INTM600880 - Transfer of assets abroad: The income charge: Power to enjoy - condition A

Condition A - ITA07/S723(1)

Condition A is that the income is in fact so dealt with by any person as to be calculated at some time to enure for the benefit of the individual whether in the form of income or not.

To meet this condition the income must be for the benefit of the particular individual who is potentially subject to the charge. It will not be sufficient that the income is calculated to enure for a group of individuals.

The condition was considered in some detail in the case of CIR v Botnar (72 TC 205) where, in relation to particularly intricate facts, this power to enjoy was considered to be satisfied because the possibility existed of transfers between trusts, from a trust in which the individual was excluded from benefit to one where he or his wife could benefit. The case demonstrates once more the importance of a very careful consideration of all the facts in relation to a particular matter, especially where intricate or complex arrangements are involved.

The condition is designed to cover situations in which the income of a person abroad is accumulated, and the circumstances are such that the individual can be seen as the future beneficiary of the accumulation of income. For example, in a foreign company where the individual can, by say redeeming debentures, receive the income at a later date; or in a foreign trust, the future beneficiary of which is the individual. In either scenario the condition may be considered as satisfied.

The transaction may be carried out by any person. However, it must actually be carried out – the need for a finding of this fact was mentioned by Lord Simonds in Lord Vestey’s Executors v CIR (31 TC 1 at page 85) where he observes,

the opening words of the paragraph emphatically indicate that the question is one of that “the income is in fact so dealt with”, etc. If therefore reliance is placed upon it there should be an explicit finding of fact.

It is unlikely to be sufficient that the income may be calculated to be so dealt with in the future.

The meaning of the word ‘calculated’ in this test was considered briefly by Mr Justice Walton in Vestey v CIR (54 TC 503 at page 555) where he observes

that it was submitted to me that “calculated” … meant “likely”. This is, of course, one of its possible meanings, although a glance at the Shorter Oxford English Dictionary makes it quite clear that this is not a precise translation of the word “calculated”. On the other hand, its primary meaning is “reckoned, estimated, or thought out”, and I would think that this is the meaning which is intended here.

Walton J went on to say that he thought a stricter interpretation than “likely” is called for; that is the approach which HMRC have continued to follow in relation to this test.

The benefit may be present or future. It may be in the form of income or not and may include a payment of any kind. Prior to April 2007 the transfer of assets code included a meaning of ‘benefit’ for the purposes of the legislation saying: “benefit” includes a payment of any kind. Therefore, provided some benefit enures to the individual it need not be a money payment at all. In this context ‘enure’ means to take or have effect or serve to the use, benefit, or advantage of a person.

Some examples taken from case law illustrate this point.

In Latilla v CIR (25 TC 116), a non-UK company paid over income to the individual by repaying debentures held by her. Such a capital payment, if it results from dealing with the income of the person abroad, may come within this test. A capital payment may also trigger the income charge - receipt of/entitlement to capital sums; this is further dealt with at INTM601020 onwards.

In Lord Chetwode v CIR (51 TC 647), the whole share capital of a Bahamas company was held by the Bahamas trustee of a settlement for the benefit of Lord Chetwode and his family. Lord Chetwode had a life interest in the trust fund and had very wide powers, including power to remove or appoint trustees, and to re-vest in himself the title to the trust fund. The House of Lords said in their judgement that, in view of the terms of the settlement, in addition to power to enjoy under other conditions, the income of the underlying company was so dealt with as to be calculated to enure for Lord Chetwode’s benefit, and thus he had power to enjoy under this condition.