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Matthew Hutton MA, CTA (fellow), AIIT, TEP, presenter of Monthly Tax Review (MTR), highlights HMRC’s view on the CGT treatment of qualifying corporate bonds after 5 April 2008, and on the possible application of income tax anti-avoidance rules on a share sale.

Matthew Hutton

QCBs – HMRC’s Analysis

A Policy Adviser for Capital Gains HMRC, has responded to a number of specific queries about the effect of the revisions on QCBs as follows:

‘You are asking about the way held over gains coming into charge on the disposal of QCBs will be treated if the QCBs are disposed of on or after 6 April 2008 if the proposals announced at PBR are accepted by Parliament and form part of the Finance Act 2008.

Where shares (etc) are exchanged for QCBs and TCGA 1992 s116(10) applies, the gain (or loss) calculated under paragraph (a) of s116(10) is the chargeable gain (or allowable loss) that would have arisen if the shares in question had been disposed of at the time of the exchange.  A chargeable gain is the gain after other reliefs and deductions etc, but is not the taxable amount after taper relief has been applied.  Taper relief under s2A is applicable where a person has net chargeable gains after deduction of allowable losses in a year of assessment.  But the proposal is that taper relief will not be available for the tax year 2008/09.

The position can therefore be illustrated as follows. 

Example

• Shares which cost £100,000 in 1999 are exchanged for a QCB in January 2005, at which time the market value of the shares is £160,000.
• S116(10) applies to the exchange.
• Maximum business asset taper relief is available in respect of the shares.

The chargeable gain held over under s116(10)(a) is £60,000. 

If the QCB is disposed of in January 2008 the chargeable gain will be liable to CGT in 2007/08.  If there are no allowable losses to set off against the chargeable gain in the year, it will benefit from 75% taper relief and £15,000 will be taxable at the individual’s marginal income tax rate (subject to the annual exemption).

If the QCB is disposed of in January 2009 the chargeable gain will be liable to CGT in 2008/09.  Taper relief will not be available for that year.  So, if there are no allowable losses to set off against the chargeable gain, £60,000 will be taxable at 18% (subject to the AEA).’

Risk of Having Past Gains Recategorised As Income

Context

When an individual sells shares in his company the consideration received may be a mixture of cash and loan notes or redeemable shares issued by the purchaser. In this situation it is standard practice to seek a clearance under ITA 2007 s701 (previously TA 1988 s707) that any income tax advantage obtained will not be counteracted by ITA 2007 s698 (previously TA 1988 s703).

HMRC practice

A representative of the HMRC Anti-Avoidance Group, speaking at the LexisNexis conference on Management Buy-Outs on 25 September, confirmed that 97-98% of all such clearance requests are granted. However, this does not mean that the matter is closed forever.

The speaker reported that HMRC have a software programme which interrogates the database of self assessment tax returns to identify individuals who have sold shares in close companies and claimed 75% taper relief. If the gain is above a de minimis amount (not disclosed by HMRC) the transaction will be reviewed and HMRC may open an enquiry into the tax return. John Buniak stated that the enquiry window does not apply when looking into a case under the provisions of s703.

If s703 is invoked so that income tax becomes chargeable on the transaction, interest will apply, which could amount to a significant sum. However, because the transaction was correctly reported as capital, no penalties will apply.

(TAXline October 2006 Issue 10 p7, contribution by Rebecca Cave of Taxwriter Ltd)

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