INTM601780 - Transfer of assets abroad: The benefits charge: Example
This example illustrates how the benefits charge is calculated. It assumes that the years are after April 2007 but before April 2013, and that all the conditions necessary for a benefits charge to apply are met.
A transfer of assets in the form of the settling of an offshore trust occurs in Year 1. The trust is not settlor interested and, as a result of the settlement, income and gains arise to the trustees. A trust beneficiary who is ordinarily resident in the UK receives cash benefits from the trustees as set out below, from the assets available for the purpose as a result of the transfer and associated operations. The benefits are not otherwise liable to income tax.
| Year | Relevant income | Trust gains | Benefits received |
|---|---|---|---|
| 1 | £10,000 | 0 | £5,000 |
| 2 | £20,000 | £50,000 | £60,000 |
| 3 | £10,000 | 0 | £20,000 |
In order to determine whether income should be treated as arising to the individual in each of the years and if so in what amount, the Steps formula must be applied.
Year 1
Step 1 – ‘the total benefits’
Add together the benefits received in the tax year and any benefits in earlier years. As this is the first year the total benefit will be £5,000.
Step 2 – ‘the total untaxed benefits’
Deduct from the total benefits the amount of income treated as arising to the individual in any earlier tax years. As this is the first year there will be no amount to deduct. Total untaxed benefits will be £5,000.
Step 3 – ‘the relevant income of the tax year’
The income of year 1 which can be used for providing a benefit for the individual is £10,000, which is ‘the relevant income of the tax year’.
Steps 4 and 5 – ‘total relevant income’ and ‘the available relevant income’
As this is the first year both the total relevant income and the available relevant income will be £10,000.
Step 6 – ‘the amount of income treated as arising for the tax year’
Compare the result of Step 2 with Step 5:
Total untaxed benefits: £5,000
Available relevant income: £10,000
The lower of the two is: £5,000
The amount treated as income arising to the beneficiary in year 1 is therefore £5,000. There is still £5,000 of relevant income, the treatment of which will be considered as we go on to consider Year 2.
Year 2
Step 1 – ‘the total benefits’
Add together the benefits received in the tax year and any benefits received in earlier years.
Year 2: £60,000
Year 1: £5,000
Total Benefits: £65,000
Step 2 – ‘the total untaxed benefits’
Deduct from the total benefits the amount of income treated as arising to the beneficiary in any earlier tax years
Total benefits: £65,000
Income arising in Year 1: £5,000
Total untaxed benefits: £60,000
Step 3 – ‘the relevant income of the tax year’
The income of year 2 which can be used to provide a benefit for the beneficiary is £20,000
Step 4 – ‘total relevant income’
Add together the relevant income of Years 1 and 2
Relevant income Year 1: £10,000
Relevant income Year 2: £20,000
Total relevant income: £30,000
Step 5 – ‘the available relevant income’
Deduct from the total relevant income the amount deducted at Step 2
Total relevant income: £30,000
Deducted at Step 2: £5,000
The available relevant income: £25,000
Step 6 – ‘the amount of income treated as arising in the tax year’
Compare the result of Step 2 with Step 5
Total untaxed benefits: £60,000
Available relevant income: £25,000
The lower of the two is: £25,000
The amount of income treated as arising to the individual in Year 2 is therefore £25,000.
Note
There are still unmatched benefits of £35,000.
There are trust gains of £50,000 arising in Year 2.
The unmatched benefits will be matched with the trust gains in line with TCGA92/S87A.
This example proceeds on the basis that the beneficiary has been subject to capital gains tax on the £35,000 in the year leaving a balance of unmatched gains of £15,000.
Year 3
Step 1 – ‘the total benefits’
Add together the benefits received in Year 3 and any benefits in earlier years
Year 3: £20,000
Year 2: £60,000
Year 1: £5,000
The total benefits: £85,000
Step 2 - ‘the total untaxed benefits’
Deduct from the total benefits the amount of income treated as arising to the beneficiary in Years 1 & 2 £30,000 (£5,000 & £25,000) and, using ITA07/S734(3), deduct any benefits treated as capital gains under TCGA92/S87 (£35,000).
Total benefits: £85,000
Income arising in Years 1 and 2: £30,000
Benefits treated as capital gains: £35,000
Total untaxed benefits: £20,000
Step 3 – ‘the relevant income of the tax year’
The income of Year 3 which can be used to provide a benefit for the beneficiary is £10,000
Step 4 – ‘the total relevant income’
Add together the relevant income of Year 3 and earlier years
Relevant income Year 1: £10,000
Relevant income Year 2: £20,000
Relevant income Year 3: £10,000
Total relevant income: £40,000
Step 5 – ‘the available relevant income’
Deduct from the total relevant income the amount of income deducted at Step 2
Total relevant income: £40,000
Deducted at Step 2: £30,000
Available relevant income: £10,000
Step 6 – ‘the amount of income treated as arising in the tax year’
Compare the result of Step 2 with Step 5
Total untaxed benefits: £20,000
Available relevant income: £10,000
The lower of the two is: £10,000
The amount of income treated as arising to the beneficiary in Year 3 is therefore £10,000.
Note
There are still unmatched benefits of £10,000.
There are still unmatched capital gains arising in the trust in Year 2 of £15,000 (£50,000 minus £35,000).
These benefits can be matched with the gains under TCGA92/S87, giving rise to a capital gain in Year 3 of £10,000 and leaving unmatched gains of £5,000.