Transfer of assets abroad in a nutshell
If there were nothing in tax law to prevent them doing so, it would be relatively easy for individuals to avoid income tax by transferring assets abroad in such a way that they could still have the benefit of income produced by the asset. This result might be achieved by a transfer to an offshore trust, overseas company or other offshore entity. Not surprisingly, there is long-standing anti-avoidance legislation (the ‘transfer of assets abroad rules’) to deter such action, or at least nullify the tax advantage, by imposing a charge to income tax.
When does a tax charge potentially arise
For the transfer of assets abroad rules to come into play:
- there has to be a transfer of assets
- there must be a tax avoidance motive present, and
- income must be payable to a person abroad as a result either of that transfer or of associated operations (as defined) or of the transfer together with associated operations
A 'person abroad' means a person who is non-UK resident or an individual who is non-UK domiciled. The transfer of assets need not itself be to a person abroad. It need not have been made in the tax year for which an income tax charge potentially arises, and may well have been made many years earlier.
The transfer of assets abroad rules provide for three distinct income tax charges, whichever is appropriate to the circumstances, as follows:
- a charge on a UK resident individual with power to enjoy the income of the person abroad
- a charge where a capital sum is received by a UK resident individual in connection with the transfer and/or associated operations
- a charge on any benefits received by a UK resident individual (normally an individual other than the transferor), that are provided out of assets available as a result of any such transfer and/or associated operations
How does the principal charge operate?
Both the following conditions must be met for the charge to apply.
- As a result of a ‘relevant transfer’ (ie a transfer of assets whereby income becomes payable to a person abroad) and/or associated operations, a UK resident individual (A) has in a tax year a ‘power to enjoy’ (as defined) income of a person abroad
- The income of the person abroad would be chargeable to income tax if it were A's income and were received by A in the UK
The charge to tax is on the amount of income treated as arising in the tax year, and the person liable is the UK resident individual to whom the income is treated as arising. For example, if A transfers securities to X Ltd, a UK company which pays dividends to T, a non-UK resident trust of which A is a beneficiary, the income of T (the person abroad) could fall to be treated under the legislation as the income of A.
What is the charge where capital sums are received?
In this case, the income tax charge is on income treated as arising to a UK resident individual (A) by virtue of their receiving a capital sum by virtue of relevant transfers and/or associated operations. It has effect where, as a result of a relevant transfer etc., income has become the income of a person abroad. The amount treated as arising to A is equal to the amount of that income. The charge applies where the payment of the capital sum to A is in any way connected with any relevant transfer or associated operation. It applies where A becomes entitled to receive a capital sum just as it does where A actually receives a capital sum. It does not matter whether the sum is received before or after the transfer. The capital sum does not have to be paid by the person abroad or out of the income of that person. A is treated as receiving the capital sum if it is received another person at A's direction or as a result of the assignment by A of A’s right to receive it.
How does the charge on benefits work?
The charge is on income treated as arising to an individual by virtue of their receiving a benefit provided out of assets available as a result of a transfer of assets abroad. The charge will in most cases be on a non-transferor, but can fall on the transferor in certain circumstances. The amount of income treated as arising is equal to the ‘chargeable amount’, and the person liable for the tax charged is the individual to whom the income is treated as arising. Whilst there is no requirement in this case that the individual be UK resident, the circumstances in which the charge can apply to a non-UK resident are limited. The chargeable amount is arrived at by a process of matching the amount or value of benefits received with the income arising to the person abroad which, as a result of the transfer and/or associated operations, can be used to provide benefits.
It might have been possible to avoid the benefits charge by routing benefits to individuals outside the scope of the charge (due to their residence or domicile status) who would then gift them onwards to someone else. Legislation was introduced in 2018 (the 'onward gifts rules') to prevent this.
What exemptions are available?
Where an offshore trust is involved, there is an exception from the charge for foreign income which falls within the definition of ‘protected foreign-source income’ for non-UK domiciled and certain deemed domiciled settlors.
An individual is not liable to income tax under the transfer of assets abroad rules for a tax year if they can satisfy an HMRC officer that the purpose of avoiding liability to taxation was the purpose, for which the relevant transfer and/or associated operations were effected. Alternatively, they must satisfy the HMRC officer that all the relevant transactions were genuine commercial transactions and that it would not be reasonable to conclude that any one or more of them was more than incidentally designed for the purpose of avoiding liability to taxation. Note that ‘taxation’ in both legs of this escape clause is not limited to income tax. Where the escape clause fails because of an associated operation, partial exemption is available in certain cases.
There is also an exemption for ‘genuine transactions’ where the imposition of tax would breach a freedom protected under an EU treaty provision protecting freedom of movement of persons, capital, services and goods.