INTM602780 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - all relevant transactions pre-5 December 2005

If all the transactions are before 5 December 2005, then ITA07/S739 applies. An individual is not liable to income tax in a tax year by reference to the relevant transactions (INTM602700), if the individual satisfies (INTM602680) an officer of Revenue and Customs that Conditions A or B are met.

Condition A

Condition A is that the purpose of avoiding liability to taxation (INTM602980) was not the purpose or one of the purposes for which the relevant transactions or any of them were effected.

Condition B

Condition B is that the transfer and any associated operations were genuine commercial transactions (INTM603020) and were not designed for the purpose of avoiding liability to taxation (INTM603040).

The approach has been to take into account transfers and all associated operations in considering whether exemption is appropriate.

During 1969, a case went before the courts (CIR v Herdman: 45 TC 394) where it was ruled that the legislation was defeated where the original transfer was innocent, but where changed circumstances were later used to avoid UK income tax. It was not because of the associated operations that Herdman had power to enjoy.

Finance Act 1969 was intended to reverse this decision but, because doubts were expressed as to its effectiveness, the approach that has been taken is that - in considering whether the exemption conditions are met - all relevant transactions and associated operations that either result in income becoming payable or give a power to enjoy are taken into account.

Tax Bulletin 40 was issued in April 1999 and gave guidance as follows:

The law was amended in 1969 following a decision of the Courts (in CIR v Herdman [45 TC 394]) that only the transfer and any associated operations giving a power to enjoy at the outset were relevant for determining whether the terms of section 741 were satisfied. The amendment to the legislation sought to bring all associated operations into consideration when section 741 was invoked. Because of doubts expressed as to the effectiveness of this amendment, it has been the Revenue’s practice in considering whether section 741 is applicable to consider only the transfer and any associated operations which directly establish a power to enjoy the income of the overseas person under any particular sub-head in section 742(2).

However, all will depend on the circumstances. It may be that the original transfer giving the power to enjoy was effected for the purpose of subsequent avoidance via associated operations.