consideration would need to be given to whether there are further untaxed amounts of ring fenced income that would be charged for this year applying the relevant remittance basis rules.

There is 1100 of unmatched relevant income to take forward.

INTM602240- Transfer of assets: Non-domiciled individuals: Transition

The provisions described in INTM602160 – INTM602220 have effect for the tax year 2008-09 and subsequent years. There are no specific transitional arrangements for introduction of the new provisions. However because of the nature of the benefits charge when making calculations for the purpose of these provisions it will still be necessary to take account of relevant income and benefits of earlier periods. Nothing however in these new provisions will alter a charge or outcome of an earlier period.

The following examples illustrate some of the points that may arise on transition.

Example 12

An ordinarily resident but non-UK domiciled individual is agreed to be potentially subject to tax under the transfer of assets benefits charge. The table below shows the income arising to persons abroad and the benefits received by the individual. The remittance basis of taxation applies for all years including 2008-09. There are no amounts remitted to the UK in any year.

		Relevant Income
Year	Date	UK Income	Foreign Income not received in UK	Benefits received outside UK
2004-05	31 March	0	2000	1000
2005-06	31 March	0	3000	1000
2006-07	31 March	0	3000	1000
2007-08	31 March	0	4000	1000
2008-09	31 March	0	2000	0

Example 13

		Relevant Income
Year	Date	UK Income	Foreign Income not received in UK	Benefits received outside UK
2004-05	31 March	0	2000	1000
2005-06	31 March	0	3000	1000
2006-07	31 March	0	3000	1000
2007-08		0	0	0
2008-09	31 March	0	2000	1000

There is no charge under the transfer of assets regime for 2004-05 to 2006-07. In effect for each of those years benefits are 'unmatched' to relevant income after exclusion by section 740(5). In 2007-08 there is no application of the transfer of assets provisions. Applying the Steps approach for 2008-09 there is 'deemed income' of 4000. The conditions for section 735 are met and applying section 735A there is foreign deemed income to be treated as relevant foreign income of 4000 chargeable under Part 8 ITTOIA.

Example 14

		Relevant Income
Year	Date	UK Income	Foreign Income not received in UK	Benefits received outside UK
2004-05	31 March	0	2000	10000
2005-06	31 March	0	3000	1000
2006-07	31 March	0	3000	1000
2007-08	31 March	0	4000	1000
2008-09	31 March	0	2000	0

There is no charge under the transfer of assets regime for 2004-05 to 2006-07. In effect for each of those years benefits are 'unmatched' to relevant income after exclusion by section 740(5). In 2007-08 applying the Steps approach a 'chargeable amount' of 12000 arises (being the lesser of the total relevant income 12000 and the total benefits 13000 less 0 already charged). Applying section 735 that amount is reduced to 0. There is unmatched benefit at 5 April 2008 of 1000 to carry forward but no pool of available relevant income. For 2008-09 there is further relevant income giving 'deemed income' of 1000. The conditions for section 735 are met and applying section 735A there is foreign deemed income to be treated as relevant foreign income of 1000 chargeable under Part 8 ITTOIA. There is unmatched available relevant income of 1000 to take forward. There is no charge under transfer of assets benefits charge.

INTM602300- Transfer of assets: Other general provisions: Contents

INTM602320	Introduction
INTM602340	No duplication of charges
INTM602480	Just and reasonable basis
INTM602500	Applicable tax rates for the income charge
INTM602520	Deductions and reliefs
INTM602540	Other general provisions

INTM602320 - Transfer of assets: Other general provisions: Introduction

Introduction

This section covers a number of general provisions that apply in relation to the transfer of assets legislation.

INTM602340 Explains the provisions that seek to ensure there is no duplication of charges in circumstances where there might be a number of individuals who could be chargeable to income tax in relation to the same income, or where there is potential for charging an individual twice in respect of the same income.

INTM602480 Explains the circumstances where a just and reasonable apportionment applies.

INTM602500 Looks at the rate of tax applicable to amounts charged under the income charge and how tax is charged where the underlying income of the person abroad is dividend income.

INTM602520 Gives details of the deductions and reliefs available in calculating the liability to income tax under the income charge.

INTM603540 Gives details of the jurisdiction of the Tribunal Service in relation to a range of matters under the transfer of assets provisions.

INTM602340 - Transfer of assets: Other general provisions: No duplication of charge: Contents

INTM602360	No duplication of charge: Introduction
INTM602380	No duplication of charge: Income to be taken into account once
INTM602400	No duplication of charge: More than one person chargeable
INTM602420	No duplication of charge: Income taken into account in charging tax
INTM602440	No duplication of charge: Subsequent receipt of income
INTM602460	No duplication of charge: Changes from 6 April 2013

INTM602360 - Transfer of assets: other general provisions: no duplication of charge: Introduction

Introduction

Where anti-avoidance legislation is concerned the United Kingdom courts have not been surprised by the fact that more than one provision may apply for taxation in respect of the same income. For example, Lord Steyn in the McGuckian case (69 TC 1) comments in the context of the transfer of assets provisions, "that the revenue authorities should have overlapping taxation powers is an unremarkable consequence". There are instances where income, to which the transfer of assets provisions potentially applies, is also potentially chargeable under some other charging provision.

The transfer of assets legislation does provide rules to prevent some specific instances of potential duplication of charge and in relation to certain situations HMRC and the courts have provided further guidance. In Tax Bulletin 40 HMRC indicated that where income could be fully assessed under the transfer of assets legislation and also under the settlements legislation in Chapter 5 Part 5 ITTOIA 2005 that it will not in practice be chargeable under both. In the case of Regina v Dimsey (74TC 263) Lord Scott noted that HMRC gave the following commitment:

"In the course of the hearing before your Lordships Mr Milne QC, counsel for the Revenue, gave an assurance on behalf of his clients that in seeking to recover income tax against a transferor under section 739(2) credit would always be given for any tax that had been paid on the same income by the transferee and vice versa, but as Lord Wilberforce remarked in Inland Revenue Commissioners V Garvin [1981] 1 WLR 793, at page 799; (1981) 55 TC 24, at page 8, the avoidance of double taxation "should be a right and not merely a privilege."

In order to legislate for situations of potential double taxation not already covered by the existing legislation the Finance Act of 2013 introduced further changes. These are looked at further at INTM602460.

INTM602380- Transfer of assets: Other general provisions: No duplication of charge: Income to be taken into account once

Income to be taken into account once

Section 743(1) ITA 2007 provides that no amount of income may be taken into account more than once in charging income tax under the transfer of assets provisions. So for example, if income has been taken into account in determining an amount chargeable under the benefits charge, and subsequently there is a further provision of a benefit from the same transactions to another individual that would also potentially lead to a charge, the income already taken into account could not be taken into account again. Similarly, if income is taken into account for the purposes of the income charge, and there is a provision of a benefit to another individual the income could not be taken into account again.

Income that arises to a person abroad may be distributed to another person who is also a person abroad – for example a group company may make a distribution to its parent company. HMRC generally accept that in such situations the legislation should not be construed so as to effectively duplicate the amount of income that may be taken into account for the transfer of assets provisions. In such situations it will be appropriate to consider to what extent the distribution and the underlying income from which is paid are the same income.

Specific cases of difficulty concerning the amount of income to be taken into account should be referred to SPT Trusts and Estates Technical in accordance with the instructions at INTM [ ] to [ ].

INTM602400 - Transfer of assets: Other general provisions: No duplication of charge: More than one person chargeable

More than one person chargeable

The second rule that aims to prevent a duplication of charge is at section 743(2) ITA 2007. It covers situations where there is a choice about the persons in relation to whom any amount of income may be taken into account in charging income tax under the transfer of assets provisions. In such a situation HMRC may take the income into account in relation to one or more of the individuals as appears just and reasonable; and if more than one in such proportions as appears to be just and reasonable. There is more detail on the just and reasonable apportionment in INTM602480.

INTM602420 - Transfer of assets: Other general provisions: No duplication of charge: Income taken into account in charging tax

Income taken into account in charging tax

For the purposes of INTM602380 and INTM602400 above the references to an amount of income taken into account in charging income tax are (section 743(3) ITA 2007):-

Where the income charge applies, the amount of income charged under the income charge. The exception to this is where INTM600980 applies to limit the amount of the income charge; the amount charged is limited for this purpose also to that amount

Where the benefits charge applies, the amount of relevant income taken into account for the purpose of that charge (see INTM601720) in calculating the amount to be charged in respect of the benefit for the tax year in question.

INTM602440 - Transfer of assets: Other general provisions: No duplication of charge: Subsequent receipt of income

Subsequent receipt of income

Until 5 April 2013 section 743(4) ITA 2007 dealt with situations where income had been charged to tax under the income charge and the income was then subsequently received by the individual. This subsection stated that the income could not be treated as being the individual's income again for income tax purposes when it was received.

In the Finance Act of 2013 section 743 (4) ITA 2007 was repealed with effect from 5 April 2013 and subsections 743 (2A) and (2B) ITA 2007 replaced it with effect from 6 April 2013. The new subsections also state that income cannot be treated as being the individual's income again for income tax purposes when it was received if it had been charged to tax under the income charge.

Issues can arise when an individual who has been taxed under section 720 or section 727 ITA 2007 in relation to the income of a non-resident trust or company and the entity concerned makes a subsequent distribution of income to the individual. HMRC accept that generally the reference to income in section 740 (4) and sections 743 (2A) and (2B) can be construed to cover such situations. However, where distributions are paid out of accumulated income it will be appropriate to consider to what extent the accumulated income has been charged to tax on the individual under the income charge in the preceding years.

If on specific cases issues regarding double charging on the subsequent receipt of income arise you should refer the case to SPT Trusts and Estates Technical in accordance with the instructions at INTM [ ] to [ ].

INTM602460 - Transfer of assets: General provisions: No duplication of charge: Changes from 6 April 2013

Changes from 6 April 2013

In order to address some of the issues regarding the potential for double charging amendments have been made to sections 721 and 728 ITA 2007 to prevent a charge arising under the transfer of assets income charge if the income is taxed under other provisions. The changes take effect from 6 April 2013.

With regards to situations where the income charge is in point because the individual had power to enjoy the Finance Act of 2013 introduces new subsection (3C) into section 721. If an individual is charged to income tax, on income of a person abroad, under another part of the tax code then there will not be a second charge under the 'power to enjoy' transfer of assets provisions in section 721 – as long as the tax charged has been paid.

Similarly, new subsection (2A) in section 728 ITA 2007 has the same effect where the income charge is in point because the individual receives or is entitled to receive a capital sum.

The changes being introduced only relate to income on which the individual is liable to tax under a different provision so in cases where the income is assessable on another person you will need to consider INTM602320 to INTM602480.

INTM602480- Transfer of assets: General provisions: Just and reasonable basis

Just and reasonable basis

Where there is a choice of individuals in relation to whom any amount of income of a person abroad may be taken into account in arriving at the amount of an income charge or benefits charge, it can sometimes be difficult to determine the amount of income taxable on each individual. To alleviate such difficulties, the legislation provides for the income to be apportioned on a 'just and reasonable' basis

How this is done will depend on the circumstances. For example, individual A may be chargeable on the whole of the income of an overseas company under the income charge. Individual B may receive a benefit from the same company that falls to be charged under the benefits charge. In this situation the income of the company should only be taken into account once (INTM602380) and it will normally be just and reasonable to include the whole of the income arising as an income charge, as the individual who has sought to avoid tax in setting up the structure in the first place will be charged to income tax and will therefore suffer no inequity in bearing the full brunt of the legislation. In this example, individual B may not have a benefit charge for the particular tax year, although the benefit may be subject to a charge in a subsequent year (INTM601700).

However, there may be exceptional circumstances where the benefit charge is seen as being just and reasonable, for example where the income charge arises due to an individual receiving a loan from the person abroad which is repaid after a very short period so that there is no continuing liability on that individual.

When looking at the just and reasonable basis for apportionment, where there is more than one individual with power to enjoy the income of the person abroad, account should be taken as to who actually made, procured or was associated with the transfer as these parameters may affect the quantum and the nature of the charge. In addition, it is necessary to have regard to the intended outcome of the arrangements which have resulted in income becoming payable to a person abroad. For example, if individual X subscribes for shares in a Jersey company for £1000 and individual Y enters into a service agreement with that company, then each individual may be subject to the income charge. However, it may well be that the asset of real value is the service agreement and that should be reflected in any apportionment of the income between the individuals.

Where the same assets are transferred by several individuals the transferors would normally be assessed in proportion to their share of the assets transferred. For example, where shares of a UK company are held by three individuals in the proportions 40%, 40% and 20% and there is liability under Section 720 ITA 2007 in respect of the income of an overseas person to which the shares are transferred, the liability is assessed on each of the three shareholders in proportion to their respective holdings. This example demonstrates both the requirement to avoid duplication of charge (INTM602380) and the 'just and reasonable' basis.

Where more than one individual is subject to the benefits charge in respect of benefits which they receive in the same year, it will be necessary to apportion the relevant income (INTM601680) among the individuals. Only by considering the facts of the particular case will it be possible to decide fairly the amount of income to be treated as arising to each individual and subject to the benefits charge. In cases where the total benefits are fully covered by the relevant income, each individual will be potentially subject to charge on the amount or value of the benefits received. Where the relevant income is less than the total amount or value of the benefits, the most appropriate apportionment of the relevant income is by reference to the ratio of the benefits received by each individual in the year to the total of the benefits provided in the year.

However, in a case where it was clearly intended that A's benefit be provided out of the relevant income of the year, and B's benefit out of that of a subsequent year (if, for example, A's benefit was paid three quarters through the year and represented the whole income of the year, while B's benefit was paid nearly at the end of the year to deal with some unexpected contingency) then A might justifiably be taxed on the whole of the benefit in the year of receipt, and B taxed in subsequent year.

Each case must be dealt with on its merits and the 'just and reasonable' basis is that which appears to be so to an officer of Revenue and Customs. Appeals against such decisions are the jurisdiction of the Tribunal (previously the Special Commissioners.) (INTM603560)

INTM602500- Transfer of assets: General provisions: Applicable tax rates for the income charge

Applicable tax rates for the income charge

One other way by which the legislation seeks to ensure that income charged to tax under the income charge is not subject to a double charge to tax is by affording relief where the income arising to the person abroad has borne income tax by deduction or otherwise (section 745 ITA 2007).

The legislation provides that where any income has borne income tax at the basic rate, the savings rate, or the dividend ordinary rate that amount of tax is not charged again when charging the income under the income charge. In effect a tax credit is available if the income which has been taxed is defined within its specific charging legislation as 'income for all the purposes of the Taxes Acts'.

Under the transfer of assets legislation the dividend income of a person abroad, taxable on the individual under the income charge, is treated as if it were actually received by the individual and is therefore charged at the dividend rate.

INTM602520 - Transfer of assets: General provisions: Deductions and reliefs

Deductions and reliefs

Where an individual is subject to the income charge the same deductions and reliefs are allowable as would have been allowed if the income treated as arising were actually received by the individual. The legislation is at section 746 ITA 2007

The reference is to deductions after the amount of the income charge has been calculated. The parameters for calculating the amount of the income charge itself by reference to the income of the person abroad are at INTM601100.

If the income of person abroad is UK source dividends, the dividends would have to be grossed up before allocating the tax credit. For years up to and including 1998-99 the recipient of the distribution was entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponded to the rate of advance corporation tax in force for the financial year in which the distribution was made. Dividends for subsequent years carry a notional tax credit. This treatment would not normally apply to non-resident shareholders, but if the income is notionally treated (for example under the income charge provisions) as that of a UK resident, the same consequences follow as for an actual recipient.

Where the income of the person abroad is foreign source dividends there would not normally be a tax credit available. However from 2008-09 section 397A ITTOIA 2005 provides for tax credits in respect of distributions from non-UK resident companies. Where the distributions are treated under any of the provisions of the Taxes Acts as the income of a person other than the recipient then that person is treated as receiving it This means that where the income charge under the transfer of assets provisions is in point a tax credit of 1/9^th of the amount or value of the grossed up distribution is available to persons holding less than 10% of the share capital of the company concerned, and subject to certain other conditions within that legislation.

Where the income of a foreign company has been subject to the income charge and subsequent dividend left out of account, it may be that the dividend is charged to tax by a UK paying agent such as a bank before being paid to the individual concerned. If this is the case relief should be given for that tax or repayment made, whichever is appropriate.

As far as the benefits charge is concerned no tax credits are available either in respect of UK or of foreign source dividends of a person abroad. However the amount of relevant income will be the net dividend after any tax charge.

INTM602540 - Transfer of assets: General provisions: Double taxation relief (DTA)

Double taxation relief

UK resident individuals subject to the income charge (INTM600760) in respect of the income of a person abroad (INTM600360) may potentially be charged to tax twice. Once in the country of origin of the person abroad, and once in the UK under the income charge. Also it is possible for an individual to be resident in two countries at the same time and be taxable in both.

There are three main methods whereby relief is given under international agreements and by domestic legislation-

Complete exemption from tax in the country of origin and (in certain circumstances) in the country of residence.

Partial relief from tax in the country of origin by reference to a maximum rate chargeable in that country.

A credit allowance in respect of tax paid in the country of origin, and given by the country of residence usually in the form of a credit against its own tax. This method is used for income which remains doubly taxed, including cases within (2) above.

All three appear in Double Taxation Agreements negotiated by the UK. Where relief is not given under an agreement, the Taxes Acts provide that relief by the credit method is to be given unilaterally to UK residents.

Relief by way of credit can be given in respect of foreign tax similar in nature to UK income tax or corporation tax charged directly on the company/trust on income arising from a source in the territory in which the company/trust is resident.

No relief should be given for tax which is similar to Capital Gains Tax, nor on tax charged directly on the company/trust in respect of income it has received from another country.

However, where an overseas company or a withholding agent is required to deduct tax from dividends, and pay this over to the appropriate authority, this withholding tax can be credited to the recipient overseas company/trust which is the person abroad in respect of the income charge. This applies even if the rate of tax is higher than that which would have been charged had the dividend been paid to an individual in the UK. This does not apply to tax deducted by a paying agent in the country in which the person abroad company/trust is

Full instructions in respect of DTR can be found in the Double Taxation Relief Manual.

INTM602600-Transfer of assets: Exemptions from charge: Contents page

Contents page

INTM602620	Introduction
INTM602640	Background
INTM602660	Applying for the exemption
INTM602680	The individual
INTM602700	To show or satisfy
INTM602720	By reference to transactions
INTM602740	The avoidance exemption
INTM603080	Genuine transaction exemption

INTM602620 - Transfer of assets: Exemption from charge: Introduction

Introduction

When the transfer of assets provisions were first introduced in 1936 as part of a package of measures to combat avoidance of tax it was recognised that they also had the potential to capture straightforward commercial transactions carried out in the ordinary course of business not involving tax avoidance. Therefore, the legislation provides scope for exemption. This exemption has been modified and added to over the years and the exemptions are now contained in ITA 2007, sections 736 – 742A. This chapter looks at the conditions for those exemptions.

Before the introduction of ITA 2007 what is now known as the 'avoidance purpose' exemption operated so that the income or benefits charge did not apply where certain specified conditions were met. In effect the avoidance purpose exemption and charge non-application are the same; an individual who would otherwise be chargeable to tax under the transfer of assets rules is not so charged where they demonstrate that the specific conditions are met in relation to the transactions that would otherwise result in the charge. Finance Act 2013 introduced the further exemption that can be found at section 742A ITA 2007. For the purpose of this guidance this is referred to as the genuine transactions exemption.

Where an individual has claimed exemption this must not be dealt with by Network offices, but should be submitted to SPT Trusts and Estates Technical in accordance with the instructions at INTM[ ] to [ ].

INTM602640 - Transfer of assets: Exemptions from charge: Background

Sections 736-742 ITA 2007

The original legislation was in section 18 FA 1936.

Tax mitigation and avoidance

Nowadays Parliament provides ways in which it is possible to reduce tax liability legitimately, for example, tax free savings. We tend to refer to this as tax mitigation. The term 'tax avoidance' on the other hand is generally used to describe arrangements designed to circumvent the intentions of Parliament and its tax legislation.

During 1969 a case CIR v Herdman 45TC 394 went before the courts. The appellants had transferred shares in a Northern Ireland family company to an Eire holding company for the stated reason of avoiding Eire tax. The arrangement was later used to avoid UK tax. The Courts ruled that the legislation (then in section 412 ITA 1952 now at section 720 ITA 2007.) was defeated where the original transfer was innocent but where changed circumstances were later used to avoid UK income tax.

In addition, Cayman Island law had been changed at the instigation of UK residents in such a way as to circumvent the transfer of assets provisions in section 412 ITA 1952.

The Finance Act 1969 was intended to reverse CIR v Herdman since it provided that the associated operation which must be proved innocent of the purpose of avoiding UK tax to secure exemption, had to include all operations which were incidental to the power to enjoy the income of the person abroad – instead of only those incidental to the acquisition of the rights by virtue of which the taxpayer has such powers.

Finance Act 1969 also reversed the Vestey decision (see Vestey v CIR 54TC 503) by attributing liability to an individual if by virtue or in consequence of a transfer to a person broad (whether alone or in conjunction with associated operations) he has power to enjoy whether or not he has a right to do so.

Finance Act 1969 was later considered to be defective in that whilst section 33(2) intended to bring into consideration all associated operations when what became section 741 ICTA 1988 (now sections 736- 742 ITA 2007) was invoked, the wording of the changes to the legislation provided that the relevant transactions were those by virtue or in consequence of which the individual had power to enjoy. This wording could in particular circumstances exclude associated operations which were not directly leading to the power to enjoy.

Because of this RI201 set out HMRC practice, when considering whether an exemption under section 741 ICTA 1988 is available, of considering only the transfer and any associated operations which directly establish a power to enjoy the income of the overseas person.

CIR v Willoughby 70 TC 57

In 1997 the Revenue lost the case when the courts decided that:-

Professor Willoughby was not chargeable because he was not ordinarily resident when he made the original transfer, and Professor Willoughby had taken advantage of an opportunity afforded by Parliament (via the get-out clause in section 741a) and that there was no tax avoidance purpose.

In responding to this:

a. was remedied by section 81 Finance Act 1997, but

b. has not been so easy to resolve. The judgement was clearly based on the facts of the case. However the view was clearly taken that this was mitigation rather than avoidance. There has been much debate as to what constitutes avoidance and also on whether the test for determining the presence of avoidance is objective or subjective.

Finance Act 2006

This added new section 741A ICTA 1988 which came into force on 5 December 2005 and was designed to clarify the meaning of section 741 following concerns that transactions involving the transfer of assets abroad were being increasingly used for tax avoidance purposes. It was also designed to remedy the defects in the Finance Act 1969. These provisions are now within ITA 2007, with the main avoidance purpose exemption at sections 737 and 738. The old rule is at section 739.

Finance Act 2013

This introduced a further 'genuine transactions' additional and alternative exemption test at section 742A of ITA 2007, which operates retrospectively for 2012-13, aimed at confirming the compatibility of the transfer of assets legislation with EU law. EU law requires that any potential avoidance can be tested on a case by case basis according to objective features and counteraction may not rely simply on establishing a purpose of avoiding tax. Benefitting from a more congenial tax regime within the single market is acceptable, but in order to do so it must be shown that the relevant market freedoms, usually the freedoms of establishment and freedom of movement of capital, are in fact served. This means, in case of freedom of establishment, that the transactions contribute to 'economic interpretation', and in the case of freedom of movement of capital, to the effective allocation of capital. These freedoms are set out in the Treaty on the Functioning of the European Union (TFEU) and the EEA Agreement (the EEA covers Norway, Iceland and Liechtenstein in addition to the "EU 27").

In terms of EU law, even though anti-avoidance legislation may result in a breach one or more freedoms, because there is less favourable treatment of one person who is in a position comparable to another, the legislation will nevertheless be compatible provided there are 'compelling reasons in the public interest' which justify it, and provided the legislation does no more than is required to achieve its aims-thus there may be 'justifications' which must be 'proportionate'.

These considerations are based on general principles of EU law, and on certain cases heard by the EU and EEA courts. There are several potential public interest justifications, but the usual one which applies to direct tax is prevention of tax avoidance (or abuse), sometimes in conjunction with balanced allocation of taxing rights. Other justifications, such as fiscal supervision and coherence of the tax system, are possible but have proved difficult to establish in practice. EU law also suggests that the tax rules must have the 'specific object' of excluding 'artificial arrangements designed to circumvent [domestic] tax law'. Sometimes this is expressed as 'wholly' or 'purely' artificial arrangements. See INTM603140 for a discussion on this point.

INTM602660 - Transfer of assets: Exemption from charge: How an individual applies for exemption

Applying for exemption

There is no specific method of applying for exemption. However, in completing their self-assessment tax return an individual will be able to state that they are not including an amount of income, which would otherwise be chargeable to tax. Because they are relying on an exemption the facts underlying this statement should also be shown in the return together with the amount considered exempt.

The exemption applies automatically if the facts show that the conditions are met. It is not therefore the subject of a 'claim' under the normal claims mechanism of the Tax Acts (section 42 TMA 1970).

However to obtain exemption the individual (INTM602680) must:-

- show in writing or otherwise to, or satisfy, an Officer of HMRC (INTM602700);

- by reference to each and every one of the transactions that would result in there being an income or benefits charge if there is no exemption (INTM602720);

- that the necessary conditions for exemption have been met (INTM602760).

In view of these pre-requisites it is essential that individuals who may be relying on an exemption give a full and clear exposition of all the facts that would otherwise have resulted in a charge and how they satisfy the conditions for exemption, including applicable amounts, when completing their self-assessment tax return.

INTM602680 - Transfer of assets: Exemption from charge: The individual

The individual

The individual who is the subject of the potential tax charge is normally in possession of the facts needed to demonstrate how the conditions for exemption are met. If the individual is relying upon the avoidance purpose exemption the individual must 'prove a negative' as Lord Denning once put it (Philippi v CIR 47 TC 75 at page 111). There is more about purpose at INTM602960. The genuine transaction exemption looks first at whether the European Union Treaty Freedoms are engaged and if they are whether the transactions are genuine. What constitutes a genuine transaction is set out in the legislation and this is considered further in INTM602960 onwards.

INTM602700- Transfer of assets: Exemption from charge: Show or satisfy

Show or satisfy

An individual who is subject to an income charge or a benefits charge is not liable to income tax if they can satisfy an Officer of HM Revenue and Customs (HMRC) that the conditions for either the avoidance purpose exemption or the genuine transaction exemption are met.

The individual, as possessor of the evidence, information and supporting documentation supporting their case for exemption may be called upon to supply it. Such evidence may include copies of advice given by professional advisers if relevant to the exemption being claimed.

The evidence required will depend on the exemption being claimed and the circumstances and complexity of the situation. It is for the individual to determine the evidence which they consider appropriate in support of their case. Examples of the evidence that HMRC might expect include:-

Particulars of all the facts of what transactions have taken place that would otherwise lead to an income or benefits charge;

Particulars of the income in respect of which a charge would otherwise arise;

Particulars of the reasons for each transaction detailed;

Particulars of the aims and objectives that it was intended to achieve by the actions taken;

Particulars of the actual outcomes of the transactions detailed.

See INTM602800 where the relevant transactions are post-4 December 2005.

See INTM603080 for further details where the claim relates to the genuine transactions exemption.

Officers of HMRC should seek information which assists in determining the genuine commercial nature of transactions, and their real purpose. They can expect an individual who is entitled to exemption to assist them in this as officers are not in a position to be prescriptive as to what evidence is required: they can have no knowledge of what information or documentation might be available. Reluctance to supply relevant and persuasive information is likely to be a pointer to denying exemption. Officers may, of course, require information relating to a tax charge.

Authority for this view in relation to the purpose test is to be found in the case of Corbett's Executrices v CIR TC25 314 (1942) where Scott LJ said that (in referring to what is now the avoidance purpose exemption legislation) "it does not call upon the Commissioners of Inland Revenue to establish the existence of any intent in the taxpayers mind to avoid liability to income tax" and "That provision allows the taxpayer to escape from liability attendant upon the specific consequences, if, but only if, he proves to the satisfaction of the Special Commissioners that some other object was his main purpose. In other words, the onus is on him; and in the present case the Special Commissioners were not satisfied that the Appellants had discharged it".

Similarly in the case of Philippi v CIR 47TC 111 (1971) Lord Denning said "We do not look at the main purpose of the person making the transfer. We look at all the purposes which he may have had. The taxpayer must prove a negative. In this case the son must prove that the father did not have as one of his purposes in making the transfer the object of avoiding United Kingdom taxation, including not only income tax and surtax but also estate duty".

Further details of what may be required in respect of the genuine transactions exemption are included in INTM603080 onwards.

It is often the case that where transactions have taken place that result in potential liability under the transfer of assets provisions professional advice will have been taken in relation to the transactions. It is sometimes suggested that such advice cannot be disclosed to HMRC because of legal and professional privilege. More is said on this in section "information powers" (see INTM603200). But there is no specific restriction on the information that an individual can provide to demonstrate that the exemption test is met, and an individual who is entitled to exemption can be expected freely to provide it. Where an individual chooses to hold back particulars that may contain material evidence about transactions that would otherwise result in a charge to tax it may well lead the officer of Revenue and Customs to conclude that the conditions for exemption are not met.

Whether the conditions are met or not

Where all the facts of a case are taken into consideration there are three possible outcomes:-

The facts support the contention that the conditions are satisfied.

The facts do not satisfy the conditions for exemption.

There is doubt or difficulty in reaching a conclusion

Where on the facts of a case the conditions are met, exemption will be due. In cases where the facts do not support exemption or where there is doubt or where difficulties arise the papers should be referred to Specialist PT Trusts and Estates Technical (INTM[ ]).

Assessments, Revenue determinations and closure notices

Cases should be referred to Specialist PT Trust and Estates Technical before determinations or closure notices are issued in cases where exemption appears not to be due or where there is doubt. However, where a year is about to go out of date for assessment and a protective assessment needs to be issued this should be done. Appeals against decisions made by Officers of HMRC are to the Tribunal (previously Special Commissioners). (See INTM [ ]).

INTM602720- Transfer of assets: Exemption from charge: By reference to transactions

The conditions for exemption are analysed 'by reference to the relevant transactions'. The term 'relevant transactions' is given specific meaning (see INTM600200), which applies equally to each exemption test. Each and every transaction that falls to be taken into account in determining what would otherwise be a chargeable amount needs to be considered and in appropriate cases evidence produced to show how the test for exemption being claimed is met. The point being that the tests are transactional and require all the transactions to be considered in satisfying the relevant test.

Taking each of the potential charges this can perhaps be summarised as:-

Income charge – power to enjoy; the transactions to be taken into account are those that result in income becoming payable to a person abroad together with those other associated operations, if different, which result in the individual having the power to enjoy the income.

Income charge – receipt of/entitlement to capital sums; the transactions to be taken into account are those that result in income becoming payable to a person abroad together with those other associated operations, if different, which result in the individual receiving or being entitled to receive a capital sum.

Benefits charge - the transactions to be taken into account are those that result in income becoming payable to a person abroad together with those other associated operations, if different, which result in the individual receiving a benefit provided out of assets available for the purpose by reason of such transactions.

From this it can be seen that in some instances the same transactions may result in income becoming payable and also give the power to enjoy the income, the entitlement to a capital sum or result in receipt of a benefit. In other instances there may be two sets of transactions one leading to the income that becomes payable, the other to the power to enjoy, entitlement to capital sum or receipt of benefit. Whichever circumstance applies the individual will need to have regard to all of the transactions in showing how the particular test is met.

In examining the actual conditions for exemption at INTM602760 and forward it will be seen that there may also be further associated operations apart from those described above that fall to be taken into account in considering whether particular conditions are met. Where that is the case, then the individual will need to satisfy HMRC in relation to all those transactions.

Although constructed differently the former legislation also took a transactional approach to the avoidance purpose exemption test requiring the individual to show that the conditions were met in relation to the transfer of assets or associated operations or any of them or in relation to the transfer of assets and any associated operations. There is more about this at INTM602760 onwards, which consider the conditions for exemption.

Not every transaction will however necessarily fall to be taken into account. Normally it will only be those that contribute to an outcome that falls within the conditions for a charge, such as those transactions which result in income becoming payable or those which give the power to enjoy income, entitlement to capital sum or receipt of a benefit. For those that are within the provisions the individual will be required to show that the conditions for exemption are met.

The principle that it is only transactions that lead to the particular outcomes which fall to be considered is demonstrated by the 1969 decision of the House of Lords in Herdman v CIR (45 TC 394). Although that case was on legislation (ITA 1952) constructed somewhat differently from that in ITA 2007 or ICTA 1988 the broad thrust of the principles demonstrated is the same as the approach set out in the bullets above. In that case the Special Commissioner had found that a transaction which brought about income becoming payable to a person abroad and which gave power to enjoy it satisfied on the evidence available the conditions for exemption. There were however further transactions whose purpose would not have satisfied the test for exemption, but those transactions neither resulted in income becoming payable to a person abroad nor gave the individual any new or additional power to enjoy income. The House of Lords accepted the reasoning of the Court of Appeal in concluding that these additional transactions did not fall to be taken into account. Lord Chief Justice MacDermott in giving his decision, which was endorsed by the House of Lords, said (at pages 406/407) in commenting on and accepting the exposition given by Counsel for the Appellant:

"My reasons for this view may be enumerated as follows. (I) The conditions which bring subsection (1) [section 412(1) ITA 1952] into force and make the income of the non-resident person chargeable as that of the individual concerned depend upon a true alternative, upon the effect of either (i) the transfer of assets alone or (ii) that transfer in conjunction with associated operations. If (i) applies (ii) does not. (II) If subsection (1) is brought into force by the transfer of assets alone, subsection(3) [the exemption provision] must be applied accordingly and so that the taxpayer will escape from liability under subsection (1) on proving that the purpose of the transfer was not tax avoidance. In such a case any operation which is an "associated operation", in the sense of being within the definition in subsection (4), will fall outside subsection (1) and outside subsection (3) as well".

He went on to expand his reasoning into the facts of the particular case which indicated the extent of the transactions that resulted in income becoming payable and the individual having the power to enjoy that income. No other transactions fell to be considered.

HMRC confirmed the use of this principle in a Tax Bulletin article in 1999 in relation to the 'power to enjoy', saying that, "it has been the Revenue's practice in considering whether a defence under section 741 [ICTA 1988] is available to consider only the transfer and any associated operations which directly establish a power to enjoy the income of the overseas person under any particular sub-head in section 742(2) [ICTA 1988]".

But there are some instances within the specific conditions where a wider approach is required and individuals will need to take this into account in providing the information required about transactions in their tax returns. Specifically, Finance Act 2006 introduced a new provision (section 737(8) ITA 2007), which will be considered further in the detailed conditions, which means that the individual may now have to disclose to HMRC additional associated operations which may not result in outcomes that meet the requirements for a charge. It is important therefore that the individual who is seeking to show that the conditions for exemption are met properly identifies all of the transactions that must be taken into account, and provides the appropriate facts about each.

Although the above approach was adopted in relation to the avoidance purpose exemption the same transactional approach will apply when considering cases under the new genuine transactions exemption introduced by the 2013 Finance Act in relation to transactions taking place on are after 6 April 2012. The approach is considered further in relation to the genuine transaction exemption in INTM603080 onwards.

INTM602740 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: Contents

INTM602760	Specific conditions to be met
INTM602780	All relevant transactions pre-5 December 2005
INTM602800	All relevant transactions post 4 December 2005
INTM602820	Post 4 December 2005: Additional requirements
INTM602840	Relevant transactions include both pre-5 December and post 4 December 2005 transaction
INTM602860	Mixed relevant transactions
INTM602880	Partial exemption
INTM602900	Expansion of certain terms contained within the conditions
INTM603060	The impact of meeting or failing the conditions

INTM602760 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: Looks in detail at the specific conditions to be met

Conditions to be satisfied

The avoidance purpose exemption test is transactional so the following paragraphs look at the detail of the applicable conditions depending on when the transactions took place. This follows the way in which the law is now constructed in that some exemptions apply according to whether the relevant transactions are all pre-5 December 2005 or all post-4 December 2005 transactions or include both.

For this purpose "post-4 December 2005 transaction" means a relevant transaction on or after 5 December 2005, and "pre-5 December 2005 transaction" means a relevant transaction effected before 5 December 2005.

The pre-5 December 2005 provisions effectively cover those that were in the ICTA 1988. This guidance does not look back in any detail at the construction and operation of the exemption provisions before the introduction of ICTA 1988.

INTM602780 - Transfer of assets: exemption from charge: Avoidance purpose exemption: all relevant transactions before 5 December 2005 transactions

If all the transactions are before the 5 December 2005 then section 739 ITA 2007 applies. An individual is not liable to income tax in a tax year by reference to the relevant transactions (INTM602720) if the individual satisfies (INTM602700) an officer of Revenue and Customs that Conditions A or B are met.

Condition A is that the purpose of avoiding liability to taxation (INTM603000) was not the purpose or one of the purposes for which the relevant transactions or any of them were effected.

Condition B is that the transfer and any associated operations-

(a) were genuine commercial transactions (INTM603020) and

(b) were not designed for the purpose of avoiding liability to taxation.

The approach has been to take into account transfers and all associated operations in considering whether exemption is appropriate.

During 1969 a case went before the courts (CIR v Herdman 45TC 394) where it was ruled that the legislation was defeated where the original transfer was innocent but where changed circumstances were later used to avoid UK income tax. It was not because of the associated operations that Herdman had power to enjoy.

The Finance Act 1969 was intended to reverse this decision but because doubts were expressed as to its effectiveness the approach that has been taken is that in considering whether the exemption conditions are met all relevant transactions and associated operations are taken into account that either result in income becoming payable or give a power to enjoy. Tax Bulletin 40 (April 1999) was issued at the time and gave guidance as follows-

"The law was amended in 1969 following a decision of the Courts (in CIR v Herdman [45 TC 394]) that only the transfer and any associated operations giving a power to enjoy at the outset were relevant for determining whether the terms of section 741 were satisfied. The amendment to the legislation sought to bring all associated operations into consideration when section 741 was invoked. Because of doubts expressed as to the effectiveness of this amendment, it has been the Revenue's practice in considering whether section 741 is applicable to consider only the transfer and any associated operations which directly establish a power to enjoy the income of the overseas person under any particular sub-head in section 742(2)."

However all will depend on the circumstances. It may be that the original transfer giving the power to enjoy was effected for the purpose of subsequent avoidance via associated operations.

INTM602800 - Transfer of assets: exemption from charge: Avoidance purpose exemption: all relevant transactions post-4 December 2005 transactions

If all the transactions are after 4 December 2005, then section 737 ITA 2007 applies. An individual is not liable to income tax in a year by reference to the relevant transactions (INTM602720) if the individual satisfies (INTM602700) an officer of HM Revenue and Customs that Conditions A or B are met. The two conditions are mutually exclusive. It is not possible for a case to get into Condition B unless Condition A is not met.

Condition A is that it would not be reasonable to draw the conclusion, from all of the circumstances of the case, that the purpose of avoiding liability to taxation (INTM602980) was the purpose or one of the purposes for which the relevant transactions or any of them were effected.

If Condition A is not met then:

Condition B is that all the relevant transactions were genuine commercial transactions (INTM603020) and it would not be reasonable to draw the conclusion, from all the circumstances of the case, that any one or more of those transactions was more than incidentally designed (INTM603040) for the purpose of avoiding liability to taxation

When considering whether the conditions are met all the circumstances of the case are to be taken into account, including the intentions and purposes of any person who designs, effects, or provides advice in relation to any relevant transaction (INTM600180). It does not matter whether or not they do it for consideration.

The legislation provides that associated operations (INTM600300) which would not have been taken into account are to be taken into account if the conditions A & B would not be met if they were to be taken into account.

The new provisions reverse the effect of Herdman (INTM602640) which found that associated operations are in broad terms only taken into account in applying the purpose test if they involve avoidance and create either a new source of income or a new power to enjoy income. The new provision requires all associated operations with an avoidance purpose to be taken into account when applying the exemption test.

In the past structures such as family trusts were sometimes transformed into avoidance vehicles, with the associated operations carefully designed so that they could not be said to create new income flows or new power to enjoy income. The tax planners contended that HMRC could not apply the legislation against these structures, even though they were as clearly abusive.

Where a structure meets the requirements for exemption and an associated operation involves only a minor element of avoidance, if the associated operation producing 'tainted' income is only a small proportion of the income of the total structure it may be appropriate to charge only the income from the 'tainted' source, thus applying the legislation in a proportionate way.

INTM602820- Transfer of assets: exemption from charge: Avoidance purpose exemption: post-4 December 2005 transaction additional requirements

Although not specific conditions there are two additional factors present in the test that applies to post-4 December 2005 transactions. These are:-

a. In determining the purposes for which the relevant transactions or any of them were effected, the intentions and purposes of any person described below are to be taken into account. Those persons are:-

1. any person who designs or effects the relevant transactions or any of them;

2. any person who provides advice in relation to the relevant transactions or any of them.

It does not matter whether or not these were for consideration.

b. If there is any associated operation (as defined at INTM600300) that would not fall to be taken into account in applying the exemption test, but which if it were taken into account the Condition would not be met as a result of that associated operation or the associated operation taken together with any other relevant transaction, that associated operation must be taken into account as described at INTM602720.

More detail in relation to (a) above is given in INTM602960 when considering purposes.

This means that when completing a tax return that relies upon an exemption, where a post-4 December 2005 transaction is involved, in addition to providing the information discussed at INTM602700 it will also be appropriate to give particulars of the involvement of any persons designing, effecting or advising in relation to the transactions in the way described above.

INTM602840 - Transfer of assets: exemption from charge: Avoidance purpose exemption: Relevant transactions include both pre-5 December 2005 and post-4 December 2005 transactions

An individual is not liable to income tax in a tax year by reference to the relevant transactions (INTM602720) if –

condition at INTM602780 is met by reference to pre-5 December 2005 transactions

condition at INTM602800 is met by reference to post-4 December 2005 transactions.

If (a) applies but (b) does not, see INTM602860.

In addition, if (b) does not apply because Condition B (INTM602800) is not met in respect of a post-4 December 2005 transaction, see INTM602880.

INTM602860- Transfer of assets: Exemption from charge: Avoidance purpose exemption: Mixed relevant transactions

Where the relevant transactions include both pre-5 December 2005 and post-4 December 2005 transactions the conditions for exemption detailed in INTM602780 and INTM602800 are to be applied separately to those transactions according to the period in which they fall. In other words the conditions in INTM602780 are to be applied to all transactions that are pre-5 December 2005 and the conditions in INTM602800 are to be applied to all transactions that are post-4 December 2005.

If the conditions for exemption in INTM602800 are met in relation to all post-4 December 2005 transactions and the conditions for exemption in INTM602780 are met in relation to all pre-5 December 2005 transactions then the individual is not liable to tax under the transfer of assets provisions for the tax year by reference to the relevant transactions.

However if all pre-5 December 2005 transactions satisfied the conditions for exemption in INTM602780 but the conditions for exemption in INTM602800 are not met in relation to post-4 December 2005 transactions (or any of them) then the following modifications operate in applying the transfer of assets provisions:-

For the income charge (INTM600540)

a. Any income arising before 5 December 2005 must not be brought into account as income of the person abroad.

For the benefits charge (see INTM601400):

3. In determining the relevant income of an earlier tax year for Step 4 it does not matter whether that year was a year for which the individual was not liable to a benefits charge because of an exemption. In other words the relevant income of that year is taken into account.

4. For the purpose of Step 1 a benefit received by the individual in or before the tax year 2005-06 is to be left out of account.

5. But in the case of a benefit received in the tax year 2005-06 the preceding bullet only applies to so much of the benefit as, on a time apportionment basis, fell to be enjoyed in any part of the year that fell before 5 December 2005.

In circumstances where any pre-5 December 2005 transaction caused the exemption test in INTM602780 to be failed, the purpose of any later associated operations post-4 December 2005 will be immaterial to the continuing liability.

INTM602880 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: Partial exemption

The provisions give partial exemption where later associated operations fail the avoidance purpose exemption conditions. In limited circumstances a partial exemption from the income charge is provided on a just and reasonable apportionment basis. Where the relevant conditions for this relief are met the individual is only liable to tax under the transfer of assets income charge in respect of part of the income for which the individual would otherwise be liable.

The part that is liable to tax will be so much of the income as appears to an officer of Revenue and Customs to be justly and reasonably attributable to the associated operations taken into account that fail the test for exemption in all the circumstances of the case.

Those circumstances include how far those operations or any of them directly or indirectly affect the nature or amount of any person's income, or any person's power to enjoy any income.

The conditions in which the relief applies are broadly as follows:-

a. An individual is liable to tax under the income charge for a tax year (the "taxable year") because Condition B in INTM602800 is not met, and

b. the two provisions below apply.

Condition (a) above implies that there is at least one transaction that is a post-4 December 2005 transaction; and that in relation to such transactions to be tested under Condition B of INTM602800 the transaction must have failed the test in Condition A.

The provisions referred to at (b) above are:-

This provision applies if:-

since the relevant transfer (INTM600220) there has been at least one tax year for which the individual was not so liable by reference to the relevant transactions effected before the end of the year, and

the individual was not so liable for that year because Condition B in INTM602800, or Condition B in INTM602780 was met.

In effect what this is saying is that there has been a relevant transfer which together with other relevant transactions would have resulted in an income charge for at least one tax year since the relevant transfer, but the transactions have met the genuine commercial transaction test for exemption (even if they failed the Condition A test if it were a post-4 December 2005 transactions).

This provision applies if the income which the individual would otherwise be liable to tax on under the income charge for the tax year is attributable -

a. partly to relevant transactions by reference to which one of the conditions in 1b above was met for the last exempt tax year, and

b. partly to associated operations not falling within 2a above.

In effect what this is saying is that the income which becomes payable to a person abroad and which would otherwise be the subject of a potential charge under the income charge must arise partly as a result of a transaction that meets an exemption condition and partly as a result of one that does not. If it is only the later associated operation that results in the income becoming payable then on the face of it no partial exemption will be due. In other words there must already have been income arising that was covered by an exemption by virtue of the genuine commercial transaction test.

In applying this provision a tax year is exempt if it is one of the tax years mentioned in provision 1 above, and there is no earlier tax year for which the individual was liable to tax under the income charge by reference to the relevant transactions or any of them.

In this provision references to a person being liable to tax for a tax year under the income charge include references to the individual being so liable had any income been treated as arising to the individual for that year by operation of the income charge.

Example

An individual subscribes for shares in an offshore company and then transfers £1million into the company, which buys a small hotel, the transaction taking place pre 5 December 2005. The hotel generates income of £10,000 per year from 2001-02 to 2008-09. The exemption has been given on the basis of commerciality (Condition B INTM602780) for the years up to and including 2007-08.

In 2008-09 the hotel is sold for £10 million and the proceeds placed on a bank deposit generating £500,000 per year.

The criteria for partial exemption to apply are met in that –

5. The investment income is partly attributable to the relevant transactions by reference to which exemptions applied in the last exempt year 2007-08 and

6. The sale of the hotel and deposit of funds are associated operations (INTM600300), connected to the relevant transaction, which were not included in the criteria for the last exempt year, and the income of the person abroad is partly attributable to such operations.

In the circumstances it must be just and reasonable to treat the investment income of £500,000 as being the amount subject to the income charge for the year 2008-09, rather than £510,000.

INTM602900- Transfer of assets: Exemption from charge: Avoidance purpose exemption: Expansion of terms contained in the conditions: Contents

INTM602920	Introduction
INTM602940	The reasonableness test
INTM602960	Purpose
INTM602980	Avoiding liability to taxation
INTM603000	Taxation
INTM603020	Commercial transactions
INTM603040	Design

INTM602920 Transfer of assets: Exemption from charge: Avoidance purpose exemption: Expansion of terms contained in the conditions: Introduction

Terms appearing in the conditions for exemption

In the legislation prior to December 2005 a number of terms were used within the exemption test but were not given any express meaning. The Finance Act of 2006 introduced a number of changes to the exemption provisions intended to clarify how key elements of the legislation apply and ensure that it works effectively as part of the strategy to prevent the avoidance of income tax on world-wide income by individuals who are ordinarily resident in the United Kingdom.

Although meanings for some of the terms are enshrined in legislation for the first time from December 2005 often these or similar terms were also present in the earlier legislation. The guidance that follows in this section looks at certain terms, reflects what is said about them currently (where meaning is now given within the legislation) and, where appropriate, seeks to bring out any difference in the earlier legislation.

The following matters are covered in this section:-

INTM602940 The reasonableness test

INTM602960 Purposes

INTM602980 Avoiding liability

INTM603000 Taxation

INTM603020 Commercial transaction

INTM603040 Incidentally designed

INTM602940- Transfer of assets: Exemption from charge: Avoidance purpose exemption: The reasonableness test

INTM602800 introduced the fact that both specific conditions to be satisfied for an exemption to be due now contain the express words, "it would not be reasonable to draw the conclusion, from all the circumstances of the case". These words within the conditions link directly with the requirement upon the individual that precedes the conditions to satisfy an officer of Revenue and Customs. The aim of this is procedure is not to put discretion entirely in the officer's hands but to ensure the necessary information and explanations are available leading to a decision which is clear and may if appropriate be tested on appeal.

This approach draws heavily on that taken in the past by the fact-finding tribunal and indeed that taken in the past by HMRC. But now makes it unambiguously clear that the individual must supply necessary information, appropriate to the circumstance, in order to enable HMRC to test the reasonableness of the conclusion that the condition is met.

Thus, although the individual has to satisfy HMRC on the test of reasonableness this does not mean that only the view taken by HMRC has any validity. The issue is whether the circumstances are such that a reasonable person, properly considering all the facts of the case, could conclude that the test was met. Any decision on this by HMRC can be reviewed by the fact-finding tribunal on appeal, who would be able to decide on the facts if the individual met the terms for exemption under the reasonableness test.

Clearly from this it can be seen that it will not be possible for HMRC to draw a reasonable conclusion that the condition is met where, for whatever reason, the individual does not provide a full factual account along the lines indicated at INTM602700.

This test although looking at the relevant transactions ensures that 'all the circumstances of the case' are to be taken into account in deciding whether exemption is due. The use of this term requires careful consideration of all of the evidence, including for example factors such as:-

the individual's stated intentions;

any other evidence of the individual's purposes and intentions;

the intentions of any other parties carrying out relevant transactions;

the actual or expected outcome of the transactions;

a comparison of the tax payable in the UK by the individual or any other person with what the situation may otherwise have been if the transactions had not taken place or the income had arisen directly to the individual.

The above list is not intended to be exhaustive, but illustrative of the extent to which surrounding evidence needs to be considered when having regard to all the circumstances of the case.

Further it should be noted that it is all the circumstances of the case, not all the circumstances of the particular transactions that are being considered. For example, if an individual has at other times taken part in tax avoidance schemes and offers no evidence of purpose of the relevant transactions it is probable that from 'all the circumstances of the case' the individual is unable to satisfy HMRC that it would not be reasonable to draw the conclusion that the condition for exemption was met.

INTM602960- Transfer of assets: Exemption from charge: Avoidance purpose exemption: Purposes

At the heart of the conditions to be met to gain exemption under the avoidance purpose exemption is, naturally enough, a test of purpose. The legislation does not however refer to the purpose of any particular individual, although the individual who would otherwise be liable to tax should be in a position to supply the information needed to come to a decision.

The individual should be asked to provide particulars in relation to each and every relevant transfer and associated operation, which may include:

1. What was done

2. Why the transaction took place

3. What was the expected outcome

4. What was the actual outcome

In considering those purposes, the legislation makes clear that HMRC have regard to the actions of not only the individual but those of other persons. The purpose of a transaction might for example include the avoidance of Corporation Tax by a United Kingdom company or avoidance of tax by beneficiaries or trustees of an offshore trust. This can be particularly important in relation to the benefits charge, where the beneficiary who must discharge the requirement to satisfy HMRC about the purpose of the transactions resulting in income becoming payable to a person abroad. The individual may not even have met the person! In the case of Philippi v CIR 47 TC75 where the original transfer was made by the taxpayer's father who could not attend the hearing, the Special Commissioners refused to allow a claim to exemption from charge on the grounds that the onus of establishing such a claim lay with the appellant and he had not satisfied them that the purpose of avoiding liability to taxation was not a purpose for which any of the transactions entered into by his father was effected.

As stated in Revenue Interpretation 201. HMRC consider that the role of advisers should be taken into account in assessing the purpose of the transaction when considering the exemption provisions. This is now made clear in the legislation (currently section 737 (5) ITA 2007). The intentions of any person, who (whether or not for consideration) designs or effects the relevant transactions or any of them, are to be taken into account in determining the purpose for which those transactions or any of them were effected.

If any professional advice obtained in a particular case is treated as a relevant factor and the individual states that they had no intention to avoid tax, it is reasonable to see whether the advice they acted on is consistent with that contention. If the individual proceeds in accordance with advice obtained (or simply instructs the agent to proceed), the purpose of the adviser would on normal principles be attributed to the individual, whether they understood the implications of the advice or not. For example, if evidence emerged that an individual's adviser or agent had devised a particular structure or recommended or arranged the creation or use of a particular non-resident entity for the purpose of saving United Kingdom tax, that purpose should be taken into account in determining, from all the circumstances of the case, the purposes for which the transactions were effected. That is the case whether or not the adviser had expressly informed the client of the purposes behind the transactions. It would be sufficient for example if evidence emerged from third parties or from the agent's working papers.

Over the years there has been long debate about exactly how a test of purpose should be construed, in particular whether the test is an objective or a subjective one. Purpose is that which an individual is seeking to achieve or the end the individual intends to reach. It must be distinguished from motive which focuses on why an individual does something (see Lord Denning in Newton v Commissioners of Taxation of the Commonwealth of Australia [1958] AC 450).

HMRC take the view that the proper way to apply a purpose test is to consider all of the facts in an objective manner, but that is not the same as saying the test is 'objective'. It is clearly wrong to assert that it is only necessary to look at the purpose individuals ascribe to their actions in deciding whether exemption is due; but it is equally wrong to say that only the outcome is relevant. It is essential to consider both. Thus, purpose or intention is essentially a subjective concept, but in practice the objective facts must be examined to draw an inference: see Pennycuick J in Lloyd's Bank v Marcan [1973] 2 All ER 359 at 367-8:

The word 'intent' denotes a state of mind. A person's intention is a question of fact. Intent may be proved by direct evidence or may be inferred from surrounding circumstances. Intent may also be imputed on the basis that a person must be presumed to intend the natural consequences of his or her act: see Hatherley LC and Giffard LJ in Freeman v Pope.

This approach is borne out by the construction of the new exemption test, referring as it does to all the circumstances of the case in considering purposes including the intentions and purposes of any person who designs, effects, or provides advice in relation to the relevant transactions or any of them.

Although the words within the current provisions may be new, 'purposes' is not new. And, as was said when the newly worded purpose test was introduced, its aim was to 'clarify' the law. In other words the new language aimed to better reflect or make clearer the existing understanding and approach to the test.

INTM603000- Transfer of assets: Exemption from charge: Avoidance purpose exemption: Taxation

The charging provisions are designed for the purpose of preventing the avoiding of liability to income tax by individuals. The exemption provisions on the other hand refer to the purpose of avoidance of liability to taxation, which is a much wider concept.

Taxation is defined as covering any revenue for which HMRC is responsible for collecting, and includes taxes, duties and National Insurance contributions. (Section 737 (7) ITA 2007)

Although earlier legislation did not include a definition of 'taxation' the term has always been taken to have a broad meaning. This was confirmed in the Courts in the case of Sassoon v CIR 25TC 158 (1943) where Scott LJ in his judgement said-

"In my view the nature of the proviso, instead of requiring a strict interpretation of the word 'taxation' in favour of the taxpayer, calls for a liberal interpretation in favour of the Crown. The draughtsman no doubt had in mind to cover what he would have called all bona fide transfers, that is to say transfers which would be regarded by the Revenue as not made for any fiscal purpose which they would regard as improper. The word 'taxation' is a short expression of such an idea and I think a happy one. Death duties, national Defence Contribution, perhaps other taxes or duties would all be within the Revenues mind in deliberately choosing the wide word 'taxation', in order to make sure that their concession of transfers for other purposes should not be used to deprive the Revenue of other taxes than income tax and Sur-tax."

The case also established the taxation meant UK taxation. If it is intended to avoid foreign tax and only foreign tax is avoided the transfer of assets provisions will not apply.

INTM603020 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: Commercial transactions

Exemption from charge may be appropriate, where the transactions were made for commercial purposes and were not designed (INTM603040) for tax avoidance purposes. Where tax has been avoided but this was merely incidental to the commercial purposes, the test at Condition B (INTM602780 and INTM602800) could be met.

In this context, HMRC have treated 'commercial' as applying only to the furtherance of trade or business, and not to the passive holding of investments (Revenue Interpretation 201 refers). The term has now been clarified in the legislation (section 738 ITA 2007).

First the transaction must be effected, in the course of a trade or business or with a view to setting up and commencing a trade or business and, in either case, for the purposes of that trade or business. Second, the transaction must not be on terms other than those that would have been made between persons not connected with each other dealing at arm's length, or be a transaction that would not have been entered into between such persons so dealing.

The above provisions ensure that transactions taking place other than at arm's length will not satisfy the terms of Condition B. This will prevent individuals claiming exemption on contrived grounds of 'commerciality'. An example of this might be where an offshore company is established as a conduit or 'money box' for personal fee income. It will also prevent claims that the establishment of a non-resident family trust was for 'commercial' reasons. HMRC accept that the creation of some trusts will satisfy the 'commerciality' tests, for example an employee benefit trust established for the benefit of a group of employees and funded on arm's length terms.

The legislation also provides that-

1. the making of investments

2. the managing of investments

3. the making and managing of investments do not constitute a trade or business except to the extent thatthe person by whom the activity is done, and

4. the person for whom it is done are persons not connected with each other and are dealing at arm's length.

The aim of this is to distinguish between asset management activity (which is a business chargeable for reward) and merely holding assets for possible increase in value.

INTM603040 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: Design

The word 'designed' was introduced into the legislation as long ago as 1938. This wording establishes a wider consideration of purpose, and introduced the concept of some element of a purpose to avoid, into a series of bona fide commercial transactions.

Although the relevant transactions (INTM602720) may be commercial transactions (INTM603020), it is recognised that such transactions may be converted into avoidance vehicles. Consequently, where reliance is placed on Condition B (INTM602780 & INTM602800) as having been met for the purposes of exemption from charge, in addition to providing evidence that there have been commercial transactions, the individual will need to provide evidence that none of the transactions were designed for the purpose of avoidance of tax.

HMRC accept that, where it can be shown that any avoidance of tax was incidental to the design of the transfer of assets and any associated operations that Condition B can be met and, in Tax Bulletin 40 and Revenue Interpretation 201, confirmed that-

'The Revenue's view is that one of the essential conditions of section 741(b) (now Condition B) would not be satisfied where there was a significant element of tax avoidance purpose in the design of the transfer and any associated operations.'

For those transactions in the period post-4 December 2005, Condition B is to be considered if Condition A (INTM602800) is not met, as avoidance of tax is a purpose of one or more relevant transactions. In the circumstances the individual will be recognising that tax avoidance was a purpose of one or more transactions resulting in Condition A not being met. Consequently, he will have to provide evidence that any such tax avoidance was incidental to the design of the transactions.

It might happen in a particular case that a relevant transaction resulted in say the establishment of a non-resident company which carried on a genuine trade or business, but the evidence suggested that the choice of location was not entirely commercially motivated, but was influenced by the tax reduction that would be achieved by using an entity in that location as part of the structure. In those circumstances it might be reasonable to conclude that the choice of location meant that the transactions were designed at least in part, for the purpose of avoiding liability to taxation. For example, if an individual running a hotel business established a company in a low tax jurisdiction to operate a hotel in that territory it might be reasonable to conclude that the relevant transaction was a genuine commercial transaction not designed for the purpose of avoiding liability to taxation. However, if a similar company was established in the same low tax jurisdiction to own and operate a hotel in the UK, although due regard must be had to all the circumstances of the case, the choice of location of the company would be a circumstance potentially pointing to the conclusion that the relevant transactions were not all genuine commercial transactions and/or were more than incidentally designed to avoid tax. It therefore follows that establishing in a low tax regime is not of itself open to challenge but there must be other commercial reasons to support that choice and activity must be genuinely lined with it.

It is not possible to offer any precise definition of the word 'incidentally', in this context. The intention of the words 'incidentally designed for the purpose' is to allow exemption under Condition B where a series of commercial transactions involves only a minor element of tax avoidance. It will be necessary to consider whether, for example, a single transaction in a chain of transactions gives a tax advantage that was more than an incidental element of the design of the transactions. Or it may be that the effect of several transactions taken together suggests that tax avoidance was one of the underlying purposes, in which case it might be reasonable to conclude that the purpose of avoiding taxation was part of the overall design.

As mentioned in INTM602960, the exemption provisions take into account the intentions and purposes of anyone who designs, effects or provides advice in relation to relevant transactions (INTM602720) whether for consideration or not. This means that if taxation is avoided both the intentions of the individual and the intentions of any advisor may be taken into account.

INTM603060 - Transfer of assets: Exemption from charge: Avoidance purpose exemption: The Impact of meeting or failing the conditions

Effect of not accepting exemption provisions apply

If an individual has failed to satisfy HMRC that tax avoidance was not a purpose for any relevant transactions, then he will potentially be subject to the income charge or benefits charge, as appropriate.

If relevant transactions were initially accepted as not undertaken for a purpose of tax avoidance, but a subsequent transaction is for tax avoidance, then the effects which this has on the amount chargeable to tax will be dependent on when the relevant transactions took place.

Incomecharge

If all the relevant transactions were effected pre-5 December 2005 or all effected post-4 December 2005, and any of these transactions causes the exemption provisions not to apply, then the individual is to be subject to the income charge on the amount of the income of the person abroad for the tax year under consideration and subsequent years

If one or more of the relevant transactions are pre-5 December 2005 transactions and one or more are post-4 December 2005 transactions, and a transaction pre-5 December 2005 causes the exemption provisions to cease to apply, the position will be as referred to in the previous paragraph. However, there are special rules where the exemption provisions cease to apply, as a result of a relevant transaction post-4 December 2005, by reference to the provisions introduced in Finance Act 2006 (INTM602640).

These rules provide that any income arising before 5 December 2005 is not counted as income of the person abroad. The aim of this rule is to prevent the income charge provisions retrospectively charging to tax any income arising prior to 5 December 2005. Consequently, the amount of the income charge will be that income arising to the person abroad for the year of assessment in which the exemption provisions ceased to apply and subsequent years. In any case for which the relevant transaction is effected for a tax avoidance purpose in a year, the whole of the income for that year is subject to the income charge. There is no apportionment of income to and from the date of the relevant transaction.

Benefits charge

The amount of income of the person abroad for all years, including those years for which the exemption provisions apply, is to be taken into account in considering the amount of benefits received by an individual which are subject to the benefits charge,

Guidance as to the amounts of benefits which are chargeable to tax where the exemption provisions cease to apply can be found at INTM601780.

INTM603080- Transfer of assets: Exemption from charge: Genuine transactions exemption: Contents

INTM603100	Conditions
INTM603120	Meaning of genuine
INTM603140	EU law implications
INTM603160	Examples of application

INTM603100 - Transfer of assets: Exemption from charge: Genuine transactions: Exemption: Conditions

Paragraph 7 Schedule 10 FA 2013 adds a new section 742A to ITA 2007. It is an additional and free standing 'genuine transactions' exemption test which operates independently of the 'avoidance purpose' exemption test whose conditions are outlined in INTM602800. It applies, in line with the general scheme of Chapter 2 Part 13 ITA 2007 (the ToA provisions) to the potential liability of an individual to a ToA charge by reference to a relevant transaction.

The three conditions for its application are:

The transaction is effected on or after 6 April 2012, and

4. On the assumption that the transaction is genuine (see INTM603120), and

would otherwise be caught by the ToA charge,

such a charge would breach the EU Treaty freedoms (most likely, of freedom of establishment or freedom of movement of capital) without justification (see INTM603140), and

The individual satisfies HMRC (subject to appeal in the usual way) that the transaction may be considered genuine, analysed by reference to objective features and having regard to any surrounding arrangements and other relevant circumstances. (see INTM602660- applying the exemption).

Thus the test only needs to be considered when there is a potential breach of the Treaty freedoms (see INTM603140).

In applying the test HMRC officers should bear in mind the underlying policy of allowing an exemption for 'genuine transactions' which serve the treaty aims of Economic interpenetration, under freedom of establishment, or The effective allocation of capital (as distinct from just tax regime shopping).

Time should not be spent on detailed enquiries where the transactions and arrangements appear genuine in that context. But where the circumstances suggest that on balance these aims are not served, and perhaps a veneer of commerciality disguises the underlying reality, so that income may arise from a purely artificial arrangement, enquiries aimed at teasing out the commercial reality will be justified.

In every case the individual should be given full opportunity to explain the genuine nature of the transactions. INTM603120 gives further detail.

INTM603120 - Transfer of assets: Exemption from charge: Genuine transactions exemption: Meaning of 'genuine'

Without prejudice to the generality of the conditions set out at INTM603100, the legislation sets out two sets of circumstances which are not 'genuine'. The first is concerned with the arm's length principle, and the second is based on the concept of a business establishment which may be argued to be being carried on overseas.

Arm's length principle

This is set out at section 742A (6) of ITA 2007, and is subject to an 'uncommercial activities' exclusion at section 742A (11). The test considers, having regard to all the arrangements under which the transaction is effected and any other relevant circumstances,-whether the transaction takes place on terms that would have been agreed between persons unconnected with each other acting at arm's length or whether it would have taken place under these conditions.

Uncommercial activities

Freedom of movement of capital may cover certain gifts. Section 742A (11) disapplies the arm's length principle in the specific situation where

the relevant transfer is made by an individual wholly for personal (not commercial) reasons and for the personal (not commercial) benefit of other individuals, and

the relevant transfer is purely gratuitous and no consideration is given for it, or is otherwise given in relation to it, by the individuals who benefit personally as mentioned above.
Relevant transfer

This is defined at section 742A (13) for the purposes of the genuine transactions exemption as including both a relevant transfer defined at section 716 (see INTM600220) and an associated operation defined at section 719 (see INTM600300).

Establishment test

This test at section 742A (7) – (10) reflects an approach developed in EU law mainly in the context of controlled foreign companies. It may be thought of as a particular application of the arm's length principle since, if the activities of an establishment do not have economic substance which adds real value in the light of other activities within a wider economic enterprise, there should be no compensation for them – the result is the same whether the matter is viewed from the perspective of whether a transaction truly contributes to the activities of an establishment or satisfies the arm's length principle.

The question of whether there is any economic activity in relation to the transfer of the asset carried on by a business establishment is, however, a useful threshold test and a practical approach in many cases. The test applies where any asset is used for the purposes of, or income is received in the course of, activities carried on outside the UK by a 'relevant person' in a 'business establishment'. The assets and income referred to are (section 742A (12)):

any of the assets transferred by the relevant transfer (which includes associated operations, see above)

any assets directly or indirectly representing any of the assets transferred
any income arising from such assets
any assets directly or indirectly representing income which accrues from such assets.

For this purpose, business establishment is defined by reference to the permanent establishment definition at sections 1141 to 1143 CTA 2010, adapted to the carrying on of activities by a person (the relevant person) rather than by a company – section 742A(10).

In order for the transaction to be considered 'genuine' those activities must consist of the provision by the relevant person of goods or services to others on a commercial basis and involve the following objective features

the use of staff in numbers, and with competence and authority

the use of premises and equipment, and
the addition of economic value, by the relevant person, to the consumers of the goods and services
Commensurate with the size and nature of the activities which are argued to be carried on outside the UK.
Practical issues

In most cases the application of the genuine transactions exemption will be quite straightforward. If arrangements observe the arm's length principle and if there are genuine commercial activities taking place outside the UK then there should be no difficulty gaining the benefit of the genuine transactions exemption, even where the avoidance purpose exemption does not apply.

Where, however, attempts are made to shift profits out of the UK artificially HMRC will if necessary apply the principles of international tax law to identify where profits are actually made, having regard in appropriate cases to the situation and use of assets which give rise to profits and also to considerations of where risks are genuinely accepted and key personnel habitually reside and take decisions. In complex cases, the OECD principles of profit attribution may need to be invoked. Establishing a brass plate operation in a low tax regime, even one elaborately decorated, will not suffice. The question to be addressed is, whether having regard to all the facts profits are actually generated in the establishment in relation to the transfer of the asset?

INTM603140 - Transfer of assets: Exemption from charge: Genuine transactions exemption: EU law implications

Brief consideration of EU law is needed to understand the background to the genuine transactions exemption. This is considered under Treaty freedoms, including restrictions, justifications and proportionality; the abuse principle and 'wholly artificial arrangements'.

EU law generally

EU law, reflecting the origins in the EEC founding States, is strongly influenced by Continental civil law, which is more purposive in its approach than English common law. There is no strict rule of precedent, although there is a principle of 'legal certainty'. The problems of dealing with 23 languages and 27 Member States lead to a tendency to repeat standard phrases. These do not necessarily carry the same significance as judicial dicta in common law.

Conventionally, the working language of the Court of Justice of the European Union (ECJ) is French, though the decision will be authoritative in a specified language, usually that of the referring domestic court. Where there is an issue with EU law, a lower domestic court may make a 'preliminary reference' under the Treaty to the ECJ for a ruling; the highest domestic court must make a reference (though this leaves room for different views of what is an issue). If the ECJ believes the issues are clear, or acte clair, it may issue a reasoned order rather than a judgment. Its judgments are in any case often hard for those familiar with UK law to follow, as they are collegiate and sparingly argued.

A few cases are referred to below. These may be easily found by searching for Eur Lex, then 'Case Law' and entering the case year and number. There will usually be an opinion of the Advocate General, perhaps containing rather more argument, followed by a decision of the court which usually, but not always, reflects the AG opinion.

Treaty freedoms, restrictions, justifications and proportionality

Direct tax falls within the competence of the Member States but States must exercise that competence consistently with EU law, which includes the fundamental freedoms set out in the Treaty on the Functioning of The European Union (TFEU). Anti avoidance legislation with a cross border element may result in a restriction of the freedoms, and the Transfer of Assets legislation is a possible example of this.

Although it was recognised when the legislation was introduced in 1936 that there was a need to exclude commercial transactions, reflected currently in the avoidance purpose exemption at ITA07/S737, this may not be enough to meet the requirements of EU law. It is a feature of the single market that individuals may appraise the characteristics of different regimes and opt for the most beneficial to suit their purpose. But this depends on the transactions and arrangements being a genuine exercise of market freedoms and not what EU law often calls an 'abuse' of them.

It follows that, even though freedoms such as freedom of establishment and freedom of movement of capital may be restricted, that restriction may be justified. Justifications may be set out in the Treaty itself or in ECJ case law. For example, a tax authority may be able to show that the domestic legislation is compatible on the basis that there are 'compelling or overriding reasons in the public interest'. Prevention of tax avoidance (or 'abuse') is one possible justification. Balanced allocation of taxing rights is another. But the authority has to demonstrate that any counteractive measure does no more than is necessary to achieve the aim of preventing abuse, thus respecting the principle of 'proportionality'. In particular this requires that

the circumstances must be considered on a case by case basis,

the taxpayer must have the opportunity to explain, for example, why the relevant transactions are genuine and not artificial and abusive, and

any disagreement must be capable of being resolved before an appeal tribunal without undue difficulty.

In practice, the EU Commission (in its communication COM (2007)0785) has indicated that national anti-abuse rules may incorporate 'safe harbour' criteria aimed at situations where the probability of abuse is highest. These may set out reasonable presumptive criteria which contribute to a balanced application of domestic anti-abuse measures in the interests of legal certainty for taxpayers and workability for tax authorities (AG Geelhoed in Case C-524/04 Thin Cap).

Abuse of the freedoms

The ECJ has held that a person who would otherwise be in a situation covered by EU law may forfeit the rights under it where there is an attempt to abuse them. The criteria were set out in a case involving the Common Agricultural Policy, Case C-110/99 Emsland-Stärke, paragraphs 52 and 53:

'A finding of abuse requires, first, a combination of objective circumstances in which, despite formal observance of the conditions laid down by Community [EU] rules, the purpose of those rules has not been achieved. It requires, second, a subjective element consisting in the intention to obtain an advantage from the Community rules by creating artificially the conditions for obtaining it.'

The principle has been applied to VAT (Case C-255/02 Halifax Bank, and more recently to direct tax in Case C-196/04 Cadbury Schweppes. Paragraph 51 of the court's decision in Cadbury Schweppes is as follows:

'On the other hand, a national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned (see to that effect Case C-264/96 ICI, paragraph 26; Case C-324/00 Lankhorst-Hohorst, paragraph 37; Case C-9/02 De Lasteyrie du Saillant, paragraph 50; and Case C- 446/03 Marks & Spencer, paragraph 57).'

It is an established principle that loss of tax is not in itself an abuse (see, for instance, Case C-294/97 Eurowings). And the importance of market freedoms is illustrated by company law cases such as Case C-212/97 Centros and Case C167/01 Inspire Art. These suggest that the circumvention of national rules by exercising the freedoms does not itself amount to abuse. But those cases involved companies and creditor protection. There is a clear application of market principles in a company choosing lighter regulation in a particular territory. Similarly, there is an exercise of market freedoms where a commercial entity chooses to take advantage of a reduced rate of taxation in another member state. This is illustrated by Cadbury Schweppes. A fiscal authority, however, may continue to tax without breaching those freedoms where there is no real application and serving of the Treaty freedoms (see below) but rather tax driven artificial arrangements designed to exploit the freedoms rather than to serve them.

Wholly artificial arrangements

'Wholly artificial arrangements' is a phrase first employed in the ICI case mentioned above. The authoritative text was English, but in the French working language the phrase was montages purement artificiels, which no doubt explains why it is sometimes in ECJ cases expressed as 'purely artificial arrangements', as for example in Case C-231/05 Oy AA.

The ICI case concerned the UK group relief legislation then at ICTA70/S258 (5)(b) and the definition of holding company as a company whose business consists wholly or mainly in holding interests in UK resident subsidiaries; the court held that this type of rule was clearly not effective in focusing on artificiality. The phrase could be translated (and arguably makes more sense in context) as 'artificial arrangements only' rather than arrangements that in some sense are 'wholly artificial'. In English law 'wholly artificial' arrangements might well be taken to mean sham arrangements (those fraudulently misleading, which very plainly was not in the mind of the court).

The EU Commission (in its communication mentioned above) takes the view that 'the detection of a wholly artificial arrangement ... amounts in effect to a substance over form analysis'. That is a more effective approach than attempting to understand in what sense an arrangement can be 'wholly artificial'.

A scheme may thus be regarded as artificial if it lacks genuine economic substance born of commercial purpose ('devoid of economic reality', as expressed at paragraph 63 of Oy AA) but is inserted to gain an advantage not within the aims of the Treaty. These aims are, for freedom of establishment 'economic interpenetration', a phrase taken from Cadbury Schweppes; and for freedom of movement of capital the efficient allocation of capital.

Paragraph 63 of Oy AA reads as follows:

'Even if the legislation at issue in the main proceedings is not specifically designed to exclude from the tax advantage it confers purely artificial arrangements, devoid of economic reality, created with the aim of escaping the tax normally due on the profits generated by activities carried out on national territory, such legislation may nevertheless be regarded as proportionate to the objectives pursued, taken as a whole.'

The ECJ's decision in that case was based on the application of both the 'prevention of tax avoidance' and 'balanced allocation of taxing rights' justifications. It demonstrates that counteraction may be applied by an authority where there are gratuitous transfers of income from one tax jurisdiction to another within a group of companies. This 'profit shifting' is a common theme. It is easier to justify counteraction where there are transfers of assets or income without commercial exchange, threatening the balanced allocation of taxing rights.

INTM603160 - Transfer of assets: Exemption from charge: Genuine transactions exemption: Examples

Creating an establishment overseas, whether or not the activities are carried on by a company, will attract exemption provided the activities are genuinely commercial and transactions take place at arm's length. But HMRC will examine the arrangements to ensure that, for example, they do not in reality reflect a UK establishment which is fronted by the foreign arrangements. Where activities do take place both overseas and in the UK, the UK activities will not fall within the exemption, as the arrangements in this respect would constitute artificial profit shifting and an abuse.

For the purpose of determining where activities take place, the principles of profit attribution will be applied, having regard to actual situation of assets which generate profit, where key decisions are taken, where key decision making persons habitually reside, and where decisions are truly taken

Assets managed abroad

The offshore funds legislation in Part 8 of TIOPA 2010 is designed to charge offshore income gains and prevent the avoidance of tax on income accruing. The Transfer of Assets provisions, among other things, prevent this legislation being circumvented through the transfer of assets into the hands of a manager based offshore. Although the overseas management activity may itself be rewarded on an arm's length basis, this does not mean that returns on the assets will escape UK tax where the conditions of the Transfer of Assets provisions are satisfied.

There will be a movement of capital but in order to benefit from the engagement of freedom of movement of capital it will be necessary to demonstrate that the purpose of the freedom is served. The purpose of freedom of movement of capital is to secure its effective allocation, and that requires a link to the place of investment and not simply seeking to balance return and risk as a manager normally does according to instructions given. In order to engage the freedom it will be necessary to demonstrate that the beneficiary has influence over the disposition of the capital in a particular State in contrast merely to arranging for its management offshore.

INTM603200 - Transfer of assets: information powers: introduction

If information is required to enable an income charge (INTM600520) or benefits charge (601400) to be considered, there are formal powers which can be used to obtain this information.

This chapter proceeds as follows:

INTM603220 Information powers - General

INTM603240 Guidance on issuing of a notice under section 748 ITA 2007

INTM603260 What is meant by 'particulars'

INTM603280 Action where objections received to providing information

INTM603300 Time to be allowed to comply with Notice

INTM603320 Issues of Notices to executors

INTM603340 What to so, if further information needed

INTM603360 What are penalties of non-compliance with Notice

INTM603380 Considers restrictions on particulars to be provided by solicitors

INTM603400 Considers restrictions on particulars to be provided by banks

INTM603420 Considers the effect of Human Rights Act

INTM603240- Transfer of assets: information powers: Guidance on the issuing of a notice under Section 748 ITA 2007

Issue of notice under section 748 ITA 2007

The legislation provides that an Officer of HM Revenue and Customs may by notice require any person to provide such particulars as the officer may reasonably require for the purposes of Chapter 2 Part 13 ITA 2007.

In most cases as a first step information required should be requested informally. However sometimes it may be appropriate to issue a notice without prior warning. In such cases care should be taken if there could be special circumstances such as ill health or age related problems.

In preparing a notice for issue, regard must be had to the following:

the request is for particulars and not for documents (see INTM603260);

the request must be reasonable and the person to whom the notice is issued must be in a position to comply with the notice;

an officer must state the time within which the particulars must be provided and that time must be at least 30 days from the date the notice is issued (see INTM603300);

except for Deputy Directors in Specialist Investigations (SI) a formal notice under section 748 must be signed by the Transfer of Assets Technical Specialist. (INTM603220)

The particulars which a person must provide if required to do so under the notice include particulars about-

transactions with respect to which the person is or was acting on behalf of others;

transactions which in the opinion of the officer should properly be investigated even though in the persons opinion no liability to income tax arises in respect of either the income charge or benefits charge; and

whether the person has taken or is taking part and, if so, what part in transactions of a description specified in the notice.

Notices should not be unduly onerous, but it is important to tailor a Notice to the particular case and be sure to include all particulars required taking care to exclude those already provided.

The final draft Notice must always be considered by the Technical Specialist prior to authorisation to ensure that there is nothing in the Notice which might preclude penalty proceedings before the Tribunal, or give to judicial review, and cannot be compelled to produce information which:

does not exist, or

in the light of evidence held, that person is not in a position to produce.

The absence of formal accounts does not necessarily mean that management accounts or management information in a company's records cannot be produced to comply with a suitably worded notice. Notices should not normally go back more than 10 years

A solicitor is not treated as having taken part in a transaction for the purposes of (c) above merely because of giving professional advice to a client about it. However Tax Bulletin 40 reflects the HMRC view that the introduction of a client to anyone responsible for establishing an overseas entity does not constitute professional advice for the purposes of (c) (INTM603380).

A separate notice should be sent to a wife or civil partner if she/he has taken an active part (for example, as co‑settlor, transferor, etc) in any transaction under review. Care should be taken to ensure that the questions put to a wife or civil partner do not involve any breach of confidentiality in regard to her husband's or civil partner's affairs.

A notice addressed to an individual must normally (to comply with the requirement of section 115 TMA 1970) be sent to, or delivered at, the usual or last known, place of residence. If it is known that the individual has left the last known place of residence, and the current residence cannot be ascertained, then it is permissible to send/deliver the Notice to the place of business or employment.

A notice to a company should be addressed to the company (not to the Company Secretary, or any other officer) at its Registered Office.

The notice may need to be accompanied by a brief covering letter explaining why it is being issued and drawing attention to section 98 (1) TMA 1970. A copy of the notice and covering letter should also go to any agents acting.

INTM603260- Transfer of assets: Information powers: What is meant by 'particulars'

'Particulars'

The particulars to be requested in a notice under section 748 will be those reasonably required to consider an individual's liability to an income charge or benefits charge, or indeed whether an individual is exempt from either of those charges.

A full review must be made of all the information held in each case to determine what particulars are needed. It is recognised that the person on whom the notice is served may have to obtain information from, say abroad, at some trouble and expense and the points involved can be complex. Consequently, HMRC must avoid requesting information already held. In addition, although there are no limitations in the legislation as to how far back information can be requested, if it is considered that information is needed going back more than 10 years this should be highlighted when referring the draft notice to the Technical Specialist (INTM603220) for comment.

It is particulars which are to be requested and not documents (INTM603220). However, it may be appropriate in the circumstances of the case to ask the individual concerned to provide documentary evidence in support of those particulars, for example in support of any contentions that exemption from charge is due (INTM602700). In addition, HMRC recognises that the person on whom the notice is served may prefer to provide documents if it is considered that that is the most convenient way to provide or illustrate particulars. For example, the notice may request:

'Particulars of the accounts for all periods since ..., or if later the date of incorporation of any such company. Such particulars to include full details of all items comprising 'The Balance Sheet', 'Profit and Loss Account' and 'Notes to the Accounts' for each separate accounting period.'

Consequently, in the covering letter (final paragraph INTM603240), a couple of sentences on the following lines may be included:

'It is permissible to furnish actual copies of any accounts of which particulars are required in paragraphs X and Y of the Notice, provided such copies are copies of full and final audited accounts.

It is also acceptable to furnish actual copies of all or any other documents in response to the requirements of the Notice, provided such copies provide all the relevant particulars required by the Notice.'

Where the notice is served on a solicitor or bank there may be limitations as to the particulars which they are to provide – see INTM603380 and INTM603400 respectively.

INTM603280 - Transfer of assets: Information powers: Action where objections received to providing information

Objections to providing information

Where a person raises an objection to a Notice on the grounds that the transactions concerned are outside the scope of section 748 ITA 2007, attention can be drawn to the provisions of that section which authorise an Officer of HM Revenue and Customs to request particulars "about transactions which in the opinion of the officer should properly be investigated for the purposes of this Chapter even though in the person's opinion no liability to tax arises under this Chapter".

The issue of a notice under section 748 is considered to place the recipient under an obligation to take all reasonable steps to find out such of the requisitioned particulars as he does not already know. The person must have the ability to comply with the notice, and cannot be compelled to produce information which:

does not exist (for example audited accounts if none have been prepared); or

in the light of evidence, that person is not in a position to produce.

But the absence of formal accounts does not mean that management accounts or management information in a company's records cannot be produced to comply with a suitably worded notice.

It is important to bear in mind that sometimes there may be legal barriers preventing an individual from obtaining, for example, particulars from trustees outside the United Kingdom tax area. In addition, a company Director may object to providing information on the basis that the consent of the Board of Directors is required. In a case which came before the Special Commissioners in 1987 the taxpayer applied for postponement of penalty proceedings on the grounds that he had been served with an Order of the Deputy Bailiff in Guernsey prohibiting him from disclosing any information. The Special Commissioner ruled that a declaration by a Guernsey Court that confidentiality should be preserved was no defence against a notice under (what is now) section 748.

In such cases the particular circumstances should be looked at carefully, and, if necessary, the views of the technical specialist in Specialist PT Trusts & Estates Technical sought

INTM603300- Transfer of assets: Information powers: Time to be allowed to comply with Notice

Time to comply

The legislation says at least 30 days. Usually 35 days is an appropriate minimum but the quantity of information and its location should be borne in mind when setting a date by which the particulars are to be provided. Reasonable requests for further time to comply should be treated sympathetically.

A person is not regarded as having failed to comply with a Notice if there is compliance within such further time, if any, as may have been allowed – section 118 (2) TMA 1970. Where there was a reasonable excuse for non-compliance, there will not be a failure to comply if the failure was rectified without unreasonable delay after the excuse had ceased. If, therefore, a request for an extension of time for compliance with a Notice is granted, the person on whom the Notice was served should be sent a letter specifying the revised date by which the information is to be supplied. This applies whether the request for an extension of time is made in writing or orally. A copy of the letter should be sent to the individual's agents.

INTM603320 - Transfer of assets: Information powers: Issue of Notices to executors

Deceased persons

Where there is more than one executor acting for the estate of a deceased person and a notice is to be issued under section 748, there is considered to be no reason why the notice should not be issued to one of the executors, provided that executor is in a position to comply with the notice. However, it is usually preferable for notices to be issued to all the executors.

INTM603340- Transfer of assets: information powers: What to do, if further information needed

Subsequent action

It is important to check that notices are fully complied with and that all particulars required by the notice have been supplied in full. If there is missing or incomplete information or replies that in effect avoid a question then the agent (or if none the taxpayer) should be telephoned as soon as the time limit has passed. If a satisfactory explanation is given an appropriate extension of time may be allowed. (INTM603300). If not the agent should be advised that the notice has not been complied with and that penalty proceedings are now to be considered. (INTM603360)

When the particulars required by a notice are received and examined it will often be the case that additional follow up information is required. This should be sought by further notice, letter or interview, whichever is appropriate.

INTM603360 - Transfer of assets: information powers: What are penalties for non-compliance with notice

Penalties for non-compliance

Penalties for non compliance with a notice served under section 748 ITA 2007 are within section 98 TMA 1970 and action to recover penalties is taken before The Tribunal (previously the Special Commissioners). Such cases must be referred in the first instance to the Technical Specialist in Specialist PT Trusts and Estates Technical. A person who fails to comply with a notice under Section 748 is liable to a penalty not exceeding £300, and to a further penalty of up to £60 for every day on which the failure continues. If the failure is remedied before the proceedings for the recovery of the penalty are commenced there is no penalty charged.

Only if a formal notice has been issued can any action be taken to recover penalties for failure to furnish particulars.

INTM603380 - Transfer of assets: Information powers: Restrictions on particulars to be provided by solicitors

Where a solicitors' client does not consent to particulars being supplied, then in accordance with section 749 ITA2007 the solicitor is required only to confirm that he is, or was, acting on behalf of the client and to supply the client's name and address along with that of any 'relevant person'.

'Relevant person' is defined within the legislation and includes settlors, transferors, transferees, persons abroad and persons concerned in any 'associated operations' (INTM600300). It also includes bodies incorporated or resident outside the UK for which the solicitor has done anything in their formation or management. The latter requirement is limited to companies which if they had been incorporated in the UK would be close companies, and which are not companies whose business consists wholly or mainly of the carrying on of a trade.

Where a solicitor does anything in connection with a settlement as a result of which income becomes payable to a person abroad or the execution of the trusts of any such settlement (in Scotland the purpose of the settlement) the settlor and that person are relevant persons. Settlor and settlement are as defined in section 620 ITTOIA 2005.

A solicitor is not treated as having taken part in a transaction merely because of giving professional advice to a client about it. However Tax Bulletin 40 published our view that the introduction of a client to anyone responsible for establishing an overseas entity does not constitute professional advice (INTM603240).

A solicitor is not privileged from disclosing the name and address of the beneficial owner of shares held as nominee.

If it is claimed that legal privilege prevents the solicitor from providing particulars required by section 748 Notice, then this should be referred to the technical specialist in Specialist Trusts and Estates Technical for advice.

Where a barrister claims that he is protected by section 749 ITA 2007( formerly section 745 (3) ICTA 1988), particular care should be taken following the High Court decision in R v CIR ex parte Goldberg [61 TC 403 1988] in respect of section 20 TMA 1970 Notices served on a leading QC. The judges ruled that documents had come into existence only for the purpose of obtaining legal advice from the QC and were protected by professional privilege. Any attempt to obtain information from a barrister by way of a formal Notice should first be discussed with the Technical Specialist in Specialist PT Trusts and Estates Technical.

INTM603400 - Transfer of assets: Information powers: Restrictions on particulars to be provided by banks

The legislation provides that a bank does not have to provide particulars of any ordinary banking transactions between the bank and a customer carried out in the ordinary course of banking business unless one of the situations below applies.

Where the bank has acted, or is acting on behalf of the customer in creating a settlement as a result of which income becomes payable to a person abroad, or in the execution of the trusts of any such settlement.

Where the bank is or has acted on behalf of the customer in connection with the formation or management of a body corporate. This requirement is limited to companies which if they had been incorporated in the UK would be close companies, and which are not companies whose business consists wholly or mainly of the carrying on of a trade.

'Settlement' is defined in section 620 ITTOIA 2005. 'Bank' is defined in section 991 ITA 2007.

The meaning of 'ordinary banking transactions' was considered by Megarry J. in the case of Royal Bank ofCanada v CIR 47TC 573-577(1971). Although his judgement did not purport to define the scope of the privilege afforded to banks he found that:

"It seems to me to be a strictly limited provision. The limitations may be ranged under four heads. First the protection is given not to particulars at large but only to particulars of certain transactions: if the particulars sought are particulars, not of any transaction, but of the name and address of some person, unrelated to anything that could fairly be called a transaction, then they are outside the protection. Second, there is a limit to the type of transaction: no transaction will suffice unless it falls within the expression "ordinary banking transactions". Third, there is a limit by reference to the parties: only transactions "between the bank and a customer" qualify. Fourth, there is a limitation as to the circumstances in which the transaction is carried out, namely, that it was "carried out in the ordinary course of banking business. This language seems to me to be carefully guarded" etc

Also the protection of this section would not apply for example to a bank's nominee company.

Although there may be a contractual duty of confidence between a bank and its customers this is subject to, and over-ridden by, the duty of any party to a contract to comply with the law of the land. If it is the duty of such a party to that contract, whether at common law or under statute, to disclose in defined circumstances confidential information, then that person must do so, and any express contract to the contrary would be illegal and void. For example, in the case of banker and customer, the duty of confidence is subject to the over‑riding duty of the banker at common law to answer questions about a customer's affairs when asked to give evidence on them in the witness box in a Court of Law. But the legislation on Human Rights needs to be considered in this context also – see INTM603420.

INTM603420- Transfer of assets: Information powers: Human Rights Act

The Human Rights Act 1998 came into force on 2 October 2000.

The European Court of Human Rights (ECtHR) has held that ascertaining tax liability is not a "determination of civil rights and obligations" for the purpose of Article 6 of the Convention.

As the determination of tax liability is not within Article 6, neither are the procedural steps, such as information or inspection notices used to decide such liability. Therefore a person cannot rely on Article 6 to protect their refusal to comply with an information notice or inspection on the grounds that it infringes their right to silence under Article 6.

Article 8 gives every person (including companies) the right to respect for

their private and family lives,
their home, and
their correspondence.

However, it specifically envisages that there will be some circumstances when it is necessary to interfere with a person's rights of privacy. It sets out the conditions that must apply before such an intrusion is lawful.

To be lawful, an intrusion into a person's private life must be:

in accordance with law,
necessary in a democratic society, and
in pursuit of a legitimate aim.

For HMRC this usually means that any intrusive action must be in accordance with the law and necessary for the economic well being of the UK.

Any planned activity that intrudes upon a person's privacy must be reasonable and proportionate to the underlying need if it is to comply with the conditions of Article 8.

INTM603500- Transfer of assets: The tribunal contents

Contents page

The Tribunal (previously the Special Commissioners) has jurisdiction in respect of appeals against decisions made by officers of Revenue and Customs in relation to the various aspects of the transfer of assets legislation. The pages that follow explain the procedures.

INTM603520	The appeals procedures
INTM603540	The tribunals jurisdiction in relation to transfer of assets
INTM603560	What the tribunal may decide
INTM603580	The arrangements where advice is needed from solicitors office and considerations regarding litigation
INTM603600	Decisions in principle
INTM603620	Where the tribunal reaches an adverse decision

INTM603520- Transfer of assets: The Tribunal The appeals procedure

The Technical Specialist in Specialist PT Trusts and Estates Technical must be consulted to consider whether the ToA case is suitable to be listed before the Tribunal. If the Technical Specialist agrees that the case is suitable to proceed to Tribunal then it will be necessary to compile a report for Solicitor's Office so that relevant legal representation can be arranged for HM Revenue & Customs. The Technical Specialist is responsible for preparing the report; however, it is the responsibility of the case owner to provide the technical specialist with all the relevant facts of the case in advance of any report being submitted to Solicitor's Office.

Administrative provisions relating to appeals are to be found in the Appeals, Reviews and Tribunals Guidance. Where requests for postponement or cancellation of a hearing are received by the case-owner these should be referred immediately to the Technical Specialist who will liaise with the HMRC Solicitor.

Guidance relating to the making of submissions can be found at INTM [ ].

INTM603540 - Transfer of assets: the tribunal: Jurisdiction in relation to transfer of assets

Jurisdiction in relation to any appeal against amounts chargeable to tax under the transfer of assets legislation lies with the Tribunal. This includes jurisdiction to affirm or replace any decision taken by an officer of HM Revenue and Customs in exercise of the officer's functions under the following provisions

Section 737 Exemption; all relevant transactions post-4 December 2005 (INTM602800)

Section 738 Meaning of "commercial transaction" (INTM603020)

Section 739 Exemption; all relevant transactions pre-5 December 2005 (INTM602780)

Section 742 Partial exemption where later associated operations fail conditions (INTM602880)

Section 742A (2).Exemption for genuine transactions (INTM603100)

Section 743(2) No duplication of charges; choice of persons in relation to whom income is taken into account (INTM602400)

If a person does not comply with a notice under Section 748 ITA 2007 (Chapter 900) then the Tribunal will consider whether penalties are due under Section 98 TMA 1970 (INTM603360.

Comprehensive guidance on how the Tribunal Service operates, can be found in the Appeals, Reviews and Tribunals Guidance.

INTM603560- Transfer of assets: The Tribunal what the tribunal may decide

An individual has the right to appeal against the total or apportioned income or benefits charge on the grounds that the sum is not just and reasonable. The Tribunal will consider all the relevant facts of the case and has the power to agree with or overturn any decision made by an officer of HM Revenue and Customs.

INTM603580- Transfer of assets: The Tribunal: Advice from Solicitors Office

All requests for advice from Solicitors Office must be submitted via the Technical Specialist in Specialist PT Trusts and Estates Technical Where litigation is in prospect the request will be signed by the Technical Specialist and forwarded. However the content must be agreed and the draft prepared in conjunction with the case owner.

Guidance on submissions to the Technical Specialist can be found in INTM [ ]. The case owner remains responsible for managing all day to day case handling issues but should refer those issues relevant for the Technical Specialist as and when it is appropriate.

INTM603600 Transfer of assets: The tribunal: Decision in principle

If the Tribunal provides a decision in principle, leaving figures to be agreed between the parties, the case-owner is responsible for securing the taxpayer's provisional agreement. When agreement has been reached with the taxpayer, a memo containing all details, including the agreed figures, should be sent to the Tribunal Service. The Tribunal Service will then certify the agreement without a formal hearing. The certification has the effect of formally determining the appeal in the agreed figures. The Clerk to the Tribunal will advise the taxpayer or his agents of the appeal determination

If agreement cannot be obtained, the papers should be referred back to the Solicitor, via the Technical Specialist, so that the Solicitor can consider listing the appeal for a further hearing.

If Double Taxation Relief is being claimed (INTM602540), it is advisable to deal with the tax consequences at this stage because the tax credit can affect the amount of income to be assessed.

The letter inviting agreement of the figures should not include any detail which might be interpreted as proposing determination of an appeal under section.54 TMA 1970. A suitable form of words for the letter is as follows:

"With reference to the hearing of the appeal on (date), and to the Tribunal's decision in principle (then given) (issued on (date)), please let me know whether you agree that the income chargeable to income tax under the income charge/ benefits charge on the basis of that decision is as follows...

This is not a proposal to settle the appeal under the provisions of section.54 Taxes Management Act 1970

Upon receipt of your agreement, the Tribunal will be asked to give its formal order determining the appeal by (reducing/increasing) the charge to..."

INTM603620 - Transfer of assets: The tribunal: Adverse decisions

Where a decision of the Tribunal is given against HMRC, the transfer of assets Technical Specialist must liaise with Solicitors Office and Policy colleagues to determine whether the decision should be appealed against.

It is the Technical Specialist's responsibility to ensure that the relevant authorities are obtained before any appeal is entered.

INTM603700 – History of the Legislation

History

The first Transfer of Assets Legislation was contained in the Finance Act of 1936 (section 18 and Schedule 2) which became law on 16th July 1936 and which set a pattern that has largely remained unchanged since.

Between 1938 and 1940 there were minor amendments and supplementary provisions to strengthen the legislation. The changes included:-

Removing the word 'mainly' from the exemption clause as it had resulted in transactions with more than one purpose, which included avoidance, being able to escape charge. The change ensured that if one of the purposes of a transaction was tax avoidance then no exemption would be due.

Strengthening the definition of 'power to enjoy' and adding a provision for a charge to arise on payment of or entitlement to capital sums.

Making clear that companies incorporated overseas are deemed to be persons resident or domiciled outside the United Kingdom for the purpose of these provisions even if they are regarded as resident in the United Kingdom for other tax purposes.

The legislation then remained substantially unaltered for nearly thirty years until the Finance Act 1969. In the meantime it had been consolidated and incorporated into the Income Tax Act 1952 starting at section 412.

The Finance Act of 1969 introduced three changes to the provisions:-

It revised the main charging provision for the income charge so that transfers and associated operations could both be looked at in considering if an individual had power to enjoy income of a person abroad.

It made changes to the terms that defined power to enjoy, and

It limited the tax charge in certain circumstances where the power to enjoy was determined by the individual being in receipt of, or entitled to receive, benefits.

The legislation was then consolidated into Income and Corporation Tax Act 1970 (sections 478-481 inclusive)

There was no further change until the Finance Act 1981. This introduced:-

a second charging provision attaching liability to individuals who receive benefits as a result of a transfer made by someone else;

a provision preventing duplication of charges;

a 'just and reasonable apportionment' where more than one individual may be chargeable in relation to any amount; and

new provisions in respect of non-UK domiciled individuals broadly putting them in a similar position to that which would have applied if they had received the income directly.

The legislation was consolidated into Income and Corporation Tax Act 1988 as sections 739-746 inclusive.

The next change to the legislation came in Finance Act 1997. A new section was introduced which had the effect of removing any possible implication that the provisions only apply if the individual in question is ordinarily resident in the United Kingdom when the transfer of assets is made, or the avoiding of income tax is the purpose, or one of the purposes, for which the transfer is effected. The change applied to income arising on or after 26th November 1996.

When income tax law was re-written under the Tax Law Rewrite project to become the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), involving changes to the charging provisions for income tax for most types of income, the charging provisions under transfer of assets were not at that time included in the rewrite. Minor changes were however made consequential upon revisions to the Income and Corporation Tax Act 1988.

The Finance Act 2006 recast the test for exemption in cases not involving a tax avoidance purpose to make its meaning clearer. The new provisions applied to transfers and associated operations made on or after 5 December 2005. The Act also corrected a drafting error in the legislation concerning gains on certain life insurance contracts and confirmed that all relevant associated operations are to be taken into account in determining whether liability arises under the income or benefits charge.

The legislation on transfer of assets has now been consolidated under Tax Law Rewrite into Chapter 2 Part 13 of Income Tax Act (ITA) 2007. This guide is based on the law as it stands under ITA 2007 and matters arising from it are discussed where appropriate under the relevant section affected. Apart from one minor change the rewrite is said not to make changes to the law as it stood prior to April 2007.

The Finance Act 2013 introduced the following changes to the transfer of assets legislation:-

an additional exemption test applies to genuine transactions made on or after 6 April 2012 where the European Union treaty freedoms are engaged;

from 6 April 2012 a company is a person abroad for the purposes of the legislation only if it is resident outside the UK; registration [DNSP: is registration not taken into account in deciding company residence?] and domicile are no longer relevant;

an individual only has to be resident in the United Kingdom to be within the charge to tax rather than ordinarily resident:

it is made clear that the individual is being charged to tax on an amount equal to the income received by the person abroad not the actual income of the person abroad;

a charge to tax under the legislation is prevented where the individual is chargeable to tax on the income under another part of the Taxes Acts and the tax due on that income charge has been paid

Where appropriate to the context more details of the various changes to the legislation can be found in the relevant sections of this guide.

Transfer of assets abroad legislation - draft guidance

INTM600000 - Transfer of Assets: Introduction Contents

INTM600020 Introduction, Background and History: contents

INTM600040 – General Introduction

General Introduction

INTM600060 – Structure of guidance

INTM600100 – Interaction with the general anti abuse rule

GAAR

INTM600140 – General Conditions All Cases: Contents

INTM600160 - General Conditions All Cases: Introduction

Introduction

INTM600180 - General Conditions All Cases: Relevant Transaction:

Contents

INTM600200 – General Conditions All Cases: Relevant Transaction: Introduction

Introducing a relevant transaction

INTM600220 – General Conditions All Cases: Relevant Transaction: Relevant transfer

What is a relevant transfer

INTM600240 - General Conditions All Cases: Relevant Transaction: What is a transfer?

Illustrations of what a transfer is

INTM600260 - General Conditions All Cases: Relevant Transaction: Assets

What are assets?

INTM600280 - General Conditions All Cases: Relevant Transaction: Location of assets

Where are assets located and does it matter?

INTM600300 - General Conditions All Cases: Relevant Transaction: Associated operations

Meaning and use of associated operation

INTM600320 - General Conditions All cases: Income becomes payable to person abroad: Contents

INTM600340 - General Conditions All cases: Income becomes payable to person abroad: introduction

Overview of relevance of income becomes payable to person abroad

INTM600360- General Conditions All cases: Income becomes payable to person abroad: person abroad

Who or what is a person abroad?

INTM600380 - General Conditions All cases: Income becomes payable to person abroad: person abroad - examples

Examples of whom or what is a person abroad

INTM600400 - General Conditions All cases: Income becomes payable to person abroad: Income

What is income for this legislation?

INTM600420- General Conditions All cases: Income becomes payable to person abroad: becomes payable

What does becomes payable mean?

INTM600440 - General Conditions All Cases: The Individual: Contents

INTM600460 – General Conditions All Cases: The Individual: Introduction

INTM600500– General Conditions All Cases: The Individual: residence status

Residence Status: Introduction

INTM600520 - Transfer of assets: The Income Charge

Contents

INTM600540 - The Income Charge: Introduction: Contents

Contents

INTM600560 – The Income Charge: Introduction

Introduction

INTM600580 - The income charge

The transfer

INTM600600 - The Income charge: General conditions

Contents

INTM600620 - The Income Charge: General conditions

Introduction

INTM600640 - The income charge: General conditions

Income charge - power to enjoy

INTM600660- The income charge: General conditions

Income charge – receipt of/entitlement to capital sum

INTM600680 - The income charge: General conditions

Which charge applies?

INTM600700 - The income charge: General conditions

Legislative purpose

INTM600720 - The income charge: General conditions

Reduction in income charge where controlled foreign company involved

INTM600740- The income charge - individual liable to charge

Contents

INTM600760 - The income charge

Such an individual

INTM600780 - The income charge

Residence Position

INTM600800 - The income charge: power to enjoy – Multiple Income charges

Multiple Transferors

INTM600820 - The income charge: Transferors

The transfer

INTM600840 - The income charge: power to enjoy - Contents

Contents

INTM600860 -The income charge: power to enjoy: Introduction

Introduction

INTM600880 - Transfer of assets: the income charge: power to enjoy - condition A

INTM600900 - Transfer of assets: the income charge: power to enjoy - condition B

INTM600920 - Transfer of assets: the income charge: power to enjoy - condition C

INTM600940 - Transfer of assets: the income charge: power to enjoy - condition D