Another Layer of TAAR – Capital Gains Tax and Relief for Losses

Another Layer of TAAR – Capital Gains Tax and Relief for Losses
HMRC have managed to include a “Targeted Anti-Avoidance Rule” (or TAAR) in the last two Finance Acts. The 2006 one applied to companies, and the 2007 one applies to individuals and Trustees.


If you sell an asset and realise a capital loss, you can set that loss against any capital gains in the same tax year, and if there are no such gains you can carry the loss forward to the next tax year and set it against gains in that year, and so on.


It therefore makes sense, if you have an asset that will realise a capital loss, to dispose of it in the same tax year as you dispose of another asset that will realise a capital gain.


The TAAR, however, will prevent you from setting that loss against the gain if:


§  The loss arises as a result of “arrangements”




§  The main purpose, or one of the main purposes, of those “arrangements” is to gain a “tax advantage”


What are “arrangements”?


These are very broadly defined, and the “arrangements” in question do not have to be legally enforceable. They include any “agreement, understanding, scheme, transaction or series of transactions”


It is likely to be a waste of time to argue that there were no “arrangements”.


What is a “tax advantage?”


Again, the definition is very widely drawn, and includes a repayment, a reduction in an assessment, a relief from tax, and the reduction or avoidance of a charge to tax.


Once again, it is unlikely to be possible to argue there was no “tax advantage” if you are targeted by HMRC.


“Main Purpose”


This is where the arguments will occur. In order to restrict your loss relief, HMRC have to show as a minimum that “one of the main purposes of the arrangements” was to obtain a tax advantage.




HMRC have published examples of “arrangements” they consider to be caught by the TAAR, and others which they say are not. There are some curious anomalies in the examples.


I cannot really quarrel with some of the examples. One of the most elegant (and outrageous!) involves setting up a trading company with a small share capital (say, £20), and selling it to a helpful friend who injects a huge amount of share capital into it (say, £1 million) and then sells it back to you for £1 million in less than 30 days. The rules for matching disposals with acquisitions mean that the sale is identified with the subsequent acquisition and so you have just made a CGT loss of £999,980 – and because this is a trading company you can claim the loss against your income for the tax year!


A neat piece of artificial tax avoidance, which no longer works, because of the TAAR.


There are several examples of what is known in the trade as “bed and spousing”. It used to be standard tax planning to “bed and breakfast” shares at the end of each tax year, either to realise losses, or to make gains to use up the Annual Exempt Amount (currently £9,200). You sold the shares, and bought them back the next day, hence the name “bed and breakfasting”. The 30 day identification rule referred to above was introduced to stop this practice, and it means that you have to wait for over 30 days before repurchasing the shares in order not to have the sale identified with the repurchase. During this time, of course, you are exposed to changes in the price of the shares.


Your spouse, however, could buy the shares back on the same day as you sold them, and then give them to you. The gift is a “no gain, no loss” transaction, and you have achieved the same effect as the old “bed and breakfast” trick.


The TAAR, however, will catch this transaction and deny you relief for the loss you made on the shares.


There are numerous variations on this in HMRC’s examples, and my favourite is the one where “Mr H” sells his loss-making shares, and “unbeknown to Mr H”, his wife buys the same shares back. According to HMRC, the TAAR will not apply here, because “there was no main purpose of obtaining a tax advantage”.


I sometimes wonder whether HMRC live in the same world as the rest of us. I have a mental picture of Mrs H blocking her ears and humming loudly (for tax reasons) while Mr H is on the phone to his stockbroker, and then Mr H doing the same while Mrs H makes her phone call.


An interesting variation of this example has Mr H owning some shares standing at a loss, which he gives to Mrs H, who then sells them together with her shares in a different company which make a gain. You might think the TAAR would apply, but not according to HMRC’s guidance – they say this is a “straightforward” transaction and is not caught.


The problem with all these examples, and with the concept of the TAAR itself, is that it is so subjective. The law now says “you cannot have relief for losses if we think you are being a bit too clever in the way you arrange things”, which effectively means your tax liability depends on how an inspector feels about the transactions concerned. It is as if there were no speed limits on the roads, and instead there was an offence of “driving faster than the police think you should”.


I think this is a very worrying trend in the legislation, and it is not going to stop with this particular TAAR. There is likely to be another one in the 2008 Budget aimed at family companies and the payment of dividends, and HMRC continue to push for their ultimate goal – a GAAR. If I tell you that “G” here stands for “General”, I think you can guess what the other words are!