INTM602140 - Transfer of assets abroad: Non-domiciled individuals: The benefits charge - the position between 6 April 2005 and 5 April 2008

Following the Tax Law Rewrite, new and separate charging provisions were introduced for all types of foreign income replacing the general charge under what was Cases IV and V of Schedule D. The new provisions, included in the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), also provided, on a claim, an alternative basis for calculating certain income categorised as ‘relevant foreign income’ and the amount on which an individual would be taxed.

From the introduction of ITTOIA non-UK domicile status could impact this relevant foreign income, and broadly speaking resulted in the income subject to the claim being taxed only when received in the UK.

Apart from minor adjustments consequential upon the introduction of ITTOIA, the transfer of assets provisions giving exclusion from charge for certain benefits of non-UK domiciled individuals remained largely unchanged. However, the exclusion from relevant income was only for income that would not be chargeable to tax based on domicile status alone. The introduction of ITTOIA was not intended to change the law under transfer of assets, and HMRC continues to operate the benefits charge provisions in this interim period in the same way that they were operated prior to April 2005 as set out in Examples 1 – 5 in INTM602120.

When the transfer of assets provisions were themselves rewritten into the Income Tax Act 2007, the post-April 2005 position was maintained through the new ITA07/S735. Therefore, it could also be argued under this provision that there is no reduction to the otherwise chargeable amount by virtue of non-UK domicile status.

The ITA 2007 provision appears to take a slightly different approach than the previous provision in ICTA 1988. It requires a chargeable amount to be calculated, and then allows the otherwise chargeable amount to be reduced if, and in proportion to, the extent that the relevant income by reference to which it is determined includes amounts that would not have been charged because of domicile. In effect, if the relevant income includes foreign income not received in the UK, the otherwise chargeable amount is reduced by reference to the proportion that amount has to the total. This approach is not without difficulties.

The provision applies if there is an otherwise chargeable amount, that is an amount which apart from the non-domicile provision would have been chargeable under the transfer of assets benefit charge, and three conditions are met:

Condition A is that the individual is domiciled outside the UK.

Condition B is that the benefit is not received in the UK.

Condition C is that if the individual had received any of the relevant income by reference to which the potential chargeable amount is determined, the individual would not have been chargeable to income tax in respect of it because of domicile status alone.

Where the conditions are met, the individual is not chargeable under the benefits charge by reference to so much of the chargeable amount determined by reference to the relevant income to which Condition C applies.

In applying Condition C, the same approach to foreign income will be taken for this purpose as operated before the introduction of ITTOIA.

Example

As Example 1 in INTM602120. Applying the steps approach in ITA 2007 the ‘chargeable amount’ would be £750 (total relevant income of £1000 compared with benefits provided received outside the UK of £750). As the foreign income of £500 is not received in the UK, take that amount to satisfy Condition C.

In the absence of a provision that says that the chargeable amount is determined by reference to one type of income in preference to another, it might be reasonable to take the view that the reduction in the chargeable amount given by ITA07/S735 is the ratio that the income that satisfies Condition C has to the total: a reduction of £375. Such an approach could however lead to extreme and anomalous results. As neither the introduction of ITTOIA nor ITA 2007 were intended to change the law under transfer of assets, HMRC will continue to operate the provisions in a way that is consistent with the former provisions in this interim period. This is subject to cases where there appears to be manipulation of the interaction of the new provisions. Where you identify a case that appears to involve manipulation, refer this to a technical specialist in Personal Tax International, Liverpool (INTM604440).

Taking this approach, the individual is not chargeable by reference to £250 of the relevant income to which Condition C applies, which leaves a charge under transfer of assets of £500.