• Print this page

Today's consultation document for a 'Principles Based Approach to Financial Products Avoidance' provides updated draft legislation on the transfers of income proposals. The anticipated commencement date is 1 April 2009 and will apply to transfers that take place on or after that date.

The broad principle of these proposals is to ensure that an existing income stream continues to be taxed as income in the hands of the transferor and that the character of the return for tax purposes cannot be changed by transferring the income stream to another person.

The draft provisions have been updated to include a much wider definition of 'transfer' to include sale, exchange, gift and assignment and any other arrangement that equates in substance to a transfer (for example, issuing a financial instrument).

The provisions ensure that the market value of the right to the income stream (referred to as 'relevant receipts') is brought into account as income of the transferor, chargeable to corporation tax in the same way as the receipts would have been chargeable but for the transfer. The income is treated as arising in line with the recognition of the transfer consideration in the accounts of the transferor. If the consideration is not recognised in the accounts (to any extent), it is treated as arising at the time of the transfer. The same treatment applies to any income representing the extent to which the market value exceeds the consideration for the transfer.

Equipment lessors will note that the proposed rules also apply to the transfer of equipment rentals. Indeed the rules apply even when an equipment asset already out on lease is itself transferred except to the extent that the sale proceeds are otherwise taxed as a capital allowance disposal receipt or as income. It is not clear how these rules will interact with the existing 'trade succession rules'.

Exclusions

These provisions do not apply if the transfer is a consequence of a transfer of shares where the rights over the shares extend beyond the 'relevant receipts', or if the transfer is of a freehold interest in land or the grant of a long (50 years) lease over land, or where the consideration for transfer is already taxed as income, profits or brought into account under the capital allowances regime.

The charging provision does not apply if and to the extent that the consideration for the transfer (or the market value if greater) is brought into account as income of the transferor, in calculating the profits of the transferor, or is brought into account under the capital allowances regime.

There are also provisions to treat the transferee as party to a loan relationship in respect of the consideration for the transfer, to the extent that it is recognised as a financial asset in its GAAP accounts.

There are also provisions dealing with transfers of income for individuals.