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Share disposal scheme subject to CGT

29th Apr 2016
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A complicated tax avoidance scheme involving the sale of shares in Anglia Water Group from Scottish to Irish trusts and then to a large investment bank did not work, a tribunal has ruled.

In an appeal to the first tier tribunal (TC05025) the trustees for the three trusts and Sir Fraser Morrison argued that gains on the sale of Scottish Trust shareholdings in AWG (by setting up of five Irish trusts, the exercise of “put options”, the purchase and sale of the shareholdings by the Irish trusts, the replacement of these trustees with the original trustees under the Scottish trusts and the consequent repatriation of these trusts) should have no or minimal capital gains tax.

HMRC argued that under the “Ramsay” principle, the transactions, which ended with a sale of shares to Merrill Lynch more than 10 years ago, should be treated as a single transaction and be liable for capital gains tax of more than £3m.

The tribunal said that the onus was on HMRC to show that the Ramsay approach.

It’s a complicated case, even by the standards of tax tribunals and their often lengthy judgements.

The tribunal judge, John Gordon Reid, said that there seemed to be a “grey area” in tax law about the issues in the case because “the position is to an extent uncertain but not wholly uncertain, and where the way is clear to proceed, but the final decision has been set up so as to rest with a third party who is likely if not almost bound to follow the taxpayer’s wishes and carry the second step into effect.”

The tribunal decided that the scheme was liable for capital gains tax.

“The creation and insertion of artificial steps to defeat that purpose is just the sort of arrangement the Ramsay approach says should be disregarded,” Judge Reid said. “Doing so yields the consequence that the arrangements are treated as a chargeable gain on the disposal of shares in the market. This simply reflects the reality.”

Replies (1)

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By Satwaki Chanda
03rd May 2016 19:13

For those who are interested, this is an outline of my understanding of how the scheme was intended to work.

1. Scottish trusts sell to Irish trusts - not directly but by way of option arrangements.

2. Because the two sets of trusts were connected, a direct sale would be fixed at market value, bringing in the big CGT charge.

3. So instead, the sale went though by way of options being granted and exercised. At the time of these events, the market value rule would have been disapplied by TCGA 1992 s 144ZA;

4. The result was that the Scottish trusts would have been subject to CGT by reference to the actual price paid - which was minimal since the sale was at an undervalue;

5. But under Irish law, the Irish trusts would have been treated as having acquired the shares at market value;

6. Therefore the subsequent sale of the shares to Merrill Lynch - at market value - would have been tax free.

The case is here if anyone wants to read it all:

Thanks (2)