Non-domiciled taxpayer did not transfer assets abroad

In HMRC v Andreas Rialas [2019] UKUT 0140, the Upper Tribunal (UT) dismissed an appeal by HMRC, finding the Transfer of Assets Abroad rules did not apply to dividend income as Mr Rialas was not the transferor, or sufficiently involved in the transfer, of shares acquired from his former business partner by his family trust.

The Transfer of Assets Abroad rules (ToAA) are wide-ranging anti-avoidance rules designed to prevent UK residents from transferring assets overseas whilst continuing to benefit from the income they produce without suffering UK Income Tax. 

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 trust for the benefit of his family.
• The trustee was a company resident in Cyprus.
• The trustees incorporated a non-UK company (BVI).
• BVI borrowed $15m from a third party and purchased the shares in Argo from Mr Cressman.
• Following the share purchase, dividends were paid by Argo to BVI.
• In January 2007 Mr Rialas and BVI 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 under the ToAA provisions as:

• Mr Rialas had transferred assets, resulting in dividends 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 appealed on the basis that:

• He was not the transferor of the Argo shares, nor did he procure the transfer.
• In the event that he was the transferor the motive defence applied.
• The imposition of a charge to Income Tax under the ToAA provisions would be in breach of his right to freely move capital under Article 56 of the Treaty Establishing the European Union (the EU defence).

The First Tier Tribunal (FTT) allowed the appeal, see Andreas Rialas v HMRC [2019] TC07316.

• 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.

HMRC appealed to the UT.

The UT dismissed the appeal confirming that:

• Mr Rialas was not the transferor in respect of the purchase by BVI of the Argo shares from Mr Cressman.
• While Mr Rialas was the transferor in respect of the settlement of the trust, the receipt of dividend income by BVI was not as a result of that transfer, and Mr Rialas had insufficient involvement with the purchase of Argo shares to invoke the provisions.
• The UT did not consider the FTT conclusion that the motive defence did not apply as this was not contested by Mr Rialas.
• The UT did not consider the application of the EU defence.

Useful guides on this topic

Transfer of Assets Abroad
What are the ToA rules? When do they apply? Is there any defence against the rules?

Non-resident trusts
When is a trust non-resident?  What are the UK tax implications of a non-resident trust?  What are the UK tax implications for any beneficiaries?  What are the UK administrative requirements for a non-resident trust?

SRT: Statutory Residence Test
What is the statutory residency test? Why is it important and how does it work?

Non-domicile status, deemed domicile and tax
Who is non-UK domiciled? What does this mean for UK Income Tax, Capital Gains Tax and Inheritance Tax? What reliefs are available to non-doms?

External Link

Andreas Rialas v HMRC [2020] UKUT 0368