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In the recent case of Beneficiary -v- Commissioners of Inland Revenue the taxpayer successfully appealed against a section 740 assessment on the ground that there was a defence under section 741. When assets are transferred abroad section 740 ICTA 1988 imposes an income tax liability in certain circumstances on individuals other then the original transferor. Section 741 ICTA 1988 provides a defence if the transfer was not done to avoid a tax liability or if it was a bona fide commercial transaction.

The grandfather was resident and domiciled in Japan. He did not wish the family fortune to come under the control of his daughter. He also wished to make his UK domiciled granddaughter financially independent. Under Japanese law his daughter would have gained his inheritance on his death.

He transferred money from Japan to a London bank. His UK lawyer advised him to transfer this to the Channel Islands to avoid a possible inheritance tax liability. He transferred the money to the Channel Islands and settled this on discretionary trusts for the granddaughter and her issue and he informed the trustee that she was to be the primary beneficiary. He also wished the money to be safe and professionally managed. The trustee subsequently appointed capital to the granddaughter.

The Inland Revenue contended first that the making of the settlement was the relevant transfer; second, the transfer of the funds from London to the Channel Islands was the relevant transfer and the making of the settlement was an associated operation. The granddaughter contended first that tax avoidance was not the purpose because the granddaughter could have used a qualifying foreign currency account (ie. a non-sterling account with a bank or the Post Office). Second, the purpose of the transfer ought to be determined from the grandfather`s subjective intentions when he made the settlement. Third, even if the grandfather had considered the tax situation, that did not amount to tax avoidance.

The Special Commissioners found that the section 741 test was subjective (and not an objective) test. They found next that the transfer of money from London to the Channel Islands did not amount to tax avoidance but was merely tax mitigation as the grandfather could have used a qualifying foreign currency account. Last, they found that there was no actual evidence that the grandfather had a tax avoidance motive when he made the settlement. There was no evidence that he sought UK tax advice. He was not concerned where the geographical location of the settlement was even though his advisers were. Overall he seems to have established a defence under Section 741. It is understood that the Revenue will appeal against the decision.


The Special Commissioners` view that the purpose test in section 741 should be subjective and not objective is contrary to the Inland Revenue view as set out in its Interpretation. The Inland Revenue also takes account of the role of advisers.

Although the Special Commissioners took the view that tax mitigation was involved, the Inland Revenue took the view that tax avoidance was involved; the boundary where one shelves off into the other remains to be seen.

The outcome of the likely appeal will be awaited with interest as it should help to define the purpose test and tax avoidance.


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