Changes announced by HM Revenue & Customs (HMRC) to Capital Gains Tax (CGT) are likely to have a significant impact upon everyday tax-planning transactions between spouses. The Targeted Anti-Avoidance Rule (TAAR) was presented in the Pre-Budget Report (PBR) in December 2006. The Budget reaffirmed that the TAAR would be implemented in its original form but published New Guidance on how it would be applied. The Chartered Institute of Taxation (CIOT) supports the overall policy objective behind the TAAR in terms of stopping unacceptable tax avoidance but does have significant concerns about whether this TAAR actually achieves that objective.
Emma Chamberlain, Chairman of the CIOT’s Capital Taxes Sub-Committee, says: “The CIOT has raised concerns with HMRC that the draft legislation in the PBR did not match the policy objective. In particular, we were concerned that the draft legislation, in effect, gave HMRC unlimited discretion to determine whether or not a particular transaction would be caught. The CIOT asked for HMRC to give examples of acceptable transactions which would not be caught by the TAAR.”
Unfortunately, rather than including additional examples of acceptable transactions, the New Guidance is mainly devoted to additional examples of unacceptable transactions which do not seem consistent with each other.
Emma Chamberlain adds: “The CIOT believes that the problems with the guidance clearly illustrate the danger of giving HMRC too wide a discretion to determine whether a transaction is taxable or not. We continue to call on the Government to implement legislation which is fair, clear and targeted.”
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Notes to Editors
On first publication of the TAAR in December 2006, a general statement of principles was accompanied by the draft legislation and HMRC guidance notes.
The Original Guidance stated that the Government's intention was that the TAAR should only catch taxpayers who "deliberately and knowingly entered into arrangements intended to avoid tax which involved additional, complex or costly steps ".
The Original Guidance went on to give examples of situations which HMRC did not consider would be caught by the TAAR. One example given was of transactions between husband and wife under which the husband had made capital gains and his wife transferred a loss-making asset to him. The Original Guidance described this transaction as straightforward and not intended to be caught by the TAAR.
Under the New Guidance, HMRC has withdrawn this example. The reason for the withdrawal is unclear, but the obvious assumption is that HMRC now considers this to be a case of unacceptable tax avoidance.
Further, under the New Guidance, HMRC appear to state that "bed and spouse" transactions (i.e. where one spouse sells an asset to realise a capital loss and the other spouse then repurchases it) are also unacceptable.
HMRC state that if neither spouse knows what the other is doing, then this may be acceptable. The clear implication is that if the spouses do know what the other is doing, then this is unacceptable.
It should be noted that the New Guidance is effectively backdated to 6 December 2006. This means that taxpayers who have already entered into conventional year-end planning are likely to be caught by the New Guidance, even though they undertook the transactions before it was published.
In the CIOT's view, a number of other examples in the guidance fall into the same category. In addition, the guidance continues to contradict the legislation and, in several places, is inconsistent with itself.