Transfers of Income Streams - Mazars - United Kingdom
Transfers of Income Streams
Current anti-avoidance provisions target specific types of transactions whereby a person gives up a right to future taxable income for what is claimed to be a tax free capital receipt.
Rather than introduce further anti-avoidance provisions as new structures or variations of previously blocked structures come to HMRC’s attention, at PBR 2007 it was proposed to introduce a generic anti-avoidance provision. This would have a wide scope to re-characterise receipts as income for tax purposes. Also the new income stream anti-avoidance provision would replace existing specific anti-avoidance legislation.
Following extensive consultation, HM Revenue & Customs has issued revised draft legislation dealing with situations where there is a transfer of a right to income, by a company or an individual, but without a transfer of the underlying asset. The purpose of the new rules is to ensure that the consideration for the transfer is taxable as income in the hands of the transferor. This is, however, limited to the underlying amounts which would normally have been taxed on the transferor as income. By way of example, on a sale of lease rentals under a long funding lease, the element of the consideration relating to a sale of the finance margin element would be potentially taxable, but consideration in respect of the underlying principal would not be. Where the consideration received is significantly less than market value, the difference will also be taxable on the transferor. The explanatory note states that the market value rule is only expected to apply exceptionally where it is clear that the transaction is not at arm’s length, or where it has been structured to make the consideration appear less than it actually was. The consideration will normally be taxable in the period or periods in which the consideration is recognised under Generally Accepted Accounting Practice for companies or businesses, or in the tax year in which the transfer takes place for individuals.
The rules do not apply where the underlying asset is also transferred, except in the case of annuities. Certain other transfers are treated instead as asset transfers, being the grant of a lease of land and the disposal of an oil licence interest in an oil licence. Existing legislation which can tax some or all of capital receipts on such grants or disposals as income will continue to apply.
To avoid double taxation, the transferee will be able to amortise the cost of acquisition of the income stream, with a tax charge only arising on the difference between cost and income.
The draft legislation is of a new breed of ‘purposive’ legislation, in that it states the broad aims of the legislation rather than prescriptively setting out each situation where the rules apply. It is subject to further consultation but is expected to come into force with effect from Budget Day on 22 April 2009. We expect further changes are likely to be made, for example the order of priority between these rules and the loan relationships rules for companies, but there will undoubtedly be concerns that these provisions may apply to a number of practical situations, such as the transfer of assets to a partnership, which are not the real motivation for the legislation.
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