Great care should be taken when planning any loss making transactions involving connected parties.
Background
In December 2005 the Chancellor of the Exchequer announced the introduction of new targeted anti-avoidance rules (TAAR) to prevent the artificial creation and use of capital losses made by companies (TCGA92 s8(2A) to s8(2C) and TCGA92 s184A). With effect for disposals made on or after 6 December 2006 TCGA92 s8(2A) to s8(2C) were withdrawn and new targeted anti-avoidance rules were introduced for all taxpayers including individuals, personal representatives, trustees and companies.
The press release issued at the time said that the aim was to block tax relief for artificially created losses, whether the tax advantage would be obtained by the person realising the loss or a third party. The TAAR was intended to apply where tax avoidance was the main purpose (or one of the main purposes) of a transaction or a series of transactions.
The legislation
The legislation was included in Finance Act 2007. The relevant clause (now included at TCGA92 s16A) is relatively short, but the wording used could cover a large number of fairly standard transactions. However the guidance subsequently issued by HMRC does say that a number of those standard transactions will not be attacked using the legislation.
The legislation applies where a loss accrues to the person directly or indirectly in consequence of arrangements where the main purpose or one of the main purposes of those arrangements was to secure a tax advantage. Arrangements is defined widely and tax advantage includes relief or increased relief, repayment or increased repayment of tax, avoidance or reduction of a charge or assessment to tax, and avoidance of a possible assessment to tax.
The taxes covered by the TAAR are capital gains tax, corporation tax and income tax.
HMRC Guidance
The detailed HMRC guidance became available in July 2007 (see HMRC manuals CG15835 and CG/APP9) although the legislation applies to transactions which took place on or after 6 December 2006. The guidance covers 18 examples.
The Government was criticised for introducing legislation which appears to catch many straightforward transactions and then taking those transactions out of the tax net by means of guidance notes which are neither comprehensive nor clear. This process has been referred to by the professional bodies as "taxed by law and untaxed by concession". It may be that the authorities deliberately intended leaving the guidance unclear in order to dissuade taxpayers from entering into transactions that might be caught by the TAAR.
HMRC guidance – examples
HMRC guidance for various transactions is considered below.
Straightforward disposals of assets
The notes make it clear that where a taxpayer owns two assets, one standing at a loss and one standing at a gain, it is perfectly permissible to dispose of both holdings. The loss on asset one would be available to set off against the gain on asset two (see APP9 Introduction note 4).
Straightforward transfer between spouses
Where a husband has shares in a company which are standing at a loss and his wife has shares in another company which are standing at a gain, the guidance says it is perfectly permissible for the husband to transfer his shares to his wife under the no gain, no loss exemption for spouses. The wife can then sell both holdings and set the loss on one against the gain on the other (APP9 example 5).
Husband sells shares and wife subsequently buys a similar amount of shares in the same company ("bed and spouse")
One example (APP9 example 4) provided by HMRC concerns a case where the husband disposes of shares at a loss in order to set off against gains on other assets. His wife subsequently buys shares of the same class in the same company, but the husband did not know the wife planned to do so and the wife was unaware of the husband's disposal.
In those somewhat unusual circumstances HMRC says that there would be no restriction on the husband's loss.
While the guidance notes do not explicitly say so, the inference is that if the wife was aware that the husband had sold his shareholding, or the husband sold his shares knowing that the wife was going to repurchase a similar number, then the TAAR would apply.
Another example (APP9 example 6) does make it clear that where a husband disposes of shares standing at a loss and his wife subsequently repurchases the same number of shares in the same company and transfers them back immediately to the husband, the HMRC considers that the loss made on the original disposal will be blocked by the TAAR.
Another example (APP9 example 7) considers the position where one spouse disposes of shares in a particular company and then the other spouse then subsequently repurchases a "small proportion" of that holding. The notes indicate that the TAAR would be unlikely to apply in those circumstances, but unfortunately gives no clue as to the definition of "small proportion".
Bed and ISA (and Bed and SIPP)
The guidance notes do not specifically cover the case where an individual disposes of shares held in his personal portfolio which are standing at a loss and then repurchases the same number of shares in the same company in his ISA portfolio ("bed and ISA"). However we understand that HMRC takes the view that this will be looked at in the same way as "bed and breakfast" transactions involving spouses, referred to above.
Bed and breakfast
It appears that the TAAR will not apply where shares are repurchased more than 30 days after the original disposal, provided that there are no special arrangements in place regarding limiting the share price on the re-acquisition.
General
This Briefing Note is based on the guidelines issued by HMRC. As HMRC's guidance does not have statutory effect, any loss-making transactions involving connected parties should be planned with great care. The Chartered Institute of Taxation has commented on the legislation, guidance and examples and their comments can be found at: www.tax.org.uk/Resources/CIOT/Migrated Resources/d-f/example-2-capital-loss-set-against-income.pdf.
Consideration should also be given to appropriate disclosure to protect against discovery assessment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
