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May 5, 2020

No Motive - Transfer of Assets Abroad (Davies & Others v HMRC)

The Upper Tribunal has found that Mr Davies, Mr McAteer and Mr Evans-Jones (the taxpayers) could not benefit from the Motive Exemption or Treaty Relief in relation to overseas property income subject to UK tax under the Transfer of Assets Abroad rules.

Transfer of Assets Abroad Rules 

The transfer of assets abroad (TOAA) rules were brought in in their original form for income tax in 1935, and extended to capital gains tax (CGT) in 1965. The rules are complex and far reaching, but in short they may apply where non-UK resident companies or trusts are created which can benefit UK-resident individuals.

An income tax charge will apply to the individuals where the following conditions are met:

  • There must be a transfer of assets by (or procured by) an individual.
  • As a result of the transfer (alone or in conjunction with associated operations), income becomes payable to a person abroad (e.g. a company or a trust).
  • The individual has power to enjoy that income in some way as a result of a transfer of assets alone or together with associated operations, or receive/be entitled to receive a capital sum in any way connected with any relevant transactions.
  • The individual must be ordinarily resident in the UK in the year of liability.

Motive Defence/Exemption

A Motive Defence can be used to dis-apply the income tax charge where the individual can demonstrate that it would not be reasonable to conclude from the circumstances that avoiding tax was one of the purposes of the transaction, or otherwise satisfy HMRC that the transactions(s) was carried out for genuine commercial purposes and that any avoidance of tax was nothing more than incidental.

The Motive Exemption is not automatic and must be claimed in a self-assessment tax return.

Treaty Relief 

The UK has double tax treaties with many countries to protect against the risk of double taxation where income/gains are liable to tax in more than one jurisdiction.


The taxpayers sought to acquire a development property in the UK. This was facilitated through a Mauritian company, ABP Properties Ltd, on the basis that any profits would be taxable in Mauritius only under the UK-Mauritian double tax treaty (DTT).

The taxpayers each took out a life policy with Suisse Life & Pensions (Bermuda) Ltd, the owner of ABP Properties Ltd, and the taxpayers' entitlements under their life policies were in turn linked to ABP.

HMRC issued discovery assessments to the taxpayers, on the basis that the were subject to tax on the income of ABP Properties Ltd under the TOAA rules.

The case was brought to the First Tier Tribunal (FTT), where the taxpayers argued that the TOAA rules should not apply. They relied on the motive exemption, and should this fail, they argued that they were not liable to be taxed under the TOAA rules under Article 7 of the  DTT.

The FTT found that the motive exemption should not apply, and that relief would not be available under the DTT. The taxpayers appealed to the Upper Tribunal (UT).

The Case 

It was accepted that the taxpayers had made a transfer which fell within the TOAA rules. The questions was whether the Motive Defence could apply to exempt the income from UK tax.

The taxpayers argued that purpose of the transactions was to acquire pensions, however the UT agreed with the FTT's findings that the choice of pension arrangement also involved tax avoidance. It was on this basis that the Motive Exemption should not apply.

The taxpayers also argued that the income was not subject to tax under the DTT, and that this position should not change as a result of the application of the TOAA rules.

The UT provided that the DTT dealt with the taxation of a companies' profits, but not the UK's power to tax its residents. The income ABP Properties Ltd was found to be taxable in the UK on the individuals.

Concluding Thoughts

The TOAA rules are not straightforward to apply and have a wide reach. It may be necessary to consider not only the facts of the situation, but also relevant DTT articles, statutory provisions, and case law to determine whether income/gains are taxable in the UK.

If you are concerned that you overseas activities may be taxable in the UK, please contact our team.

Related Articles 

Home Or Away? Company Residence And CMC (23 October 2019)

Extra-Territorial Reach of HMRC Information Notices (31 May 2019)


Contact us today to discuss your tax requirements.
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