Quarterly News

Take care in planning to avoid the 50% rate

It is now well known that an additional rate of tax of 50% is to be introduced from 6 April 2010 for individuals whose taxable income exceeds £150,000. Individuals affected by this will no doubt be looking for ways to reduce their tax liability.

One route which will certainly be examined will be to try to establish that a transaction falls within the capital gains tax (CGT) rules and is therefore taxable at only 18%. The gap of 32% is a very tempting one to consider but be aware that HMRC have a strong incentive to move the other way and may seek to turn 18% into 50%.

Where share transactions take place, there is some complex anti-avoidance legislation that can turn a capital gain into an income tax charge which has been in place for many years. This can apply where HMRC can show that the arrangements were not done for commercial reasons and were done for the purpose of avoiding tax. For example, a higher rate tax individual who owns two companies A and B sells some of the shares in company A to company B for cash. This may trigger the rules because all that is effectively happening is that cash is being extracted from company B’s distributable profits to the shareholder and so what appears to be a capital gains tax transaction is, in substance, a dividend.

Land transactions can also be an area of contention. Suppose instead of buying land in their own name an individual uses a company to buy the land and develop the site. Then instead of selling the development in the company, they sell the shares in the company (the purchaser may also find this attractive for stamp duty land tax purposes). They think they have made a capital gain on the shares but HMRC have legislation which they can use to argue that this should be treated as an income tax liability because if the land had been sold, there would have been a revenue profit.

Where a land transaction is carried out directly by an individual, that individual may want to argue that it is a capital transaction. However, the definition of a trade for income tax purposes includes what is known as 'an adventure in the nature of trade' and there is a substantial body of case law which has established the characteristics of such an adventure which may lead to an income tax charge.

If you are planning significant one-off transactions you need to take advice before you start to ensure that these potential problem areas can be avoided, so do contact us.

In the last edition

Autumn 2011 headlines

• Low-paid get a boost
• The Residence Test
• When does 10% = 4%?
• What a Relief

We provide four Quarterly News Journals packed with useful breaking news, all intended to keep you up to date with the latest information. We display one years worth of news, just in case you have missed something.

• back |
• top