INTM600920 - Transfer of assets abroad: The income charge: Power to enjoy - condition C

Condition C - ITA07/S723(3)

Condition C 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.

One example is the case of Earl Beatty’s Executors v CIR (23 TC 574). 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.

The case of Earl Beatty’s Executors v CIR also dealt with the situation where 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.

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. 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.