Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
369

726
Non-domiciled individuals
(1)
An individual is not chargeable to income tax under section 720 in respect of
any income treated as arising to the individual under section 721 if conditions
A and B are met.
(2)
Condition A is that the individual is domiciled outside the United Kingdom.
5
(3)
Condition B is that if the income had in fact been the individual’s income,
because of being so domiciled the individual would not have been chargeable
to income tax in respect of it.
Charge where capital sums received
727
Charge to tax on income treated as arising under section 728
10
(1)
The charge under this section applies for the purpose of preventing the
avoiding of liability to income tax by individuals who are ordinarily UK
resident by means of relevant transfers.
(2)
Income tax is charged on income treated as arising to such an individual under
section 728 (individuals receiving capital sums as a result of relevant
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transactions).
(3)
Tax is charged under this section on the amount of income treated as arising in
the tax year.
(4)
The person liable for any tax charged under this section is the individual to
whom the income is treated as arising.
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(5)
For exemptions from the charge under this section, see sections 736 to 742
(exemptions where no tax avoidance purpose or genuine commercial
transaction).
(6)
For rules about the availability of deductions and reliefs where income is
charged under this section, see section 746 (deductions and reliefs where
25
individual charged under section 720 or this section).
728
Individuals receiving capital sums as a result of relevant transactions
(1)
Income is treated as arising to such an individual as is referred to in section
727(1) in a tax year for income tax purposes if—
(a)
income has become the income of a person abroad as a result of—
30
(i)
a relevant transfer,
(ii)
one or more associated operations, or
(iii)
a relevant transfer and one or more associated operations, and
(b)
the capital receipt conditions are met in respect of the individual in the
tax year (see section 729).
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(2)
Section 725 (reduction in amount charged where controlled foreign company
involved) applies for determining the amount of income treated as arising
under subsection (1) as it applies for determining the amount so treated under
section 721(1).
(3)
It does not matter for the purposes of this section—
40
(a)
whether the income would be chargeable to income tax apart from
section 727,

Income Tax Bill
Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
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(b)
whether the individual is ordinarily UK resident at the time when the
relevant transfer abroad is made, or
(c)
whether the avoiding of liability to income tax is a purpose for which
that transfer is effected.
729
The capital receipt conditions
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(1)
For the purposes of section 728(1), the capital receipt conditions are met in
respect of the individual in a tax year (“the relevant year”) if—
(a)
either—
(i)
in the relevant year the individual receives or is entitled to
receive any capital sum, whether before or after the relevant
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transfer, 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 an entitlement, would be)
in any way connected with any relevant transaction.
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(2)
But subsection (1)(a)(ii) does not apply merely because of the receipt of a sum
by way of loan if the loan is wholly repaid before the relevant year begins.
(3)
In subsection (1) “capital sum” means—
(a)
any sum paid or payable by way of loan or repayment of a loan, and
(b)
any other sum paid or payable—
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(i)
otherwise than as income, and
(ii)
not for full consideration in money or money’s worth.
(4)
For the purposes of subsection (1), a sum is treated as a capital sum which the
individual (“A”) receives or is entitled to receive if another person receives or
is entitled to receive it—
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(a)
at A’s direction, or
(b)
as a result of the assignment by A of A’s right to receive it.
730
Non-domiciled individuals
(1)
An individual is not chargeable to income tax under section 727 in respect of
any income treated as arising to the individual under section 728 if conditions
30
A and B are met.
(2)
Condition A is that the individual is domiciled outside the United Kingdom.
(3)
Condition B is that if the income had in fact been the individual’s income,
because of being so domiciled the individual would not have been chargeable
to income tax in respect of it.
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Charge where benefit received
731
Charge to tax on income treated as arising under section 732
(1)
Income tax is charged on income treated as arising to an individual under
section 732 (non-transferors receiving a benefit as a result of relevant
transactions).
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Income Tax Bill
Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
371

(2)
Tax is charged under this section on the amount of income treated as arising
for the tax year.
(3)
The person liable for any tax charged under this section is the individual to
whom the income is treated as arising.
(4)
For exemptions from the charge under this section, see sections 736 to 742
5
(exemptions where no tax avoidance purpose or genuine commercial
transaction).
732
Non-transferors receiving a benefit as a result of relevant transactions
(1)
This section applies if—
(a)
a relevant transfer occurs,
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(b)
an individual who is ordinarily UK resident receives a benefit,
(c)
the benefit is provided out of assets which are available for the purpose
as a result of—
(i)
the transfer, or
(ii)
one or more associated operations,
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(d)
the individual is not liable to income tax under section 720 or 727 by
reference to the transfer and would not be so liable if the effect of
sections 726 and 730 were ignored, and
(e)
the individual is not liable to income tax on the amount or value of the
benefit (apart from section 731).
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(2)
Income is treated as arising to the individual for income tax purposes for any
tax year for which section 733 provides that income arises.
(3)
Also see that section for the amount of income treated as arising for any such
tax year.
733
Income charged under section 731
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(1)
To find the amount (if any) of the income treated as arising under section 732(2)
for any tax year in respect of benefits provided as mentioned in section
732(1)(c) take the following steps.
Step 1

Identify the amount or value of such benefits received by the individual in the
30
tax year and in any earlier tax years in which section 732 has applied.

The sum of those amounts and values is “the total benefits”.
Step 2

Deduct from the total benefits the total amount of income treated as arising to
the individual under section 732(2) for earlier tax years as a result of the
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relevant transfer or associated operations.

The result is “the total untaxed benefits”.
Step 3

Identify the amount of any income which—
(a)
arises in the tax year to a person abroad, and
40
(b)
as a result of the relevant transfer or associated operations can be used
directly or indirectly for providing a benefit for the individual.

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Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
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That amount is “the relevant income of the tax year” in relation to the
individual and the tax year.
Step 4

Add together the relevant income of the tax year and the relevant income of
earlier tax years in relation to the individual (identified as mentioned in Step 3).
5

The sum of those amounts is “total relevant income”.
Step 5

Deduct from total relevant income—
(a)
the amount deducted at Step 2, and
(b)
any other amount which may not be taken into account because of
10
section 743(1) and (2) (no duplication of charges).

The result is “the available relevant income”.
Step 6

Compare the total untaxed benefits and the available relevant income.

The amount of the income treated as arising under section 732(2) for any tax
15
year is the total untaxed benefits unless the available relevant income is lower.

If the available relevant income is lower, it is the amount of income treated as
so arising.
(2)
Subsection (1) is subject to section 734 (reduction in amount charged: previous
capital gains tax charge).
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(3)
See also section 740(5) to (7) (which makes provision about relevant income
and benefits where relevant transactions include both transactions before 5
December 2005 and transactions after 4 December 2005 and exemptions under
this Chapter cease to apply).
734
Reduction in amount charged: previous capital gains tax charge
25
(1)
This section applies if—
(a)
benefits provided as mentioned in section 732(1)(c) are received in a tax
year,
(b)
for that tax year the whole or part of any benefits so provided is a
capital payment to which section 87 or 89(2) of, or paragraph 8 of
30
Schedule 4C to, TCGA 1992 applies (chargeable gains: gains attributed
to beneficiaries),
(c)
it is such a payment because the total untaxed benefits exceed the
available relevant income (see Step 6 in section 733(1)) and so it is not
treated as income arising to the individual under section 732(2), and
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(d)
because of that capital payment chargeable gains are treated as
accruing to the individual in that or a subsequent tax year under any of
the provisions referred to in paragraph (b).
(2)
For any tax year after one in which such chargeable gains are so treated, the
amount of income treated as arising to the individual under section 732(2) in
40
respect of benefits provided as mentioned in section 732(1)(c) as a result of the
transfer or operations in question is calculated as follows.
(3)
The amount is calculated under section 733(1) as if the total untaxed benefits
were reduced by the amount of those gains.

Income Tax Bill
Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
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(4)
In this section “the total untaxed benefits” and “the available relevant income”
have the same meaning as in section 733(1) (see Steps 2 and 5).
735
Non-domiciled individuals
(1)
This section applies if—
(a)
apart from this section, an individual receiving a benefit would be
5
chargeable to income tax under section 731 in respect of any income
treated as arising to the individual (“the chargeable amount”), and
(b)
conditions A to C are met.
(2)
Condition A is that the individual is domiciled outside the United Kingdom.
(3)
Condition B is that the benefit is not received in the United Kingdom.
10
(4)
Condition C is that, if the individual had received any of the relevant income
by reference to which the chargeable amount is determined under section 733,
because of being domiciled outside the United Kingdom the individual would
not have been chargeable to income tax in respect of it.
(5)
If this section applies, the individual is not chargeable to income tax under
15
section 731 on so much of the chargeable amount as is determined by reference
to the relevant income to which condition C applies.
(6)
Sections 833 and 834 of ITTOIA 2005 (income treated as remitted to the United
Kingdom) apply for the purposes of this section as they would apply for the
purposes of section 832 of that Act (remittance basis) if the benefit were
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relevant foreign income.
Exemptions: no tax avoidance purpose or genuine commercial transaction
736
Exemptions: introduction
(1)
Sections 737 to 742 deal with exemptions from liability under this Chapter.
(2)
Some exemptions apply according to whether the relevant transactions are all
25
pre-5 December 2005 transactions or all post-4 December 2005 transactions or
include both (see sections 737, 739 and 740).
(3)
In this section and sections 737 to 742—
“post-4 December 2005 transaction” means a relevant transaction effected
on or after 5 December 2005, and
30
“pre-5 December 2005 transaction” means a relevant transaction effected
before 5 December 2005.
737
Exemption: all relevant transactions post-4 December 2005 transactions
(1)
This section applies if all the relevant transactions are post-4 December 2005
transactions.
35
(2)
An individual is not liable to income tax under this Chapter for the tax year by
reference to the relevant transactions if the individual satisfies an officer of
Revenue and Customs—
(a)
that Condition A is met, or
(b)
in a case where Condition A is not met, that Condition B is met.
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Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
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(3)
Condition A is that it would not be reasonable to draw the conclusion, from all
the circumstances of the case, that the purpose of avoiding liability to taxation
was the purpose, or one of the purposes, for which the relevant transactions or
any of them were effected.
(4)
Condition B is that—
5
(a)
all the relevant transactions were genuine commercial transactions (see
section 738), and
(b)
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 for the purpose of avoiding
10
liability to taxation.
(5)
In determining the purposes for which the relevant transactions or any of them
were effected, the intentions and purposes of any person within subsection (6)
are to be taken into account.
(6)
A person is within this subsection if, whether or not for consideration, the
15
person—
(a)
designs or effects, or
(b)
provides advice in relation to,

the relevant transactions or any of them.
(7)
In this section—
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“revenue” includes taxes, duties and national insurance contributions,
“taxation” includes any revenue for whose collection and management
the Commissioners for Her Majesty’s Revenue and Customs are
responsible.
(8)
If—
25
(a)
apart from this subsection, an associated operation would not be taken
into account for the purposes of this section, and
(b)
the conditions in subsections (2) to (4) are not met if it is taken into
account, because of—
(i)
the associated operation, or
30
(ii)
the associated operation taken together with any other relevant
transactions,

it must be taken into account for those purposes.
738
Meaning of “commercial transaction”
(1)
For the purposes of section 737, a relevant transaction is a commercial
35
transaction only if it meets the conditions in subsections (2) and (3).
(2)
It must be effected—
(a)
in the course of a trade or business and for its purposes, or
(b)
with a view to setting up and commencing a trade or business and for
its purposes.
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(3)
It must not—
(a)
be on terms other than those that would have been made between
persons not connected with each other dealing at arm’s length, or
(b)
be a transaction that would not have been entered into between such
persons so dealing.
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Part 13 — Tax avoidance
Chapter 2 — Transfer of assets abroad
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(4)
For the purposes of subsection (2), making investments, managing them or
making and managing them is a trade or business only so far as—
(a)
the person by whom it is done, and
(b)
the person for whom it is done,

are persons not connected with each other and are dealing at arm’s length.
5
739
Exemption: all relevant transactions pre-5 December 2005 transactions
(1)
This section applies if all the relevant transactions are pre-5 December 2005
transactions.
(2)
An individual is not liable for income tax under this Chapter for the tax year
by reference to the relevant transactions if the individual satisfies an officer of
10
Revenue and Customs that condition A or B is met.
(3)
Condition A is that the purpose of avoiding liability to taxation was not the
purpose, or one of the purposes, for which the relevant transactions or any of
them were effected.
(4)
Condition B is that the transfer and any associated operations—
15
(a)
were genuine commercial transactions, and
(b)
were not designed for the purpose of avoiding liability to taxation.
740
Exemption: relevant transactions include both pre-5 December 2005 and post-
4 December 2005 transactions
(1)
This section applies if the relevant transactions include both pre-5 December
20
transactions and post-4 December transactions.
(2)
An individual is not liable to tax under this Chapter for the tax year by
reference to the relevant transactions if—
(a)
the condition in section 737(2) (exemption where all relevant
transactions are post-4 December 2005 transactions) is met by reference
25
to the post-4 December 2005 transactions, and
(b)
the condition in section 739(2) (exemption where all relevant
transactions are pre-5 December 2005 transactions) is met by reference
to the pre-5 December transactions.
(3)
If subsection (2)(b) applies but subsection (2)(a) does not, this Chapter applies
30
with the modifications in subsections (4) to (6).
(4)
For the purposes of sections 720 to 730, any income arising before 5 December
2005 must not be brought into account as income of the person abroad.
(5)
In determining the relevant income of an earlier tax year for the purposes of
section 733(1) (see Step 4), it does not matter whether that year was a year for
35
which the individual was not liable under section 731 because of section 739 or
this section.
(6)
For the purposes of Step 1 in section 733(1), a benefit received by the individual
in or before the tax year 2005-06 is to be left out of account.
(7)
But, in the case of a benefit received in the tax year 2005-06, subsection (6)
40
applies only so far as, on a time apportionment basis, the benefit fell to be
enjoyed in any part of the year that fell before 5 December 2005.