Chapter 2: Transfer of assets abroad

Overview

1897.     This Chapter contains provisions directed against tax avoidance by means of transfers of assets.

1898.     The clauses of this Chapter are arranged in the following order:

• Clauses 647 to 652 - introduction;

• Clauses 653 to 659 - charge where power to enjoy income;

• Clauses 660 to 663 - charge where capital sums received;

• Clauses 664 to 668 - charge where benefit received;

• Clauses 669 to 675 - exemptions: no tax avoidance purpose or genuine commercial transaction;

• Clauses 676 to 680 - general;

• Clauses 681 to 684 - supplementary.

Clause 647: Overview of Chapter

1899.     This clause provides an overview of the Chapter.

1900.     Subsection (1) introduces the three charges that are imposed by the Chapter. It is new.

1901.     Subsection (4) extends references to individuals to include their spouses and their civil partners. It is based on section 742(9) of ICTA.

Clause 648: Meaning of "relevant transaction"

1902.     This clause defines the expression "relevant transaction". It is based on section 741B(2) of ICTA.

1903.     Either a "relevant transfer" or an "associated operation" may be a "relevant transaction", and the convenient new label "relevant transaction" is used extensively in this Chapter.

1904.     The expressions "relevant transfer" and "associated operation" are defined in clauses 649 and 652, to which subsection (2) provides signposts.

Clause 649: Meaning of "relevant transfer" and "transfer"

1905.     This clause defines "relevant transfer" and "transfer" for the purposes of this Chapter. It is based on sections 739(1), 740(1) and 742(1A) and (9) of ICTA.

Clause 650: Meaning of "assets" etc

1906.     This clause non-exhaustively defines the term "assets" and makes provision about the interpretation of references to assets representing assets, income or accumulations of income. It is based on section 742(9) of ICTA.

Clause 651: Meaning of "person abroad" etc

1907.     This clause introduces the term "person abroad", meaning a person who is resident or domiciled outside the United Kingdom. It is based on sections 739(1) to (3), 740(1) and (3), 742(2), (4), (8) and (9A) and 745(3) of ICTA and section 111(1) of FA 1989.

1908.     Subsection (2) provides that a UK resident body corporate that is incorporated outside the United Kingdom is treated as if it were resident outside the United Kingdom. It forestalls arguments that a non-UK incorporated but UK-resident body corporate is somehow domiciled in a part of the United Kingdom and therefore not a person abroad.

1909.     Subsection (2) also provides that a person treated as neither UK resident nor ordinarily UK resident under clause 475(3) (trustees of settlements) and persons treated as non-UK resident under section 767(4) (personal representatives) are treated as resident outside the United Kingdom (and thus persons abroad).

Clause 652: Meaning of "associated operation"

1910.     This clause defines the term "associated operation". It is based on section 742(1) of ICTA.

1911.     This clause includes a minor change in the law relating to the references to "assets" in section 742(1) of ICTA. See Change 103 in Annex 1.

Clause 653: Charge to tax on income treated as arising under section 654

1912.     This clause imposes the charge to income tax on individuals with power to enjoy income as a result of relevant transactions and indicates the measure of income and the person liable. It is based on sections 739(1), (2) and 743(1) of ICTA. It is the first of a sequence of clauses (clauses 653 to 659) which deal with this charge.

1913.     Subsection (5) provides that the individual to whom income is treated as arising is the person liable. This person is defined in clause 654.

1914.     This clause also provides signposts to other clauses detailing how the income charged is calculated and when exemption is due.

Clause 654: Individuals with power to enjoy income as a result of relevant transactions

1915.     This clause describes the individual to whom income is treated as arising and the circumstances in which it is treated as arising. It is based on sections 739(1) to (2) and 742(1B) of ICTA.

1916.     Sections 739(2) and (3) of ICTA indicate the person liable by using the expression "such an individual" - but do not make it clear how much of section 739(1) is implied by that expression. This clause and section 661{j6039m}, which are based on section 739(2) and (3), reproduce the expression "such an individual", which has been the subject of case law: see, in particular, Vestey v CIR (1979), 54 TC 503 HL. ⁶

⁶ [1980] STC 10.

Clause 655: When an individual has power to enjoy income of person abroad

1917.     This clause defines in general terms when an individual has power to enjoy income of a person abroad. It is based on section 742(2) and (3) of ICTA. One of the conditions for liability under clause 653 is that the individual has "power to enjoy" income of a person abroad: clause 654(2).

1918.     Subsection (1) introduces the concept of the enjoyment conditions. Subsection (2) provides a link to clause 656, which sets out those conditions.

Clause 656: The enjoyment conditions

1919.     This clause continues the definition of when an individual has power to enjoy income of a person abroad, by detailing "the enjoyment conditions". It is based on section 742(2) of ICTA.

Clause 657: Special rules where benefit provided out of income of person abroad

1920.     This clause deals with the quantum of charge where:

• the enjoyment condition is the receipt of a benefit provided out of the income of the person abroad or related money; and

• the individual has not been charged previously to income tax on that income.

It is based on section 743(5) of ICTA.

Clause 658: Reduction in amount charged where controlled foreign company involved

1921.     This clause gives apportionment under the controlled foreign company (CFC) rules in Chapter 4 of Part 17 of ICTA priority over the income treated as arising under clause 654. It is based on section 747(4) of ICTA.

1922.     The CFC rules address a similar mischief to the transfer of assets abroad legislation (avoidance by companies rather than individuals), but in a different way. This clause prevents double taxation and determines which branch of anti-avoidance legislation takes priority.

Clause 659: Non-domiciled individuals

1923.     This clause provides that an individual is not chargeable to tax under clause 653 in respect of income treated as arising to the individual under clause 654 if two conditions are met. It is based on section 743(3) of ICTA.

1924.     This clause is similar to sections 831 and 832 of ITTOIA 2005 (claims by non-domiciled individuals for relevant foreign income to be charged on the remittance basis).

Clause 660: Charge to tax on income treated as arising under section 661

1925.     This clause imposes the charge to income tax, on individuals receiving capital sums as a result of relevant transactions, which was previously imposed by section 739(3) of ICTA. It indicates the measure of income and the person liable. It is based on sections 739 and 743 of ICTA. It is one of a sequence of clauses (clauses 660 to 663) which are based on the former charge under section 739(3).

1926.     Clauses 660{j6039g} to 663{j6043b} defeat schemes designed to avoid liability under clauses 653{j6039f} to 659{j6043a}.

Clause 661: Individuals receiving capital sums as a result of relevant transactions

1927.     This clause largely replicates clause 654. It is based on sections 739(1), (1A) and (3), 742(1A) and 747 (4) of ICTA.

Clause 662: The capital receipt conditions

1928.     This clause is concerned with the expression "receives or is entitled to receive any capital sum". It is based on section 739(3) to (6) of ICTA.

1929.     This clause also makes it clear that where liability arises because an individual has only an entitlement to receive a capital sum, rather than actual receipt, then liability under clause 660 continues only for as long as the entitlement to receive a capital sum exists. See Change 104 in Annex 1.

1930.     If the entitlement to the capital sum ceases because the capital sum is actually paid to the transferor (either in whole or in part), then the receipt of the capital sum does result in continuing liability under this clause; subsection (1) reflects this.

1931.     Subsection (2) makes an exception to this rule. If a sum is received by way of loan, this does not give rise to liability if the loan is wholly repaid before the tax year begins. Subsection (2) is based on section 739(6) of ICTA.

1932.     Subsection (4) comments on the expression "receives or is entitled to receive" in subsection (1).

Clause 663: Non-domiciled individuals

1933.     This clause is the equivalent, for this sequence of clauses, of clause 659. It is based on section 743(3) of ICTA.

Clause 664: Charge to tax on income treated as arising under section 665

1934.     This clause imposes the charge, on non-transferors receiving a benefit as a result of relevant transactions, previously imposed by section 740 of ICTA. It indicates the measure of income and the person liable. It is based on section 740(2). It is one of a sequence of clauses (clauses 664 to 668) which are based on the former charge under section 740 of ICTA.

1935.     Clauses 664 to 668 deem individuals to receive taxable income if (broadly speaking) they receive benefits as a result of transfers of the kind envisaged in clauses 653 to 663 but are not liable under those clauses.

Clause 665: Non-transferors receiving a benefit as a result of relevant transactions

1936.     This clause sets out the circumstances under which income is treated as arising. It is based on sections 740(1) and (2) and 742(1A) of ICTA.

1937.     Subsection (1)(d) also makes it clear that persons who are liable to income tax under clause 653 or clause 660 are not subject to the charge under clause 664. See Change 105 in Annex 1.

Clause 666: Income charged under section 664

1938.     This clause sets out in a method statement the rules for determining the amount (if any) of income treated as arising under clause 664. It is based on sections 740(2) and (3) and 741C(7) of ICTA.

1939.     It also spells out some implications which involve minor changes to the law. See Change 106 in Annex 1.

1940.     In broad terms, the effect of this clause and clause 667 is:

• to tax non-transferors on benefits which they receive (but only on the amount or value of those benefits);

• to ensure that tax will only be charged on a benefit to an individual if income has arisen by the use of which such benefits could be provided; and

• to ensure nevertheless that tax will not be avoided merely by conferring the benefit before the "relevant income" is actually available.

1941.     The method statement in this clause will make no practical difference to taxpayers' record-keeping obligations.

1942.     The method statement makes it clear that "relevant income" in relation to an individual is not actually taxable income of the individual, but is an element in the calculation of taxable income. "Relevant income" is actual income arising to a person abroad; the income charged under clause 664 is income treated as arising to the individual in question. This deemed income may be more or less than the "relevant income of the tax year" in relation to the individual and the tax year identified at Step 3.

1943.     The Bill will have effect for income tax purposes for 2007-08 and later tax years. But the calculation of income charged under clause 664 in (for example) 2007-08 will take account of "relevant income" in relation to the individual, not only of 2007-08 but (if the statutory conditions were satisfied) of earlier tax years - whether or not the individual had any liability under section 740 of ICTA for those tax years.

Clause 667: Reduction in amount charged: previous capital gains tax charge

1944.     This clause supplements clause 666; it is directed against the same amount being charged to both income tax and capital gains tax. It is based on section 740(6) of ICTA.

Clause 668: Non-domiciled individuals

1945.     This clause gives a measure of relief to non-domiciled individuals. It is based on section 740(5) of ICTA.

1946.     Subsection (1) lays down the conditions for this clause to apply. If an individual receives a benefit which would otherwise be chargeable to income tax under clause 664, this clause applies if conditions A to C are met. These conditions are set out in subsections (2), (3) and (4).

1947.     If this clause applies, subsection (5) provides that the benefit does not give rise to an income tax charge on the individual, to the extent that the chargeable amount of this benefit is determined by reference to the relevant income to which condition C applies.

1948.     This clause is similar to sections 831 and 832 of ITTOIA 2005 (claims by non-domiciled individuals for relevant foreign income to be charged on the remittance basis).

Clause 669: Exemptions: introduction

1949.     This clause introduces clauses 670 to 675, a sequence of clauses giving exemption from liability under this Chapter. It is based on section 741B(2) to (5) of ICTA.

1950.     Subsection (3) defines the expressions "post-4 December 2005 transaction" and "pre-5 December 2005 transaction", which are used extensively in this sequence of clauses.

Clause 670: Exemption: all relevant transactions post-4 December 2005 transactions

1951.     This clause sets the purpose test which applies if all the relevant transactions are post-4 December 2005 transactions. It is based on sections 741A(1) to (4), (7) and (8) and section 741B(4) of ICTA.

Clause 671: Meaning of "commercial transaction"

1952.     This clause defines the expression "commercial transaction", which is used in Condition B in clause 670(4). It is based on section 741A(5) to (7) of ICTA.

Clause 672: Exemption: all relevant transactions pre-5 December 2005 transactions

1953.     This clause sets the "purpose test" which applies if all the relevant transactions are pre-5 December 2005 transactions. It is based on sections 741(1) and 741B(3) of ICTA.

1954.     This clause replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1955.     HMRC's internal procedures restrict the exercise of the Commissioners for Her Majesty's Revenue and Customs' functions under section 741 of ICTA to a small group of specialist officers. Change 5 will have no effect on this practice.

1956.     This clause continues to use the source legislation's word "taxation", which has been the subject of case law. For example, Sassoon v CIR (1943), 25 TC 154 CA indicates that "taxation" in this context is not restricted to income tax.

Clause 673: Exemption: relevant transactions include both pre-5 December 2005 and post-4 December 2005 transactions

1957.     This clause lays down how the purpose tests are to be applied if the relevant transactions include both pre-5 December transactions and post-4 December transactions. It is based on sections 741B(5) and 741C(1) to (6) and (8) of ICTA.

Clause 674: Application of section 675 (partial exemption)

1958.     This clause lays down the conditions for clause 675 (partial exemption where later associated operations fail conditions) to apply. It is based on section 741D(1) to (5) and (9) of ICTA.

1959.     In summary, this clause applies if an arrangement originally satisfies the purpose tests but is "tainted" by later associated operations.

Clause 675: Partial exemption where later associated operations fail conditions

1960.     This clause restricts the income in respect of which the individual is liable to tax under this Chapter. It is based on section 741D(6) and (7) of ICTA.

Clause 676: No duplication of charges

1961.     This clause is directed against multiple taxation. It is based on sections 743(4) and 744(1) of ICTA.

1962.     This clause replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

1963.     HMRC's internal procedures restrict the exercise of the Commissioners for Her Majesty's Revenue and Customs' functions under section 744 of ICTA to a small group of specialist officers. Change 5 will have no effect on this practice.

Clause 677: Meaning of taking income into account in charging income tax for section 676

1964.     This clause relates to the interpretation of clause 676. It is based on section 744(2) of ICTA.

Clause 678: Rates of tax applicable to income charged under sections 653 and 660 etc

1965.     This clause deals with rates of tax applicable to income charged under clauses 653 and 660. It is based on section 743(1) to (1B) and (5) of ICTA.

1966.     Subsection (1) retains the expression "by deduction or otherwise", as it has been the subject of judicial comment: see R v Dimsey & Allen (2001), 74 TC 263 HL, ⁷ paragraph 53 of the House of Lords' judgment.

⁷ [2001] STC 1520.

Clause 679: Deductions and reliefs where individual charged under section 653 or 660

1967.     This clause applies for the purposes of calculating an individual's liability to income tax, and is concerned with the availability of deductions and reliefs. It is based on section 743(2) of ICTA.

Clause 680: Amounts corresponding to accrued income scheme profits and related interest

1968.     This clause ensures that any charge made on an individual under this Chapter takes proper account of accrued income when the assets of the person abroad include "securities" for the purposes of the accrued income scheme. It is based on section 742(4) to (7) of ICTA.

1969.     Although section 742(5) of ICTA says "Sections 739 to 741 shall have effect ..", this clause works on the basis that the operation of the other sections in Chapter 3 of Part 17 of ICTA is not excluded.

Clause 681: Power to obtain information

1970.     This clause enables HMRC to obtain information which is relevant to the operation of this Chapter. It is based on section 745(1) to (3) of ICTA.

1971.     Subsection (1) includes two minor changes.

1972.     First, it refers to "an officer of Revenue and Customs" (namely, the officer dealing with the case) instead of "the Board". See Change 5 in Annex 1. HMRC's internal procedures restrict the exercise of the Commissioners for Her Majesty's Revenue and Customs' functions under section 745 of ICTA to a small group of specialist officers. Change 5 will have no effect on this practice.

1973.     Second, it expressly restricts the particulars to be provided to those which an officer of Revenue and Customs may reasonably require. See Change 107 in Annex 1.

1974.     Subsection (2) also includes a minor change in the law. It sets the minimum time which HMRC may allow for the particulars to be provided at 30 days rather than 28 days. See Change 101 in Annex 1.

Clause 682: Restrictions on particulars to be provided by solicitors

1975.     This clause restricts HMRC's power to require solicitors to provide information under clause 681. It is based on section 745(3), (4) and (6) of ICTA.

Clause 683: Restrictions on particulars to be provided by banks

1976.     This clause restricts HMRC's power to require banks to provide information under clause 681. It is based on section 745(5) to (6) of ICTA.

Clause 684: Special Commissioners' jurisdiction on appeals

1977.     This clause gives the Special Commissioners, on appeal, jurisdiction to affirm or replace officers' decisions in exercise of certain functions under this Chapter. It is based on sections 741(1), 741A(9), 741D(8) and 744(1) of ICTA.

1978.     This clause replaces references to "the Board" with references to "an officer of Revenue and Customs" (namely, the officer dealing with the case). See Change 5 in Annex 1.

Chapter 3: Transactions in land

Overview

1979.     This Chapter contains a wide-ranging anti-avoidance rule specifically aimed at transactions in land. It is based on sections 776 to 778 of ICTA.

1980.     The clauses of this Chapter are arranged in the following order:

• Clauses 685 to 687 - introduction;

• Clauses 688 to 693 - charge on gains from transactions in land;

• Clauses 694 to 697 - further provisions relevant to the charge;

• Clauses 698 to 700 - exemptions;

• Clauses 701 and 702 - recovery of tax;

• Clauses 703 and 704 - clearances and power to obtain information;

• Clause 705 - interpretation.

Clause 685: Overview of Chapter

1981.     This clause provides an overview of the Chapter. It is based on section 776(1) and (2) of ICTA.

Clause 686: Meaning of disposing of land

1982.     This clause explains the expression "disposing of land". It is based on section 776(4) of ICTA.

Clause 687: Priority of other income tax provisions

1983.     This clause provides for other tax provisions to apply in priority to Chapter 3. It is based on section 777(10) of ICTA.

Clause 688: Charge to tax on gains from transactions in land

1984.     This clause imposes the charge to income tax on gains from transactions in land. It is based on section 776(3A) of ICTA. It is the first of a group of clauses (clauses 688 to 693) which form the core of the Chapter.

1985.     Subsection (2) signposts exemptions from the charge.

Clause 689: Income treated as arising where gains obtained from some land disposals

1986.     This clause sets out the circumstances in which income is treated as arising. It is based on section 776(2), (3), (5), (13) and (14) of ICTA.

1987.     Subsection (1) specifies the requirements which must all be met if this clause is to apply. One of the requirements is that all or any part of the land is situated in the United Kingdom.

1988.     HMRC's interpretation of the territorial scope of section 776 of ICTA is summarised in the table below.

1989.     This clause and clause 692 reflect this interpretation, and make a minor change in the law (although not in practice). See Change 108 in Annex 1.

1990.     The expression "all or part of the land" in subsection (1)(c) is based on section 776(14) of ICTA; it will (for example) cover a case in which several areas of land, some within the UK and some outside the United Kingdom, pass under a single bargain. In such a case, if the person liable is non-UK resident, the total consideration will be apportioned, and the provisions will be applied to the separate gain for each area of land in the United Kingdom to arrive at the non-UK resident's deemed income.

1991.     If this clause applies, subsection (2) treats the gain as income and deems it to arise when the gain is realised.

1992.     For the sake of consistency with the rest of the clause, subsection (5) refers to the opportunity of "realising" a gain, rather than (as in the source legislation) the opportunity of "making" it. This difference is verbal not substantive.