INTM600820 - Transfer of assets abroad: The income charge: The individual - the transfer

What is 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. 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 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. The more likely charge where a person other than the individual who made the transfer is treated as having income arising to them is the benefits charge (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 ITA07/S720), 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 (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 may 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. 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 associated with it and that he can be regarded as having made the transfer such that the connection is made and the income charge applies. Equally, if an individual in some way ‘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.

A recent case which considers whether an individual was a transferor is Rialas v HMRC ([2020] UKUT 0367 (TCC)). The relevant issue was whether an individual had procured a transfer of another person’s shares. Mr Rialas (R) and Mr Cressman (C) each owned 50% of the shares in a UK company, Argo. R wanted to buy C’s shares. R incorporated an offshore company (Farkland) wholly owned by an offshore trust set up for the benefit of R’s family. R arranged for Farkland to borrow funds from another offshore company on generous terms to purchase C’s Argo shares. Farkland then had entitlement to dividends from Argo as it now held 50% of the share capital. In this case, the transfer that resulted in income being payable to a person abroad was C’s sale of his shares to Farkland.

The Upper Tribunal held that R was not the transferor of C’s shares due to the fact the transfer of assets consisted of another person’s shares. The court commented at paragraph [42] of its judgment, referring to the Fisher case at the Upper Tribunal:

the question [of who was the real transferor of an asset] could not be answered by posing general questions such as whether a person “organised”, “brought about”, “engineered”, “caused” or even “procured” the transfer.

Then, in the same paragraph, directly quoting from the Fisher Upper Tribunal judgment:

If the individual has no influence over what the actual transferor does with the assets, there is no good reason why he should be treated as the “real” Transferor.

The Rialas case can be contrasted with the Fisher case ([2023] UKSC 44). In the Rialas case, the transfer was by another individual and the court concluded Mr Rialas did not have sufficient control over that other individual’s behaviour so as to cause him to sell his shares.

In Fisher, the courts addressed whether a transfer made by a company of a UK telebetting business to Gibraltar could be said to have been procured by that company’s individual shareholders and directors who collectively had control over that company. HMRC argued that several members of the Fisher family should be properly regarded as the real transferors. The Fishers argued that the UK company made the transfer and, as directors, they were acting in the interest of the company, meaning the transfer of assets provisions could not apply as there was no relevant transfer.

Two out of the three Fisher family members had an active role in the transfer; the other one did not. The Upper Tribunal concluded that it was not possible to impute the transfer carried out by the company to any of the Fishers as ‘quasi-transferors’. But this position was overturned at the Court of Appeal which held that there was a relevant transfer and that it was ‘procured’ by each individual who had an active role in the transfer. Two of the taxpayers were thus treated as ‘quasi-transferors’ for the purposes of the transfer of assets code.

The case went on to the Supreme Court in 2023 where it was held that a transfer made by a company could not be procured by its individual shareholders unless the arrangements were contrived. It was held that the ToAA statute did not allow HMRC to charge individuals to income tax by reference to income arising to a person abroad as a result of a transfer made by a company in which they held shares.

At paragraph [73] of their judgment, the Supreme Court stated:

Section 739 is expressly limited to “individuals”. The absence of any definition of what it means for an individual to control a company in order to be the transferor of assets transferred by that company suggests strongly to me that section 739 was not intended to apply to transfers by companies.

Then, at paragraph [87] of their judgment, the Supreme Court stated:

HMRC may protest that this leaves a lacuna in the legislation since all an individual needs to do is put the asset into a company and then get the company to transfer that asset abroad. The answer to that is three-fold. First, as Mr Afzal pointed out, the introduction of section 740 applying to non-transferors means that that individual will not escape the tax charge if he or she actually receives a benefit in this jurisdiction in the form of income or capital. The second answer may lie in the point that the Upper Tribunal made at para 63 of their decision. They said a taxpayer could not avoid the operation of section 739 by simply transferring his income-producing assets to a UK company prior to the transfer of the same assets by the company to a foreign company or individual. The interposition of the UK company would be regarded as a device, and the substance of the transaction would still be a transfer of those assets by the individual to the foreign entity. Likewise, if a UK company was deliberately set up to circumvent a liability to income tax, that scenario might be treated as falling within one of the recognised exceptions to the distinct legal personality of the company.

In the circumstances raised in paragraph [87] HMRC would be of the view that, if an individual put an asset into a company and then got that company to transfer an asset abroad, the individual would be treated as making the relevant transfer and the transfer made by the company would be an associated operation meaning the individual would still potentially fall to be charged under ITA07/S720 or ITA07/S727.

However, where the company had genuinely made the relevant transfer, HMRC could no longer argue that an individual shareholder had procured the company to make the transfer, and that individual would no longer be within the scope of ITA07/S720 or ITA07/S727.

In response to the Supreme Court decision, HMRC enacted new legislation in section 22 of Finance (No.2) Act 2024 (see INTM600825) which is now set out in ITA07/S720A and ITA07/S727A. The aim of the new measure is to bring within the scope of the income charges relevant transfers made by closely-held companies for those individuals that have a qualifying interest (see INTM600830). This is the way in which HMRC envisaged the legislation was to work in the first place and so the new sections provide clarity to individuals in respect of their potential chargeability under ToAA regarding transfers made by companies in which they hold shares. The measure will apply in respect of income arising to a person abroad from 6 April 2024 regardless of when the relevant transfer took place.

The decision did not completely close the door on procurement arguments. At paragraph [85] of their judgment, the Supreme Court stated:

As to what Lord Wilberforce meant when he referred to an individual being “associated with” the transfer as contrasted with someone “who had no hand in” the transfer (p 1175D), that must, in my judgment, be left to be explored in another case. A set of facts may arise in future where HMRC can properly argue that someone who is not the owner or the legal transferor of the assets has nonetheless procured the transfer or used an agent to transfer the assets.

Features 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 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
• 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 the facts and circumstances of the matter if there is doubt about whether there is an appropriate connection for an income charge to be applied.

If more than one individual appears to have effected, procured or is, or 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 Personal Tax International, Liverpool should be sought before any charge to tax is raised (see INTM604440).

If there is more than one individual who may be the subject of any income charge, then see INTM602400.