Background Note
46.In many cases where a person sells or otherwise disposes of a right to receive income (whether one amount or many) without selling the underlying asset from which the income derives, tax law provides that the sum obtained by the seller is taxed as income rather than as a chargeable gain.
47.This may be the result of case law or of specific statutory provisions, the most important of which are sections 730 (dividends), 775A (annual payments) and 785A (chattel lease rentals) of the Income and Corporation Taxes Act 1988 (ICTA).
48.These statutory rules are not comprehensive. There are also differences and inconsistencies in the way the various provisions work, and disclosures made under Part 7 of the Finance Act 2004 and other information shows that they have been the subject of attempts to avoid their operation.
49.The new legislation sets out a general principle that a lump sum received for the sale or transfer of income stream is subject to tax in the transferor’s hands in the same way that the income itself would have been (so there is no possibility of converting income into capital). The rule is subject to a number of exceptions.
50.The new legislation follows two consultation exercises on the use of principles-based drafting to counter avoidance in the areas of financial products. The consultation documents can be accessed at the following references:
