The Government has closed down a major tax avoidance scheme involving dividend rights on shares, before it got off the ground.
The scheme, which was disclosed to HMRC under the new anti-avoidance disclosure rules, would have exploited a loophole in the S730 Income and Corporation Taxes Act. This section deals with so-called 'dividend stripping' - the sale of rights to dividends on shares where the shares themselves are not sold. Subsection 3 provides that where a dividend right has been bought and then sold on before the dividend is received, the sale proceeds are not regarded as the seller's income. It was argued that this exemption applies even if the seller is a financial trader who claims the cost of the strip as a tax loss. The tax avoidance scheme planned to make use of this exemption, allowing users to artificially generate losses through trading in dividend rights.
To plug the loophole, the relevant subsection of S730 will be repealed, effective from 20 January. Paymaster General, Dawn Primarolo said: "The use of avoidance schemes such as this which get around the intention of Parliament is unacceptable and unfair to the majority of taxpayers who pay their fair share. If necessary we will not hesitate to move against similar schemes in the future."