INTM602860 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - partial exemption

The provisions at ITA07/S741 and S742 give partial exemption where later associated operations fail the avoidance purpose exemption conditions.

In limited circumstances, a partial exemption from the income charge is provided on a just and reasonable apportionment basis. Where the relevant conditions for this relief are met, the individual is only liable to tax under the transfer of assets income charge in respect of part of the income for which the individual would otherwise be liable.

The part that is liable to tax will be so much of the income as appears to an officer of Revenue and Customs to be justly and reasonably attributable to the associated operations taken into account that fail the test for exemption in all the circumstances of the case.

Those circumstances include how far those operations, or any of them, directly or indirectly affect the nature or amount of any person’s income or any person’s power to enjoy any income.

The conditions in which the relief applies are broadly as follows:

  • an individual is liable to tax under the income charge for a tax year (the “taxable year”) because Condition B in ITA07/S737(4) (INTM602800) is not met, and
  • Provisions 1 and 2 (set out below) apply.

The first bullet point above implies that there is at least one transaction that is a post-4 December 2005 transaction and that, in relation to such transactions to be tested under Condition B of INTM602800, the transaction must have failed the test in Condition A.

Provision 1

The first provision referred to above applies if:

  • since the relevant transfer (INTM600220) there has been at least one tax year for which the individual was not so liable by reference to the relevant transactions effected before the end of the year, and
  • the individual was not so liable for that year because either Condition B in ITA07/S737(4) (INTM602800) was met or Condition B in ITA07/S739(4) (INTM602780) was met.

In effect what this is saying is that there has been a relevant transfer which - together with other relevant transactions - would have resulted in an income charge for at least one tax year since the relevant transfer, but the transactions have met the genuine commercial transaction test for exemption (even if they failed the Condition A test if they were post-4 December 2005 transactions).

Provision 2

The second provision referred to above applies if the income which the individual would otherwise be liable to tax on under the income charge for the tax year is attributable:

  • partly to relevant transactions by reference to which one of the conditions in the second bullet point of Provision 1 above was met for the last exempt tax year, and
  • partly to associated operations not falling within the first bullet point above within this provision.

In effect what this is saying is that the income which becomes payable to a person abroad, and which would otherwise be the subject of a potential charge under the income charge, must arise partly as a result of a transaction that meets an exemption condition and partly as a result of one that does not. If it is only the later associated operation that results in the income becoming payable then on the face of it, no partial exemption will be due. In other words, there must already have been income arising that was covered by an exemption by virtue of the genuine commercial transaction test.

In applying this provision, a tax year is exempt if it is one of the tax years mentioned in Provision 1 above and there is no earlier tax year for which the individual was liable to tax under the income charge by reference to the relevant transactions or any of them.

In this provision, references to a person being liable to tax for a tax year under the income charge include references to the individual being so liable had any income been treated as arising to the individual for that year by operation of the income charge.

Example

An individual subscribes for shares in an offshore company and then transfers £1million into the company. The company buys a small hotel, the transaction taking place pre-5 December 2005. The hotel generates income of £10,000 per year from 2001-2002 to 2008-2009.

The exemption has been given on the basis of commerciality (Condition B INTM602780) for the years up to and including 2007-2008.

In 2008-2009 the hotel is sold for £10 million, and the proceeds placed on a bank deposit generating £500,000 per year.

The criteria for partial exemption to apply are met in that:

  • the investment income is partly attributable to the relevant transactions by reference to which exemptions applied in the last exempt year 2007-2008, and
  • the sale of the hotel and deposit of funds are associated operations (INTM600300), connected to the relevant transaction, which were not included in the criteria for the last exempt year, and the income of the person abroad is partly attributable to such operations.

In the circumstances it must be just and reasonable to treat the investment income of £500,000 as being the amount subject to the income charge for the year 2008-2009, rather than £510,000.