Transfer of assets abroad: Overview of ITA2007/Sections 721 and 727 (‘Income Charge’)
The ‘Income Charge’ applies to an individual who transfers assets, or who procures or is associated with a transfer by somebody else. Section 731 applies to an individual who has not personally transferred assets but who benefits from a transfer made by somebody else. See INTM600030 for an overview of Section 731, the ‘Benefits Charge’.
The broad conditions for application of the ‘Income Charge’ are:
- There must be a transfer of assets by (or procured by) an individual.
- As a result of the transfer (alone or in conjunction with associated operations), income becomes payable to a person abroad.
- The individual has power to enjoy that income in some way as a result of a transfer of assets alone or together with associated operations, or receive/be entitled to receive a capital sum in any way connected with any relevant transactions.
- The individual must be ordinarily resident in the UK in the year of liability.
Where these conditions are fulfilled, income is treated as arising to the individual to the extent which income becomes payable to a person abroad as a result of the transactions.
Any disposal (by sale or otherwise) of assets made at any time by an individual to a non-resident company, non-resident trust or other person abroad is a potential transfer of assets (or may alternatively be an associated operation of another transfer) for the purposes of Sections 721 and 727. The legislation may also apply where the transfer of assets is to a UK entity, if there are associated operations that result in income becoming payable to a person abroad.
For example the legislation may apply where an individual transfers cash to create a new non-resident trust, or subscribes for the share capital of an offshore company, or where an individual transfers assets such as shares or property to a new or existing non-resident trust or other person or company abroad. It can also apply where intangible assets are transferred; for example a UK individual may transfer his services to an offshore company. A transfer may be made by way of sale or purchase of assets, or by way of gift.
If the relevant conditions are satisfied, any income arising to a person abroad can be taxed by this legislation, whether UK source income (dividends from a UK company, UK property rental income, etc.) or foreign source income (trading profits of a non-resident company, foreign dividends, other foreign investment income, etc.).
There are special rules where the individual is non-UK domiciled, and is a remittance basis user. Such an individual will be taxable only in respect of UK source income and foreign income remitted to the UK.
An individual may have power to enjoy the income arising to a person abroad in a wide variety of ways such as a shareholder of an overseas company, a beneficiary of a non-resident trust, or by benefiting in some other way. The individual does not have to actually receive any of the income at all. Only ordinarily resident individuals can be taxed by Sections 721 and 727. It is not necessary for the individual to have been ordinarily resident in the UK at the time of the transfer. Legislation was changed with effect from 26 November 1996 to make this clear. So the legislation may apply where an individual transferred assets whilst resident abroad and later comes to the UK.
Where a transfer of assets or any associated operations involve the creation of a non-resident trust or settlement, the settlor may be chargeable under the provisions of Chapter 5, Part 5 ITTOIA 2005 (see TSEM4010 onwards). If you discover the existence of a non-resident trust (i.e. a trust for which some or all of the trustees are non-resident) you should contact SPT Trusts & Estates Nottingham, to check if a record already exists. If SPT Trusts & Estates Nottingham does not already know of the existence of the non-resident trust, they will create a record to monitor ongoing UK tax liabilities of the settlor, any beneficiaries and of the trustees.
Where the trustees of a non-resident trust or settlement realise capital gains, the settlor or beneficiaries may be chargeable to Capital Gains Tax under the provisions of TCGA92/S86 or S87, see CG38200 onwards.