Background
The UK tax system contains two key pieces of anti-avoidance legislation designed to prevent assets being transferred or held overseas to avoid UK tax.
The first of these relates to chargeable gains and aims to prevent UK resident individuals keeping assets outside the scope of capital gains tax by holding them through a closely controlled company resident abroad.
The second provision is often known as the 'transfer of assets abroad' legislation. This aims to prevent UK ordinarily resident individuals (UK resident individuals from 6 April 2013) avoiding income tax through a transfer of assets so that income becomes that of an offshore person while the UK individual continues to be able to enjoy the income or to receive entitlement to capital or other benefits as a result of the transfer.
On 16 February 2011 the European Commission issued infraction notices in relation to these two pieces of tax legislation stating the current UK tax rules are 'disproportionate' and incompatible with the treaty freedom of the single market. Following consultation, the UK Government published a response and draft amending legislation on 11 December 2012 for inclusion in Finance Bill 2013. It remains to be seen whether these steps are sufficient to satisfy the EU Commission.
Gains attributed to members of a closely controlled non-resident company
Section 13 TCGA in effect looks through a non-UK resident closely controlled company, and attributes chargeable gains realised by the company to UK resident participators. This has been subject to a de minimis rule where the amount to be attributed to participators and connected persons does not exceed 10% of the company's gains.
Gains on trading assets used for non UK trades have been excluded from charge under Section 13 TCGA.
The Government proposals published on 11 December 2012 will increase the threshold at which participators and connected persons may have gains attributed to them from over 10% to over 25%.
There will also be two new exemptions.
- Gains on assets used only for genuine business activities overseas will be excluded from the scope of charge. The draft legislation refers to 'economically significant activities'' which are defined as activities which consist of the provision by the company of goods or services to others on a commercial basis and that involve use of staff in numbers, the use of premises and equipment and the addition of economic value to those to whom the goods or services are supplied. .
- Cases that satisfy a 'motive test' whereby it can be shown that no tax avoidance motive was not the, or a main, purpose of the arrangements of which the acquisition, holding or disposal of an asset formed a part. This is a welcome development as previously s13 could apply even if there was no tax avoidance intended.
In addition there is a clarification as to how the current exemption for assets used for the purposes of a trade carried on outside the UK will apply to properties used for furnished holiday lettings (FHL). However for these purposes there are some modifications to the rules as to what will be treated as a 's13 FHL'.
These amendments will have retrospective effect in relation to disposals on or after 6 April 2012. In the case of a disposal made on or after 6 April 2012 but before 5 April 2013, a person to whom a part of a chargeable gain or allowable loss would (but for these amendments) have accrued on the disposal may make an election in writing for Section 13 to apply in relation to the disposal without the amendments.
Transfer of assets
There are two existing exemptions from the transfer of assets charge where specific conditions are met. It is necessary to demonstrate that either there was no tax avoidance purpose to the transfer (or operations associated with the transfer) or the transactions are genuinely commercial in nature and any tax avoidance purpose was incidental.
Legislation will be introduced in Finance Bill 2013, with retrospective effect from 6 April 2012, to create a new exemption which operates where the EU treaty freedoms are engaged and which focuses on whether the nature of transactions is genuine and whether they serve the purpose of the freedoms. Unlike the existing exemptions, this does not depend on the purpose for which the transactions were effected. Instead, it relies wholly on objective criteria around the economic circumstances of the transactions. In essence, the new test identifies arm's length transactions that are carried out for the purposes of genuinely commercial activities that take place overseas. Income attributable to such transactions will not be charged to tax under the transfer of assets legislation.
Under the new exemption, income is left out of account in a transfer of assets charge if it is attributable to a relevant transaction that is a qualifying arm's length transaction. Specific clauses define what constitutes a 'genuine'' transaction. Where the assets transferred are used for the purposes of or received in the course of, activities carried out in a territory outside the UK, by a person who has a business establishment in that territory, those activities must consist of the provision of goods or services to others on a commercial basis. The activities must involve the use of sufficient staff with the appropriate level of competence and authority to carry them out. Also, the activitiesmust involve the use of premises and equipment commensurate with their size and nature. Finally, the activities must also involve the person who has the business establishment adding a commensurate level of economic value to the customers to whom the goods or services are provided.
The draft legislation specifically states that the arm's length test will not apply where the relevant transfer is made by an individual wholly for personal reasons, no consideration is given and all assets and income are used in this respect. It is stated that this may be the case, for example, where an individual settles assets into a non-resident trust for the benefit of his family.
In a straightforward and welcome proposal, the amending legislation excludes companies that are incorporated outside the UK, but that are resident in the UK, from the definition of a 'person abroad'.
Amending legislation also clarifies how benefits received by an individual are matched to the 'relevant income' arising to the person abroad under the non-transferor provisions. These computational changes generally have effect for income treated as arising in 2013/14 and subsequent years.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
