In my consideration of how far you can go with regard to tax avoidance these days, I have looked briefly at the role of litigation and legislation in the form of the disclosure provisions.Financial planners will also be aware of very specific legislation to counter tax avoidance over the tax codes. The body of legislation that could be grouped under the heading of anti-avoidance is increasing in every Finance Act. We already know that we are to get more this year. This will include tightening up and extending the disclosure provisions, along with specific provisions to counteract the purchased interest in excluded property trusts and reverter to settlor strategies, both of which were promoted reasonably vigorously ahead of the pre-Budget report. Some anti-avoidance legis-lation has a direct impact on planning that could quite reasonably have been employed by a broad range of financial planners. Perhaps most obviously, we have had the pre-owned assets tax. Indeed, it is the Poat provisions that will be applied to the reverter to settlor scheme referred to above. A piece of anti-avoidance legislation is to be introduced imposing an income tax charge where there is perceived avoidance of inheritance tax, whereby a donor continues to enjoy a benefit from a given asset (tangible or intangible) and does not pay for that benefit and, importantly, the transaction is not caught by the gift with reservation rules. Of course, the gift with reservation rules remain very much on the statute books and are a classic example of anti-avoidance legislation. I reiterate that it is important to remember that the Poat legislation reinforces the gift with reservation legislation. Another piece of relatively recent anti-avoidance legislation was that targeting capital redemption bonds effected by companies. Broadly speaking, this legislation was introduced as a result of the perceived exploitation of capital redemption bonds in plans effected to create capital losses. As a result, capital redemption bonds effected by companies could well be brought into the loan relationship rules. Any particular case depends substantially, it seems, on the method of accounting adopted in respect of the capital redemption bonds. If the capital redemption bond is accounted for on an amortised cost basis, it would seem that generally one would not need to apply the loan relationship rules and this would mean that the tax deferment sought by the effecting of the bond would be substantially achieved. If, however, the capital redemption bond were accounted for on a fair value basis, it would seem that the loan relationship rules would apply and a year-on-year tax charge could arise. Even if a capital redemption bond is accounted for on an amortised cost basis, it would seem that HM Revenue & Customs could overturn this from a tax standpoint and apply the loan relationship rules if accounting for the bond on an amortised cost basis is thought not to be just and reasonable. Some commentators have suggested that this conclusion might be reached if the underlying asset of the capital redemption bond is substantially cash. It will be interesting to see how these rules are applied in practice. It has to be said, however, that if an investment bond is thought to be the right investment for a company, the uncertainty surrounding capital redemption bonds might be overcome by using an ordinary offshore insurance bond structure. You would need a life or lives assured and this may have been one of the reasons why a capital redemption bond – without the need for a life assured – was chosen. By the way, the pre-Budget report announced the introduction of further rules to inhibit the capital loss-making opportunities of the capital redemption bond effected by all types of investor. Before leaving the subject of appropriate investments for companies, it is worth bearing in mind that, for many companies, a collective investment may look to be a suitable investment, at least on tax grounds. Consider these two key tax facts:
- Dividends to which a company is entitled are not subject to tax in the hands of the corporate shareholder.
- Any gains after the indexation allowance made by a company are subject to corporation tax.