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The Government has announced that legislation will be brought forward in Finance Bill 2010 to block a tax avoidance scheme that exploits the gifts of qualifying investments to charities rules ICTA 1988, s 587B and ITA 2007, s 431.
The scheme involves an offshore company selling listed shares with a market value in excess of the amounts paid, while retaining an option – exercisable after three years – to buy back the shares for £1.
The buyer then gifts the shares to a charity and gets tax relief on the higher market value, despite having paid only a fraction of that market value. The vending company’s buy-back option is not taken into account for the purposes of determining the relief.
In an a ministerial announcement, the financial secretary to the Treasury, Stephen Timms, explained that the charities rules disregard contingent liabilities, such as an option, until the liability crystallises, typically by the exercise of the option in this case.
In reality the option is never exercised, and the scheme organisers get their money back from the charity through some contrived arrangements. The benefit to the charity was typically less than half of one percent of the value of the tax relief obtained, said Mr Timms.
The legislative changes are effective from today (15 December 2009). They reduce the tax relief on such arrangements to the lower of the cost of acquisition to the donor of the shares or investments gifted, or the market value at the date of disposal, where the acquisition was made as part of a tax advantage scheme.
Further details are contained in a draft explanatory note published on HMRC’s website, along with the proposed legislation.
