UK residents are normally taxed on their worldwide income. However, HMRC generally cannot tax foreign income that belongs to a non-UK resident.
This could allow a UK resident to transfer income-producing assets to an offshore trust or company while continuing to benefit from the income.
The Transfer of Assets Abroad rules prevent this type of tax avoidance. This article focuses on the charge under section 720 Income Tax Act 2007.
When can section 720 apply?
Section 720 can apply where a UK resident transfers assets to a person or entity abroad but retains the ability to benefit from the resulting income.
Common examples include:
- Transferring investments to an offshore trust from which the individual or their family can benefit.
- Transferring money or assets to an offshore company controlled by the individual.
- Subscribing for shares in an offshore company that later provides benefits to the individual or their family.
The three main conditions
For the section 720 charge to apply, three main conditions must be met.
1. Power to enjoy the income
The transferor must have the power to enjoy the foreign income.
This does not mean that the income must be paid directly to them. It may be enough that the income can be used for their benefit or for the benefit of their spouse or civil partner.
2. The income would be taxable
The income must be of a type that would be subject to UK income tax if it belonged directly to the transferor and was received in the UK.
3. The transferor is UK resident
The person who transferred the assets must be UK resident in the relevant tax year.
How much is taxed?
The income arising to the offshore person may be treated as the transferor’s own income.
This can apply even if the offshore trust or company keeps the income and does not pay it to the transferor.
The income is generally taxed according to its original character. For example, offshore dividend income attributed to the transferor will generally be taxed as dividend income.
Example
David is UK resident and owns an investment portfolio.
He transfers the portfolio to an offshore trust. David and his wife are both beneficiaries of the trust, meaning that they can benefit from its income.
During the tax year, the trust receives £20,000 of dividends. The trustees keep the money inside the trust and do not pay anything to David.
Section 720 may still apply because:
- David transferred the investments abroad.
- David and his wife can benefit from the trust.
- David is UK resident.
- The dividends would have been taxable if David had received them directly.
The £20,000 may therefore be treated as David’s dividend income. David could be required to report it on his UK tax return and pay UK tax, even though he did not receive the money.
Is there an exemption?
The rules should not normally apply to a genuine commercial transaction where tax avoidance was not one of its purposes.
For example, an arm’s-length sale to an unrelated overseas buyer should normally fall outside the rules if the sale is made at market value.
However:
- There is no HMRC clearance procedure.
- The taxpayer must show that tax avoidance was not a purpose of the transfer.
- This may be difficult where there is no clear commercial reason for the arrangement.
The main point
Transferring assets or income to an offshore trust or company does not necessarily remove the income from UK tax.
If a UK resident transfers the assets but can still benefit from the income, section 720 may treat that offshore income as their own income.
Anyone considering an offshore trust, company or similar arrangement should obtain UK tax advice before transferring the assets.
This article provides general information only and does not constitute tax advice.
