In Andreas Rialas v HMRC [2019] TC07316 the FTT found the Transfer of Assets abroad rules did not apply to dividend income: Mr Rialas was not the transferor of shares acquired by his offshore family trust from his former business partner.
The Transfer of Assets Abroad rules (TOAA) are anti-avoidance rules designed to prevent UK residents transferring the ownership of assets overseas whilst continuing to benefit from the income from those assets without suffering UK income tax on them. They were originally in s739-746 ICTA 1998, now s714-751 of Income Tax Act 2007.
- They are very wide ranging but have a motive defence test which can ensure no tax is due.
Mr Rialas was a non-domiciled UK resident for the tax years in question. He owned 50% of a UK company, Argo, and wished to buy out his business partner Mr Cressman to enable a third-party sale to take place:
- In May 2005 he set up an offshore discretionary family trust (the trustees were a company resident in Cyprus) which owned a non-UK company (“BVI”), to acquire the shares for $15m.
- Following the sale of the shares, dividends were paid by Argo to the BVI company.
- In January 2007 Mr Rialas and the BVI company sold the shares in Argo to a third party.
HMRC assessed Mr Rialas to income tax of £1,094,067 on the dividends paid by Argo:
- Either Mr Rialas was the transferor of assets to a person abroad, resulting in dividends (on shares in Argo) being received by a person abroad and he had the power to enjoy that income or
- he procured the transfer and had the power to enjoy the income.
Mr Rialas claimed:
- He was not the transferor of the shares, nor did he procure the transfer.
- In the event that he was the transferor the motive defence applied.
- The imposition of a liability to income tax under s739 ICTA would infringe his right to free movement of capital under Article 56 of the Treaty Establishing the European Union.
The FTT allowed the appeal:
- Mr Rialas was not a transferor of assets abroad; he did not transfer Mr Cressman’s shares to BVI nor did he procure their transfer, although there were circumstances where an individual could be found to be procuring a transfer such that the rules would apply.
- Had he been a transferor he could not claim the motive defence; one of his purposes in setting up the structure was the avoidance of Inheritance Tax.
- The £10 he used to set up BVI was not a "transfer" for TOAA purposes; the rules are to deter the transfer of income-producing assets already owned, not those assets being newly set up and if there was a transfer here all non-resident trusts could be caught by the TOAA rules which was "simply going too far".
- Had he been a transferor the tribunal would have had to disapply the TOAA as, in this particular case, the rules were not compatible with the EU principle of free movement of capital because they were penal in their effect.
Links to our guides:
Transfer of assets abroad (TOA)
External link:
Andreas Rialas v HMRC [2019] TC07316