INTM602480 - Transfer of assets abroad: Other general provisions: Just and reasonable basis

Where there is a choice of individuals in relation to whom any amount of income of a person abroad may be taken into account in arriving at the amount of an income charge or benefits charge, it can sometimes be difficult to determine the amount of income taxable on each individual.

To alleviate such difficulties, the legislation provides for the income to be apportioned on a ‘just and reasonable’ basis. How this is done will depend on the circumstances. For example, individual A may be chargeable on the whole of the income of an overseas company under the income charge. Individual B may receive a benefit from the same company that falls to be charged under the benefits charge. In this situation the income of the company should only be taken into account once (INTM602380).

It will normally be just and reasonable to include the whole of the income arising as an income charge, as the individual who has sought to avoid tax in setting up the structure in the first place will be charged to income tax and will therefore suffer no inequity in bearing the full brunt of the legislation. In this example, individual B may not have a benefit charge for the particular tax year, although the benefit may be subject to a charge in a subsequent year (INTM601720).

However, there may be exceptional circumstances where the benefit charge is seen as being just and reasonable, for example where the income charge arises due to an individual receiving a loan from the person abroad which is repaid after a very short period so that there is no continuing liability on that individual.

When looking at the just and reasonable basis for apportionment, where there is more than one individual with power to enjoy the income of the person abroad, account should be taken as to who actually made, procured or was associated with the transfer, as these parameters may affect the quantum and the nature of the charge.

In terms of transfers made by closely-held companies (INTM600825), the just and reasonable basis for apportionment would be in proportion with the individuals’ qualifying interest in the company (INTM600830). This is on the basis that each individual shareholder would be treated as transferring a proportion of the asset transferred by the company equal to their qualifying interest.

In addition, it is necessary to have regard to the intended outcome of the arrangements and to the assets transferred which have resulted in income becoming payable to a person abroad. For example, if individual X subscribes for shares in a Jersey company for £1000 and individual Y enters into a service agreement with that company, then each individual may be subject to the income charge. However, it may well be that the asset of real value is the service agreement and that should be reflected in any apportionment of the income between the individuals.

Where the same assets are transferred by several individuals acting together in concert, the transferors would normally be assessed in proportion to their share of the assets transferred. For example, where shares of a UK company are held by three individuals in the proportions 40%, 40% and 20% and there is liability under ITA07/S720 in respect of the income of an overseas person to which the shares are transferred, the liability is assessed on each of the three shareholders in proportion to their respective holdings. This example demonstrates both the requirement to avoid duplication of charge (INTM602380) and the ‘just and reasonable’ basis.

Where more than one individual is subject to the benefits charge in respect of benefits which they receive in the same year, it will be necessary to apportion the relevant income (INTM601700) among the individuals. Only by considering the facts of the particular case will it be possible to decide fairly the amount of income to be treated as arising to each individual and subject to the benefits charge.

In cases where the total benefits are fully covered by the relevant income, each individual will be potentially subject to charge on the amount or value of the benefits received. Where the relevant income is less than the total amount or value of the benefits, the most appropriate apportionment of the relevant income is by reference to the ratio of the benefits received by each individual in the year, to the total of the benefits provided in the year.

If more than one individual subject to the benefits charge receive benefits in different tax years, but relevant income arises only in later years, it will be necessary to apportion the relevant income between the individuals. It will only be by considering the facts that a reasonable apportionment can be achieved in such a situation. Where there is sufficient relevant income arising in the later year to cover all of the benefits arising in the years concerned, a benefits charge will arise on each of the individuals. If the relevant income in the later year is less than the total benefit overall arising in that year, in earlier years the most appropriate apportionment of the relevant income will be by reference to the ratio of the benefits each individual has received to the total benefits.

When considering benefits provided to beneficiaries in different years, you should not lose sight of the fact that benefits arising in earlier years may have been subject to capital gains tax under TCGA92/S87 (see INTM601520) and as such will need to be deducted from total untaxed benefits in line with the steps set out in ITA07/S733(1).

However, in a case where it was clearly intended that A’s benefit be provided out of the relevant income of the year, and B’s benefit out of that of a subsequent year, e.g., A’s benefit was paid three quarters through the year and represented the whole income of the year, while B’s benefit was paid nearly at the end of the year to deal with some unexpected contingency. Then A might justifiably be taxed on the whole of the benefit in the year of receipt, and B taxed in the subsequent year.

Each case must be dealt with on its merits and the ‘just and reasonable’ basis is that which appears to be so to an officer of HM Revenue and Customs. Appeals against such decisions are the jurisdiction of the Tribunal (INTM604160).