INTM601700 - Transfer of assets abroad: The benefits charge: Relevant income

The general conditions required for there to be a benefits charge are set out in INTM601480.

The amount to be treated as income arising to the individual is arrived at by comparing the benefits received with the available relevant income. To arrive at the available relevant income figure, steps 3 to 5 of ITA07/S733(1) must be worked through. The steps and the calculation of the income arising are considered further in INTM601740.

The relevant income arising for each tax year is the amount of any income which arises in the tax year to a person abroad and, as a result of the relevant transfer (INTM600220) or associated operations (INTM600300), can be used directly or indirectly for providing a benefit for the individual.

There is no further definition within the legislation of what is income that can be used directly or indirectly for providing a benefit (ITA07/S733). However, it must be income that can be so used as a result of the relevant transfer or associated operations. This page looks at the approach taken to determining income that can be used directly or indirectly for providing a benefit.

What is income will broadly follow the description at INTM600400, and ‘person abroad’ is discussed at INTM600360. The income of a person abroad that can be taken into account is limited by the extent to which it is income that can be used as a result of the actions described for providing a benefit for the individual. However, it is not limited to the income of the provider of the benefit. It is any income which arises in the tax year to a person abroad providing it can be so used as a result of the particular actions. The income does not have to be used for providing the benefit; it is enough that it can be used directly or indirectly.

Only income arising on or after 10 March 1981 can be taken into account as relevant income because the benefits charge only applies from that date (INTM601440).

The different language of the benefits charge highlights the fact that what is taken into account as relevant income for the benefits charge may be somewhat different to the measure of income that may fall to be taken into account for the income charge. As it is only income that can be used which is taken into account, in most cases it will be appropriate to look at any factors that may prevent income being so used. For example, any part of the income that has been genuinely paid away may not be capable of being termed as income that can be used for providing a benefit.

It should be kept in mind that relevant income has to be considered on a tax year by tax year basis, so that once an amount has been determined as being relevant income of a tax year it will fall to be taken into account as relevant income in any subsequent year’s benefits charge calculation. It cannot be amended by, for example, a subsequent disbursement, neither will it cease to be relevant income if, for example, it ceases to be regarded as income within the structure perhaps because it has been capitalised.

In considering whether any part of the income has been genuinely paid away in a manner such as it could not be regarded as income that can be used for providing a benefit, there are three broad categories of disbursements that will generally be taken into account:

• income genuinely paid away in meeting legitimate expenses
• income distributions paid out of income
• taxes paid by the person abroad in respect of the income

As mentioned above, relevant income should be calculated for each tax year, and is usually only reduced once calculated when matched with benefits received, as set out in the six steps referred to in INTM601740. However, it is recognised that such an approach may lead to the same amount of income of the person abroad being taken into account for tax more than once. This may occur, for example, if an income distribution is made to a beneficiary in a later year, and the relevant income is not reduced to take into account such a distribution that has been subject to tax in the beneficiary’s hands.

In order to prevent this, the relevant income should be reduced by income distributions made out of an earlier year’s relevant income, to the extent that it can be demonstrated that the income distributions have been subject to tax, either in the UK or some other jurisdiction. In order to reduce the amount of relevant income by such income distributions, the individual who is subject to a potential benefits charge should reasonably believe that any income distribution made out of the relevant income of an earlier year has been subject to tax either in the UK or another jurisdiction.

The individual subject to the benefits charge may be reliant on information from trustees or other third parties. While it is accepted that such trustees may not have a detailed knowledge of beneficiaries’ tax affairs, they will be in a position to make a reasonable assumption as to whether an income distribution should be subject to tax and should compute relevant income accordingly. Provided relevant income is calculated on such a reasonable assumption HMRC will not seek to challenge it.

The only other circumstance where relevant income is reduced once calculated for a tax year is where income is paid to a charity recognised as such for tax purposes by HMRC. The amount of relevant income is reduced by the amount of income paid to the charity.

It is likely to be largely a question of fact whether income can be used for providing a benefit, and regard should be had, where necessary, to relevant documentation of the person abroad, as well as any applicable foreign law that may have a bearing on the way the person abroad acts and operates.

The following examples may help to illustrate how relevant income will generally be determined.

Example 1

A foreign company with investment business has interest income of £100,000 for a tax year. It pays costs for the management of the company of £25,000 out of its income. As management costs for the company are deductible expenditure and assuming that all other conditions for a benefits charge are met, the relevant income of this company for that purpose would be considered to be £75,000 – the amount that can be used for providing a benefit.

If the income of this company fell to be taken into account for the purpose of the income charge, the amount of the income for that purpose would be considered to be £100,000.

Example 2

The same company decides at the end of the tax year to add its ‘net profit’ of £75,000 to its reserves. Two years later it makes a payment of £50,000 and contends this reduces relevant income. As relevant income has to be considered on a tax year by tax year basis HMRC would take the view that relevant income of the tax year remained £75,000 as in Example 1 above.

Example 3

A foreign trust has no income of its own but owns a foreign company which has rental income of £100,000. The trustees make a payment of £30,000 out of trust capital to a beneficiary. In considering what is relevant income for the purposes of the benefits charge, the income of both the company and the trustees is taken into account. The relevant income will thus be £100,000 as it is income that can indirectly be used for providing a benefit. The payment out of the trust does not impact that.

Example 4

A foreign trust has accumulated income from year one of £100,000 and retains this in a segregated account. A beneficiary of the trust approaches the trustee for funds in year two and the trustees make an income distribution to the beneficiary in year two of £20,000. The trustees have no income in year two from which to make the distribution so use the income held on account from year one. The trustees are aware that the beneficiary is resident and domiciled in the UK. It is therefore reasonable for them to assume that UK income tax will be paid on the income distribution, and thus the relevant income for year one will be reduced to £80,000 when calculating any future benefits charge.

Note

For the purposes of calculating the liability of a UK resident beneficiary who receives a capital distribution or benefit it is important that the trustees of non-resident trusts maintain records of the income and gains that arise in the structure. They should maintain historical records for the purpose of matching the income and gains with the capital distributions and benefits they make. Sometimes, for various reasons, no historic record of the amounts of capital, income and gains arising in the funds under management are available. This presents trustees with specific difficulties in notifying UK resident beneficiaries, who have received capital distributions or benefits from the trustees, of the income and gains against which such distributions can be matched which would give rise to a UK tax liability. Where this occurs, it may be necessary to estimate the capital, income and gains elements contained within funds under management for each year based upon the known facts.

Based upon the known facts available, any reasonable agreed basis may be adopted although no estimate should be applied if the actual information required to decide the matter can be obtained from third parties. In such cases the actual information should be sought and used.

Where it is necessary to estimate, either the Retail Prices Index (RPI), or the Consumer Prices Index (CPI) may be applied to an agreed year and scaled forward or backward as agreed to reach an agreed apportionment of the investment fund. Any known fact, such as the value of the opening capital settled, should also be factored into the analysis.

Alternatively, reference may be made to using investment performance information for each relevant year that may have been compiled by professional trust associations specifically for this purpose. This may provide an acceptable alternative to using an estimated calculation in situations where the original records are not held or cannot be obtained.

Where HMRC are advised that no records of historic funds under management have been maintained - or that estimated or investment performance tables have been used to reconstitute the capital, income or gain elements of such funds - a risk assessment of the tax impact should be undertaken. Where the suggested adjustment is considered to be material then the matter should be investigated further.

If technical advice is required by HMRC staff in these circumstances, they should contact Personal Tax International (see INTM604440).