The Transfer of Assets Abroad rules: room for improvement?

The UK Budget of 30 October 2024 has significantly changed the UK tax landscape. In addition to the new rules being introduced from 6 April 2025, the Treasury has also called for evidence on how the rules for personal offshore tax anti-avoidance can be modernised, aiming to removing ambiguity and uncertainty. The amendments will take effect no earlier than 6 April 2026, with submissions closed from 19 February 2025. 

The Transfer of Assets Abroad rules (the ToAA, set out between sections 714-751 of the Income Tax Act 2007, the Act), were first introduced in 1936. The current ambiguity in the legislation has resulted in it being subject to extensive litigation since its inception. Most recently, in December 2023, HMRC was heavily criticised by the Supreme Court in the Fisher case for assuming powers they did not have. HMRC’s apparent view that the penal ToAA provisions work better to achieve their aim if taxpayers are unable to know whether they would be caught or not, was described as “improper” and having an “unconstitutional” flavour. The Court found that the Fishers were not transferors for the purposes of the legislation, on the basis that a transfer made by a company could not be imputed to the individual shareholders, and that if any lacuna was left in the legislation, the Government would need to “think carefully about how to fill that gap in a fair, appropriate and workable manner”. The Government’s response to this was swift, and updated legislation was published in the Spring Budget to take effect from 6 April 2024.

In light of Fisher and the movement by the courts to interpret the legislation narrowly, this call for evidence provides an opportunity to proactively clarify the legislation, rather than wait for the courts to force reactive changes or continue to rely on complex case law. We have highlighted some areas in the ToAA which we believe could benefit from this exercise, specifically around the relevance of “associated operations”, when assets “represent” other assets, and the identity of the relevant taxpayer. Clarification would provide greater certainty for both the taxpayer and HMRC, and reduce the need for both parties to engage in lengthy litigation. There are other aspects of the legislation that are ripe for reform which we do not cover here, such as the availability of the motive defence (including clarification of the distinction between “avoidance” and “mitigation”) and how multiple transfers into the same structure are treated. Whilst there might be some resistance from HMRC to “narrowing” the rules, a key lesson from Fisher is that ambiguity is not always favourable for them. 

Associated operations

The concepts surrounding associated operations are significant to the legislation, as they determine what income is caught by the rules. However, these concepts remain very case law-dependent despite the legislation, particularly in relation to the relevance and timing of associated operations. The legislation provides the following definitions for relevant transfers and associated operations:

716 Meaning of “relevant transfer” and “transfer”

(1) A transfer is a relevant transfer for the purposes of this Chapter if—

(a) it is a transfer of assets, and

(b) as a result of—

(i) the transfer,

(ii) one or more associated operations, or

(iii) the transfer and one or more associated operations, income becomes payable to a person abroad.

719 Meaning of “associated operation”

(1) In this Chapter “associated operation”, in relation to a transfer of assets, means an operation of any kind effected by any person in relation to—

(a) any of the assets transferred,

(b) any assets directly or indirectly representing any of the assets transferred,

(c) the income arising from any assets within paragraph (a) or (b), or

(d) any assets directly or indirectly representing the accumulations of income arising from any assets within paragraph (a) or (b).

(2) It does not matter whether the operation is effected before, after or at the same time as the transfer.

Perhaps understandably, HMRC may be inclined to draw the widest possible definition permitted by the legislation, which can lead to perverse outcomes.

Relevance and timing

Case law does provide some guidance, in that there must actually be a factual association between the operations (Corbett’s Executrices), and the associated operations must be “relevant” in causing income to be payable to the taxpayer (Herdman), where relevant operations are “those by means of which, in conjunction with the transfer, a taxpayer could enjoy the income and did not include associated operations taking place after the transfer had conferred on the taxpayer the power to enjoy the income.” The legislation was amended for transfers and associated operations taking place on or after 5 December 2005, so that “irrelevant” associated operations must be taken into account when applying the purpose test of the motive defence.

In terms of timing, associated operations can take place before or after the relevant transfer, and on the face of the legislation there is no time limit. In practice it has been left to the courts to determine when the line of relevance should be drawn, creating uncertainty. An adviser might take the view that an associated operation 20 years ago is unlikely to be relevant to a transfer being considered in the present, but strictly under the legislation this could be in scope. A possible solution might be to introduce a rebuttable presumption in favour of the taxpayer that operations separated by three or five years, for example, are not relevant unless HMRC can demonstrate that they form part of a single arrangement. 

Assets directly or indirectly representing any of the assets transferred

A relevant transfer or associated operation may involve original assets, or “assets representing assets” (per s717 of the Act). The term “represent” is not defined in the Act and takes its ordinary meaning, so there is room for argument over what this means. 

Some examples will be quite clear. If an individual sells House A and uses the proceeds to buy House B, it seems reasonable that House B is a replacement for House A, so the value can be traced horizontally across.

Where matters are less clear is in vertical representation. Instead of a replacement asset, what if there is a structure of assets holding other assets? How far through this structure does the representation argument follow when considering operations associated with a relevant transfer at the top of the structure? 

For example, consider a trustee of an offshore trust, which holds a trading group of companies. Part of the group was funded by a relevant transfer of assets into the trust. However, part of the group pre-dates this transfer and its operation does not relate to income associated with this transfer.

Several layers down the structure, an operating company sells widgets. Is each sale of a widget an associated operation, and each widget an asset representing the group? If the operating company was funded from the relevant transfer, it is clear that the sale of its widgets would be associated operations. But if an underlying company has not been funded from the assets transferred, the income from those assets, or assets representing the same, then HMRC should not be able to argue that it “represents” the value of all holding companies in the group.

Although there is some guidance on these points in case law, clarification in the legislation would be welcome.

Identity of the taxpayer

The ToAA applies to individual taxpayers, yet references in the Act to an individual also apply to their spouse or civil partner according to s714(4). However, it is not clear from the legislation whether the extended definition only applies in determining who has the power to enjoy income as a result of relevant transactions, so that the transferor and their spouse are relevant (which seems to be the likely intention), or whether it can be applied further. For example, if the individual transferor is deemed to include their spouse, does that mean their spouse can also be treated as a transferor? If so, HMRC would have discretion on which taxpayer they want to pursue where one member of a married couple made a relevant transfer. HMRC appears to take the view that the extended meaning can apply in circumstances where there are “wider arrangements” and civil partners/spouses are “in some way connected with relevant transactions and the results of relevant transactions” (as stated in the HMRC manual at INTM600460). There is no legislative support for that approach and little clarity on what it means. A couple may have completely different individual tax profiles, creating real uncertainty for them and their advisors if both could be treated as being the transferor. Clarifying whether this rule applies only to the power of enjoyment or also to the identity of the transferor (and in which precise circumstances) would alleviate this uncertainty. 

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2025