INTM601820 - Transfer of assets abroad: The benefits charge: Computation of income before April 2007

As INTM601800 indicates, the Steps computation is not without difficulties in some areas. However, this page seeks to show how the approach being taken to the Steps methodology is consistent with the way in which the benefits charge operated prior to April 2007.

Therefore, if one took the example in INTM601800 as if all the years 1 to 8 were before 6 April 2007 the application of the former provisions under ICTA88/S740 would be as shown below.

For years 1 to 7, there would be no benefits charge as an exemption applied in relation to the original transfer. The exemption provisions at that time said that where the conditions for exemption are met, “section 740… shall not apply”.

For year 8, the new ‘associated operation’ taints the exemption and, as the conditions for ICTA88/S740(1) to apply are met, a potential benefits charge arises.

To arrive at the amount subject to the benefits charge, a comparison is made of the amount or value of the benefit (received in that year) with the relevant income of tax years up to and including the tax year in which the benefit is received. If in an earlier year there was a surplus of unmatched benefit, that surplus benefit is matched with relevant income of a subsequent year before that income is compared to benefits received in that year. In effect the surplus benefits are held in abeyance until they can be matched to a subsequent year’s relevant income.

A question could arise in this example in applying ICTA88/S740(2), as to whether ‘any such benefit as is mentioned in subsection (1)’ brings into consideration all benefits received provided out of assets, which are available for the purpose by virtue or in consequence of the transfer or of any associated operations. However, such a wide view could counter the effective exemption for earlier years. So, in applying ICTA88/S740(2)(b) in this example, the amount to be charged in the tax year in which the benefit is received is found by comparing the amount or value of the benefit received in that year only (£10,000), with ‘the relevant income of years of assessment up to and including the year of assessment in which the benefit is received’ (as all earlier years were covered by an exemption). It is only if there is a surplus of unmatched benefit that ICTA88/S740(2)(b) comes into play to match that surplus benefit with relevant income of a subsequent tax year. Where a year is covered by an exemption, there is no chargeable benefit (as the provision of section 740 ‘shall not apply’), and so the provision of ICTA88/S740(2)(b) cannot apply to carry it forward if unmatched. In this case there is no benefit of an earlier year that could fit within ICTA88/S740(2)(b), and therefore nothing that falls to be added to the benefit of the year in the comparison.

The result in this example is that the benefit received in year 8 is £10,000, the relevant income of all years up to and including year 8 is £355,000 and therefore £10,000 is treated as income of the individual for that year.

As the benefit does not exceed the relevant income, there is no surplus benefit to carry forward under ICTA88/S740(2)(b). If there were a subsequent year under the same rules, for the next year the relevant income to be matched of £355,000 would be reduced by the extent of the amount treated as income in year 8 of £10,000 and would then have added to it any new amount of relevant income of that subsequent year.

The past position can effectively be put into a series of steps:

• identify and quantify any benefits received in the tax year
• identify and quantify any unmatched benefits of previous years and deduct any amount treated as a capital sum for TCGA92/S87
• calculate the relevant income of the tax year and earlier tax years (back to 10 March 1981)
• deduct from the relevant income any amounts taken into account in charging tax under ICTA88/S739 or S740
• treat unmatched benefits of earlier years as income to the extent of the benefit or total relevant income, whichever is less
• match benefits of the year with remaining unmatched relevant income; treat as income of year up to the amount of the benefit or the relevant income, whichever is less
• carry forward any unmatched benefits or surplus relevant income