INTM600980 - Transfer of assets abroad: The income charge: Power to enjoy - special rule relating to benefits

ITA07/S724 provides for a special rule. If an individual, who would otherwise be subject to the income charge – power to enjoy, has the power to enjoy income of a person abroad because of receiving any such benefit as is referred to in Condition C (INTM600920 benefit provided out of income of person abroad), the normal income charge is displaced. Instead, the individual is liable to income tax under the income charge for the tax year in which the benefit is received on the whole of the amount or value of that benefit.

This provision does not apply if it is shown that the benefit derives directly or indirectly from income on which the individual has already been charged to income tax under the transfer of assets provision for that tax year or a previous tax year.

This provision was considered in the case of CIR v Botnar (72 TC 205). Although it did not affect the outcome in that case, there is some helpful comment on it. The views expressed there appear to confirm that in the case of actual receipt of a benefit (as opposed to mere entitlement to receive), the provision is determinative of the charge to tax which could produce a radically different result than what might otherwise be the charge under the income charge. Further, that where the power to enjoy arises on this basis, the tax is charged not on the income which the individual has power to enjoy but on the value of the benefit. This may bear no relationship whatsoever to the income of the person abroad as long as it originated from it even indirectly. The Commissioner rejected the view that the provision only operates where the benefit received in a year exceeds the income of the person abroad.

From this, where the conditions are met, the provision may have the effect of increasing the charge for a particular tax year to more than the actual income of the person abroad. This could occur if, for example, the value of the benefit received exceeded the income arising to the person abroad as a result of the transfer. In these circumstances the amount charged would be the value of the benefit received.

Alternatively, if the benefit received in a particular tax year was less than the income arising to the person abroad as a result of the transfer, then the charge would be lower than the income as it would be limited to the value of the benefit received.