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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate debt: transfers of income streams: overview

Transfers of income streams: overview

Selling an income stream is a device designed to try to turn economic income into a return that is treated by tax law as capital. Schemes have been developed where, for example, shareholders sell the right to receive a large company dividend in exchange for an amount almost equal to the dividend, without selling the shares. Without any legislative provision to counteract this, the income tax bill on the receipt might be eliminated.

From 1938 legislation has been enacted to prevent the sale of rights to dividends or interest receipts, without the sale of the underlying asset, from being effective for tax purposes. The most recent legislation was at ICTA88/S730.

Legislation has also been passed over the years to counter sales of income streams in relation to other types of income. Examples include ICTA88/S775A, which concerned annual payments, and ICTA88/S785A, which dealt with lease rentals of plant or machinery.

The legislation introduced in FA 2009 (now rewritten to CTA 2010) replaces these existing piecemeal provisions that target particular schemes involving particular types of income. The purpose of the legislation is that receipts derived from a right to receive income (and which are economic substitutes for income) are to be treated as income for the purposes of corporation tax and income tax.

Broadly, where a person transfers the right to an income stream in return for consideration, it is taxed on the ‘relevant amount’ as if it was income of the type transferred. The ‘relevant amount’ will often be the amount of the consideration, but see CFM77060 for the market value rule which may apply.

Where the transferee is a company it is taxable only on its accounting profit from acquiring the income stream. This will generally be the difference between the cost of the income stream and the amount of income it actually receives. The tax treatment of company transferees is at CFM77160. However, there is no similar relief or special treatment for non-corporate transferees.

The transfers of income streams provisions do not apply to the extent that the consideration for the transfer is already charged to tax as an amount of income or is brought into account as a disposal receipt or proceeds for capital allowance purposes.

The new rules apply to transfers on or after 22 April 2009.