INTM602160 - Transfer of assets abroad: Non-domiciled individuals: The benefits charge - the position from 6 April 2008

Finance Act 2008 introduced major changes to the way in which a potential benefits charge under the transfer of assets provisions is affected by domicile status. These changes bring the position for amounts deemed as income arising to the individual under the transfer of assets provisions fully into line with the provisions that would apply for the individual if the deemed amount were actually income received directly by the individual.

The new rules are contained in a revised ITA07/S735.

Unlike the old rule, the new structure does not provide for either relevant income or the chargeable amount to be excluded. Rather, it sets a ‘ring-fence’ around amounts that could be affected by domicile status, and which would otherwise be charged to tax in the year that income is deemed to arise to the individual, and allows those amounts to be taxed only when there is a relevant amount remitted to the UK. The effect is the same as if a corresponding amount of actual income had arisen directly to an individual to whom the remittance basis of taxation applies.

The new provisions apply if three conditions are met:

• income is treated as arising to an individual under the transfer of assets benefits charge
• the remittance basis applies to the individual for that year
• the individual is not UK domiciled in the year (that is, the year for which a benefits charge would otherwise arise).

For details of when the remittance basis applies see the separate guidance in RDRM31005 onwards.

The way in which the new provision works is:

• all the amounts that would otherwise be taxed under the benefits charge are considered
• deemed income is designated as ‘foreign’ if, and to the extent that, the relevant income to which it relates would be ‘relevant foreign income’ if it were the individual’s
• the amount of ‘foreign deemed income’ so determined is then treated as if it were ‘relevant foreign income’.

The result is to create a ring-fenced amount regarded as ‘relevant foreign income’ which can then be charged to tax under the rules contained in Part 8 ITTOIA, and not under the transfer of assets benefits charge. The Part 8 rule charges tax for any tax year in which the individual is resident in the UK and during which any of the relevant foreign income is remitted to the UK. It does not matter whether the source from which the income arose exists when the income is remitted.

Detailed guidance on the operation of Part 8 ITTOIA is contained in the Residence, Domicile & Remittance Basis Manual and what is meant by ‘relevant foreign income’ is also determined from Part 8 ITTOIA (ITTOIA05/S830).

To ensure that the remittance basis rules work as they should in relation to ring-fenced amounts, the new transfer of assets provisions treat relevant income, or a benefit, that relates to any part of the foreign deemed income as deriving from that part of the foreign deemed income for the purpose of applying the remittance basis rules in Chapter A1 of Part 14 ITA 2007.

Detailed guidance on applying the remittance basis can be found in the Residence, Domicile & Remittance Basis Manual. In applying that guidance in the context of transfer of assets benefits charge it is necessary to consider both the benefits and underlying income to determine whether and when any of the ‘relevant foreign income’ is regarded as remitted to the UK.

A detailed example on this provision is at INTM602220.

From 6 April 2017, special rules apply which can bring non-UK domiciled settlors of certain non-resident trusts within the scope of the benefits charge. For further details on these rules, see INTM603180 onwards.