INTM601040 - Transfer of assets abroad: The income charge: Meaning of capital sum

For the purpose of the income charge – receipt of/entitlement to capital sums, the term ‘capital sum’ is specifically defined in ITA07/S729(3) and means:

• any sum paid or payable by way of a loan or repayment of a loan, and
• any other sum paid or payable otherwise than as income, and not for full consideration in money or money’s worth.

Where the capital sum is receipt of a loan in any earlier tax year, the relevant charging condition set out in INTM601020 is not met merely because of that receipt if the loan is wholly repaid before the relevant year begins. The ‘relevant year’ is a tax year, that is a tax year for which liability would otherwise arise.

Example

In years 1 to 4 income arises to a person abroad as a result of a relevant transfer by an individual. The individual does not have any power to enjoy the income or entitlement to a capital sum, but in year 2 receives a loan. In year 3 the loan is repaid in full, and there is no ongoing entitlement to further loans or other capital sums. In these circumstances there would be an income charge in years 2 and 3.

There would also be an ongoing charge for year 4 but for the proviso above relating to repayment of a loan, where that is in effect the only feature that triggers the income charge - receipt of entitlement to capital sums.

In addition, a sum is treated as a capital sum which the individual receives or is entitled to receive if another person receives or is entitled to receive it at the individual’s direction or as a result of the assignment by the individual of his right to receive it.

This might include, for example, a situation whereby an individual is able to direct an overseas person to make a payment to one of his creditors or can direct that a loan be made to a third party. The payments being ‘capital’ in nature may amount to a capital sum for the purpose of this test.

It is not only the receipt of a loan by an individual that is a capital sum. The making of a loan by an individual to a person abroad can also satisfy this meaning, as it carries with it the entitlement to repayment.

This entitlement would be an entitlement to a capital sum, and thus the condition would be met from the time that the loan is made to the person abroad. Any repayment of such a loan would itself be the receipt of a capital sum by the individual. This capital sum is not itself a loan and consequently ITA07/S729(2) does not apply (as this only applies to loans to the transferor), and so the repayment of the loan by the person abroad will not in itself stop the income charge from running in the years following repayment.

In order to stop the income charge from continuing to apply, the individual will need to demonstrate that there was no ongoing entitlement of any description to a capital sum and each case will depend on its facts. Alternatively, rather than the person abroad repaying the loan, if the individual waives the right to repayment, then the individual’s entitlement to receive a capital sum ceases and for the following years the capital sum condition will not be met, and no charge will arise.