INTM600960 | Transfer of assets abroad: The income charge: Power to enjoy - condition E

Condition E - ITA07/S723(7)

Condition E is that the individual is able in any manner to control directly or indirectly the application of the income.

This test covers, amongst other things, the situation where the individual has a controlling interest in a foreign company, either by controlling the voting rights or other rights under the company’s Articles of Association.

An example of indirect control is found in the case of Lee v CIR (24 TC 207). In that case an individual transferred shares to a Canadian company in exchange for the issue to him of shares in the company. The individual was not a director but under the company’s by-laws he had power to elect and remove its directors, and his consent was necessary for any amendment to the by-laws and for the allotment and transfer of shares. It was decided that the individual had power to control the application of the income of the Canadian company within the meaning of this test, because of his power to appoint or remove the company’s directors (who in turn were able to control the company’s income). The fact that control was indirect was immaterial.

In Lord Chetwode v CIR (51 TC 647) the House of Lords found that, because Lord Chetwode retained extensive powers over the assets of a foreign settlement in which he had a life interest, he had power to enjoy within this condition because he could control the application of the income of the foreign underlying company whose shares were held by the trustees.

It may sometimes be thought that an individual who has transferred assets to a non-UK settlement for example, or who is associated with such a transfer, continues to have power to enjoy the income of the structure by virtue of this condition because of powers expressed in the settlement deed, with or without associated arrangements, such as, for example, a ‘letter of wishes’ or being a ‘protector’ in relation to the settlement.

However, the Special Commissioners decided in the case of CIR v Schroder (57 TC 94) that on the particular facts in that case the test was not met. They found that

Mr Schroder was able to appoint trustees who…could be expected to deal with the trust income in accordance with his wishes: but he could not compel them to do so and there is no suggestion that any of them would have acted in breach of their fiduciary duties under the settlements.

In dismissing HMRC’s appeal against the Commissioners’ decision The High Court appears in effect to have distinguished a position of influence from a position of control. Vinelott J said (page 125):

But the question in the instant case is not whether the settlor was likely to be able to influence or even to exercise a decisive influence over the exercise by the trustees of their fiduciary powers. The question is whether he was able to control the application of the income, and to answer that question affirmatively it must in my judgement be possible to say at least that he was in a position to ensure that the trustees would act in accordance with his wishes without themselves giving any independent consideration and accordingly to act in disregard of their fiduciary duty.

As Mr Schroder was within the category of persons defined as excluded from benefit under the settlements, there was no possibility of establishing a power to enjoy by any of the other tests in the particular circumstances of the case.

However, the test does not require that the individual is able to derive personal benefit from the power of control. Therefore, if in fact a settlor of a settlement, for example, does continue to have power to direct the application of income for the benefit of others, even though he himself may be specifically excluded from benefit, this power to enjoy condition may well be met.

In most cases it is unlikely that satisfaction of the power to enjoy test will rest on the basis of this condition alone.